<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 1998
REGISTRATION NO. 333-56401
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PERISCOPE SPORTSWEAR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 2330 13-4006463
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
1407 BROADWAY, SUITE 620
NEW YORK, NEW YORK 10018
(212) 382-3660
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S EXECUTIVE OFFICES)
---------------
GLENN SANDS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PERISCOPE SPORTSWEAR, INC.
1407 BROADWAY, SUITE 620
NEW YORK, NEW YORK 10018
(212) 382-3660
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE
OF AGENT FOR SERVICE)
---------------
WITH A COPY TO:
GEORGE LANDER KENNETH J. BARONSKY
MORSE, ZELNICK, ROSE & LANDER, LLP MILBANK, TWEED, HADLEY & MCCLOY
450 PARK AVENUE 601 SOUTH FIGUEROA STREET, 30TH FLOOR
NEW YORK, NEW YORK 10022 LOS ANGELES, CA 90017
(212) 838-1177 (213) 892-4000
(212) 838-9190 (FAX) (213) 629-5063 (FAX)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================
PROPOSED PROPOSED
AMOUNT TO MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.001 per share...... 3,674,480 $13.50 $49,605,480 $14,633.62
- ------------------------------------------------------------------------------------------
Representatives'
Warrants.............. 307,928 $ 0 $ 0 (2)
- ------------------------------------------------------------------------------------------
Common Stock issuable
upon exercise of
Representatives'
Warrants.............. 307,928 $16.20 $ 4,988,434 $ 1,471.59(3)
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Total................................................. $54,593,914 $16,105.21(4)
==========================================================================================
</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act.
(2) No registration fee required pursuant to Rule 457(g) under the Securities
Act.
(3) Pursuant to Rule 416 of the Securities Act, there are also being
registered hereby such additional indeterminate number of shares of Common
Stock as may become issuable pursuant to the anti-dilution provisions of
the Representatives' Warrants.
(4) The entire fee has previously been paid.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION, DATED JULY 27, 1998
3,195,200 SHARES
[LOGO OF PERISCOPE]
COMMON STOCK
-----------
Of the 3,195,200 shares (the "Shares") of Common Stock, par value $.001 per
share (the "Common Stock") offered hereby (the "Offering"), 2,600,000 shares
are being offered by Periscope Sportswear, Inc., a Delaware corporation (the
"Company") and 595,200 shares are being offered by the Selling Stockholders.
See "Principal and Selling Stockholders." The Company will not receive any
proceeds from the sale of shares by the Selling Stockholders.
Prior to this Offering, there has been no public market for the Common Stock.
The Common Stock has been approved for quotation on the Nasdaq National Market
under the symbol "PSCP." It is currently anticipated that the initial public
offering price will be between $11.50 and $13.50 per share. For a discussion of
the factors considered in determining the initial public offering price of the
Shares, see "Underwriting."
SEE "RISK FACTORS" COMMENCING ON PAGE 8 HEREIN FOR A DISCUSSION OF CERTAIN
RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE 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 PROCEEDS
DISCOUNTS AND PROCEEDS TO TO SELLING
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
- -----------------------------------------------------------------------------------
Total(3).................. $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Excludes the value of warrants to purchase up to 260,000 shares of Common
Stock (307,928 shares of Common Stock if the Over-Allotment Option is
exercised in full) at an exercise price per share equal to 120% of the
initial public offering price per share issuable upon exercise of warrants
to be issued to Sutro & Co. Incorporated and L. H. Friend, Weinress,
Frankson & Presson, Inc. upon the closing of this Offering (the
"Representatives' Warrants"). The Company and the Selling Stockholders have
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $825,000.
(3) The Underwriters have been granted the option, exercisable within 45 days
after the date of this Prospectus, to purchase up to an aggregate of
479,280 additional shares of Common Stock, on the same terms as set forth
above, solely to cover over-allotments, if any (the "Over-Allotment
Option"). The first 280,000 of such shares will be purchased from Glenn
Sands, the Company's President and Chief Executive Officer, and the balance
of such shares will be purchased from the Company. If the Over-Allotment
Option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to the Selling
Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
-----------
The Shares are being offered by the Underwriters named herein subject to
prior sale and when, as and if delivered to and accepted by the Underwriters.
It is expected that the Shares will be ready for delivery through the offices
of Sutro & Co. Incorporated, Los Angeles, California, or through the facilities
of The Depository Trust Company in New York, New York, on or about , 1998,
against payment therefor in immediately available funds.
SUTRO & CO. INCORPORATED
L. H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.
SCOTT & STRINGFELLOW, INC.
The date of this Prospectus is , 1998
<PAGE>
Bi-fold inside front cover contains photographs of women's and children's
clothing displayed in showrooms and on models as well as photographs
documenting the Company's production process. The photographs are accompanied
by the following descriptive captions:
PERISCOPE
What America wears today.
Periscope Sportswear provides an extensive line of high-quality women's and
children's clothing in the moderate price category, primarily for sale under
private labels.
The Company's design team creates, develops and coordinates an extensive
range of updated basics for women and children. The Company works closely with
each customer to refine styles that suit its specific market requirements.
By entering the knit garment production process at the design and creation
phase rather than purchasing finished fabrics, the Company achieves production
cost savings, maintains control over fabric quality and variety, and offers
rapid turnaround time.
Comprehensive quality control procedures and manufacturer site inspections
ensure that the Company's fabrics, materials and finished goods meet its
exacting standards.
Aside from a small in-house cutting facility, the Company utilizes third-
party contract manufacturers. Approximately 65% of the Company's sewing
production is done in Mexico, and the Company intends to shift more production
to Mexico to take advantage of significant cost savings, while continuing to
maintain high quality. Outsourcing manufacturing allows the Company to respond
quickly to changing production requirements, while eliminating the significant
capital investment requirements and potential labor problems associated with
maintaining facilities and a manufacturing workforce.
Sold in an estimated 11,000 stores, the Company's finished products are
delivered by Company-owned trucks or shipped nationwide by common carrier.
Buyers include major department stores and specialty store chains such as
Charming Shoppes (Fashion Bug), Cato Stores and Sears; mass merchants such as
Kmart; and wholesale clubs such as Costco Wholesale.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY OVER-ALLOTMENT, THE ENTERING OF STABILIZING BIDS, EFFECTING
SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information contained in this Prospectus (i) assumes that the Over-Allotment
Option has not been exercised, (ii) reflects the reincorporation of the Company
in Delaware and the concurrent 124,000-for-one stock split and (iii) assumes
that 4,490,000 shares of Common Stock were outstanding before the Offering
after giving effect to the contribution by BancBoston Ventures, Inc. to the
capital of the Company of 569,200 shares of Common Stock in consideration of
the prepayment of certain indebtedness by the Company. All references to the
Company in this Prospectus refer to Periscope Sportswear, Inc., a Delaware
corporation, and its subsidiaries.
THE COMPANY
The Company provides an extensive line of high-quality women's and children's
clothing in the moderate price category to major retailers, primarily for sale
under private labels. The Company has been able to achieve attractive profit
margins on its knit products by controlling all aspects of the production
process. The Company believes that it differentiates itself by entering the
knit garment production process at the fabric design and creation phase, unlike
many of the Company's competitors who enter the garment production process
later by purchasing finished fabrics. The Company believes that control over
the knit production process enables it to capitalize on its design and garment
production expertise to produce quality apparel for its customers on shorter
lead times and at attractive profit margins. In 1997, approximately 80% of the
Company's sales were of knit products. In addition to knit products, the
Company also produces (i) woven products of the Company's design where the
Company purchases dyed and printed fabric and then controls all cutting, sewing
and finished goods production and (ii) imported finished knit and woven
products. The Company's products are sold nationwide through department and
specialty store chains, including Charming Shoppes (Fashion Bug), Cato Stores,
Montgomery Ward, Goody's and Sears; mass merchants, including Kmart and Wal-
Mart; and wholesale clubs, including Costco Wholesale.
In 1996, the Company made a strategic decision to relocate a portion of its
sewing production from the United States to Mexico, where the Company believed
that it could produce high-quality goods at significant cost savings because
labor costs in Mexico are significantly lower than in the United States. In
addition, goods produced in Mexico are exempt from U.S. import duties under the
North American Free Trade Agreement ("NAFTA"). In 1997, the Company established
a firm manufacturing base in Mexico, during which time the Company conducted
approximately 25% of the sewing portion of its production process in Mexico.
Currently, approximately 65% of the sewing portion of the Company's production
process is conducted in Mexico and the Company intends to continue to shift its
sewing production to Mexico. The remaining 35% of sewing and all other stages
of production occur domestically. The Company believes that a significant
contributor to its recent increase in gross profit margins is related to the
shift of a majority of its sewing operations to Mexico.
The Company's net sales increased 12.2% to $38.5 million in the first six
months of 1998 from $34.3 million in the first six months of 1997, and
increased 11.8% to $88.0 million in 1997 from $78.7 million in 1996. In late
1997, the Company made the strategic decision to restructure its children's
division, which included the discontinuation of the sale of certain less
profitable lines of children's clothing to focus on its higher margin
children's lines. The implementation of the Company's new children's division
strategy, coupled with the increased employment of lower cost Mexican
contractors, resulted in improved gross profit margins from 19.7% in the first
six months of 1997 to 22.7% in the first six months of 1998. The Company's
backlog of orders at June 30, 1998 was approximately $48.6 million, as compared
to approximately $25.3 million at June 30, 1997, representing an increase of
approximately 92%. The Company expects to ship all of its existing backlog
prior to the end of 1998.
1
<PAGE>
The Company's products are updated versions of basic, recurring styles that
have a proven record of sales success and that the Company believes are less
susceptible to fashion obsolescence and less seasonal in nature than fashion
styles. The Company's merchandisers and designers regularly update these basic
styles to reflect current fashion trends by using new color schemes, fabrics
and decorative trim and by incorporating nuances of existing popular styles.
The Company's products primarily consist of knit tops, bottoms, related
separates, dresses, short sets, and woven products (e.g., corduroy, twill,
denim), including bottoms, jumpers, dresses, coordinates, short sets and tops.
The Company manufactures products only on the basis of firm orders received
from its customers. After an order has been placed, the Company contracts with
a broad base of manufacturers at each stage of the production process, allowing
the Company to maximize production flexibility, speed and efficiency, while
eliminating the significant capital investment requirements and potential labor
problems associated with maintaining manufacturing facilities and a
manufacturing workforce. The Company contracts with its manufacturers on an
order-by-order basis, further contributing to the Company's production
flexibility by allowing the Company to select the manufacturers best suited to
fill a given order. The Company believes that its long-standing relationships
with many contract manufacturers, certain of which have committed their entire
facilities to the Company on a priority basis, contribute to its ability to
produce quality apparel products on a timely and cost effective basis. Although
no long-term contractual obligations exist between the Company and its
manufacturers, approximately 80% of the Company's major contract manufacturers
in 1997 had been conducting business with the Company for over five years.
OPERATING STRATEGY
The Company's operating strategy consists of the following key elements:
. Produce Only on a Firm Commitment Basis. The Company purchases raw
materials and produces goods only upon receipt of a firm commitment from
a customer. Once a product is shipped to a customer, the Company
generally does not accept returns unless the product is defective or
delivered late. These practices minimize the Company's need to carry
unsold inventories.
. Focus on an "Updated Basics" Product Line. The Company's products are
updated versions of basic, recurring styles that have a proven record of
sales success and that the Company believes are less susceptible to
fashion obsolescence and less seasonal in nature than fashion styles.
The Company regularly updates these proven styles to reflect current
fashion trends which it believes enhances sales by providing its product
line a new and fresh look. In addition, the Company believes this
practice also allows it to capitalize on higher profit margins
associated with updated basics apparel, compared to those of more
generic apparel products priced on a commodity basis.
. Maintain Control Over the Entire Production Process. The Company is able
to provide superior customer service and achieve attractive profit
margins by controlling the entire production process of its knit
products. By controlling the production process, the Company has the
ability to tailor products to a customer's specific needs, offer
customers rapid order turn around time, maintain flexible scheduling
unconstrained by a finite production capacity, maximize fabric yields by
knitting fabrics to the Company's own specifications and maintain higher
standards of quality control.
. Outsource Manufacturing. Outsourcing allows the Company to respond
quickly to changing production requirements, while eliminating the
significant capital investment requirements and potential labor problems
and other risks associated with maintaining manufacturing facilities and
a manufacturing workforce. The Company does not own any manufacturing
facilities except for a limited in-house cutting facility located within
its warehouse in North Bergen, New Jersey. The Company maintains cost-
efficiency and flexibility by outsourcing at nearly all stages of
production to the lowest cost provider able to maintain the Company's
timing and quality requirements.
2
<PAGE>
. Provide Value to Customers. The Company seeks to add value to customers'
overall merchandising effort by helping them maximize sales and profit
margins. The Company works closely with its customers to develop
coordinated products and distinctive product lines at their particular
price points. This process allows the Company's customers to achieve a
degree of differentiation from their retail competitors. The Company
believes its ability to design and offer distinctive product lines is a
competitive advantage and leads to large volume orders. The Company's
sales force also consults with customers concerning optimal delivery
schedules, floor presentation, pricing and other merchandising
considerations. In addition, the Company provides its customers with
competitive market intelligence gathered through discussions with its
contract manufacturers. By integrating its sales force, design
capabilities and manufacturing capabilities, the Company's customers
receive up-to-date, high-quality products at competitive prices.
. Develop Long-Term Customer Relationships. The Company emphasizes
developing long-term relationships with its customers by providing a
high level of customer service through its sales force. Each sales
person is responsible for all aspects of a customer's order, including
design assistance, the development and approval of product samples and
regular order status updates until the delivery of finished goods. The
Company seeks to capitalize on its knowledgeable and experienced sales
force by maintaining regular interaction with its customers which
provides the Company a thorough understanding of which products will
meet their particular needs.
GROWTH STRATEGY
The Company intends to grow its business by: (i) increasing sales to existing
customers, (ii) expanding the Company's customer base, (iii) expanding ladies'
product offerings, (iv) expanding the children's apparel division and (v)
pursuing select acquisitions. The Company believes a number of current industry
trends will increase demand for its apparel products. First, the Company
believes that increasing numbers of consumers regard private label products as
less expensive than brand name products, but of equal or better quality.
Retailers also find private label products attractive as they provide higher
profit margins than brand name products. Second, the Company also believes that
there has been a trend in recent years toward the purchase of casual,
moderately priced apparel, driven by the popularity of casual dress-down
Fridays and increasing numbers of casual social activities. Third, in recent
years there has also been significant growth in the children's apparel market.
Finally, the Company believes that the general consolidation of major retailers
and department stores has created a preference among retailers for doing
business with a limited number of large, well-capitalized suppliers that can
provide large product volumes quickly and efficiently. The Company believes its
focus on casual, moderately priced, private label apparel for women and
children positions it to capitalize on these trends.
RECAPITALIZATION
In May 1996, the Company completed a leveraged recapitalization (the
"Recapitalization") whereby the Company borrowed an aggregate of $18.0 million
from BankBoston, N.A. (formerly known as The First National Bank of Boston) and
BancBoston Ventures, Inc. ("BBV"). Substantially all of the proceeds from these
loans were used to repurchase the stock holdings of a former stockholder of the
Company and for a distribution to the Company's then remaining stockholder,
Glenn Sands, the Company's President and Chief Executive Officer. The
Recapitalization was undertaken to consolidate management control under the
Company's current President and Chief Executive Officer, Glenn Sands. In
connection with the Recapitalization, BBV acquired a 35% equity interest in the
Company from Glenn Sands for $2.0 million. See "Principal Stockholders."
The Company was incorporated in Delaware on May 19, 1998, as the successor,
by merger, to Periscope I Sportswear, Inc., a New York corporation organized in
1975. The Company's principal executive offices are located at 1407 Broadway,
Suite 620, New York, New York 10018, and its telephone number is (212) 382-
3660.
3
<PAGE>
RISK FACTORS
The Common Stock offered hereby involves certain risks, including the
Company's dependence on (i) its private label relationships, (ii) its contract
manufacturers, (iii) its key customers and (iv) its access to working capital.
In addition, the Company's operations are subject to the risks associated with
foreign operations and the price and availability of the raw materials used by
the Company to produce its products. For a complete discussion of the risk
factors that should be considered by prospective investors, see "Risk Factors."
THE OFFERING
<TABLE>
<S> <C>
Shares Offered by:
The Company 2,600,000 shares
The Selling Stockholders 595,200 shares
Common Stock to be Outstanding
after this Offering 7,090,000 shares (1)
Use of Proceeds To repay approximately $27.0 million of
indebtedness with the balance to be used
for working capital. See "Use of Proceeds."
Nasdaq National Market Symbol for
the Common Stock "PSCP"
</TABLE>
- --------
(1) Does not include (i) 260,000 shares of Common Stock reserved for issuance
upon exercise of the Representatives' Warrants and (ii) 750,000 shares of
Common Stock reserved for issuance under the Company's Stock Option Plan,
none of which are subject to outstanding options exercisable within 60 days
of the date hereof. See "Underwriting" and "Management--Stock Option Plan."
4
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data of the Company presented below as of December 31,
1995, 1996 and 1997, and June 30, 1998, and for the years ended December 31,
1995, 1996 and 1997, and for the six months ended June 30, 1997 and 1998, have
been derived from the consolidated financial statements of the Company and
unaudited pro forma financial data. The consolidated financial statements as of
December 31, 1997 and for the year then ended have been audited by Arthur
Andersen LLP, independent public accountants, and the consolidated financial
statements as of December 31, 1995 and 1996, and for each of the two years then
ended have been audited by Friedman Alpren & Green LLP independent public
accountants. The financial statements as of June 30, 1998, and for the six
months ended June 30, 1997 and 1998, and the pro forma data have been derived
from the unaudited consolidated financial statements of the Company, which have
been prepared on the same basis as the audited financial statements, and in the
opinion of management, reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such data. The historical and
pro forma results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for any future
period. The financial data set forth below is qualified by reference to, and
should be read in conjunction with, the Company's Consolidated Financial
Statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere in this
Prospectus.
CONSOLIDATED INCOME DATA (IN THOUSANDS EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ ------------------
1995 1996 1997 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $67,317 $78,706 $87,957 $ 34,257 $ 38,502
Cost of sales...................... 50,669 62,902 70,610 27,499 29,762
------- ------- ------- -------- --------
Gross profit..................... 16,648 15,804 17,347 6,758 8,740
Operating expenses................. 9,253 14,230 12,519 6,092 5,544
------- ------- ------- -------- --------
Income from operations............. 7,395 1,574 4,828 666 3,196
Factor and financing costs......... 1,047 3,245 4,743 2,080 2,485
------- ------- ------- -------- --------
Income (loss) before income tax
provision (benefit)............. 6,348 (1,671) 85 (1,414) 711
Income tax provision (benefit)..... 253 (15) 60 -- 359
------- ------- ------- -------- --------
Net income (loss)................ $ 6,095 $(1,656) $ 25 $ (1,414) $ 352
======= ======= ======= ======== ========
Basic and diluted net income(loss)
per share......................... $ -- $ (0.28) $ 0.07
======= ======== ========
Weighted average shares outstand-
ing(1)............................ 5,059 5,059 5,059
======= ======== ========
PRO FORMA NET INCOME DATA
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE
DATA) (2)
Income before income tax provision,
as reported....................... $ 6,348
Pro forma income tax provision..... 2,730
-------
Pro forma net income............. $ 3,618
=======
</TABLE>
- --------
(1) Before giving effect to the contribution by BancBoston Ventures, Inc. to
the capital of the Company of 569,200 shares of Common Stock, to be made
concurrently with the closing of the Offering. Such shares, upon such
contribution, will no longer be outstanding.
(2) Reflects a pro forma provision for income taxes as if the Company had been
a C Corporation for Federal and state income tax purposes during 1995.
5
<PAGE>
The unaudited Pro Forma Consolidated Statements of Operations represent the
historical results of operations of the Company for the year ended December 31,
1997, and the six months ended June 30, 1997 and 1998, adjusted to reflect a
reduction in interest expense and amortization of debt issuance costs following
the use of approximately $27.0 million of net proceeds of the Offering to repay
indebtedness as if such transactions had occurred at the beginning of such
periods. The Pro Forma Consolidated Statements of Operations are not
necessarily indicative of what the Company's results of operations would have
been had such transactions occurred at the beginning of such period. The
Company expects to recognize an extraordinary gain on the early retirement of
certain debt to be repaid from the proceeds of this Offering totaling
approximately $3.6 million.
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)(1)(2)
------------------------------
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1997 1997 1998
------------ -------- --------
<S> <C> <C> <C>
Net sales....................................... $87,957 $ 34,257 $ 38,502
Cost of sales................................... 70,610 27,499 29,762
------- -------- --------
Gross profit.................................. 17,347 6,758 8,740
Operating expenses.............................. 12,519 6,092 5,544
------- -------- --------
Income from operations.......................... 4,828 666 3,196
Factor and financing costs...................... 1,443 657 1,079
------- -------- --------
Income (loss) before income tax provision
(benefit).................................... 3,385 9 2,117
Income tax provision (benefit).................. 1,170 -- 663
------- -------- --------
Net income (net loss)......................... $ 2,215 $ 9 $ 1,454
======= ======== ========
Basic and diluted net income (loss) per
share(3)....................................... $ 0.31 $ -- $ 0.21
======= ======== ========
Weighted average number of shares outstand-
ing(3)......................................... 7,090 7,090 7,090
======= ======== ========
</TABLE>
CONSOLIDATED BALANCE SHEET DATA (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
ACTUAL JUNE 30, 1998
----------------------- -----------------------
1995 1996 1997 ACTUAL AS ADJUSTED(4)
------ ------- ------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Working capital(deficit)...... $5,606 $ (629) $ 444 $ 829 $8,987
Total assets.................. 9,961 12,976 15,383 22,956 24,617
Total debt, including due to
factor....................... -- 22,288 24,839 28,101 1,254
Stockholders' equity (defi-
ciency)...................... 5,840 (15,843) (15,818) (15,466) 10,453
====== ======= ======= ======= ======
</TABLE>
- --------
(1) The pro forma information gives effect to the Offering and application of
the net proceeds therefrom, resulting in a reduction of interest expense
and the elimination of amortization of debt issuance costs upon completion
of this Offering, all as if this Offering had occurred at the beginning of
the periods indicated. Interest expense has been reduced to reflect the
repayment of $27.0 million of indebtedness as of the beginning of each
period presented and the utilization of the remaining net proceeds to fund
seasonal cash needs during the periods presented. Interest expense has also
been reduced to utilize actual principal and interest payments on debt to
be repaid with a portion of the proceeds of this Offering to reduce
borrowings outstanding under the Company's factoring agreement.
(2) The pro forma information has not been adjusted to reflect an expected
extraordinary gain on the early retirement of certain debt to be prepaid
from the proceeds of this Offering. The extraordinary gain primarily
results from the contribution of 569,200 shares of the Company's Common
Stock (valued at the assumed offering price of $12.50 per share) by
BancBoston Ventures, Inc. as consideration for the early repayment of debt
due to BancBoston Ventures, Inc. and BankBoston, N.A.
(footnotes continued on following page)
6
<PAGE>
(2) Continued
The pro forma extraordinary gain is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR MONTHS ENDED
ENDED JUNE 30,
DECEMBER 31, ----------------
1997 1997 1998
------------ ------- -------
<S> <C> <C> <C>
Pro forma net income before extraordinary
item........................................ $ 2,215 $ 9 $ 1,454
Extraordinary item:
Gain on early retirement of debt 7,115 7,115 7,115
Less: Expensing of related deferred financ-
ing costs.................................. (1,125) (1,125) (868)
Less: Provision for income taxes............ (2,576) (2,576) (2,686)
------- ------- -------
Pro forma net income......................... $ 5,629 $ 3,423 $ 5,015
======= ======= =======
Basic and diluted pro forma income per share. $ 0.79 $ 0.48 $ 0.71
======= ======= =======
</TABLE>
(3) The computation of pro forma basic and diluted earnings per share for the
year ended December 31, 1997 and for the six months ended June 30, 1997 and
1998, is based upon (i) giving effect to the 124,000-for-1 stock split
effective on July 21, 1998, (ii) 4,490,000 shares of Common Stock
outstanding prior to the Offering (after giving effect to the concurrent
contribution by BancBoston Ventures, Inc. to the capital of the Company of
569,200 shares of Common Stock in consideration of the prepayment of
certain indebtedness of the Company) and (iii) 2,600,000 shares of Common
Stock sold by the Company in the Offering. There is no difference between
pro forma basic and diluted earnings per share for the year ended December
31, 1997 and for the six months ended June 30, 1997 and 1998, since the
conversion of the stock options and warrants issued in connection with the
Offering is antidilutive.
(4) As adjusted to reflect the sale of Shares offered hereby and the
anticipated use of the net proceeds therefrom. See "Use of Proceeds."
7
<PAGE>
RISK FACTORS
An investment in the Shares offered hereby is speculative and involves a
high degree of risk. In addition to the other information contained in this
Prospectus, the following risk factors should be considered carefully in
evaluating the Company and its business before purchasing the Shares offered
hereby.
DEPENDENCE ON PRIVATE LABEL RELATIONSHIPS; LACK OF TRADE NAME RECOGNITION
For 1997 and 1996, approximately 75% and 70%, respectively, of the Company's
net sales were derived from product sales to retailers of private label
apparel. All sales made under a private label relationship are made on a
purchase order basis and there are no long-term contracts with respect to any
private label relationships. There can be no assurance that existing private
label relationships will continue in the future or that the Company will be
able to obtain new private label relationships on an ongoing basis, if at all.
If the Company's private label sales were substantially reduced, the Company
would have to seek to offset such reductions through the development and sale
of trade name products, which is not the primary focus of the Company's
business as currently conducted.
DEPENDENCE ON CONTRACT MANUFACTURERS
The Company manufactures substantially all of its knit products, which
accounted for approximately 80% of its product sales in 1997, through third
party contract manufacturers at every stage of production. The Company does
not have long-term contracts or formal arrangements with any of its contract
manufacturers or suppliers. Competition for production capacity of apparel
manufacturers is significant. Because the Company does not have long-term
contracts for mill production or for the cutting and sewing of products, the
Company competes with other companies for production capacity. In the event
any of the Company's suppliers or manufacturers are unable or unwilling to
produce the Company's products in a timely manner, the Company would have to
rely on other current sources or identify new contractors. In such event,
there can be no assurance that the Company would be able to switch to such new
contractors in a timely manner or that such contractors would allocate
sufficient capacity to the Company in order to meet its production
requirements. Delays in shipments to the Company or inconsistent or inferior
apparel quality as a result of the required switch to new contractors could
adversely affect the Company's relationships with its customers. There can be
no assurance that the supply of alternate manufacturing facilities will be
available on commercially reasonably terms, if at all, if required. Any
substantial delay in locating, or the inability to locate, acceptable
alternate sources of manufacturing could have a material adverse affect on the
Company's business, financial condition and results of operations. See
"Business--Manufacturing."
RISKS ASSOCIATED WITH FOREIGN OPERATIONS
Approximately 65% of the sewing portion of the Company's manufacturing
process occurs in Mexico. Foreign manufacturing is subject to a number of
risks, including transportation delays and interruptions, political and
economic disruptions, tariffs, import and export controls and changes in
governmental policies. These operations could be adversely affected by
political instability in Mexico, other changes in the regulatory climate in
Mexico or changes in U.S. or Mexican tariff or trade policy. There can be no
assurance that trade relations between Mexico and the United States will not
adversely change. If that were to occur, there can be no guarantee that the
Company will be able to locate and utilize alternatively located facilities on
the same cost basis. In addition, stringent controls, such as review and
inspection of fabrics, samples, specifications, fit and completed garments and
factory visits, must be undertaken in Mexico to ensure the production of
quality products. There can be no assurance that events will not occur in the
future which will result in increased production costs or delays of product
deliveries which, in turn, may result in losses of revenue and goodwill.
Currently, sales of finished garments imported from China and Taiwan
represent, in the aggregate, approximately 12% of the Company's gross sales.
Should the Company wish to increase its sales of imported goods significantly,
such increase will be subject to increased risk, such as political
instability, resulting in the
8
<PAGE>
disruption of trade from China and Taiwan and other foreign countries in which
the Company now manufactures or in the future may manufacture its products and
in which the Company now has or in the future may have suppliers. In addition,
the imposition of additional regulations relating to imports or duties from
countries not covered by NAFTA and any significant decline in the value of the
dollar against foreign currencies and restrictions on the transfer of funds
could also adversely affect the Company. In addition, the Company's import
operations are subject to constraints imposed by bilateral textile agreements
between the United States and China. These agreements impose quotas on the
amount and type of goods which can be imported into the United States from
China and are subject to changes in U.S./Chinese trade policy. Recently there
have been a number of trade disputes between China and the United States
during which the United States threatened to impose tariffs and duties on some
products imported from China and to withdraw China's "most favored nation"
trading status. A significant disruption in the operations of the Company's
agents located in China or the loss of most favored nation trading status for
China could have a material adverse effect on the Company's business,
financial condition and results of operations.
Certain foreign garment manufacturers have been found to operate under
conditions which are commonly referred to as "sweat shops," in some cases
employing children in violation of local law or otherwise diverging from labor
practices generally accepted as ethical in the United States. Recently, some
United States distributors have been adversely affected by their association
with such operations. The Company does not control its contract manufacturers
or their labor practices. The violation of labor or other laws by any
manufacturer used by the Company, or the divergence of an independent
manufacturer's labor practices from those generally accepted as ethical in the
United States, could result in adverse publicity for the Company and retailers
carrying the Company's products, which, in turn, could have a material adverse
effect on the Company's business, financial condition or results of
operations.
RELIANCE ON KEY CUSTOMERS
The Company's customer base has been and continues to be relatively
concentrated. Sales of the Company's products to each of Kmart, Sears, Costco
Wholesale, Charming Shoppes, Cato Stores, Montgomery Ward and Shopko Stores
accounted for approximately 30.1%, 13.3%, 10.5%, 10.4%, 5.4%, 4.7% and 4.0% of
gross sales, respectively, for the six months ended June 30, 1998. Sales of
the Company's products to each of Charming Shoppes, Sears, Kmart, Wal-Mart,
Cato Stores, Shopko Stores, Montgomery Ward and Lerner accounted for
approximately 13.4%, 12.1%, 9.4%, 7.2%, 6.5%, 5.3%, 4.4% and 4.3% of gross
sales, respectively, during 1997. In addition, sales of the Company's products
to each of Charming Shoppes, Sears, Cato Stores, Kmart, Wal-Mart and Lerner
accounted for 15.9%, 11.8%, 10.3%, 8.5%, 8.1% and 8.0% of gross sales,
respectively, during 1996, while sales of the Company's products to each of
Charming Shoppes, Lerner and Cato Stores accounted for 16.0%, 14.9% and 9.6%
of gross sales, respectively, during 1995. Based upon historical and recent
results and existing relationships with customers, the Company believes that a
substantial portion of its net sales and gross profits will continue to be
derived from a small number of large customers. There can be no assurance that
the Company's larger customers will continue to place orders with the Company,
that orders by such customers will continue at their previous levels or that
the Company can replace any such lost business. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business--
Merchandising" and "--Backlog."
PRICE AND AVAILABILITY OF RAW MATERIALS
The principal raw materials used in the Company's products are cotton, wool,
rayon and polyester. The price and availability of such raw materials and, in
turn, the yarns used by the Company to manufacture its knit apparel products
and fabrics used by the Company to manufacture its woven and knit apparel
products may fluctuate significantly, depending on a variety of factors,
including crop yields and weather patterns. The Company currently does not
engage in any hedging activities intended to offset the risk of raw material
price fluctuations. In the event that the Company is required to obtain yarn
or fabrics from sources other than its current suppliers, the quality of such
raw materials available may also fluctuate significantly. Fluctuations in the
price, availability and quality of the yarn, fabrics or other raw materials
used by the Company could have a material adverse effect on the Company's cost
of sales or its ability to meet its customers' demands and, as a result, could
have a
9
<PAGE>
material adverse effect on the Company's business and results of operations.
There also can be no assurance that the Company will be able to pass along to
its customers all, or any portion of, any future increase in the prices paid
for the raw materials used in the manufacture of the Company's products. See
"Business--Operations."
DEPENDENCE ON ACCESS TO WORKING CAPITAL
Historically, the Company has relied heavily on its access to credit
facilities to fund its operations. Substantially all of the Company's assets
are subject to security interests granted by the Company to its lenders. There
can be no assurance that the Company will be able to retain its current access
to credit or successfully obtain alternative sources of credit or working
capital on commercially reasonable terms in the future. The failure of the
Company to retain current access to credit or obtain alternative sources of
credit or working capital on commercially reasonable terms could adversely
effect the Company's business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL
The success of the Company is dependent upon the personal efforts and
abilities of Glenn Sands, its President, Chief Executive Officer and principal
stockholder. The Company has entered into an employment agreement with Mr.
Sands for a three year term expiring December 31, 2000. The Company believes
that the loss of the services of Mr. Sands may have an adverse effect on the
Company. The Company maintains key man life insurance on the life of Mr. Sands
in the amount of $18.0 million. See "Management--Employment Agreements."
In addition, the Company believes that its future success depends upon its
ability to attract and retain qualified personnel. Competition to attract and
retain such personnel within the apparel industry is intense. There can be no
assurance that the Company will be successful in attracting and retaining
high-quality personnel in the future. See "Management."
CONTROL BY PRINCIPAL STOCKHOLDERS
Following the completion of this Offering, Glenn Sands, Scott Pianin and
BancBoston Ventures, Inc. will beneficially own an aggregate of approximately
52.9% of the Company's outstanding Common Stock. See "Principal and Selling
Stockholders" and "Certain Transactions." As a result of this stock ownership,
Messrs. Sands and Pianin and BancBoston Ventures, Inc. have sufficient voting
power together 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.
RISKS ASSOCIATED WITH SIGNIFICANT GROWTH
During the last three years, the Company has experienced substantial growth
which has strained the Company's administrative and operational resources and
need for working capital. The Company remains vulnerable to a variety of
business risks generally associated with rapidly growing companies. The
Company's past growth cannot be assumed to be indicative of its future results
of operations. Any future growth will require, among other things, increasing
amounts of working capital and financing, and may place a significant strain
on the Company's management and on its financial information processing
systems. In addition, future growth may depend upon the Company's ability to
contract with additional manufacturers. The failure to obtain additional
financing, to maintain or upgrade its information processing systems, to
recruit additional staff and key personnel, to locate additional contract
manufacturers or the failure to respond effectively to difficulties
encountered during expansion could have a material adverse effect on the
Company's business, financial condition and results of operations.
VARIATIONS IN OPERATING RESULTS; SEASONALITY
The Company has not historically experienced seasonable variations in its
business; instead, the Company typically experiences significant shifts in its
net sales on a customer by customer and quarter by quarter basis. Since most
of the Company's sales are derived from large bulk orders, a change in the
timing of receipt or shipment, or
10
<PAGE>
the number of orders received by the Company, could result in a significant
shift in the timing or amount of the Company's revenues. Additionally,
misjudgment by the Company of the market for the products that it designs may
result in decreased orders and sales. Further, sales of children's apparel is
seasonal with sales reaching their peak during the "back to school" period. If
sales of the Company's children's apparel increases, the Company may
experience greater variations in operating results from quarter to quarter.
The variations in the operating results of the Company's business affects
borrowings under the Company's lines of credit and its level of backlog, which
fluctuate in response to demand for the Company's products. Therefore, the
results of any interim period are not necessarily indicative of the results
that may be achieved for an entire year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
CYCLICALITY AND TRENDS IN THE APPAREL INDUSTRY
The apparel industry is subject to rapidly changing consumer demands and
preferences. There can be no assurance that consumers will continue to favor
the products designed and produced by the Company under private label
relationships or its own brands, and a significant shift in consumer
preferences could have a material adverse effect on the Company's business,
financial condition and results of operations. The apparel industry is a
cyclical industry heavily dependent upon the overall level of consumer
spending, with purchases of apparel and related goods tending to decline
during recessionary periods when disposable income declines. A difficult
retail environment could result in downward price pressure which could
adversely impact the Company's gross profit margins. Additionally, all of the
Company's customers are in the retail industry, which industry has experienced
significant changes and difficulties over the past several years, including
consolidation of ownership, increased centralization of buying decisions,
restructuring, bankruptcies and liquidations. Additionally, financial problems
of a retailer could cause the Company's factor to limit the amount of credit
extended to such retailer. If the Company's factor were to impose such
limitation, the Company could be required to curtail business with such
retailer or to assume additional credit risk relating to such customer's
receivables. The Company cannot predict what effect, if any, continued or
additional changes within the retail industry will have on its business,
financial condition or results of operations.
COMPETITION
There is intense competition in the apparel industry in general and in the
private label apparel market in which the Company does business. The Company
competes with numerous apparel manufacturers, including brand name and private
label producers, and retailers that have established, or may establish,
internal product development and sourcing capabilities. The Company's products
also compete with a substantial number of designer and non-designer product
lines. Many of the Company's competitors have greater financial, manufacturing
and distribution resources than the Company. Any increased competition from
manufacturers or retailers, or any increased success by existing competition,
could result in reductions in unit sales or prices, or both, which could have
a material adverse effect on the Company's business and results of operations.
See "Business--Competition."
ANTI-TAKEOVER PROVISIONS
The Company's Restated Articles of Incorporation and Restated Bylaws include
provisions that may have the effect of discouraging persons from pursuing a
non-negotiated takeover of the Company and preventing certain changes of
control. Certain of these provisions may also discourage a future acquisition
of the Company not approved by the Company's Board of Directors in which
stockholders might receive maximum value for their shares or which a
substantial number and perhaps even a majority of the Company's non-management
stockholders believe to be in the best interest of all stockholders. The
Certificate of Incorporation provides for the Board of Directors to be divided
into three classes and Directors may be removed only for cause upon the
affirmative vote of at least two-thirds of the shares of capital stock of the
Company entitled to vote. The Board of Directors is authorized to issue up to
5,000,000 shares of the Company's undesignated Preferred Stock in one or more
series, to determine the powers, preferences and rights, and the
qualifications, limitations or restrictions, granted to or imposed upon any
wholly unissued series of undesignated Preferred Stock, and to fix the number
of shares constituting any series and the designation of such series, without
any further vote or action by the stockholders. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change
11
<PAGE>
in control of the Company and may adversely affect the voting and other rights
of the holders of Common Stock. See "Description of Capital Stock--Certain
Provisions of the Company's Certificate of Incorporation and Bylaws."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Shares offered hereby will experience immediate and
substantial dilution in net tangible book value of $11.03 (88%) per share from
the assumed initial public offering price of $12.50 per share. See "Dilution."
ABSENCE OF DIVIDENDS
The Company does not expect to pay cash or stock dividends on its Common
Stock in the foreseeable future. Additionally, the terms of the Company's
Factoring Line restrict the Company from paying cash dividends on its Common
Stock, and the Company may in the future enter into other loan or financing
arrangements that restrict the payment of cash dividends on the Common Stock.
See "Dividend Policy."
NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY
OF SHARE PRICE.
Prior to this Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Shares
has been determined by negotiations between the Company and the
Representatives. See "Underwriting" for a discussion of the factors considered
in determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market. There can be no
assurance that an active trading market in the Common Stock will develop or,
if developed, that it will be sustained. The market price of the Company's
securities following this Offering also may be highly volatile. There have
been periods of extreme fluctuation in the stock market that, in many cases,
were unrelated to the operating performance of, or announcements concerning,
the issuers of the affected securities. Securities of issuers having
relatively limited capitalization or securities recently issued in a public
offering are particularly susceptible to fluctuation based on short-term
trading strategies of certain investors. In addition, the market price of the
Common Stock could fluctuate significantly due to variations in the Company's
anticipated or actual results of operations or conditions in the apparel
industry, in general. Although the initial public offering price of the Shares
reflects the Company's and the Representatives' assessment of current market
conditions, there can be no assurance that the price of the Company's Common
Stock will be maintained following the Offering. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of the Company's Common Stock in
the public market after this Offering or the perception that such sales may
occur could adversely affect the market price of the Common Stock. The
4,490,000 shares of Common Stock presently outstanding are "restricted
securities" within the meaning of Rule 144 under the Securities Act of 1933,
as amended (the "Securities Act"), and may be sold under the conditions of
such rule, including satisfaction of certain holding period requirements.
Except for the sale by the Selling Stockholders of 595,200 shares of Common
Stock offered hereby (875,200 if the Over-Allotment Option is exercised in
full with respect to Mr. Sands' shares), holders of the shares have executed
agreements pursuant to which they may not sell or otherwise dispose of such
shares for a period of 270 days after the closing of this Offering without the
prior written consent of Sutro & Co. Incorporated (the "Lock-Up Agreements").
After giving effect to the sale of shares offered by the Selling Stockholders,
212,700 shares of Common Stock presently outstanding, which shares are subject
to Lock-Up Agreements, will become eligible for sale in the public market in
reliance on Rule 144 beginning 90 days after the date of this Prospectus,
taking into account the volume limitations imposed upon the sale of
"restricted securities" by "affiliates." The sale or availability for sale of
significant quantities of Common Stock could adversely affect the market price
of the Common Stock. See "Shares Eligible for Future Sale."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,600,000 shares of
Common Stock offered by the Company (at the assumed initial public offering
price of $12.50 per share and after deducting estimated underwriting discounts
and commissions and offering expenses) are estimated to be approximately $29.4
million ($31.7 million if the Underwriters' over-allotment option is exercised
in full).
The Company expects to use approximately $27.0 million of the net proceeds
from the Offering to repay outstanding indebtedness, including (i) the
repayment in full of a term loan (the "BankBoston Note") from BankBoston, N.A.
($13.5 million as of June 30, 1998), (ii) the repayment in full of a term loan
(the "BBV Note") from BancBoston Ventures, Inc. ($3.0 million as of June 30,
1998), (iii) the repayment in full of a subordinated note (the "Sands Note")
from Glenn Sands ($2.0 million as of June 30, 1998), (iv) the repayment in
full of a term loan (the "CIT Note") from CIT ($500,000 as of June 30, 1998),
and (v) the repayment of a portion of the net amount then outstanding under
its accounts receivable factoring line (the "Factoring Line") with CIT ($8.8
million as of June 30, 1998). In consideration of the prepayment of the
BankBoston Note and the BBV Note, BBV has agreed to contribute 569,200 shares
of Common Stock to the capital of the Company. The balance of the net proceeds
will be used for working capital.
The BankBoston Note bears interest at the greater of the lender's base rate
or the federal funds effective rate plus 1.25% per annum (9.75% as of June 30,
1998) and is due May 15, 2001. The BBV Note bears interest at 7% per annum and
is due May 15, 2001. The Sands Note bears interest at prime plus 0.5% (9.0% as
of June 30, 1998) and is due January 1, 2000. The CIT Note bears interest at
prime plus 1% (9.5% as of June 30, 1998) and is due November 1, 1998. The
Factoring Line bears interest at prime plus 0.5% (9.0% as of June 30, 1998)
and expires May 31, 2000. Borrowings under the Factoring Line have been used
for working capital purposes, and after completion of the Offering, the
Company intends to borrow from time to time under the Factoring Line to meet
its working capital needs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
DIVIDEND POLICY
Since May 17, 1996, when the Company changed its tax payer status from an S
Corporation to a C Corporation, the Company has not declared or paid any cash
dividends on its Common Stock and does not anticipate paying any such
dividends in the foreseeable future. The Company intends to retain future
earnings, if any, to fund ongoing operations and future capital requirements
of its business. Additionally, the terms of the Company's Factoring Line
restrict the Company from paying cash dividends on its Common Stock, and the
Company may in the future enter into other loan or financing arrangements that
restrict the payment of cash dividends on the Common Stock. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations--
Liquidity and Capital Resources."
13
<PAGE>
CAPITALIZATION
The following table sets forth the current portion of long-term debt and
capitalization of the Company as of June 30, 1998 (i) on an actual basis and
(ii) as adjusted, giving effect to the sale of 2,600,000 shares offered by the
Company and the application of the estimated net proceeds therefrom as
described under "Use of Proceeds." This table should be read in conjunction
with the Company's financial statements and the notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Short-term debt and capital lease obligation(1)...... $ 547,973 $ 47,973
=========== ===========
Long-term debt and capital lease obligation (less
current portion)(1)................................. $18,731,205 $ 231,205
----------- -----------
Stockholders' equity (deficiency):
Preferred Stock, $.001 par value; 5,000,000 shares
authorized; no shares issued...................... -- --
Common Stock, $.001 par value;
Authorized 35,000,000 shares; issued and outstand-
ing 4,490,000 shares, actual; and 7,090,000
shares as adjusted(2)(3)......................... 40,000 7,090
Additional paid-in capital......................... 731,229 11,669,139
Treasury Stock(4).................................. (11,380,000) --
Accumulated deficit(5)............................. (4,857,463) (1,223,172)
----------- -----------
Total stockholders' equity (deficiency).......... (15,466,234) 10,453,057
----------- -----------
Total capitalization........................... $ 3,264,971 $10,684,262
=========== ===========
</TABLE>
- --------
(1) See Notes 6 and 7 to the Company's Financial Statements for information
concerning the Company's indebtedness.
(2) Does not include (i) 260,000 shares of Common Stock reserved for issuance
upon exercise of the Representatives' Warrants and (ii) 750,000 shares of
Common Stock reserved for issuance under the Company's Stock Option Plan,
none of which are subject to outstanding options exercisable within 60
days of the date hereof. See "Underwriting" and "Management--Stock Option
Plan."
(3) Reflects the 124,000-for-1 stock split effected on July 21, 1998, in
connection with the reincorporation of the Company in Delaware and the
change in par value of the Company's Common Stock to $.001 per share.
(4) Reflects the retirement of the Company's Treasury Stock in connection with
the reincorporation of the Company in Delaware.
(5) Reflects an expected extraordinary gain on the early retirement of certain
debt to be prepaid from the proceeds of the Offering of $3.6 million. The
extraordinary gain results primarily from the contribution of 569,200
shares of the Company's Common Stock (valued at the assumed offering price
of $12.50 per share) by BancBoston Ventures, Inc. as consideration for the
early repayment of debt due to BancBoston Ventures, Inc. and Bank Boston
N.A. The extraordinary gain has been reduced by (i) the expensing of the
unamortized portion of deferred financing costs related to the above debt
totaling $739,000 and (ii) the related provision for income taxes of $2.7
million.
14
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1998, was
approximately negative $16.2 million or negative $3.61 per share of Common
Stock. Net tangible book value per share is equal to the Company's total
tangible assets less total liabilities, divided by the total number of shares
of Common Stock outstanding immediately prior to the Offering after giving
effect to the concurrent contribution by BancBoston Ventures, Inc. to the
capital of the Company of 569,200 shares of Common Stock in consideration of
the prepayment of certain indebtedness by the Company. After giving effect to
the sale of 2,600,000 Shares offered by the Company at an assumed initial
public offering price of $12.50 per share (after deducting the underwriting
discount and estimated expenses of this Offering), the pro forma net tangible
book value of the Company as of June 30, 1998, would have been approximately
$10.5 million or $1.47 per share. This represents an immediate increase in pro
forma net tangible book value of $5.08 per share to existing stockholders and
an immediate dilution of $11.03 per share (88%) to new investors. Dilution is
determined by subtracting (i) pro forma net tangible book value per share
after this Offering from (ii) the amount of cash paid by a new investor for a
share of Common Stock. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Proposed public offering price per share..................... $12.50
Net tangible book value per share before Offering.......... $(3.61)
Increase per share attributable to new investors........... $ 5.08
------
Pro forma net tangible book value per share after Offering
(1)......................................................... $ 1.47
------
Dilution to new investors.................................... $11.03
======
</TABLE>
- --------
(1) Does not give effect to the issuance of (i) 260,000 shares of Common Stock
upon exercise of the Representatives' Warrants and (ii) 750,000 shares of
Common Stock reserved for issuance under the Company's Stock Option Plan,
none of which are subject to outstanding options exercisable within 60
days of the date hereof. See "Underwriting" and "Management--Stock Option
Plan."
The following table sets forth as of June 30, 1998, the number and
percentage of shares purchased, and the amount and percentage of consideration
paid, by existing stockholders for shares of Common Stock purchased from the
Company for cash and by new investors at the assumed initial public offering
price of $12.50 per share (before deduction of the underwriting discount and
estimated offering expenses) as adjusted to give effect to the concurrent
contribution by BancBoston Ventures, Inc. to the capital of the Company of
569,200 shares of Common Stock in consideration of the prepayment of certain
indebtedness of the Company.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(2)
----------------- --------------------------AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- -------------- ------------------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders
(1).................... 4,490,000 63.3% $ 2,069,835 6.0% $ 0.46
Public Investors (1).... 2,600,000 36.7% 32,500,000 94.0% $12.50
--------- ----- -------------- --------
Total................. 7,090,000 100.0% $ 34,569,835 100.0%
========= ===== ============== ========
</TABLE>
- --------
(1) Does not give effect to the exercise of warrants and options described in
footnote 1 to the immediately preceding table.
(2)Does not reflect deduction of the underwriting discount or estimated
Offering expenses.
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data of the Company presented below as of December
31, 1993, 1994, 1995, 1996 and 1997, and June 30, 1998, and for the years
ended December 31, 1993, 1994, 1995, 1996 and 1997, and for the six months
ended June 30, 1997 and 1998, have been derived from the consolidated
financial statements of the Company. The consolidated financial statements as
of December 31, 1997, and for the year then ended have been audited by Arthur
Andersen LLP, independent public accountants, and the consolidated financial
statements as of December 31, 1993, 1994, 1995 and 1996, and for each of the
four years then ended have been audited by Friedman Alpren & Green LLP,
independent public accountants. The financial statements as of June 30, 1998,
and for the six months ended June 30, 1997 and 1998, have been derived from
the unaudited consolidated financial statements of the Company, which have
been prepared on the same basis as the audited financial statements, and in
the opinion of management, reflect all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of such data. The
historical results of operations for the six months ended June 30, 1998 are
not necessarily indicative of the results that may be expected for any future
period. The financial data set forth below is qualified by reference to, and
should be read in conjunction with, the Company's Consolidated Financial
Statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere in this
Prospectus.
CONSOLIDATED INCOME DATA (IN THOUSANDS EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $72,924 $51,930 $67,317 $78,706 $87,957 $34,257 $38,502
Cost of sales........... 55,773 39,015 50,669 62,902 70,610 27,499 29,762
------- ------- ------- ------- ------- ------- -------
Gross profit.......... 17,151 12,915 16,648 15,804 17,347 6,758 8,740
Operating expenses...... 7,912 7,233 9,253 14,230 12,519 6,092 5,544
------- ------- ------- ------- ------- ------- -------
Income from operations.. 9,239 5,682 7,395 1,574 4,828 666 3,196
Factor and financing
costs.................. 923 417 1,047 3,245 4,743 2,080 2,485
------- ------- ------- ------- ------- ------- -------
Income (loss) before
income tax provision
(benefit)............ 8,316 5,265 6,348 (1,671) 85 (1,414) 711
Income tax provision
(benefit).............. 564 292 253 (15) 60 -- 359
------- ------- ------- ------- ------- ------- -------
Net income (loss)..... $ 7,752 $ 4,973 $ 6,095 $(1,656) $ 25 $(1,414) $ 352
======= ======= ======= ======= ======= ======= =======
Basic and diluted net
income (loss) per
share.................. $ 0.78 $ 0.50 $ 0.61 $ (0.24) $ -- $ (0.28) $ 0.07
======= ======= ======= ======= ======= ======= =======
Weighted average number
of shares
outstanding(1)......... 9,920 9,920 9,920 6,820 5,059 5,059 5,059
======= ======= ======= ======= ======= ======= =======
PRO FORMA NET INCOME
DATA (IN THOUSANDS
EXCEPT PER SHARE DATA)
(UNAUDITED) (2)
Income before income tax
provision, as
reported............... $ 8,316 $ 5,265 $ 6,348
Pro forma income tax
provision.............. 3,576 2,264 2,730
------- ------- -------
Pro forma net income.. $ 4,740 $ 3,001 $ 3,618
======= ======= =======
Pro forma basic and di-
luted net income per
share.................. $ 0.48 $ 0.30 $ 0.36
======= ======= =======
Pro forma weighted
average shares
outstanding............ 9,920 9,920 9,920
======= ======= =======
</TABLE>
16
<PAGE>
- --------
(1) Weighted average shares outstanding are determined before giving effect to
the contribution by BancBoston Ventures, Inc. to the capital of the
Company of 569,200 shares of Common Stock to be made concurrent with the
closing of the Offering, which shares, upon such contribution, will no
longer be outstanding.
(2) Reflects pro forma provision for income taxes as if the Company had been a
C Corporation for Federal and state income tax purposes during 1993, 1994
and 1995. The Company did not record a deferred tax asset in connection
with the losses incurred for the period January 1, 1996 to May 16, 1996
because such assets could not be realized by utilization of such losses in
the Company's income tax returns filed for the period May 17, 1996 to
December 31, 1996.
CONSOLIDATED BALANCE SHEET DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1998
---------------------------------------- -------------------------
ACTUAL
----------------------------------------
1993 1994 1995 1996 1997 ACTUAL AS ADJUSTED (1)
------- ------ ------ -------- -------- -------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital (defi-
cit)................... $ 5,167 $4,902 $5,606 $ (629) $ 444 $ 829 $ 8,987
Total assets............ 11,464 9,444 9,961 12,976 15,383 22,956 24,617
Total debt, including
due to factor.......... -- -- -- 22,288 24,839 28,101 1,254
Stockholders' equity
(deficiency)........... 5,492 5,155 5,840 (15,843) (15,818) (15,466) 10,453
======= ====== ====== ======== ======== ======== =======
</TABLE>
- --------
(1) As adjusted to reflect the sale of Shares offered hereby and the
application of the net proceeds therefrom. See "Use of Proceeds."
17
<PAGE>
PRO FORMA INFORMATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The unaudited Pro Forma Consolidated Statements of Operations represent the
historical results of operations of the Company for the year ended December
31, 1997, and the six months ended June 30, 1997 and 1998, adjusted to reflect
a reduction in interest expense and amortization of debt issuance costs
following the use of approximately $27.0 million of net proceeds of the
Offering to repay indebtedness as if such transactions had occurred at the
beginning of such periods. The Pro Forma Consolidated Statements of Operations
are not necessarily indicative of what the Company's results of operations
would have been had such transactions occurred at the beginning of such period
(see note 2 below).
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1997 JUNE 30, 1998
------------------------- -------------------------- --------------------------
AS ADJUST- PRO AS ADJUST- PRO AS ADJUST- PRO
REPORTED MENTS FORMA REPORTED MENTS FORMA REPORTED MENTS FORMA
-------- ------- ------- -------- ------- ------- --------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales..................... $87,957 $ -- $87,957 $34,257 $ -- $34,257 $38,502 $ -- $38,502
Cost of Sales................. 70,610 -- 70,610 27,499 -- 27,499 29,762 -- 29,762
------- ------ ------- ------- ------ ------- ------- ------ -------
Gross Profit................. 17,347 -- 17,347 6,758 -- 6,758 8,740 -- 8,740
Operating expenses:
Selling, shipping general and
administrative.............. 12,519 -- 12,519 6,092 -- 6,092 5,544 -- 5,544
------- ------ ------- ------- ------ ------- ------- ------ -------
Operating income............. 4,828 4,828 666 -- 666 3,196 -- 3,196
Factoring and
Financing Costs(1)(2)....... 4,743 (3,300) 1,443 2,080 (1,423) 657 2,485 (1,406) 1,079
------- ------ ------- ------- ------ ------- ------- ------ -------
Income (loss) before income
taxes....................... 85 3,300 3,385 (1,414) 1,423 9 711 1,406 2,117
Income taxes(3)............... 60 1,110 1,170 -- -- -- 359 304 663
------- ------ ------- ------- ------ ------- ------- ------ -------
Net income (loss)(4)...........$....25 $2,190 $ 2,215 $(1,414) $1,423 $ 9 $ 352 $1,102 $ 1,454
======= ====== ======= ======= ====== ======= ======= ====== =======
Pro forma basic and diluted
net
income (loss) per share...... $ 0.31 $ -- $ 0.21
======= ======= =======
Pro forma weighted average
shares outstanding(5)........ 7,090 7,090 7,090
======= ======= =======
</TABLE>
- -------
(1) Reflects the elimination of the amortization of debt issuance costs which
will be written off in connection with the repayment of debt. The original
assigned value of debt issuance costs was approximately $1.3 million and
such costs were being amortized on a straight-line basis over the terms of
the related debt. See "Use of Proceeds."
(2) Reduction of interest expense related to the repayment of $27.0 million of
indebtedness as of the beginning of each period presented and the
utilization of the remaining net proceeds to fund seasonal cash needs
during the periods presented. Interest expense has also been reduced to
utilize actual principal and interest payments on debt to be repaid with a
portion of the proceeds of this Offering to reduce borrowings outstanding
under the Company's factoring agreement. See "Use of Proceeds."
(3) The differences in Federal income taxes provided and the amounts
determined by applying the Federal statutory tax rate to pro forma income
(loss) before income taxes result from the following (in thousands):
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR MONTHS ENDED
ENDED JUNE 30,
DECEMBER 31, -------------
1997 1997 1998
------------ ------ -----
<S> <C> <C> <C>
Tax at statutory rate........................... $1,151 $ 3 $ 720
Add (deduct) the effect of:
State income taxes............................. 314 14 192
Nondeductible expenses......................... 95 51 45
Change in valuation allowance.................. (390) (68) (294)
------ ------ -----
$1,170 $ -- $ 663
====== ====== =====
</TABLE>
(footnotes continued on following page)
18
<PAGE>
(footnotes continued from previous page)
(4) Net income (loss) has not been adjusted to reflect an expected
extraordinary gain on the early retirement of certain debt to be prepaid
from the proceeds of this Offering. The extraordinary gain primarily
results from the contribution of 569,200 shares of the Company's Common
Stock (valued at the assumed offering price of $12.50 per share) by
BancBoston Ventures, Inc. as consideration for the early repayment of debt
due to BancBoston Ventures, Inc. and BankBoston, N.A.
The pro forma extraordinary gain is comprised of the following:
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR MONTHS ENDED
ENDED JUNE 30,
DECEMBER 31, ----------------
1997 1997 1998
------------ ------- -------
<S> <C> <C> <C>
Pro forma net income before extraordinary
item........................................ $ 2,215 $ 9 $ 1,454
Extraordinary item:
Gain on early retirement of debt............ 7,115 7,115 7,115
Less: Expensing of related deferred financ-
ing costs.................................. (1,125) (1,125) (868)
Less: Provision for income taxes............ (2,576) (2,576) (2,686)
------- ------- -------
Pro forma net income......................... $ 5,629 $ 3,423 $ 5,015
======= ======= =======
Basic and diluted pro forma income per share. $ 0.79 $ 0.48 $ 0.71
======= ======= =======
</TABLE>
(5) The computation of pro forma basic and diluted earnings per share for the
year ended December 31, 1997 and for the six months ended June 30, 1997
and 1998, is based upon (i) giving effect to the 124,000-for-1 stock split
effected on July 21, 1998 (ii) 4,490,000 shares of Common Stock
outstanding prior to the Offering (after giving effect to the concurrent
contribution by BancBoston Ventures, Inc., to the capital of the Company
of 569,200 shares of Common Stock in consideration of the prepayment of
certain indebtedness of the Company) and (iii) 2,600,000 shares of Common
Stock sold by the Company in the Offering. There is no difference between
pro forma basic and diluted earnings per share for the year ended December
31, 1997 and for the six months ended June 30, 1997 and 1998, since the
conversion of the stock options and warrants issued in connection with the
Offering is antidilutive.
19
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
The unaudited Pro Forma Consolidated Balance Sheet at June 30, 1998, is
adjusted to reflect the issuance by the Company of 2,600,000 shares of Common
Stock at the assumed initial public offering price of $12.50 per share and the
application of approximately $27.0 million of net proceeds of this Offering to
repay debt.
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------------
PRO FORMA
AS REPORTED ADJUSTMENTS AS ADJUSTED
----------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents, including re-
stricted cash equivalents(1)............. $ 80 $ 2,400 $ 2,480
Receivables, net.......................... 161 -- 161
Merchandise inventories................... 17,168 -- 17,168
Prepaid expenses and other current as-
sets..................................... 3,111 -- 3,111
-------- ------- -------
Total current assets.................... 20,520 2,400 22,920
Property and equipment.................... 709 -- 709
Other assets(2)........................... 1,727 (739) 988
-------- ------- -------
$ 22,956 $ 1,661 $24,617
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current portion of long-term debt and cap-
ital lease obligation(3)................. $ 548 $ (500) $ 48
Accounts payable.......................... 9,542 -- 9,542
Due to factor(3).......................... 8,822 (7,847) 975
Accrued expenses and other liabili-
ties(2).................................. 779 2,589 3,368
-------- ------- -------
Total current liabilities............... 19,691 (5,758) 13,933
Long-term debt and capital lease obliga-
tion(3).................................. 18,731 (18,500) 231
Stockholders' equity (deficiency)(1)(2)... (15,466) 25,919 10,453
-------- ------- -------
$ 22,956 $ 1,661 $24,617
======== ======= =======
</TABLE>
- --------
(1) Estimated net proceeds from the sale by the Company of 2,600,000 shares of
Common Stock after repayment of certain indebtedness, factor borrowings
and related accrued interest. See "Use of Proceeds."
(2) Reflects an expected extraordinary gain on the early retirement of certain
debt to be prepaid from the proceeds of the Offering of $3.6 million. The
extraordinary gain results primarily from the contribution of 569,200
shares of the Company's Common Stock (valued at the assumed offering price
of $12.50 per share) by BancBoston Ventures, Inc. as consideration for the
early repayment of debt due to BancBoston Ventures, Inc. and Bank Boston
N.A. The extraordinary gain has been reduced by (i) the expensing of the
unamortized portion of deferred financing costs related to the above debt
totaling $739,000 and (ii) the related provision for income taxes of $2.7
million.
(3) Reflects the repayment from the proceeds of the Offering of $27.0 million
of certain indebtedness, factor borrowings and related accrued interest of
the Company.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto appearing elsewhere in this Prospectus.
In addition to the historical information contained herein, the discussion in
this Prospectus contains certain forward-looking statements that involve risks
and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as applicable to all forward-looking statements wherever they
appear in this Prospectus. The Company's actual results could differ
materially from those discussed herein. See "Special Note Regarding Forward
Looking Statements." Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this section
and in "Risk Factors."
OVERVIEW
The Company provides an extensive line of high-quality women's and
children's clothing in the moderate price category to major retailers,
primarily for sale under private labels. In 1997, approximately 80% of the
Company's sales were of knit products. The Company has been able to achieve
attractive profit margins on its knit products by controlling all aspects of
the production process. The Company believes that it differentiates itself by
entering the knit garment production process at the fabric design and creation
phase, unlike many of the Company's competitors who enter the garment
production process later by purchasing finished fabrics. The Company believes
that control over the knit production process enables it to capitalize on its
design and garment production expertise to produce quality apparel for its
customers on shorter lead times and at higher profit margins than its
competitors. In addition to knit products, the Company also produces (i) woven
products of the Company's design where the Company purchases dyed and printed
fabric and then controls all cutting, sewing and finished goods production and
(ii) imported finished knit and woven products. The Company's products are
sold nationwide through department and specialty store chains, including
Charming Shoppes (Fashion Bug), Cato Stores, Montgomery Ward, Goody's and
Sears; mass merchants, including Kmart and Wal-Mart; and wholesale clubs,
including Costco Wholesale.
In 1996, the Company made a strategic decision to shift a substantial
portion of its sewing production from the United States to Mexico where the
Company believes that pricing from contract manufacturers is more favorable
due to lower Mexican labor costs compared to U.S. labor costs. Although the
shift to Mexico for certain of the Company's production has increased the
length of the Company's inventory production and turn cycle, the Company
believes that its shift of sewing production to Mexico allows the Company to
maintain its competitive product pricing and attractive profit margins. The
Company estimates that approximately 25% of its knit sewing production was
performed by contract manufacturers in Mexico in 1997 and that approximately
65% of knit production is currently performed in Mexico. All transactions with
international suppliers currently are denominated in U.S. dollars and are not
subject to exchange rate fluctuations.
In the fourth quarter of 1997, the Company decided to restructure its
children's division, which consisted of (i) the discontinuation of certain of
the children's division's basic commodity products which have traditionally
provided the Company with lower gross margins, (ii) the reduction of
management personnel employed by the children's division and (iii) the use of
Mexican contract manufacturing for certain portions of the production process.
As part of the restructuring of the children's division, the Company also
reduced production and design management personnel in 1997. The Company's
reduction in management personnel, coupled with its shift in sewing production
to Mexico (for its ladies' and children's products), have contributed to the
Company's lower operating expense for 1997 and the first six months of 1998.
The Company realized gross profit margins of 22.7% and operating margins of
8.3% for the first six months of 1998 compared to 19.7% and 1.9% for the first
six months of 1997, largely as a result of utilizing lower cost Mexican
contract sewing and the restructuring of the children's division.
21
<PAGE>
In May 1996, the Company completed a leveraged recapitalization (the
"Recapitalization") whereby the Company borrowed an aggregate of $18.0 million
from BankBoston, N.A and BBV. Substantially all of the proceeds from these
loans were used to repurchase the stock holdings of a former stockholder of
the Company and for a distribution to the Company's then remaining
stockholder, Glenn Sands, the Company's President and Chief Executive Officer.
The Recapitalization was undertaken to consolidate management control under
the Company's current President and Chief Executive Officer, Glenn Sands. In
connection with the Recapitalization, BBV acquired an equity interest in the
Company. See "Principal Stockholders." The addition of $18.0 million of debt
incurred in connection with the Recapitalization in May 1996 increased the
Company's factor and financing costs from approximately $1.0 million in 1995
to $3.2 million and $4.7 million in 1996 and 1997, respectively. The Company
believes that its incurrence of additional debt in connection with the
Recapitalization, coupled with the increase in inventory turn time as a result
of shifting certain of the Company's contract manufacturing to Mexico, have
also constrained the Company in its ability to grow as (i) the financing of
orders under its receivables factoring arrangements have been limited due to
the Company's higher debt levels and (ii) order production cycles under such
factoring arrangements have lengthened (extending the length of time such
related debt remains outstanding) due to the use of Mexican contract
manufacturers. The Company intends to pay down its outstanding debt incurred
in connection with the Recapitalization with the proceeds of the Offering. See
"Use of Proceeds."
RESULTS OF OPERATIONS--RATIOS
The following tables set forth, for the periods indicated, certain items for
the Company's Statements of Operations presented as a percentage of revenues.
The operating results for any period are not necessarily indicative of results
that can be expected for any future period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.............. 75.3% 79.9% 80.3% 80.3% 77.3%
------- ------- ------- -------- --------
Gross profit.................... 24.7% 20.1% 19.7% 19.7% 22.7%
Operating expense............... 13.7% 18.1% 14.2% 17.8% 14.4%
------- ------- ------- -------- --------
Income from operations.......... 11.0% 2.0% 5.5% 1.9% 8.3%
Factoring and financing costs... 1.6% 4.1% 5.4% 6.1% 6.5%
------- ------- ------- -------- --------
Income (loss) before income tax
(benefit) provision............ 9.4% (2.1%) 0.1% (4.2%) 1.8%
======= ======= ======= ======== ========
</TABLE>
RESULTS OF OPERATIONS
First Six Months of 1998 Compared to First Six Months of 1997
Net sales for the first six months of 1998 were $38.5 million, compared to
$34.3 million for the first six months of 1997, an increase of $4.2 million or
12.2%. Sales increased $7.3 million for ladies sportswear due to increases in
the volume of ladies sportswear sales. The increase in ladies sportswear sales
was offset by a decrease in children's division sales of approximately $3.1
million due to the Company's decision in late 1997 to discontinue certain less
profitable children's division product lines resulting in lower sales volume.
As of June 30, 1998, backlog in the children's division was $7.5 million,
compared with $5.0 million as of June 30, 1997.
Gross profit increased to $8.7 million, or 22.7% of net sales for the first
six months of 1998, compared to $6.8 million or 19.7% of net sales for the
first six months of 1997. This increase in gross profit margin as a percentage
of sales was primarily due to the substantial increase in the utilization of
Mexican contractors whose pricing to the Company reflects lower labor costs in
Mexico relative to United States labor costs and, to a lesser extent, the
discontinuation of certain less profitable children's lines.
22
<PAGE>
Operating expenses decreased to $5.5 million, or 14.4% of net sales for the
first six months of 1998, from $6.1 million, or 17.8% of net sales for the
first six months of 1997. The decrease resulted primarily from a reduction in
officers' compensation of approximately $600,000. During 1998, the Company's
President agreed to an amendment to his employment agreement which resulted in
the lower compensation expense.
Income from operations increased to $3.2 million for the first six months of
1998, compared to $666,000 for the first six months of 1997. This increase was
due primarily to (i) an increase in gross profit margins of 3.0% resulting
from the shift in sewing production to Mexico; (ii) an increase in sales
volume for ladies sportwear; and (iii) a decrease in general and
administrative expenses resulting from lower officers' compensation expense.
Factor and financing costs increased to $2.5 million for the first six
months of 1998 compared to $2.1 million for the first six months of 1997. This
increase of $404,000 was primarily due to increased factoring costs associated
with higher sales volumes.
The Company earned $711,000 during the six months ended June 30, 1998, and
has reflected a provision for income taxes of $359,000. The Company concluded
that based on the current results, it would not increase the valuation
allowance relating to the increase in deferred tax assets for the six months
ended June 30, 1998. Accordingly, a benefit of $153,000 has been reflected in
the results of operations for the six months ended June 30, 1998. For the six
months ended June 30, 1997, the Company had a loss before income taxes of $1.4
million. The Company concluded based on its situation at the time, that it
could not overcome the presumption that it was more likely than not that it
would fully realize the net operating loss carryforward and deferred tax
assets generated as a result of the loss for the six months ended June 30,
1997. Accordingly the Company did not record a benefit in the consolidated
financial statements for the six months ended June 30, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales were $88.0 million in 1997, compared to $78.7 million in 1996,
representing an increase of $9.3 million or 11.8%. This increase was primarily
due to an increase in sales volume of ladies' woven sportswear products and an
increase in the volume of children's division sales in 1997, partially offset
by a slight decrease in the volume of ladies' knit sportswear sales.
Gross profit increased to $17.3 million, or 19.7% of net sales in 1997,
compared to $15.8 million, or 20.1% of net sales in 1996. This decrease in
gross profit as a percentage of net sales was primarily due to children's
division sales, which sales carried a lower gross profit margin due to the
nature of the products sold and which products carried higher costs due to the
exclusive use of domestic contractors.
Operating expenses decreased to $12.5 million in 1997, compared to $14.2
million in 1996, representing a decrease of $1.7 million. This decrease was
due primarily to a buy-out of a former owner and officer of the Company during
1996 in connection with the Recapitalization and the elimination of
compensation related thereto, partially offset by an increase in selling
commissions earned in 1997.
Income from operations increased to $4.8 million in 1997, compared to $1.6
million in 1996. This increase resulted primarily from increased sales volumes
coupled with lower compensation expense, offset for slightly lower gross
profit margins and increased selling commissions.
Factoring and financing costs increased to $4.7 million in 1997, compared to
$3.2 million in 1996. The increase of $1.5 million was primarily due to
interest expense incurred of approximately $550,000 related to the
Recapitalization. The balance of the increase was attributable to an increase
in factoring costs due to increased sales.
For the year ended December 31, 1997, the Company had income before income
taxes of $85,000 and a tax provision of $60,000. The higher effective tax rate
related to the income tax provision in 1997 resulted from
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the significance of the amount of nondeductible expenses for tax purposes when
compared to the level of income before income taxes earned in 1997. For the
year ended December 31, 1996, the Company had a loss before income taxes of
$1.7 million. The Company concluded, based on its situation at the time, that
it could not overcome the presumption that it was more likely than not that it
would fully realize the net operating loss carryforward and deferred tax
assets generated as a result of the losses incurred for the year ended
December 31, 1996. Accordingly, the Company did not record a significant
benefit in the consolidated financial statements for the year ended December
31, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales were $78.7 million in 1996, compared to $67.3 million in 1995,
representing an increase of 16.9%. This increase was primarily due to an
increase in net sales of $5.9 million attributable to increased volume in the
newly created children's division and an increase in net sales of $7.0 million
attributable to volume increases experienced by the Company's woven products
division.
Gross profit decreased to $15.8 million, or 20.1% of net sales in 1996,
compared to $16.6 million, or 24.7% of net sales in 1995. Reduced gross profit
margins were a result of competitive pricing related to off-shore production
utilized by certain of the Company's competitors. This industry trend required
management to evaluate various off-shore production alternatives prior to
management's decision to move certain portions of manufacturing to Mexico.
Thus, this decrease was primarily due to the Company's decision to maintain
its market share by reducing its prices while evaluating off-shore production
alternatives.
Operating expenses increased to $14.2 million in 1996, compared to $9.3
million in 1995, representing an increase of $4.9 million. This increase was
primarily due to increased officer compensation and selling and shipping
costs.
Income from operations decreased to $1.6 million in 1996, compared to $7.4
million in 1995. This decrease resulted primarily from lower gross profit
margins coupled with increased officer compensation and increased selling and
shipping costs, partially offset by an increase in sales volumes.
Factoring and financing costs increased to $3.2 million in 1996, compared to
$1.0 million in 1995. The increase of $2.2 million was due to interest expense
related to the Recapitalization and, to a lesser extent, increased factoring
costs due to increased sales.
For the year ended December 31, 1996, the Company had a loss before income
taxes of $1.7 million. The Company concluded, based on its situation at the
time, that it could not overcome the presumption that it was more likely than
not that it would fully realize the net operating loss carryforward and
deferred tax assets generated as a result of the losses incurred for the year
ended December 31, 1996. Accordingly, the Company did not record a significant
benefit in the consolidated financial statements for the year ended December
31, 1996. For the year ended December 31, 1995, the Company recorded an income
tax provision of $253,000. The lower effective rate in 1995 resulted from the
Company's S Corporation election for Federal and state income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by $1.1 million from a deficit of $629,000 at
December 31, 1996 to working capital of $444,000 at December 31, 1997. The
change results primarily from a reduction in payables and an increase in
advances to officer. Working capital increased by $385,000 from $444,000 at
December 31, 1997 to $829,000 at June 30, 1998. The change results primarily
from reductions in current maturities of the Company's long-term debt.
Capital expenditures amounted to $51,000, $205,000 and $218,000 for the
years ended December 31, 1995, 1996 and 1997, respectively, and $89,000 and
$111,000 for the six months ended June 30, 1997 and 1998, respectively. These
expenditures were made primarily to upgrade and expand capabilities of
computer equipment and to maintain Company facilities in the ordinary course
of business.
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During 1995, the Company used $5.4 million in financing activities to fund
dividends to stockholders. During 1996, the Company used $1.3 million in
financing activities. In 1996, proceeds from long-term debt and the payment of
advances by officers totaled $20.0 million and $980,000, respectively. Such
proceeds were reduced by the use of funds to acquire treasury stock ($11.4
million), to pay dividends to stockholders ($9.3 million), to repay long-term
debt ($1.0 million) and for costs incurred in connection with obtaining
financing ($600,000). During 1997 and the six months ended June 30, 1997, cash
provided from financing activities totaled $1.1 million and $1.9 million,
respectively, and resulted primarily from the proceeds of long-term debt which
were slightly offset by repayments of long-term debt. For the six months ended
June 30, 1998, cash provided from financing activities totaled $26,000.
Repayments of long-term debt of $200,000 were offset by payments of $230,000
on advances due from an officer.
The Company has historically met its cash requirements through cash flow
from operations, borrowings from various lenders, including affiliates, and
factoring of its accounts receivable and letters of credit under the Factoring
Line. After application of the net proceeds to the Company from the sale of
the Shares offered hereby to repay indebtedness, the Company expects that the
only indebtedness outstanding will be approximately $1,254,000 under the
Factoring Line and a capital lease obligation of the Company (or approximately
$279,000 if the Underwriters' over-allotment is exercised in full). See "Use
of Proceeds." The Company intends to borrow from time to time under the
Factoring Line to meet its working capital needs. Due to the cyclical nature
of its sales, the Company's working capital requirements peak during the
second and third quarters.
The addition of $18.0 million of debt incurred in connection with the
Recapitalization in May 1996 increased the Company's factor and financing
costs from approximately $1.0 million in 1995 to $3.2 million and $4.7 million
in 1996 and 1997, respectively. The Company believes that its incurrence of
additional debt in connection with the Recapitalization, coupled with the
increase in inventory turn time as a result of shifting certain of the
Company's contract manufacturing to Mexico, have also constrained the Company
in its ability to grow as (i) the financing of orders under its receivables
factoring arrangements have been limited due to the Company's higher debt
levels and (ii) order production cycles under such factoring arrangements have
lengthened (extending the length of time such related debt remains
outstanding) due to the use of Mexican contract manufacturers. The Company
intends to pay down its outstanding debt incurred in connection with the
Recapitalization with the proceeds of the Offering. See "Use of Proceeds."
The Company's Factoring Line permits daily working capital borrowings of
90.0% of accounts receivable (non-recourse), plus 50.0% of letters of credits
outstanding issued by the Company not to exceed $10.0 million. The outstanding
debt is collateralized by the Company's inventory, receivables and is
personally guaranteed by Glenn Sands, the Company's President and Chief
Executive Officer. The Factoring Line expires on May 31, 2000, and is subject
to annual renewal. Borrowings are subject to a monthly processing charge equal
to 0.7% on gross sales up to $25 million, 0.65% on gross sales between $25
million and $75 million and 0.6% of gross sales over $75 million. In addition,
an interest charge is applied on the total outstanding debt equal to prime
plus 0.5% or 9.0% at December 31, 1997. At June 30, 1998, the Company had a
net outstanding balance of $8.8 million under the Factoring Line.
At December 31, 1996 and 1997 and June 30, 1998, the Company was not in
compliance with certain financial ratio covenants relating to dilution and
minimum earnings before interest, income taxes, depreciation and amortization
ratios, as defined. The Company obtained waivers related to such noncompliance
through July 1999.
The Company anticipates that it will be able to satisfy its cash
requirements including its expected growth for the next 12 months, primarily
with cash flow from operations and borrowings under the Factoring Line.
YEAR 2000 COMPLIANCE
The Company is currently in the process of evaluating its information
technology for Year 2000 compliance. The Company does not expect that the cost
to modify its information technology infrastructure to be Year 2000 compliant
will be material to its financial condition or results of operations. The
Company does not anticipate
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any material disruption in its operations as a result of any failure by the
Company to be in compliance. The Company has purchased new information
technology platforms which, among other things, are Year 2000 compliant.
Hardware and software costs will be capitalized by the Company and all other
costs associated with Year 2000 compliance will be expensed as incurred. The
Company has had discussions with its customers and vendors and although the
Company believes that the information systems of its major customers and
vendors (insofar as they relate to the Company's business) comply with Year
2000 requirements, there can be no assurance that the Year 2000 issue will not
affect the information systems of such customers and vendors as they relate to
the Company's business, or that any such impact on such customers and vendors'
information systems would not have a material adverse effect on the Company's
business, financial condition or results of operations. The remediation of
Year 2000 issues involving the Company's information systems is expected to be
completed in time to prevent any material adverse consequences to the
Company's business, financial condition or results of operations.
INFLATION
As of the date hereof, inflation has not had and is not expected to have a
significant impact on the Company's business.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures About Segments of an Enterprise and Related Information,"
introduces a new model for segment reporting, called the "management
approach." The management approach is based on the way that management
organizes segments within a company for making operating decisions and
assessing performance. Reportable segments can be based on products and
services, geography, legal structure, management structure--any manner in
which management disaggregates a company. The management approach replaces the
notion of industry and geographic segments in current accounting standards.
SFAS 131 is effective for fiscal years beginning after December 15, 1997.
However, SFAS 131 need not be applied to interim statements in the initial
year of application. SFAS 131 requires restatement of all prior period
information reported. The Company intends to adopt this standard when required
and is in the process of determining the effect of SFAS 131 on the Company's
financial statement disclosures.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The statement is intended to eliminate the diversity in
practice in accounting for internal-use software costs and improve financial
reporting. The statement is effective for fiscal years beginning after
December 15, 1998. The Company is in the process of determining the effect of
this statement on the Company's consolidated financial position and results of
operations.
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BUSINESS
GENERAL
The Company provides an extensive line of high-quality women's and
children's clothing in the moderate price category to major retailers,
primarily for sale under private labels. The Company has been able to achieve
attractive profit margins on its knit products by controlling all aspects of
the production process. The Company believes that it differentiates itself by
entering the knit garment production process at the fabric design and creation
phase, unlike many of the Company's competitors who enter the garment
production process later by purchasing finished fabrics. The Company believes
that control over the knit production process enables it to capitalize on its
design and garment production expertise to produce quality apparel for its
customers on shorter lead times and at attractive profit margins. In 1997,
approximately 80% of the Company's sales were of knit products. In addition to
knit products, the Company also produces (i) woven products of the Company's
design where the Company purchases dyed and printed fabric and then controls
all cutting, sewing and finished goods production and (ii) imported finished
knit and woven products. The Company's products are sold nationwide through
department and specialty store chains, including Charming Shoppes (Fashion
Bug), Cato Stores, Montgomery Ward, Goody's and Sears; mass merchants,
including Kmart and Wal-Mart; and wholesale clubs, including Costco Wholesale.
INDUSTRY
Apparel Sales Growth. The Company believes that, based on information that
it has obtained from outside sources it deems to be reliable, the U.S. apparel
industry totaled approximately $170.0 billion in retail sales in 1997. The
industry grew approximately 2.2% and 4.9% in 1996 and 1997, respectively.
According to Standard & Poor's Apparel and Footwear Industry Survey, in 1997
small brands and private label goods accounted for approximately 70% of U.S.
wholesale apparel sales while national brands accounted for approximately 30%
of U.S. wholesale apparel sales. The Company believes, further, that in 1997,
based on the outside sources referred to above, women's apparel accounted for
approximately 53% of all U.S. apparel sales, while children's clothing
accounted for approximately 17% of all U.S. apparel sales. The U.S. children's
apparel industry increased in market size from $24.7 billion in 1994 to
approximately $28.9 billion in 1996, a 17% increase.
Trend Toward Casual Dress. The Company believes there is a growing trend in
the United States toward casual dress, as reflected in the growing number of
companies which have implemented policies such as "dress-down Fridays," and
the increasing number of people who work at home. In addition, the Company
believes that outside of the workplace, social activities are focusing on a
more casual lifestyle. The Company also believes that in recent years, apparel
consumers have become more cost conscious and are bypassing premium or
designer products in favor of more casual, moderately-priced products.
Trend Toward Private Label Apparel. The Company believes that there is a
growing trend, on the part of both retailers and consumers, toward private
label apparel. Private label apparel bears the retailer's own name or a
proprietary brand name exclusive to the retailer. Producers are able to sell
these garments to retailers at lower wholesale prices due to certain economies
of scale, including lower advertising and promotional costs, lack of brand
name license fees and royalties, and other risks and expenses customary in the
brand-name apparel industry. As a result of the lower wholesale prices,
private label apparel generally provides higher margins for the retailer than
brand name or designer products. Industry sales of small brands and private
label apparel represented approximately 70% of total U.S. apparel sales in
1997. The Company believes that this shift is due primarily to the education
of consumers and retailers as to the benefits of private label products. The
Company believes increasing numbers of consumers regard private label products
as less expensive than brand name products, but of equal or better quality.
This increase in consumer demand for private label garments, coupled with
retailers' demands for higher margins, has resulted in retailers allocating
more space to private label products.
Trend Toward Retail Consolidation. Over the last few years, the retail
apparel industry has been consolidating. This consolidation has produced
larger retailers and department stores that, on an individual basis, demand
larger quantities of high-quality products from their suppliers.
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OPERATING STRATEGY
The Company's operating strategy consists of the following key elements:
Produce Only on a Firm Commitment Basis. The Company purchases raw materials
and produces goods only upon receipt of a firm commitment from a customer.
Once a product is shipped to a customer, the Company generally does not accept
returns unless the product is defective or delivered late. These practices
minimize the Company's need to carry unsold inventories.
Focus on an "Updated Basics" Product Line. The Company's products are
updated versions of basic, recurring styles that have a proven record of sales
success and that the Company believes are less susceptible to fashion
obsolescence and less seasonal in nature than fashion styles. The Company
regularly updates these proven styles to reflect current fashion trends which
it believes enhances sales by providing its product line a new and fresh look.
In addition, the Company believes this practice also allows it to capitalize
on higher profit margins associated with updated basics apparel, compared to
those of more generic apparel priced on a commodity basis.
Maintain Control Over the Entire Production Process. The Company is able to
provide superior customer service and achieves attractive profit margins by
controlling the entire production process of its knit products. By controlling
the production process, the Company has the ability to tailor products to a
customer's specific needs, offer customers rapid order turn around time,
maintain flexible scheduling unconstrained by a finite production capacity,
maximize fabric yields by knitting fabrics to the Company's own specifications
and maintain higher standards of quality control.
Outsource Manufacturing. Outsourcing allows the Company to respond quickly
to changing production requirements, while eliminating the significant capital
investment requirements and potential labor problems and other risks
associated with maintaining manufacturing facilities and a manufacturing
workforce. The Company does not own any manufacturing facilities except for a
limited in-house cutting facility located within its warehouse in North
Bergen, New Jersey. The Company maintains cost-efficiency and flexibility by
outsourcing at nearly all stages of production to the lowest cost provider
able to maintain the Company's timing and quality requirements.
Provide Value to Customers. The Company seeks to add value to customers'
overall merchandising effort by helping them maximize sales and profit
margins. The Company works closely with its customers to develop coordinated
products and distinctive product lines at their particular price points. This
process allows the Company's customers to achieve a degree of differentiation
from their retail competitors. The Company believes its ability to design and
offer distinctive product lines is a competitive advantage and leads to large
volume orders. The Company's sales force also consults with customers
concerning optimal delivery schedules, floor presentation, pricing and other
merchandising considerations. In addition, the Company provides its customers
with competitive market intelligence gathered through discussions with its
contract manufacturers. By integrating its sales force, design capabilities
and manufacturing capabilities, the Company's customers receive up-to-date,
high-quality products at competitive prices.
Develop Long-Term Customer Relationships. The Company emphasizes the
development of long-term relationships with its customers by providing a high
level of customer service through its sales force. Each sales person is
responsible for all aspects of a customer's order, including design
assistance, the development and approval of product samples and regular order
status updates until the delivery of finished goods. The Company seeks to
capitalize on its knowledgeable and experienced sales force by maintaining
regular interaction with its customers which provides the Company a thorough
understanding of which products will meet their particular needs.
GROWTH STRATEGY
The Company believes a number of current industry trends will increase
demand for private label apparel products. First, the Company believes that
increasing numbers of consumers regard private label products as
less expensive than brand name products, but of equal or better quality.
Retailers also find private label products attractive as they provide higher
profit margins than brand name products. Second, the Company believes that
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there has been a trend in recent years toward the purchase of casual,
moderately priced apparel, driven by the popularity of casual dress-down
Fridays and increasing numbers of casual social activities. Third, in recent
years there has also been significant growth in the children's apparel market.
Finally, the Company believes, that the general consolidation of major
retailers and department stores has created a preference among retailers for
doing business with a limited number of large, well-capitalized suppliers that
can provide large product volumes quickly and efficiently. The Company
believes its focus on casual, moderately priced, private label apparel for
women and children positions it to capitalize on these trends. The Company
intends to grow its business by pursuing the following strategies:
Increase Sales to Existing Customers. The Company seeks to increase sales to
existing customers by expanding sales to individual buyers of additional
products within a particular product line and selling to additional buyers
within the same organization. Certain of the Company's customers began their
relationship with the Company by purchasing only one of the Company's
products. Since these initial purchases, the Company has been able to expand
its sales to such customers to multiple products and often to multiple lines.
This strategy has enabled the Company to expand its product sales to its
existing customers over time. In addition, retailers typically employ a number
of buyers who focus on different product lines including, among other things,
types of fabric, gender and product sizes. To capitalize on this industry
dynamic, the Company seeks to leverage its strong relationships with
individual buyers to gain access to additional buyers of different product
lines within the same organization. The Company aggressively pursues these
cross-selling opportunities by offering, for example, woven bottoms to
customers which currently purchase only knit tops. The Company's broad product
line enables it to pursue many of these cross-selling opportunities.
Expand the Company's Customer Base. The Company intends to leverage its
proven track record of sales success, reputation for quality products and
superior customer service to expand its customer base. The Company utilizes
such qualities to establish test programs whereby new customers can evaluate
the quality of the Company's products and sales success before placing large
orders. In addition, the Company's sales force places great importance on
maintaining its relationships with individual buyers as a way of gaining
access to new customers if such buyers change employers.
Expand Ladies' Product Offerings. The Company seeks to increase sales to
customers by offering ladies' products in categories outside of the Company's
traditional knit product offerings. The Company's goal is to be considered by
its customers as providing a "one-stop shopping" opportunity, where such
customers can easily and quickly fill all of their buying needs. The Company
has already begun expansion of its ladies woven product line from pants to
skirts, tops, shorts and jumpers. Sales of the Company's woven products
increased from $8.2 million in 1996 to $16.2 million in 1997. Additionally,
the Company is seeking to develop other ladies' lines, such as sweaters, and
to import moderately-priced finished goods.
Expand Children's Apparel Division. The Company began selling children's
apparel in 1995. Since that time, revenues from the sale of children's apparel
have grown from $6.6 million in 1995 to $17.8 million in 1997. In the last
quarter of 1997, the Company made the strategic decision to discontinue its
lines of children's basic, commodity products in favor of developing new
children's lines utilizing the Company's "updated basics" strategy. In
connection with this decision, the Company hired a new management team and
additional personnel for its children's division. The Company believes that
its updated products will differentiate it from typical children's apparel
producers and has already begun to realize sales growth and gross margin
improvement from its new lines currently in production. The Company will seek
to expand product offerings in its updated basics children's line.
Pursue Select Acquisitions. The Company may, from time to time on an
opportunistic basis, acquire apparel companies with significant private label
business and/or underdeveloped apparel brands or licensed trademarks. The
Company will primarily focus on acquisition candidates that provide the
Company with certain operational or manufacturing synergies in order to
realize enhanced economies of scale in the Company's sales and production
processes. The Company has no current plans or agreements to acquire any other
companies.
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PRODUCTS
The Company provides an extensive line of high-quality women's and
children's clothing in the moderate price category. The Company's products are
updated versions of basic, recurring styles which have a proven record of
sales success with its customers and that the Company believes are less
susceptible to fashion obsolescence and less seasonal in nature than fashion
styles. The Company employs merchandisers and designers to regularly update
these basic styles to reflect current fashion trends by using new color
schemes, fabrics, decorative trim and by incorporating nuances of existing
popular styles.
The Company believes its product line diversity and custom design
capabilities provide a competitive advantage because it makes the Company a
"one-stop shop" for its customers whereby an individual buyer can purchase
substantially all the products necessary to complete its private label line
without having to shop additional suppliers. The Company has developed an
extensive product line in its primary market, ladies' casual wear, which
includes knit tops, bottoms, related separates, dresses and short sets, and
woven (e.g., corduroy, twill, denim) bottoms, jumpers, dresses, coordinates,
short sets and tops. In addition to its standard production garments, the
Company also produces, on a limited basis, custom designed merchandise for
certain of its customers. In addition to the Company's existing knit product
lines, which accounted for approximately 80% of the Company's sales in 1997,
the Company expanded its product offerings to include ladies' woven bottoms
and children's apparel in 1995. Since 1995, the Company has expanded its
ladies woven products to also include tops, shorts, overalls and jumpers.
Sales of the Company's woven products increased from $8.2 million in 1996 to
$16.2 million in 1997.
The Company began selling children's knit apparel in 1995. Since that time,
revenues from children's apparel sales have grown from $6.6 million in 1995 to
$17.8 million in 1997. In order to increase profit margins on growing sales of
children's apparel, the Company hired a new management team and additional
personnel for its children's division in the first quarter of 1998. The new
management team has focused on developing new children's lines utilizing the
Company's "updated basics" strategy instead of continuing to offer commodity
basic goods as the children's division had done prior to 1998. Such updated
basics have typically enabled the Company to achieve higher profit margins on
its product lines.
The Company sells its products primarily under private labels; however, the
Company also sells a limited number of products under its own labels. During
1997, approximately 75% and 25% of the Company's products were sold under
private labels and the Company's proprietary brand names, respectively.
CUSTOMERS
The Company's products are sold nationwide in an estimated 11,000 stores
operated by approximately 154 department and specialty store chains, mass
merchandisers, and other retail outlets. For the year ended December 31, 1997,
sales to department and specialty stores accounted for approximately 79.5% of
the Company's net sales, while sales to mass merchandisers, wholesale clubs
and mail order catalogues accounted for approximately 17.3%, 2.9% and 0.3% of
the Company's sales, respectively. The Company does not currently have any
long-term commitments or contracts with any of its customers.
The following table presents data on the Company's gross sales, in thousands
of dollars and in the percentage of gross sales, to its largest customers for
each of the last three years and for the six months ended June 30, 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
1995 1996 1997 JUNE 30, 1998
------------------ ------------------ ------------------ ------------------
DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS PERCENTAGE
------- ---------- ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cato Stores............. $ 6,748 9.6% $ 8,617 10.3% $ 6,065 6.5% $ 2,291 5.4%
Charming Shoppes........ 11,212 16.0 13,306 15.9 12,584 13.4 4,390 10.4
Costco Wholesale........ -- -- -- -- 1,451 1.5 4,434 10.5
Kmart................... 5,025 7.2 7,126 8.5 8,844 9.4 12,714 30.1
Lerner.................. 10,464 14.9 6,749 8.0 3,985 4.3 297 0.7
Montgomery Ward......... -- -- -- -- 4,104 4.4 1,986 4.7
Sears................... 1,822 2.6 9,922 11.8 11,347 12.1 5,610 13.3
Shopko Stores........... -- -- 2,569 3.1 4,964 5.3 1,688 4.0
Wal-Mart................ 3,207 4.6 6,814 8.1 6,744 7.2 414 1.0
</TABLE>
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MERCHANDISING
The Company employs an interactive approach to merchandising. Throughout the
design and production process, the Company's sales and marketing staff works
closely with the design and production team from order taking to shipping, to
ensure that goods are produced to its customers' exact specifications in an
efficient and timely manner. The Company's sales and marketing staff
participates in the production process by checking samples of work-in-process
goods at various stages to verify that these goods meet customer
specifications. In many cases, sample items are presented to customers at
designated points of the production process to obtain feedback and effectively
ensure that the finished goods meet customer expectations.
The Company also works closely with its customers to develop coordinated
products and distinctive product lines to serve their customers more
effectively. Rather than offering goods only from shelf lines, the Company
seeks to add value to its customers' overall merchandising efforts by helping
them maximize sales and profit margins at their respective price points and
achieve a degree of differentiation from their retail competitors. The Company
believes its ability to design and offer distinctive product lines is a
competitive advantage and leads to large volume orders.
Design
The Company believes that its customers rely on its ability to design,
produce and deliver, on a timely basis, commercially successful apparel lines.
The Company's design team is responsible for the creation, development and
coordination of an extensive range of products and product lines and regularly
updates existing styles to mirror changing fashion trends. In particular, the
Company's design team seeks to enhance consumer demand for its products by
combining functional fabrics with creative designs and color schemes. The
Company's design and merchandising teams continually monitor and evaluate the
ladies' and children's markets for styles and trends in fabrics, trims and
accessories, and analyze sales information provided by its customers. The
Company's design teams work closely with its customers to help identify such
customers' design needs and revise designs as necessary to reflect the style,
image and value that each customer wishes to offer to its consumers.
The Company has developed an expertise in fabric design, dyeing and printing
over the past seven years which enables it to rapidly update its products. The
Company maintains an in-house art department which develops printed fabrics
which eliminates the need to buy standard printed or dyed fabrics from
suppliers. The Company's art department, using state-of-the-art CAD systems,
redesigns art work purchased from various art studios by altering colors,
backgrounds, graphics, shapes and other items to make it suitable for printed
fabrics which it believes will fit the fashion tastes of the Company's
customers. The Company currently catalogues its printed fabrics in an
extensive print library which encompasses approximately 2,000 different
designs. The Company believes its print library is an important resource
because it greatly reduces its need to regularly source new fabric patterns,
colors and designs. In addition, these distinctive patterns and designs are
copyrighted by the Company which helps to ensure that its updated and
distinctive products are not readily imitated by competitors.
Sales and Marketing
The Company's selling operation is highly centralized. Sales to the
Company's customers are made by an in-house sales force of 10 people,
primarily through the Company's New York City showrooms. Senior management
actively participates in the planning of the Company's marketing and selling
efforts. The Company does not employ independent sales representatives or
operate regional sales offices, but does participate in various regional
merchandise marts, industry marketplaces at which numerous vendors rent space
in order to display their products to regional buyers. This sales structure
enables management to effectively control the Company's sales effort and to
deal directly with, and be readily accessible to, the Company's major
customers. Products are generally marketed to department and specialty store
customers four to five months in advance of each of the Company's selling
seasons.
The Company emphasizes the development of long-term relationships with its
customers. The Company has established strong relationships with individual
buyers at each of its customers, and more importantly, it has
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also established relationships with senior management of its key customers.
The Company believes multiple tier relationships help to insulate it from
changes in individual buyers at its various customers as is common in the
apparel business.
A key component of the Company's ability to achieve its long-term
relationships is the high level of services that the Company's sales force
provides to its customers. Each sales person is responsible for all aspects of
a customer's needs, including design assistance, developing product samples,
obtaining orders, coordinating fabric choices, monitoring production and
delivering finished products. During the production process, such salesperson
is responsible for informing the customer about the progress of an order,
including any difficulties that might affect delivery time. In this way, the
Company and its customer can make appropriate arrangements regarding any delay
or other change in the order. Further, the Company ensures that multiple
salespersons are familiar with each customer account so that they can work
cooperatively to assist one another on a reciprocal basis. The Company
believes that this sales management technique provides an advantage over its
competitors because it ensures that its customers always have a knowledgeable
salesperson available to discuss product orders and related issues.
The Company's sales force is in constant contact with its customers to
develop an understanding of the customers' retail strategies, style
preferences and production requirements, as well as to identify prevailing
fashion trends. The Company then utilizes this information to provide its
customers with products that meet their particular requirements efficiently.
The Company's sales and design team works with certain of its customers to
custom design garments which incorporate current industry fashion trends that
will reflect the style and image that a buyer intends to project to consumers.
In order to facilitate this process the Company requires that its sales force
be knowledgeable about all aspects of the design and garment production
process. The Company believes its knowledgeable sales force enables it to
provide its customers immediate feedback as to the various costs of creating
and changing designs, the costs and availability of various fabrics, and
production times.
The Company also consults with its customers concerning the style and
coordination of the clothing they purchase, optimal delivery schedules, floor
presentation, pricing and other merchandising considerations. Frequent
communications between the Company's senior management and other sales
personnel and their counterparts at various levels in the buying organizations
of the Company's customers is an essential element of the Company's marketing
and sales efforts. These contacts allow the Company to closely monitor retail
sales volume to maximize sales at favorable profit margins for both the
Company and its customers. The Company and its largest customers discuss
retail trends and their plans regarding anticipated levels of purchases of
Company products for future seasons. These discussions are intended to assist
the Company in planning the production and timely delivery of its products.
CONTRACT MANUFACTURING AND DISTRIBUTION
Overview
The Company manufacturers substantially all of its knit products, which
accounted for approximately 80% of its product sales in 1997, through
designing and creating fabric and contracting with select manufacturers at
every stage of both fabric and finished goods production. The balance of the
Company's products consists primarily of (i) woven products of the Company's
design where the Company purchases dyed and printed fabric and then controls
all cutting, sewing and finished goods production and (ii) imported finished
knit and woven products.
A significant component of the Company's operating strategy is the
utilization of third party contract manufacturers throughout the entire
production process from yarn purchasing through product delivery. The Company
believes this is a significant competitive advantage because it provides the
Company with the flexibility to choose the lowest cost provider available at
each stage of the production process that can meet the Company's delivery and
quality requirements. In addition, outsourcing of production eliminates
significant capital investment requirements and minimizes the risk of labor
problems and other risks associated with maintaining manufacturing facilities
and a manufacturing workforce. The Company does not own any manufacturing
facilities except for limited in-house cutting capacity located within its
warehouse in North Bergen, New Jersey. The Company does not engage in any
hedging activities intended to offset the risk of raw material price
fluctuations. The
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Company supplies its main contractors with a high volume of business on a
consistent basis, making the Company an important customer of these
contractors. In certain instances, the Company provides these contractors with
100% of their business. This strategy enables the Company to leverage its
position as a key customer to negotiate favorable pricing, and to receive
production priority and preferential treatment. The Company believes that this
manufacturing model allows it to maximize production flexibility, speed and
efficiency without sacrificing product quality.
The Company believes its production model helps it to achieve attractive
gross profit margins. Whereas substantially all apparel companies begin the
manufacturing process by purchasing finished fabric from a converter, the
Company enters the production process for its knit products at the stage of
purchasing yarn for its fabrics. By utilizing contract manufacturers at an
earlier stage of the production process, the Company avoids certain mark-ups
normally passed on to the Company's competitors that purchase finished fabrics
from converters. In addition, in 1996, the Company made a strategic decision
to shift the majority of its sewing operations from the United States to
Mexico. The enactment of NAFTA, whereby goods produced in Mexico are generally
exempt from U.S. import duties as long as they meet certain guidelines, made
it economically feasible for the Company to take advantage of Mexico's large
and skilled labor pool. See "--Imports and Import Restrictions." The Company
believes that by having its products sewn in Mexico, it can produce high-
quality goods at significant cost savings because labor costs in Mexico are
significantly lower than in the United States.
The Company has developed long-standing relationships with many of its
contract manufacturers and believes that these relationships contribute to its
ability to produce quality apparel products on a timely and cost effective
basis. In 1997, approximately 80% of the Company's major contract
manufacturers had been conducting business with the Company for over five
years. In addition, the Company has in the past loaned start-up capital to an
existing manufacturer to assist such manufacturer with the development of
manufacturing facilities in Mexico where the Company's products are sewn. In
exchange for such loan, the Company has first priority over work performed in
such factory for the foreseeable future so long as the Company continues to
send work to such manufacturer. The Company believes that it has ready access
to numerous contractors. The Company determines which of its contractors to
utilize based on, among other factors, the price charged by each contractor
and each contractor's available production capacity to complete the order, the
transportation lead times required to deliver goods, the availability of quota
for the product from various countries and the contractor's ability to produce
goods on a timely basis subject to customers' quality specifications. The
Company regularly visits its contractors and communicates with governmental
authorities to ensure that such contractors are in compliance with federal,
state and local labor laws. If any contractor is found to be in violation of
such laws, the Company immediately terminates its relationship with such
contractor.
The Company believes it is well-positioned to take advantage of the trend
toward shorter lead times among retailers, and to continue to increase its
market share because of its control over the entire production process and its
ability to control production schedules at its contractors. The Company has
the ability, through its contract manufacturers, to operate on production
schedules with lead times ranging from as few as 30 days to several months to
accommodate its customers' requirements. Typically the Company's specialty
retail customers attempt to respond quickly to changing fashion trends and are
increasingly less willing to assume the risk that goods ordered on long lead
times will be out of fashion when delivered. The Company maintains its sewing
facilities in New Jersey for orders with shorter lead times. While mass
merchandisers such as Kmart are beginning to operate on shorter lead times,
they are also occasionally able to estimate their needs as much as six months
to one year in advance for products that do not change in style significantly
from season to season.
Yarn Sourcing
The manufacturing process for knit products begins with yarn purchasing. The
Company buys yarns of various qualities and characteristics from six primary
domestic suppliers as well as from overseas sources through brokers. With
additional capital from the Offering, the Company will be positioned to
purchase yarn directly from foreign mills at a substantial cost savings. The
Company purchases its own yarn to ensure the quality of the raw materials used
in its garment production.
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Knitting
A key component of the Company's ability to produce goods at attractive
profit margins is its ability to control the knitting process. The Company has
an in-depth knowledge of the technical aspects of the knitting process which
allows it to produce its knit fabrics efficiently and cost effectively.
Controlling the knitting process allows the Company to specify the exact
technical specifications and widths at which its fabrics are produced. This
allows the Company to design its patterns to maximize the yields it receives
from each yard of fabric produced. In addition, the mills convert the yarn
into rolls of fabric meeting the Company's specifications as to yarn content,
weight, width and knitting design. This allows the Company to control the
quality of the fabric for flaws, weight deficiencies or other problems earlier
in the production process, thereby increasing customer satisfaction with its
finished products. The Company utilizes approximately ten primary knitting
mill contractors which it believes can be supplemented by an equal number of
secondary knitting mills to increase capacity. Mills are selected, in part,
based on their ability to produce fabric at different custom widths, as well
as their cost and timing of production. Knitted fabric is sent to one of the
Company's finishers for dyeing, bleaching or printing and preparing the fabric
for cutting. The Company also purchases, primarily from domestic sources,
finished fabric (both dyed and printed) for its woven products as well as, on
an occasional basis, for its knit products.
Dyeing and Printing
Fabric rolls are delivered to one of two primary outside dyers and/or to one
of two primary outside printers who create, respectively, solid colors or
print patterns, as specified by the Company. Of the finished products sold by
the Company, approximately 60% are solid colors, and 40% are printed fabrics.
By working closely with its manufacturers over the past seven years, the
Company has developed an expertise in fabric design, dyeing and printing. The
Company currently catalogues its printed fabrics in an extensive print library
which encompasses approximately 2,000 different styles. If patterns from the
Company's library are not used, outside design studios are employed to create
new printing patterns to the Company's specifications. See "Merchandising--
Design."
Cutting
Printed or dyed rolls of fabric are shipped directly to third party
manufacturers for cutting. The Company uses five primary cutting facilities
for knits which are located in New Jersey. Wovens are cut in South Carolina as
well as in factories in Mexico. The duty on woven and knit fabrics cut in
Mexico is 2% and 4% , respectively, of the cost of the fabric, the fabric
cutting and insurance cost for products cut and sewn in Mexico. The ultimate
cost of cutting certain woven goods in Mexico is still less expensive than
cutting wovens in the United States. Under NAFTA, duties on wovens or knit
goods cut in Mexico will be eliminated by January 1, 2002. As duties on
cutting wovens and knits in Mexico decrease over time, the Company expects to
shift an increasing amount of its cutting to Mexico. See "--Import
Restrictions."
The Company's technical production support staff, located in New York City,
produces patterns for cutting piece goods and, using state-of-the-art computer
equipment, marks and grades the patterns onto templates in a manner to
minimize fabric waste. The Company achieves a low rate of waste of
approximately 10%, while the Company believes that the industry average is
approximately 20%. The Company attributes this low level of waste to its
sophisticated computer grading equipment as well as to the fact that it can
have fabric rolls manufactured in customized widths, according to the garments
to be produced from the fabric. The Company cuts approximately 6% of its goods
in an in-house facility located in its New Jersey warehouse to expedite
certain orders.
Sewing
Cut garments are delivered to the Company's distribution facility in North
Bergen, New Jersey and are packaged with various trim to be attached to the
garments, product labels and tags and, in some cases, clothing
34
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hangers specified by a retailer. Before these cut garments are shipped to the
sewing contractor, a finished product sample, including a stitching diagram as
well as garment specifications, are sent to the sewing contractor.
Before the sewing contractor begins work on the main order, it produces a
sample garment for inspection and approval by the Company's production support
staff. The Company sends the sample garment to its customer for inspection and
approval before commencing full-scale production. Once begun, the sewing
process generally takes two to eight weeks. In 1997, the Company engaged the
services of approximately 25 sewing contractors. Approximately 65% of the
Company's sewing is currently performed in Mexico, with the balance performed
by domestic sewing contractors for product orders which are requested on an
accelerated basis. Pursuant to NAFTA-enabling legislation, garments cut in the
United States, sewn in Mexico and imported into the United States are not
subject to tariffs or quotas. See "--Import Restrictions." The Company
believes that its recent increase in gross profit margins is directly related
to lower labor costs because of the shift of its sewing operations from the
United States to Mexico.
Asian Production
In 1997, approximately 15% of the Company's gross sales (across all
divisions) were of finished products imported from China and Taiwan. The
Company believes that foreign contract manufacturing allows it to take
advantage of lower manufacturing costs for products which require more labor
to produce and to avail itself of a skilled labor force which is better
equipped and trained to produce certain products, particularly certain kinds
of knitwear. The Company anticipates that in 1998, an aggregate of
approximately 10% of its sales will be of products imported from China and
Taiwan. Compared to production in the United States or Mexico, foreign
sourcing of products requires a significant lead time between order and
receipt, ranging from six to ten months in the case of Far Eastern sourced
manufacturing. Thus, the Company continues to import foreign goods primarily
on an opportunistic basis.
Shipping and Delivery of Finished Products
Upon completion of the manufacturing process, the Company's products,
whether produced domestically or imported, are shipped from the contract
manufacturers by sea, air or land either to the Company's distribution
facility in North Bergen, New Jersey or directly to customers. Products are
packaged to the specifications of the customer. Products shipped from the
Company's distribution center are shipped on one of five Company-owned trucks
or by common carrier. Most finished goods are delivered to the customer's
consolidators, many of which are located in Northern New Jersey. All shipping,
bills of lading, invoices, etc. are controlled by the Company from the North
Bergen facility.
Quality Control
The Company has in place comprehensive quality control procedures to ensure
that fabrics, materials and finished goods meet the Company's exacting quality
standards. The Company regularly visits and inspects each of its domestic and
foreign contract manufacturers to ensure compliance with the Company's quality
standards. The Company oversees testing of yarns, fabrics and trim for
colorfastness, washability and other standards. Sample garments are randomly
subjected to quality control tests by the Company for fit and appearance.
Finished garments are subject to final inspection in the Company's
distribution facility for general appearance and quality prior to shipment to
customers. Products which are manufactured in foreign countries are tested to
ensure that they comply with customer specifications. The Company verifies
that those products shipped from foreign manufacturers meet United States
customs import requirements.
BACKLOG
At June 30, 1998, unfilled orders believed to be firm were approximately
$48.6 million, compared to approximately $25.3 million of unfilled orders
believed to be firm at June 30, 1997. The Company believes that all of its
backlog of firm orders as of June 30, 1998, will be filled within six months.
Firm orders include
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<PAGE>
purchase orders placed but not yet filled. The amount of unfilled firm orders
at a particular time is affected by a number of factors, including the
scheduling of manufacture and shipment of finished goods, which, in some
instances, is dependent on the desires of the customer. Accordingly, a
comparison of unfilled firm orders from period to period is not necessarily
meaningful and may not be indicative of eventual actual shipments or the
Company's ability to fill orders. Although the Company's orders typically
contain cancellation provisions, the Company's experience has been that the
cancellations, rejections or returns of firm orders have not materially
reduced the amount of sales realized from its backlog.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that advanced information processing is important to
maintain its competitive position. The Company continues to upgrade its
management information systems in order to maintain better control of its
inventory and to provide management with information that is both more current
and more accurate than was available previously. To this end, the Company has
purchased a new ACS Optima computer system from Computer Generated Solutions
("CGS"). This system is widely used in the apparel industry. It is a complete
corporate system, which includes modules for, among other things, order entry,
accounts receivable, customer service, finished goods inventory, credit
management, invoicing and shipping, sales and management analysis, master
production scheduling systems, raw material management and fabric management.
The new CGS core operating system will be integrated with the Company's new
Stewart Sinclair Warehouse Management system and will allow for scanning
inbound bar-coded finished goods inventory. As finished goods inventory is
processed for shipping, it will be scanned as it is placed into a carton for
shipment. The system will check the carton's contents against the order for
shipment accuracy. Only when the carton's contents match the order will the
shipping label be printed. The order information will then be used to produce
a master Bill of Lading, an Advanced Ship Notice and an invoice which will be
transmitted via Electronic Data Interchange ("EDI") to the customer. The
Company's new computer systems will be run in parallel with the Company's
current computer system until the Company is assured that the new system is
running properly. The new computer systems will also allow the Company to link
to its contractors via the Internet and enable it to monitor its finished
goods inventory remotely. As a result, the Company will be able to ship its
finished goods directly to its customers from its sewing contractors in Mexico
and its domestic remote packing facilities.
The Company has expanded its EDI program to include the majority of its
major customers and allow the Company to comply with customers' specific
requirements. This technology allows the electronic exchange of purchase
orders, invoices, and advanced shipping notices.
IMPORT RESTRICTIONS
The Company presently imports garments under two separate scenarios having
distinct customs and trade consequences: (i) imports of goods sewn (and
sometimes cut) in Mexico and (ii) imports of finished goods, primarily from
China and Taiwan.
The North American Free Trade Agreement ("NAFTA") became effective on
January 1, 1994. NAFTA provides that tariffs on goods imported into the United
States from Mexico are accorded reduced or duty-free access, depending upon
the type of goods imported. With respect to the apparel industry, NAFTA has
effectively eliminated or substantially reduced tariffs on garments imported
into the United States from Mexico if such goods are made from fabric
originating from sources located in the United States, Canada or Mexico. The
key requirement for NAFTA qualification is that the yarn and cloth for a
garment, and the cutting, sewing and finishing of a garment, must take place
within North America. Merchandise produced pursuant to these requirements is
entitled to enter the United States at a preferential or zero rate tariff and
is not subject to any quota. In addition, pursuant to legislation adopted by
Congress to enact NAFTA in the United States, immediate, duty-free and quota-
free entry into the United States from Mexico is permitted for garments sewn
from components which are cut in the United States from United States knit,
woven or formed cloth. NAFTA's tariff on the value of finished knit goods of
4% and a 2% tariff on the value of finished woven goods is charged if
36
<PAGE>
such goods are cut in Mexico and then imported into the United States. Tariffs
on goods cut in Mexico, pursuant to NAFTA tariff schedules, are expected to
decline to zero over three years.
Garments imported directly (mostly from the Pacific Rim) are normally taxed
at most favored nation ("MFN") tariffs and are subject to a series of
bilateral quotas that regulate the number of garments that may be imported
annually into the United States. The tariffs for most of the countries from
which the Company currently imports or intends to import have been set by
international negotiations under the auspices of the World Trade Organization
("WTO"). These tariffs generally range between 17% and 35%, depending upon the
nature of the garment (e.g., shirt, pant), its construction and its chief
weight by fiber.
In addition to these tariff rates, merchandise from the countries from which
the Company imports is also subject to bilateral quota restraints, pursuant to
U.S. domestic law or the multi-lateral Agreement of Textile and Clothing,
which is under the auspices of the WTO. Most bilateral quotas are negotiated
on a calendar year basis. After the United States and a particular country
agree to a particular level of exports in a particular quota category, the
country that receives the quota has the right to determine the method by which
such quota is assigned to its manufacturers. Most countries, however, assign
it to the factories that actually produce the garments. Shipments which are
exported to the United States must, in addition to the usual commercial
documentation, have appropriate and official textile visas, in either an
electronic or paper format, which confirm their quota status. This
documentation must be filed prior to the admission and clearance of the
merchandise into the United States. Accordingly, the Company usually requires
that this paperwork be submitted prior to payment.
COMPETITION
The apparel industry is highly competitive and the Company competes with
numerous apparel manufacturers, including brand name and private label
producers, and retailers which have established, or may establish, internal
product development and sourcing capabilities. The Company's products also
compete with a substantial number of designer and non-designer product lines.
Many of the Company's competitors and potential competitors have greater
financial, manufacturing, distribution and marketing resources than the
Company. The Company believes that it competes favorably on the basis of
quality and value of its apparel lines and products, price, the production
flexibility, efficiency and speed that it enjoys as a result of its control
over the entire production process, and its long-term relationships with
contract manufacturers and customers. Nevertheless, any increased competition
from manufacturers or retailers, or any increased success by existing
competition, could result in reductions in unit sales or prices, or both,
which could have a material adverse effect on the Company's business and
results of operations.
TRADEMARKS
The Company's primary business has been the production of private label
goods for its customers. However, long-term trademarks and trade names which
have been used by the Company are listed below. Each is owned by the Company
and registered in its name.
PERISCOPE(R) was launched for use in department and specialty stores.
ASHLY BRENT(R) which has been used on all specialty store products.
JUST DAWN(R) which has been used mainly on discount store products.
ANOTHER NAME(R) which has been used on discount store products with
decreasing frequency since 1981.
CURIOSITY'S CAT(R) which has been used on all import goods.
DIRECTIVES(R) which has been used on department and specialty store
products.
DNA(R) which has been used on a junior's/young women's apparel line.
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EMPLOYEES
At June 30, 1998, the Company employed 145 persons on a full-time basis,
comprised of 15 executive and management employees, 10 sales employees and 120
administrative and warehouse employees. None of the Company's employees is a
member of any labor union or is subject to a collective bargaining agreement.
The Company considers its relations with its employees to be good.
PROPERTIES
The Company's executive offices, showrooms and sales offices as well as its
design facilities are located in approximately 9,000 square feet on the sixth
and tenth floors at 1407 Broadway, New York, New York. The floors are leased
pursuant to a single lease for a term expiring in April 2002, at a current
annual base rent of $305,600. The Company's accounting offices, in-house
cutting and sample production facilities, fabric marking and grading facility,
label making facility, as well as its in-house quality control facility and
warehousing and distribution center are located in approximately 50,000 square
feet at 2075 91st Street, North Bergen, New Jersey. The facility is leased for
a term expiring September 2000 at a current annual base rent of $266,116. The
Company believes that its existing facilities are adequate to meet its current
and foreseeable needs and that it can successfully negotiate new leases when
its current leases expire.
LEGAL PROCEEDINGS
The Company is not involved in any pending or threatened legal proceedings
that could have a material impact on the Company's consolidated financial
statements.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's executive officers and directors, and their ages as of July
15, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Glenn Sands............. 42 President and Chief Executive Officer, Chairman of the Board
Scott Pianin............ 39 Executive Vice President and Chief Operating Officer, Director
Raymond Kuslansky....... 48 Vice President, Chief Financial Officer, Treasurer and Secretary
</TABLE>
GLENN SANDS founded the Company in 1977 and since its inception has been its
President and Chief Executive Officer. Mr. Sands oversees every major aspect
of the Company's operations, including sales and marketing, production and
manufacturing, financial reporting, converting of raw materials, costing,
designing, contract negotiating, Far Eastern operations and personnel
management.
SCOTT PIANIN has served as Executive Vice President and Chief Operating
Officer of the Company since May 1998. Mr. Pianin has been an executive
officer of the Company since 1994 and has been employed by the Company since
1991 in various sales capacities. He is responsible for all sales, marketing
and merchandising activities of the Company. From 1984 through 1991, Mr.
Pianin served as Sales Manager of Apparel America Inc., an apparel company
that manufactures and markets licensed T-shirts. From 1982 to 1984, Mr. Pianin
was Sales Manager--Knit Products of Cheri-Alan, Ltd., a ladies' sportswear
manufacturer.
RAYMOND KUSLANSKY has served as the Company's Vice President, Chief
Financial Officer, Treasurer and Secretary since May 1998. Mr. Kuslansky has
been an executive officer of the Company since August 1987. Among other
responsibilities, Mr. Kuslansky oversees the Company's banking and vendor
relations, insurance, office administration, electronic data processing and
accounting and audit functions. From 1983 to 1987, Mr. Kuslansky was the
controller of Craftex Creations, Inc., a ladies' sleepwear manufacturer and
marketer. From 1981 to 1983, Mr. Kuslansky was the controller of Rob Roy,
Inc., a manufacturer of children's wear. Mr. Kuslansky is a Certified Public
Accountant.
The Company intends to identify three individuals who will serve as
independent directors to take office upon completion of this Offering.
Upon the consummation of the Offering, the Board of Directors of the Company
will be divided into three classes, as nearly equal in number as possible.
Thereafter, each year the stockholders will elect the members of one of the
three classes to a three year term of office. The classification of the
directors will be determined upon the consummation of the Offering. Officers
are elected to serve, subject to the discretion of the Board of Directors,
until their successors are appointed.
COMMITTEES OF THE BOARD OF DIRECTORS
Following the completion of this Offering, the Company's Board of Directors
will appoint an Audit Committee. The members of the Audit Committee will be
determined by the Board of Directors upon the appointment of the Company's
independent directors. The Audit Committee will recommend to the Board of
Directors the appointment of independent auditors, review and approve the
scope of the annual audit of the
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Company's financial statement reviews and approve any non-audit services
performed by the independent auditors and periodically review and approve
major accounting policies and significant internal accounting control
procedures.
Following the completion of this Offering, the Company's Board of Directors
will appoint a Compensation Committee. The members of the Compensation
Committee will be determined by the Board of Directors upon the appointment of
the Company's independent directors. The Compensation Committee will review
and recommend to the Board of Directors compensation arrangements for officers
and directors, administer stock option plans and review major personnel
matters.
OTHER KEY PERSONNEL
The persons listed below are also key employees of the Company.
<TABLE>
<CAPTION>
PERIOD WITH
NAME AGE THE COMPANY CURRENT POSITION
---- --- ----------- ----------------
<S> <C> <C> <C>
Jeffrey Sirchio..................... 41 9 mos. Vice President--Operations
Leo Ashkinadze...................... 48 10 yrs. General Manager--Production
Steven Schatzberg................... 48 2 yrs. Vice President--Sales
Paul Schwartz....................... 48 8 yrs. Kidswear--Vice President
Richard Roth........................ 39 8 mos. Kidswear--Vice President
Scott Tunis......................... 42 9 yrs. Vice President--Production
Mei-Ling Ku......................... 45 11 yrs. General Manager--Imports
</TABLE>
JEFFREY W. SIRCHIO, VICE PRESIDENT--OPERATIONS. Mr. Sirchio has served as
Vice President--Operations of the Company since November 1997. Prior to
joining the Company, Mr. Sirchio was Vice President--Operations of UMI
Collections, Inc., a designer dress manufacturer, from 1987 to 1997.
LEO ASHKINADZE, GENERAL MANAGER--PRODUCTION. Mr. Ashkinadze joined the
Company in 1988 and has served as General Manager--Production of the Company
since 1990.
STEVEN SCHATZBERG, VICE PRESIDENT--SALES. Mr. Schatzberg has served as Vice
President--Sales of the Company since June 1995 and has been employed by the
Company since October 1994. From 1987 to 1994, Mr. Schatzberg was the owner of
Certified Buying, Inc., a buying office which acted as the liaison between
major U.S. retail chains and apparel manufacturers in the United States,
Canada and Europe.
PAUL SCHWARTZ, KIDSWEAR--VICE PRESIDENT. Mr. Schwartz joined the Company in
1990 and has been Kidswear--Vice President since 1996. Prior to joining the
Company, Mr. Schwartz held positions at several clothing importing and
manufacturing companies as well as at retail apparel chains, where he worked
primarily in the junior's and children's divisions.
RICHARD J. ROTH, KIDSWEAR--VICE PRESIDENT. Mr. Roth has served as Kidswear--
Vice President since he joined the Company in November 1997. From 1994 through
October 1997, Mr. Roth worked at House of Perfection, Inc. (d/b/a Stepping
Stones), a manufacturer of children's sportswear and infant and toddler
clothing, where he served first as the Head of Fashion Division and later as
Head of Product Development--Infants and Toddler Division. From 1982 until
1994, he worked at Wonderland Fashions, Inc., a manufacturer of children's
dresses and sportswear, where he served as Vice President--Production, Finance
commencing in 1989.
SCOTT TUNIS, VICE PRESIDENT--PRODUCTION. Mr. Tunis has served as Vice
President--Production of the Company since 1996 and has been employed by the
Company since 1989. Mr. Tunis is responsible for various aspects of production
including sales, fabric printing, converting, costing, designing, production
scheduling and yield analyzing.
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<PAGE>
MEI-LING KU, GENERAL MANAGER--IMPORTS. Ms. Ku joined the Company in 1987 and
since 1989 has served as General Manager--Imports. Ms. Ku is responsible for
sourcing, merchandising, price negotiating and overseeing the production flow
of imported finished garments from Asia. Ms. Ku received professional training
in clothing technology in Germany and served as the Director of Planning
Division of the Garment Industry Association in Taipei, Taiwan.
DIRECTOR COMPENSATION
The Company will pay each director who is not a full-time employee of the
Company an annual retainer the amount of which shall be determined by the
Compensation Committee of the Board of Directors and will be payable
quarterly. The Company will reimburse each such director for reasonable travel
expenses incurred in connection with his or her activities on behalf of the
Company. In addition, each director who is not an employee of the Company,
upon first taking office, will receive options to purchase shares of Common
Stock of the Company. The number of options to be granted will be determined
by the Compensation Committee of the Board of Directors. Such options will
vest over a three year period. See "--Stock Option Plan."
EXECUTIVE COMPENSATION
The following table summarizes the compensation earned during the last three
fiscal years by the Company's Chief Executive Officer and each of its
executive officers who received compensation in excess of $100,000 for
services rendered in all capacities to the Company for the fiscal year ended
December 31, 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------
NAME AND
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)
------------------ ---- ---------- ----------
<S> <C> <C> <C>
Glenn Sands...................................... 1997 $1,195,379 --
President and Chief Executive Officer 1996 $1,640,924 --
1995 $3,710,029 --
Scott Pianin..................................... 1997 $ 147,290 $1,025,491(1)
Executive Vice President and Chief Operating Of-
ficer 1996 $ 140,800 $ 570,702(1)
1995 $ 145,800 $ 381,867(1)
Raymond Kuslansky................................ 1997 $ 168,424 --
Vice President, and Treasurer and Secretary 1996 $ 162,122 $ 10,000
1995 $ 150,592 $ 10,000
</TABLE>
- --------
(1) Consists of performance compensation paid to Mr. Pianin and S.R.P. Sales,
Inc., a corporation controlled by Mr. Pianin.
EMPLOYMENT AGREEMENTS
In May 1998, the Company entered into an employment agreement with Glenn
Sands, providing for his employment as the Company's President and Chief
Executive Officer for a three year term commencing as of January 1, 1998. The
agreement provides, on an annual basis, for a base salary of $500,000, a
$450,000 performance based bonus and a $50,000 business expense allowance. The
agreement also provides for the participation by Mr. Sands in all executive
benefit plans.
In May 1998, the Company entered into an employment agreement with Scott
Pianin, providing for his employment as the Company's Executive Vice President
and Chief Operating Officer of the Company for a three year term commencing
July 1, 1998. The agreement provides, on an annual basis, for a base salary of
$184,000, additional compensation based on achieving certain performance
criteria and the right to participate in all executive benefit plans.
41
<PAGE>
In May 1998, the Company entered into an employment agreement with Raymond
Kuslansky. The Agreement is for a five year term and provides for an annual
base salary of $168,000 and the right to participate in all executive benefit
plans.
STOCK OPTION PLAN
On May 28, 1998, in order to attract and retain qualified personnel
necessary for the success of the Company, the Company adopted a Stock Option
Plan (the "Stock Option Plan") covering up to 750,000 shares of the Company's
Common Stock, pursuant to which officers, directors, key employees and
consultants to the Company are eligible to receive incentive stock options and
non-qualified stock options. The Stock Option Plan, which expires on May 15,
2008 is currently administered by the entire Board of Directors. Upon the
appointment of a Compensation Committee, the Stock Option Plan will be
administered by the Compensation Committee. The selection of participants,
grant of options, determination of price and other conditions relating to the
exercise of options is determined by the entire Board of Directors, and will
be determined by the Compensation Committee upon its appointment by the Board
of Directors. The selection of participants, grant of options, determination
of price and other conditions relating to the exercise of options is
determined by the entire Board of Directors, in its sole discretion, and will
be determined by of the Compensation Committee, in its sole discretion, upon
its appointment. Incentive stock options granted under the Stock Option Plan
are exercisable for a period of up to 10 years from the date of grant at an
exercise price which is not less than the fair market value of a share of
Common Stock on the date of the grant, except that the term of an incentive
stock option granted under the Stock Option Plan to a stockholder owning more
than 10% of the outstanding Common Stock may not exceed five years and its
exercise price may not be less than 110% of the fair market value of a share
of Common Stock on the date of the grant.
OPTION GRANTS
The Company anticipates that it will grant, prior to the effective date of
this Offering stock options under the Stock Option Plan to certain of its
employees, including executive officers. The amount of any such grant has not
yet been determined by the Company.
Subsequent to the Offering, under the Stock Option Plan, each director who
is not an employee of the Company, upon first taking office, is to be granted
options to purchase shares of Common Stock exercisable ratably over three
years at the fair market value of such shares on the date of grant. The number
of options to be granted will be determined by the Compensation Committee of
the Board of Directors. See "Management--Director Compensation."
42
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of the date of the
Offering, with respect to the beneficial ownership of the Company's Common
Stock held by (i) each stockholder known by the Company to be the beneficial
owner of more than 5% of its outstanding shares, (ii) each director and
executive officer named in the Summary Compensation Table, (iii) the directors
and executive officers of the Company as a group and (iv) each Selling
Stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING
----------------------- ---------------------
SHARES TO BE
NAME NUMBER PERCENT SOLD NUMBER PERCENT
- ---- ------------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS
Glenn Sands(1).......... 2,628,800 58.6 -- 2,628,800 37.1
Scott Pianin(2)......... 99,200 2.2 -- 99,200 1.4
ALL DIRECTORS AND
EXECUTIVE OFFICERS
AS A GROUP (3 PER-
SONS).................. 2,728,000 60.8 -- 2,728,000 38.5
OTHER PRINCIPAL
STOCKHOLDERS:
BancBoston Ventures,
Inc(3)................. 1,018,000 22.7 -- 1,018,000 14.4
OTHER SELLING
STOCKHOLDERS:(4)
Jay Botchman............ 173,600 3.9 99,200 74,400 1.0
Michael Covino.......... 186,000 4.1 148,800 37,200 *
Shirley Gibbons......... 198,400 4.4 198,400 -- --
Sylvester Miniter....... 186,000 4.1 148,800 37,200 *
</TABLE>
- --------
* Less than 1%.
(1) The address of Mr. Sands is c/o the Company, 1407 Broadway, Suite 620, New
York, NY 10018. Mr. Sands has granted the Representatives a 45-day option
to purchase up to 280,000 additional shares of Common Stock, solely for
the purpose of covering over-allotments, if any. If such option is
exercised in full, the number of shares held by Mr. Sands will be reduced
to 2,348,800 and his percentage of the outstanding shares will be reduced
to 33.1%.
(2) The address of Mr. Pianin is c/o the Company, 1407 Broadway, Suite 620,
New York, NY 10018.
(3) The address of BancBoston Ventures, Inc. is 100 Federal Street, Boston, MA
02110.
(4) None of the Selling Stockholders listed in the above table except for Mr.
Sands has held any position, office or has had any other material
relationship with the Company or any of its predecessors or affiliates
within the past three years.
43
<PAGE>
CERTAIN TRANSACTIONS
On May 17, 1996, the Company borrowed $3.0 million from BBV. The loan bears
interest at 7% per annum and matures on May 15, 2001. During 1997, the Company
made interest payments on this loan aggregating $159,250. This loan is to be
prepaid from the proceeds of this Offering. See "Use of Proceeds."
On May 17, 1996, the Company entered into a Term Loan Agreement with
BankBoston, N.A., an affiliate of BBV. Pursuant to this agreement, as amended,
BankBoston, N.A. loaned the Company $15.0 million, payable in quarterly
principal installments of $100,000 through December 31, 1998, increasing
thereafter to $500,000 a quarter through March 2001, with the balance of $8.7
million due in May 2001. This loan bears interest at the greater of the
lender's base rate or the federal funds effective rate plus 1.25% (9.75% at
December 31, 1997). During 1997, the Company made interest payments on this
loan aggregating $1.3 million. At June 30, 1998, the outstanding principal
amount due was $13.5 million. This loan is to be prepaid from the proceeds of
this Offering. See "Use of Proceeds."
Substantially all of the proceeds from the loans described above were used
to purchase from a former executive of the Company 50% of the then outstanding
shares of Common Stock of the Company for $11.4 million and to fund a $6.0
million dividend distribution to the Company's then remaining stockholder and
principal executive, Glenn Sands. In addition, in connection with these
transactions, Glenn Sands sold 1,736,000 shares of Common Stock (after giving
pro forma effect to the reincorporation of the Company in Delaware and the
concurrent stock split) to BBV (representing 35% of the then outstanding
shares of the Company) for $2.0 million.
In June 1998, the Company agreed with BankBoston, N.A. and BBV that the
loans described above will be prepaid if the Company completes an equity
financing from which it realizes net proceeds of at least $19.0 million and,
in consideration thereof, BBV agreed that upon such prepayment it will
contribute 569,200 shares of Common Stock to the capital of the Company.
On May 17, 1996, the Company loaned $950,000 to Glenn Sands, its President
and Chief Executive Officer. The loan, as amended, bears interest at prime
plus 0.5% (9% at December 31, 1997) and is due January 2000. In April 1997,
Mr. Sands loaned the Company $2.0 million. The loan is evidenced by a
subordinated demand note bearing interest at the rate of prime plus 0.5% (9%
at December 31, 1997). The loan is due January 2000. This loan is to be repaid
from the proceeds of this Offering. See "Use of Proceeds."
The Company purchases transportation related services from Global Air, Inc.
("Global"), a company wholly-owned by Mr. Sands. Fees paid by the Company to
Global for travel related to the Company's business for the year ended
December 31, 1997 totaled $64,101.
Future transactions with affiliated parities will be approved by the
Company's Board of Directors only after the interest of any director or
affiliate is fully disclosed to the Board of Directors and it is established
that such transaction is fair and reasonable to the Company and is on terms no
less favorable than those that could be obtained from unaffiliated parties.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, par value of $.001 per share ("Common Stock"), and 5,000,000
shares of Preferred Stock, par value $.001 per share ("Preferred Stock"). Upon
completion of the Offering, there will be 7,090,000 shares of Common Stock
outstanding and no shares of Preferred Stock outstanding. As of June 30, 1998,
there were outstanding 4,490,000 shares of Common Stock after giving pro forma
effect to the contribution by BBV to the capital of the Company of 569,200
shares of Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to the
preferences that may be applicable to any outstanding Preferred Stock, the
holders of Common Stock are entitled to receive dividends as and when declared
by the Board of Directors out of funds legally available for dividends, and,
in the event of liquidation, dissolution or winding up of the Company, to
share ratable in all assets remaining after the payment of liabilities. The
Common Stock has no preemptive, conversion or other subscription rights.
Upon completion of this Offering, the directors and executive officers of
the Company will beneficially own approximately 38.5% of the Company's
outstanding shares and accordingly will be in a position to effectively elect
all of the Company's directors and control the affairs of the Company.
PREFERRED STOCK
The Board of Directors is authorized to issue the Company's undesignated
Preferred Stock in one or more series, to determine the powers, preferences
and rights, and the qualifications, limitations or restrictions, granted to or
imposed upon any wholly unissued series of undesignated Preferred Stock, and
to fix the number of shares constituting any series and the designation of
such series, without any further vote or action by the stockholders. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company and may adversely affect the
voting and other rights of the holders of Common Stock. The Company has no
current plans to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Certificate of Incorporation limits the liability of directors
of the Company to the fullest extent permitted under Section 102(b)(7) of the
Delaware General Corporation Law (the "DGCL"). To this end, no director of the
Company will be liable to the Company or to its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability for
(i) any 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 the law, (iii) any willful or
negligent payment of an unlawful dividend, stock purchase, or redemption, or
(iv) any transaction from which the director derived an improper personal
benefit.
The Certificate of Incorporation provides that the Board of Directors
consist of three classes of directors serving for staggered three-year terms.
As a result, one-third of the Company's Board of Directors will be elected
each year. In accordance with the DGCL, directors serving on classified boards
of directors may only be removed from office for cause. The Certificate of
Incorporation provides that stockholders may take such action only by the
affirmative vote of at least two-thirds of the voting stock outstanding and
that there shall be no cumulative voting. However, upon completion of this
Offering, the Certificate of Incorporation provides that stockholders may not
take action by written consent in lieu of a meeting. The Certificate of
Incorporation also provides that special meetings may be called at any time,
but only by the Chairman of the Board. Both such provisions may not be amended
or repealed except by the affirmative vote of at least 75% of the shares of
stock of the Company issued and outstanding.
The Company's Bylaws provide that only the Board of Directors may call a
special meeting of stockholders and that stockholders must follow an advance
notification procedure for certain stockholder nominations of
45
<PAGE>
candidates and for certain other stockholder business to be conducted at the
annual meeting. These provisions could, under certain circumstances, operate
to delay, defer or prevent a change in control of the Company.
These provisions could delay or frustrate the removal of incumbent directors
or a change in control of the Company. The provisions also could discourage,
impede or prevent a merger, tender offer or proxy contest, even if such event
would be favorable to the interests of stockholders.
SECTION 203 OF DGCL
As a corporation organized under the laws of the State of Delaware, the
Company is subject to Section 203 of the DGCL which restricts certain business
combinations between the Company and an "interested stockholder" (in general,
a stockholder owning 15% or more the Company's outstanding voting stock) or
its affiliates or associates for a period of three years following the date on
which the stockholder becomes an "interested stockholder." The restrictions do
not apply if (i) the corporation has elected in its certificate of
incorporation not to be governed by the Delaware anti-takeover law (the
Company has not made such an election), (ii) prior to a person qualifying as
an "interested stockholder," the Board of Directors approves either the
business combination or the transaction which would cause such individual to
become an "interested stockholder," (iii) upon consummation of the transaction
in which any person becomes an "interested stockholder," such person owns at
least 85% of the voting stock of the Company outstanding at the time the
transaction commences (excluding shares owned by certain employee stock
ownership plans and persons who are both directors and officers of the
Company) or (iv) on or subsequent to the date on which a person becomes an
"interested stockholder," the business combination is both approved by the
Board of Directors and authorized at an annual or special meeting of the
Company's stockholder, without written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock not owned by the "interested
stockholder."
INCLUSION ON THE NASDAQ NATIONAL MARKET
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "PSCP."
TRANSFER AGENT
The transfer agent for the Common Stock is the American Stock Transfer &
Trust Company, New York, New York.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common
Stock. The Company cannot predict the effect, if any, that sales of Common
Stock or the availability of such shares for sale will have on the market
price of the Common Stock prevailing from time-to-time. Future sales of
substantial amounts of Common Stock in the public market, including shares
issued upon the exercise of options to be granted pursuant to the Company's
Stock Option Plan, could adversely affect the prevailing market price of the
Common Stock.
Upon completion of this Offering, the Company will have 7,090,000 shares of
Common Stock outstanding. The 4,490,000 shares of Common Stock presently
outstanding are "restricted securities" within the meaning of Rule 144 under
the Securities Act of 1933, as amended (the "Securities Act"), and may be sold
under the conditions of such rule, including satisfaction of certain holding
period requirements. Except for the sale by the Selling Stockholders of
595,200 shares of Common Stock offered hereby (875,200 if the Over-Allotment
Option is exercised in full with respect to Mr. Sands' shares), holders of the
shares have executed agreements pursuant to which they may not sell or
otherwise dispose of such shares for a period of 270 days after the closing of
this Offering 212,700, without the prior written consent of Sutro & Co.
Incorporated (the "Lock-Up Agreements"). After giving effect to sale of the
shares offered by the Selling Stockholders, 212,700 shares of Common Stock
presently outstanding, which shares are subject to Lock-Up Agreements, will
become eligible for sale in the public market in reliance on Rule 144
beginning 90 days after the date of this Prospectus, taking into account the
volume limitations imposed upon the sale of "restricted securities" by
"affiliates."
In general, under Rule 144 as currently in effect, beginning 90 days after
the Offering, a person (or persons whose shares are aggregated) who
beneficially owns shares as to which at least one year has elapsed since the
date of acquisition in a transaction not involving a registered public
offering is entitled to sell within any three-month period a number of shares
that does not exceed the greater of one percent of the then outstanding shares
of Common Stock (70,900 shares immediately after this Offering) or the average
weekly trading volume of the Common Stock on over-the-counter market during
the four calendar weeks preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission (the "Commission"). Sales
under Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. Any person (or persons whose shares are aggregated) who is not deemed
to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who beneficially owns shares as to which at least one
year has elapsed since the later of the date of the acquisition of the
securities from the Company or from an affiliate of the Company, would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations, manner-of-sale provisions, public information requirements or
notice requirements.
47
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives, Sutro &
Co. Incorporated, L.H. Friend, Weinress, Frankson & Presson, Inc. and Scott &
Stringfellow, Inc. (the "Representatives"), have severally agreed, subject to
the terms and conditions of the Underwriting Agreement with the Company and
the Selling Stockholders, to purchase from the Company and the Selling
Stockholders the number of shares of Common Stock set forth opposite their
respective names. The Underwriters are committed to purchase and pay for all
such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS OF COMMON STOCK
------------ ----------------
<S> <C>
Sutro & Co. Incorporated....................................
L.H. Friend, Weinress, Frankson & Presson, Inc..............
Scott & Stringfellow, Inc...................................
---------
Total..................................................... 3,195,200
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the initial public offering,
the price and concessions and reallowances to dealers may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters and to certain other conditions, including the right to
reject orders in whole or part.
The Underwriters have been granted an option exercisable for 45 days after
the date of the Underwriting Agreement to purchase up to a maximum of 479,280
additional shares of Common Stock to cover over-allotments, if any. The first
280,000 of such shares will be purchased from Glenn Sands, the Company's
President and Chief Executive Officer, and the balance of such shares will be
purchased from the Company. If the Underwriters exercise such option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in
the foregoing table.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters and certain related persons against certain liabilities relating
to the offering contemplated by this Prospectus, including liabilities under
the Securities Act, or to contribute to payments which the Underwriters may be
required to make in respect thereof.
Except with respect to the 595,200 shares offered by the Selling
Stockholders (875,200 if the Over-Allotment Option is exercised in full with
respect to Mr. Sands' shares), the Company's directors, officers and
stockholders have agreed not to offer, sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exchangeable for shares
of Common Stock of the Company for a period of 270 days after the date of this
Prospectus without the prior written consent of Sutro & Co. Incorporated
except for a bona fide gift to a third party or as a distribution to the
partners or stockholders of a Company stockholder, provided that the
recipient(s) thereof agree in writing to be bound by the terms of the lock-up
agreement to which such stockholder is bound.
The Underwriters may engage in stabilizing bids, cover syndicate short
positions or impose penalty bids. If the Underwriters create a short position
in the Common Stock in connection with this Offering (i.e., if they sell more
shares of Common Stock than are set forth on the cover page of this
Prospectus), the Representatives may reduce that short position by purchasing
Common Stock in the open market. The Representatives also may elect to reduce
any short position by exercising all or part of the over-allotment option
described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of this Offering. In general, purchases
of a security for the purpose of stabilization or to reduce a syndicate short
position could cause the price of the security to be higher than it might
otherwise be in the absence of such purchases. The imposition of a penalty bid
may have an effect on the price of a security to the extent that it were to
discourage resales of the security by purchasers in this offering.
48
<PAGE>
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of, or any effect that the
transactions described above may have on, the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or,
once commenced, will not be discontinued at any time without notice.
The Company has agreed to sell to Sutro & Co. Incorporation and L.H. Friend,
Weinress, Frankson & Presson, Inc. warrants to purchase from the Company up to
260,000 shares of Common Stock (307,928 shares of Common Stock if the Over-
Allotment Option is exercised in full) at an exercise price per share equal to
120% of the initial public offering price per share (the "Representatives'
Warrants"). Sutro & Co. Incorporated and L.H. Friend, Weinress, Frankson &
Presson, Inc. shall each pay $1.00 to the Company for their respective
Representatives' Warrants. The Representatives' Warrants may not be sold,
transferred, assigned, pledged or hypothecated for a period of twelve months
from the effective date of the Registration Statement of which the prospectus
is a part, except to officers and partners (but not directors) of the
Representatives and other members of the underwriting or selling group and
officers or partners (but not directors) thereof in compliance with the
applicable provisions of the Corporate Financing Rules of the National
Association of Securities Dealers, Inc. The Representatives' Warrants will be
exercisable for a 5-year period beginning one year from the effective date of
the Registration Statement of which the prospectus is a part. In addition, the
Company has granted certain demand and piggyback registration rights to the
holders of the Representatives' Warrants, which enable them to register the
Common Stock underlying the Representatives' Warrants under the Securities
Act.
Prior to this offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price for the Common Stock was
determined by negotiations between the Company and the Representatives. Among
the factors considered in such negotiations were the history of, and the
prospects for, the Company and the industry in which it competes, an
assessment of the Company's management, its past and present operations, its
past and present earnings and the trend of such earnings, the prospects for
future earnings, the present state of the Company's development, the general
conditions of the securities market at the time of the Offering, and the
market prices of publicly-traded common stocks of comparable companies in
recent periods. The Representatives have informed the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "PSCP."
49
<PAGE>
LEGAL MATTERS
The validity of the Shares being offered hereby will be passed upon for the
Company by Morse, Zelnick, Rose & Lander, LLP, New York, New York. Certain
matters will be passed upon for the Underwriters by Milbank, Tweed, Hadley &
McCloy, Los Angeles, California.
EXPERTS
The consolidated financial statements and schedule included in this
Prospectus and elsewhere in the Registration Statement, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP and Friedman Alpren & Green LLP, independent public accountants, and are
included herein in reliance upon the authority of said firms as experts in
giving said reports.
CHANGE IN ACCOUNTANTS
The Company's Board of Directors appointed Arthur Andersen LLP, as the
independent public accountants for the Company on January 15, 1998, to replace
Friedman Alpren & Green LLP. During the period Friedman Alpren & Green LLP was
retained by the Company, there were no disagreements between Friedman Alpren &
Green LLP and the Company on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Friedman Alpren & Green
LLP, would have caused them to make reference to the disagreement in any of
their reports to the Company. In addition, no report on the financial
statements of the Company rendered by Friedman Alpren & Green LLP contained an
adverse opinion or a disclaimer of opinion or was qualified or modified as to
uncertainty, the scope of the audit performed or accounting principles.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with the Commission with respect to the Shares offered hereby.
This Prospectus filed as a part of the Registration Statement does not contain
all of the information contained in the Registration Statement and the
exhibits thereto, certain portions of which have been omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the Shares offered hereby, reference is made to
such Registration Statement including the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other documents are not necessarily complete, and in each
instance, reference is made to such contract, agreement or other documents
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement and
exhibits may be inspected without charge and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, as well as at the New York
regional office of the Commission at Seven World Trade Center, 13th Floor, New
York, New York 10048 and at Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained
from the Public Reference Section of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission maintains an Internet web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of that site is
http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by its independent
certified public accountants.
50
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein under "Prospectus Summary," "Risk
Factors," "Summary Financial Data," "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," including, without limitation, those concerning (i) the Company's
strategy, (ii) the Company's expansion plans and (iii) the Company's capital
expenditures contain forward-looking statements concerning the Company's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause such differences include, but are not limited to,
those discussed under "Risk Factors." The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking
statements that may be made to reflect any future events or circumstances.
51
<PAGE>
PERISCOPE I SPORTSWEAR, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Independent Auditors' Report............................................. F-3
Consolidated Balance Sheets as of December 31, 1996 and 1997 and June 30,
1998 (Unaudited)........................................................ F-4
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997 and for the Six Months Ended June 30, 1997 and 1998
(Unaudited)............................................................. F-5
Consolidated Statements of Stockholders' Equity (Deficiency) for the
Years Ended December 31, 1995, 1996 and 1997 and for the Six Months
Ended June 30, 1998 (Unaudited)......................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and for the Six Months Ended June 30, 1997 and 1998
(Unaudited)............................................................. F-7
Notes to Consolidated Financial Statements............................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Periscope I Sportswear, Inc.:
We have audited the accompanying consolidated balance sheet of Periscope I
Sportswear, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Periscope
I Sportswear, Inc. and subsidiaries as of December 31, 1997, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
New York, New York
June 8, 1998, except
with respect to certain matters
discussed in Note 15, as
to which the date is July 24, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Periscope I Sportswear, Inc.:
We have audited the accompanying consolidated balance sheet of Periscope I
Sportswear, Inc. and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for each of the years in the two-year period ended December 31,
1995 and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Periscope
I Sportswear, Inc. and Subsidiaries as of December 31, 1996, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1995 and 1996, in conformity with generally accepted
accounting principles.
/s/ FRIEDMAN ALPREN & GREEN LLP
New York, New York
March 3, 1997
F-3
<PAGE>
PERISCOPE I SPORTSWEAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................ $ 103,129 $ 181,397 $ 46,949
Cash and cash equivalents--restrict-
ed................................. 31,709 315,289 33,188
Accounts receivable, less allowance
for doubtful accounts of $50,000 as
of December 31, 1996 and 1997 and
$24,028 as of June 30, 1998........ 178,148 317,834 161,101
Loan receivable--officer............ 47,500 -- --
Income tax refund receivable........ 149,747 98,572 --
Other receivable.................... -- 364,000 1,066,000
Inventories......................... 9,228,509 10,996,315 17,168,285
Advance to officer.................. -- 583,392 353,392
Deferred offering costs............. -- 10,000 377,278
Prepaid income taxes................ 389,583 -- --
Prepaid expenses and other current
assets............................. 462,009 278,098 1,313,887
------------ ------------ ------------
Total current assets............... 10,590,334 13,144,897 20,520,080
PROPERTY AND EQUIPMENT, at cost, less
accumulated depreciation and amorti-
zation.............................. 295,387 381,874 708,739
LOAN RECEIVABLE--Officer, less cur-
rent portion........................ 872,813 906,459 906,459
DEFERRED FINANCING COSTS, less accu-
mulated amortization of $160,662,
$417,723 and $546,252 as of December
31, 1996 and 1997 and June 30, 1998,
respectively........................ 1,124,640 867,579 739,050
SECURITY DEPOSITS.................... 92,581 81,738 81,738
------------ ------------ ------------
Total assets....................... $ 12,975,755 $ 15,382,547 $ 22,956,066
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFI-
CIENCY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................... $ 1,400,000 $ 1,200,000 $ 500,000
Current maturities of capital lease
obligation......................... -- -- 47,973
Due to factor....................... 3,288,019 5,138,996 8,821,955
Accounts payable.................... 6,234,020 5,797,206 9,541,585
Accrued expenses and other current
liabilities........................ 297,003 564,680 779,582
------------ ------------ ------------
Total current liabilities.......... 11,219,042 12,700,882 19,691,095
LONG-TERM DEBT....................... 17,600,000 18,500,000 18,500,000
CAPITAL LEASE OBLIGATION............. -- -- 231,205
------------ ------------ ------------
Total liabilities.................. 28,819,042 31,200,882 38,422,300
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note
10)
STOCKHOLDERS' DEFICIENCY:
Common stock, no par value;
30,000,000 shares authorized,
10,019,200 shares issued and
5,059,200 shares outstanding as of
December 31, 1996 and 1997 and June
30, 1998........................... 40,000 40,000 40,000
Additional paid-in capital.......... 731,229 731,229 731,229
Accumulated deficit................. (5,234,516) (5,209,564) (4,857,463)
Treasury stock (4,960,000 shares),
at cost, as of December 31, 1996
and 1997 and June 30, 1998......... (11,380,000) (11,380,000) (11,380,000)
------------ ------------ ------------
Total stockholders' deficiency..... (15,843,287) (15,818,335) (15,466,234)
------------ ------------ ------------
Total liabilities and stockholders'
deficiency........................ $ 12,975,755 $ 15,382,547 $ 22,956,066
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-4
<PAGE>
PERISCOPE I SPORTSWEAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES............... $67,316,603 $78,706,090 $87,957,306 $34,256,853 $38,502,314
COST OF SALES........... 50,668,537 62,902,505 70,610,571 27,499,147 29,762,289
----------- ----------- ----------- ----------- -----------
Gross profit........... 16,648,066 15,803,585 17,346,735 6,757,706 8,740,025
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling and shipping... 5,777,768 7,544,526 8,546,165 3,791,114 3,813,405
General and administra-
tive.................. 3,475,558 6,685,071 3,972,833 2,300,346 1,730,577
----------- ----------- ----------- ----------- -----------
9,253,326 14,229,597 12,518,998 6,091,460 5,543,982
----------- ----------- ----------- ----------- -----------
Income from opera-
tions................. 7,394,740 1,573,988 4,827,737 666,246 3,196,043
FACTORING AND FINANCING
COSTS.................. 1,047,034 3,244,554 4,743,107 2,080,334 2,484,682
----------- ----------- ----------- ----------- -----------
Income (loss) before
income tax provision
(benefit)............. 6,347,706 (1,670,566) 84,630 (1,414,088) 711,361
INCOME TAX PROVISION
(BENEFIT).............. 253,000 (15,000) 59,678 -- 359,260
----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ 6,094,706 $(1,655,566) $ 24,952 $(1,414,088) $ 352,101
=========== =========== =========== =========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE..... $ 0.61 $ (0.24) $ -- $ (0.28) $ 0.07
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 9,920,000 6,820,000 5,059,200 5,059,200 5,059,200
=========== =========== =========== =========== ===========
PRO FORMA NET INCOME
DATA (Unaudited) (Notes
2 and 9):
Income before income
tax provision, as
reported.............. $ 6,347,706
Pro forma income tax
provision............. 2,729,514
-----------
Pro forma net income... $ 3,618,192
===========
Pro forma basic and
diluted earnings per
share................. $ 0.36
===========
Pro forma weighted
average shares
outstanding........... 9,920,000
===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
PERISCOPE I SPORTSWEAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK ADDITIONAL EARNINGS TREASURY STOCK STOCKHOLDERS'
------------------ PAID-IN (ACCUMULATED ------------------------ EQUITY
SHARES AMOUNT CAPITAL DEFICIT) SHARES AMOUNT (DEFICIENCY)
---------- ------- ---------- ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1994................... 9,920,000 $40,000 $ 29,835 $ 5,084,737 -- $ -- $ 5,154,572
Dividends to
stockholders.......... -- -- -- (5,409,667) -- -- (5,409,667)
Net income............. -- -- -- 6,094,706 -- -- 6,094,706
---------- ------- -------- ----------- ---------- ------------ ------------
BALANCE, December 31,
1995................... 9,920,000 40,000 29,835 5,769,776 -- -- 5,839,611
Dividends to
stockholders.......... -- -- -- (9,348,726) -- -- (9,348,726)
Acquisition of treasury
stock................. -- -- -- -- (4,960,000) (11,380,000) (11,380,000)
Stockholder
contribution.......... -- -- 685,714 -- (595,200) -- 685,714
Common stock issued in
connection with
financing............. -- -- -- -- 595,200 -- --
Issuance of common
stock................. 99,200 -- 15,680 -- -- -- 15,680
Net loss............... -- -- -- (1,655,566) -- -- (1,655,566)
---------- ------- -------- ----------- ---------- ------------ ------------
BALANCE, December 31,
1996................... 10,019,200 40,000 731,229 (5,234,516) (4,960,000) (11,380,000) (15,843,287)
Net income............. -- -- -- 24,952 -- -- 24,952
---------- ------- -------- ----------- ---------- ------------ ------------
BALANCE, December 31,
1997................... 10,019,200 40,000 731,229 (5,209,564) (4,960,000) (11,380,000) (15,818,335)
Net income
(Unaudited)........... -- -- -- 352,101 -- -- 352,101
---------- ------- -------- ----------- ---------- ------------ ------------
BALANCE, June 30, 1998
(Unaudited)............ 10,019,200 $40,000 $731,229 $(4,857,463) (4,960,000) $(11,380,000) $(15,466,234)
========== ======= ======== =========== ========== ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
PERISCOPE I SPORTSWEAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------------------- -----------------------
1995 1996 1997 1997 1998
----------- ------------ ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $ 6,094,706 $ (1,655,566) $ 24,952 $(1,414,088) $ 352,101
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities--
Depreciation and
amortization.......... 58,584 242,353 402,782 196,207 195,610
Provision for doubtful
accounts.............. 102,441 17,572 196,847 47,282 63,976
Loss on sale of
property and
equipment............. 1,339 -- -- -- --
Interest income earned
on restricted cash
and cash
equivalents........... (3,046) (1,663) (1,479) (1,479) --
Issuance of common
stock as
compensation.......... -- 15,680 -- -- --
Changes in assets and
liabilities--
Accounts receivable... (214,964) 27,009 (336,533) (15,472) 92,757
Income tax refund
receivable........... -- (149,747) 51,175 11,939 98,572
Other receivable...... -- -- (364,000) -- (702,000)
Inventories........... (2,614,400) (4,227,524) (1,767,806) (6,311,940) (6,171,970)
Deferred offering
costs................ -- -- (10,000) -- (367,278)
Prepaid income
taxes................ 39,017 (389,583) 389,583 7,114 --
Prepaid expenses and
other current
assets............... (19,108) (202,875) 183,911 176,396 (1,035,789)
Security deposits..... 7,328 (30,477) 10,843 18,085 --
Due to factor......... 2,228,463 5,445,100 850,977 2,552,078 3,182,959
Accounts payable...... (350,990) 2,562,422 (436,814) 2,851,976 3,744,379
Accrued expenses and
other current
liabilities.......... 182,621 (152,872) 267,677 42,445 214,902
----------- ------------ ---------- ----------- ----------
Net cash provided by
(used in) operating
activities.......... 5,511,991 1,499,829 (537,885) (1,839,457) (331,781)
----------- ------------ ---------- ----------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
and equipment......... (51,221) (205,083) (218,354) (89,208) (110,946)
Proceeds from sale of
property and
equipment............. 2,000 -- -- -- --
----------- ------------ ---------- ----------- ----------
Net cash (used in)
provided by
investing
activities.......... (49,221) (205,083) (218,354) (89,208) (110,946)
----------- ------------ ---------- ----------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from long-term
debt.................. -- 20,000,000 2,000,000 2,000,000 --
Advances from officer.. -- -- -- -- --
Principal payments on
long-term debt........ -- (1,000,000) (300,000) (100,000) (200,000)
Principal payments on
capital lease
obligation............ -- -- -- -- (3,822)
Payments on loans
receivable and
advances to officers.. -- 979,687 -- -- 230,000
Advance to officer..... -- -- (583,392) -- --
Deferred financing
costs................. -- (599,589) -- -- --
Acquisition of treasury
stock................. -- (11,380,000) -- -- --
Dividends to
stockholders.......... (5,409,667) (9,348,726) -- -- --
----------- ------------ ---------- ----------- ----------
Net cash (used in)
provided by
financing
activities.......... (5,409,667) (1,348,628) 1,116,608 1,900,000 26,178
----------- ------------ ---------- ----------- ----------
(INCREASE) DECREASE IN
RESTRICTED CASH AND
CASH EQUIVALENTS....... -- -- (282,101) -- 282,101
----------- ------------ ---------- ----------- ----------
Net increase
(decrease) in cash.. 53,103 (53,882) 78,268 (28,665) (134,448)
CASH, beginning of
period................. 103,908 157,011 103,129 103,129 181,397
----------- ------------ ---------- ----------- ----------
CASH, end of period..... $ 157,011 $ 103,129 $ 181,397 $ 74,464 $ 46,949
=========== ============ ========== =========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-7
<PAGE>
PERISCOPE I SPORTSWEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Periscope I Sportswear, Inc. and Subsidiaries (the "Company") designs and
manufactures apparel through contractors. The Company provides an extensive
line of high quality women's and children's clothing, in the moderate price
category to major retailers, primarily for sale under private labels. The
Company operates in a highly competitive industry that is subject to changing
consumer demands and customer preferences.
In order to improve operating results and cash flows generated from
operations, the Company has implemented several strategies during the first
six months of 1998. The Company has substantially increased the utilization of
Mexican contractors to produce its goods, which has reduced the Company's
production costs and improved gross profits. In addition, the Company made a
strategic decision to restructure its children's division with the objective
of achieving higher margins for this division.
During May 1996, the Company undertook a leveraged recapitalization whereby
the Company borrowed an aggregate of $18,000,000 (see Note 6). Substantially
all the proceeds from these loans were used to repurchase 4,960,000 shares of
the Company's common stock owned by a 50% stockholder (see Note 8) and to fund
a distribution to the remaining stockholder. In connection with the
recapitalization, the remaining majority stockholder sold 1,736,000 shares of
the Company's common stock to BancBoston Ventures, Inc. for $2,000,000, the
fair value of such stock. In addition, the remaining majority stockholder also
transferred 595,200 shares of the Company's common stock to three individuals
as consideration for services provided to the Company in connection with the
$18,000,000 financing discussed above. Accordingly, the Company recorded the
fair value of the 595,200 shares transferred and the services provided
($685,714) as deferred financing costs and as a credit to additional paid-in
capital to reflect the contribution made by the majority stockholder (see Note
8). The deferred financing costs are being amortized over the life of the
related debt as factor and financing costs in the accompanying consolidated
statements of operations.
In addition, on May 17, 1996, Periscope I Sportswear, Inc. ("Periscope I")
transferred 99% of its net assets to Periscope Sportswear, LLC, a limited
liability company ("LLC"), and 1% of its net assets to Periscope II
Sportswear, Inc. ("Periscope II"), in a tax-free exchange for a 99% ownership
interest in the LLC and all of the common stock of Periscope II. Periscope II
then transferred its net assets to the LLC in exchange for a 1% ownership
interest. The accompanying consolidated financial statements include the
accounts and results of Periscope II and the LLC since their inception (May
17, 1996).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries (see Note 1). All significant
intercompany accounts and transactions have been eliminated.
Unaudited Interim Consolidated Financial Information
All information with respect to the consolidated balance sheet as of June
30, 1998, the consolidated statements of operations and cash flows for the six
months ended June 30, 1997 and 1998 and the consolidated statement of
stockholders' equity (deficiency) for the six months ended June 30, 1998 is
unaudited. In addition, cost of sales included in the accompanying statements
of operations was computed using the gross profit method. In the opinion of
management, all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation of the results for such periods, have been
reflected therein. The results of operations for the six months ended June 30,
1998 are not necessarily indicative of the results of operations that may be
expected for the full year.
F-8
<PAGE>
PERISCOPE I SPORTSWEAR INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their
estimated useful lives using the straight-line method. Leasehold improvements
are amortized over their lease terms or the estimated useful lives of the
assets, whichever is shorter. Maintenance and repairs are charged against
results of operations as incurred.
The estimated useful lives of the Company's property and equipment are as
follows:
<TABLE>
<S> <C>
Machinery and equipment.................................... 5-7 years
Furniture and fixtures..................................... 7 years
Automobiles................................................ 5 years
Computer equipment and software............................ 3-5 years
Leasehold improvements..................................... Life of the lease
</TABLE>
Long-Lived Assets
The Company reviews its long-lived assets and certain related intangibles
for impairment whenever changes in circumstances indicate that the carrying
amount of an asset may not be fully recoverable. The measurement of impairment
losses to be recognized is based on the difference between the fair values and
the carrying amounts of the assets. Impairment would be recognized in
operating results if a diminution in value occurred. The Company does not
believe that any such changes have occurred.
Deferred Financing Costs
The costs incurred for obtaining financing, including all related legal and
accounting fees, are recorded in the accompanying consolidated balance sheets
as deferred financing costs. Deferred financing costs are being amortized over
the life of the related debt (5 years).
Fair Value of Financial Instruments
Due to the short maturities of the Company's cash, receivables and payables,
the carrying values of these financial instruments approximates their fair
values. The fair value of the Company's debt is estimated based on the current
rates offered to the Company for debt with similar remaining maturities. The
Company believes that the carrying value of its debt estimates the fair value
of such debt instruments.
Transactions with International Suppliers
All transactions with international suppliers currently are denominated in
U.S. dollars and are not subject to exchange rate fluctuations.
F-9
<PAGE>
PERISCOPE I SPORTSWEAR INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
The Company recognizes revenues upon shipment of merchandise to its
customers, which policy has been followed consistently in the accompanying
consolidated financial statements. In previously issued financial statements
for the period May 17, 1996 to December 31, 1996 and for the six months ended
June 30, 1997, revenue for private label/special orders was accounted for upon
completion of production and segregation of such goods for delivery. In
connection with the Company's initial offering of its equity securities to the
public, the Company revised its recognition policy to record revenue for all
merchandise when shipped as the preferable method for all sales and the
results of operations for the year ended December 31, 1996 and the six months
ended June 30, 1997 have been restated accordingly.
Income Taxes
Periscope I and Periscope II file Federal income tax returns. The LLC is not
a taxpaying entity for Federal, New York state or New Jersey state income tax
purposes and, accordingly, no provisions are made for such taxes. Periscope I
and Periscope II's allocable shares of taxable income or loss from the LLC are
reportable on their income tax returns.
Prior to May 17, 1996, Periscope I had elected S Corporation status for
Federal, New York state and New Jersey state income tax purposes. Under these
elections, Periscope I's taxable income or loss was reportable by its
stockholders on their individual income tax returns, and Periscope I made no
provision for Federal income taxes. Reflected on the consolidated statement of
operations for the year ended December 31, 1995 is a pro forma calculation of
the provision for income taxes as if the Company had been a C Corporation for
Federal and state income tax purposes. The formation of Periscope II as a
wholly owned subsidiary required Periscope I to terminate its S Corporation
status and to be taxed as a C Corporation.
The Company accounts for income taxes utilizing the liability approach.
Deferred income taxes are provided for differences in the recognition of
assets and liabilities for tax and financial reporting purposes. Temporary
differences result primarily from various accruals and reserves being
deductible for tax purposes in future periods.
Earnings (Loss) Per Share
The Company has implemented Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"), which establishes standards for the
method of computation, presentation and disclosure for earnings per share
("EPS"). SFAS 128 simplifies the standards for computing EPS previously found
in APB Opinion No. 15, "Earnings Per Share," and makes them comparable to
international EPS standards. It requires the presentation of two EPS amounts,
basic and diluted, on the face of the income statement for all entities with
complex capital structures and the restatement of all prior period EPS
calculations presented. Previously reported EPS amounts were not affected by
the adoption of this new standard. Basic earnings per share represents net
income (loss) divided by the weighted average shares outstanding. Diluted
earnings per share represents net income (loss) divided by the weighted
average shares outstanding adjusted for the incremental dilution of common
stock equivalents. There were no differences between basic and diluted EPS for
1995, 1996 and 1997.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures About Segments of an Enterprise and Related Information,"
introduces a new model for segment reporting, called the "management
approach." The management approach is based on the way that management
organizes segments within a company for making operating decisions and
assessing performance. Reportable segments can be based on
F-10
<PAGE>
PERISCOPE I SPORTSWEAR INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
products and services, geography, legal structure, management structure--any
manner in which management disaggregates a company. The management approach
replaces the notion of industry and geographic segments in current accounting
standards. SFAS 131 is effective for fiscal years beginning after December 15,
1997. However, SFAS 131 need not be applied to interim statements in the
initial year of application. SFAS 131 requires restatement of all prior period
information reported. The Company intends to adopt this standard when required
and is in the process of determining the effect of SFAS 131 on the Company's
financial statement disclosures.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The statement is intended to eliminate the diversity in
practice in accounting for internal-use software costs and improve financial
reporting. The statement is effective for fiscal years beginning after
December 15, 1998. The Company is in the process of determining the effect of
this statement on the Company's consolidated financial position and results of
operations.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the current year presentation.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials......................... $4,628,630 $ 4,406,475 $ 6,879,725
Work-in-process....................... 1,969,079 2,037,581 3,181,226
Finished goods........................ 2,630,800 4,552,259 7,107,334
---------- ----------- -----------
Total inventories..................... $9,228,509 $10,996,315 $17,168,285
========== =========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment............... $ 77,549 $ 117,458 $ 122,124
Furniture and fixtures................ 66,740 85,233 124,347
Automobiles........................... 10,032 12,629 12,629
Computer equipment and software....... 114,679 269,148 619,314
Leasehold improvements................ 83,844 86,730 86,730
---------- ----------- -----------
352,844 571,198 965,144
Less--Accumulated depreciation and
amortization......................... (57,457) (189,324) (256,405)
---------- ----------- -----------
$ 295,387 $ 381,874 $ 708,739
========== =========== ===========
</TABLE>
F-11
<PAGE>
PERISCOPE I SPORTSWEAR INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. FACTORING AND FINANCING ARRANGEMENTS
Substantially all of the Company's accounts receivable are factored on a
nonrecourse basis. Borrowings are subject to a monthly processing charge equal
to 0.7% on gross sales up to $25 million, 0.65% on gross sales between $25
million and $75 million and 0.6% of gross sales over $75 million. Interest on
advances made by the factor is charged at .5% over prime (9% at December 31,
1997) and the factoring agreement is collateralized by the Company's
receivables and inventory. The agreement expires on May 31, 2000 and may be
terminated at the option of the factor with 60 days written notice. The factor
also guarantees the Company's letters of credit. The uncollected balance of
receivables held by the factor as of December 31, 1996 and 1997 and June 30,
1998 was approximately $11.2 million, $17.5 million and $21.4 million,
respectively. Total charges, including interest expense, factoring fees and
commissions, were $1,047,034, $2,055,986, $2,764,761, $1,131,969 and
$1,478,836 for the years ended December 31, 1995, 1996 and 1997 and for the
six months ended June 30, 1997 and 1998, respectively. Such charges are
included in factoring and financing costs in the accompanying consolidated
financial statements.
6. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BankBoston, N.A. term note pay-
able--$15 million term loan bor-
rowed on May 17, 1996. The term
note bears interest at the greater
of the lender's base rate or the
federal funds effective rate plus
1.25% (9.75% at December 31,
1997). The term note is payable in
quarterly principal installments
of $100,000 through December 31,
1998. Quarterly principal payments
increase to $500,000 through March
2001 with a final payment of
$8,700,000 due in May 2001. (a)... $14,000,000 $13,700,000 $13,500,000
Term note payable--$2 million term
loan borrowed on November 20,
1996. The term note bears interest
at prime plus 1% (9.5% at December
31, 1997). The term note is pay-
able in quarterly principal pay-
ments of $250,000 through November
1, 1998........................... 2,000,000 1,000,000 500,000
BancBoston Ventures, Inc., ("BBV")
subordinated note payable--$3 mil-
lion note payable due to a stock-
holder of the Company. The note
payable bears interest at 7% per
annum and is due on May 15, 2001.
The note payable is subordinated
to the Company's term notes
payable. (a)...................... 3,000,000 3,000,000 3,000,000
Subordinated note payable--note
payable due to a stockholder of
the Company. The note payable
bears interest at prime plus 0.5%
(9% at December 31, 1997), is sub-
ordinated through April 1, 1998
and is due on
January 1, 2000................... -- 2,000,000 2,000,000
----------- ----------- -----------
19,000,000 19,700,000 19,000,000
Less--Current maturities of long-
term debt......................... (1,400,000) (1,200,000) (500,000)
----------- ----------- -----------
Long-term debt..................... $17,600,000 $18,500,000 $18,500,000
=========== =========== ===========
</TABLE>
F-12
<PAGE>
PERISCOPE I SPORTSWEAR INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(a) During July 1998, the term note payable was amended to defer quarterly
payments due from September 1998 through June 1999 until July 1999. These
payments total $1,300,000 and have been reflected in the accompanying
consolidated financial statements at December 31, 1997 and June 30, 1998
as long-term. In addition, the $15 million term note payable and the $3
million subordinated note payable agreements were also amended in June
1998 to require the prepayment of such notes if the Company successfully
completes an equity offering with net proceeds of no less than $19.0
million and in consideration thereof, BBV agreed that upon such
prepayment it will contribute 569,200 shares of Common Stock to the
capital of the Company.
Under the provisions of the term notes, the Company is required to maintain
certain financial ratios and comply with other financial conditions. The term
notes also prohibit the Company from incurring certain additional
indebtedness, limit certain investments, advances or loans and restrict
substantial asset sales. At December 31, 1996 and 1997 and June 30, 1998, the
Company was not in compliance with certain financial ratio covenants relating
to dilution and minimum earnings before interest, income taxes, depreciation
and amortization ratios, as defined. The Company obtained waivers related to
the noncompliance through July 1999.
The aggregate principal maturities of debt as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998............................................................. $ 1,200,000
1999............................................................. 2,300,000
2000............................................................. 2,000,000
2001............................................................. 14,200,000
-----------
$19,700,000
===========
</TABLE>
7. CAPITAL LEASE OBLIGATION
Capital lease obligation consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ -----------
1996 1997 1998
------ ----- -----------
(UNAUDITED)
<S> <C> <C> <C>
Capital lease obligation due through May 2003 with in-
terest at 8.3% and secured by the related equipment.. -- -- 279,178
Less--Current maturities of capital lease obligation.. -- -- (47,973)
------ ----- --------
Capital lease obligation.............................. $ -- $ -- $231,205
====== ===== ========
</TABLE>
Minimum annual payments under the capital lease, including interest, are as
follows at June 30, 1998:
<TABLE>
<S> <C>
1998 (remaining six months)........................................ $ 34,674
1999............................................................... 69,348
2000............................................................... 69,348
2001............................................................... 69,348
2002............................................................... 69,348
2003 and thereafter................................................ 28,891
--------
Present value of future minimum lease obligations................ 340,957
Less--Amount representing interest................................. (61,779)
--------
Net minimum payment.............................................. 279,178
Less--Current maturities of capital lease obligation............... (47,973)
--------
Capital lease obligation........................................... $231,205
========
</TABLE>
F-13
<PAGE>
PERISCOPE I SPORTSWEAR INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIENCY)
Recapitalization
In connection with the recapitalization in May 1996 (see Note 1), the
Company repurchased 4,960,000 shares of common stock from a former stockholder
for $11,380,000. Such shares are included in treasury stock in the
accompanying consolidated financial statements. In addition, the majority
stockholder also transferred 595,200 shares of the Company's common stock to
three individuals as compensation for services provided to the Company in
connection with the $18,000,000 financing (see Notes 1 and 6). Accordingly,
the Company recorded the fair market value of the 595,200 shares transferred
and the services provided ($685,714) as a credit to additional paid-in capital
to reflect the contribution made by the majority stockholder.
Incentive Stock Plan
In November 1996, the Company adopted a Stock Incentive Plan (the "1996
Plan") covering up to 496,000 shares of the Company's Common Stock, pursuant
to which officers, directors and key employees of the Company and consultants
to the Company are eligible to receive incentive stock options, stock
appreciation rights, restricted stock and restricted stock units. The
selection of participants, grants to receive incentive stock options, stock
appreciation rights, restricted stock and restricted stock units,
determination of price and other conditions relating to the exercise of
options is determined by the Board of Directors. In 1996, 99,200 shares of
restricted stock were issued under the 1996 Plan. The accompanying
consolidated financial statements include compensation expense recorded in
1996 totaling $15,680 related to the restricted stock issued. No other grants
have been made under the 1996 Plan.
9. INCOME TAXES
Federal and state income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
------------------- -------------------
1996 1997 1997 1998
--------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal:
Current........................... $(246,535) $241,103 $(275,171) $347,256
Deferred.......................... (309,091) (133,024) (98,868) (97,318)
State and local:
Current........................... (61,288) 114,509 (130,690) 164,925
Deferred.......................... (81,818) (67,235) (32,915) (55,603)
Valuation allowance................ 683,732 (95,675) 537,644 --
--------- -------- --------- --------
$(15,000) $ 59,678 $ -- $359,260
========= ======== ========= ========
</TABLE>
The differences in federal income taxes provided and the amounts determined
by applying the Federal statutory tax rate (34%) to income (loss) before
income taxes result from the following:
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
------------------- -------------------
1996 1997 1997 1998
--------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Tax at statutory rate................ $(567,992) $28,774 $(480,790) $241,863
Add (deduct) the effect of:
State income taxes.................. (94,450) 31,201 (107,979) 72,152
Nondeductible expenses.............. (36,290) 95,378 51,125 45,245
Change in valuation allowance....... 683,732 (95,675) 537,644 --
--------- ------- --------- --------
$(15,000) $59,678 $ -- $359,260
========= ======= ========= ========
</TABLE>
F-14
<PAGE>
PERISCOPE I SPORTSWEAR INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1995, the Company had elected S Corporation status for Federal, New
York and New Jersey State income tax purposes. Accordingly, the provision for
income taxes reflected in the accompanying consolidated statements of
operations for the year ended December 31, 1995 is substantially lower than
the pro forma provision reflecting the income tax provision as if the Company
were a C Corporation for Federal and state income tax purposes. The difference
in taxes provided in 1995 and the amounts determined by applying the Federal
statutory tax rate (34%) is due to the Company's S Corporation election.
The components of deferred income tax assets and liabilities, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred income tax assets:
Net operating loss carryforwards.......... $ 307,823 $ -- $ --
Reserves and other, net................... 390,909 588,057 740,978
--------- --------- ---------
Total deferred income tax asset.......... 698,732 588,057 740,978
Valuation allowance...................... (683,732) (588,057) (588,057)
--------- --------- ---------
$ 15,000 $ -- $ 152,921
========= ========= =========
</TABLE>
The principal difference between the carryforwards available for tax return
purposes and financial reporting relates to reserves that have been recognized
in the financial statements that will result in future tax-deductible amounts.
The Company concluded based on objective evidence that it could not overcome
the presumption that it was more likely than not that it would fully realize
the deferred tax assets included in the consolidated financial statements as
of December 31, 1996 and 1997. Accordingly, a valuation allowance has been
recorded to fully reserve the Company's deferred tax assets at December 31,
1996 and 1997. The Company had income before income taxes of $711,361 for the
six months ended June 30, 1998 and has concluded that based on the current
results it would not increase the reserve relating to the deferred tax assets.
Accordingly, a benefit of $152,921 has been reflected in the results of
operations for the six months ended June 30, 1998.
Sales by Periscope I or existing shareholders of common stock can cause a
"change of control," as defined in Section 382 of the Internal Revenue Code of
1986, as amended, which would limit the ability of Periscope I or its
subsidiaries to utilize these loss carryforwards in later tax periods. Should
such a change of control occur, the amount of loss carryforwards available for
use in any one year would most likely be substantially reduced. Future
treasury regulations, administrative rulings or court decisions may also
effect Periscope I's future utilization of its loss carryforwards.
10. COMMITMENTS AND CONTINGENCIES
Litigation
The Company and its subsidiaries are from time to time parties to litigation
arising in the normal course of their business. Management believes that none
of these actions will have a material adverse effect on the financial position
or results of operations of the Company and its subsidiaries.
F-15
<PAGE>
PERISCOPE I SPORTSWEAR INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Lease Commitments
The Company is obligated under noncancelable operating leases for
manufacturing, showroom and administrative facilities. Approximate future
minimum annual lease payments, exclusive of required payments for increases in
real estate taxes and operating costs, as of December 31, 1997 are as follows
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1998............................................................ $ 568,333
1999............................................................ 571,716
2000............................................................ 505,187
2001............................................................ 305,600
2002............................................................ 101,867
----------
$2,052,703
==========
</TABLE>
Rent expense was $502,250, $658,789, $653,061, $321,717 and $323,785 for the
years ended December 31, 1995, 1996 and 1997 and for the six months ended June
30, 1997 and 1998, respectively.
Consulting and Noncompetition Agreement
On May 15, 1996, the Company entered into a five-year consulting and
noncompetition agreement with a former stockholder. The agreement calls for an
annual fee of $75,000, payable in weekly installments, through May 2001.
Charges under the agreement totaled $52,768, $75,000, $37,500 and $37,500 for
the years ended December 31, 1996 and 1997 and for the six months ended June
30, 1997 and 1998, respectively.
Employment Agreements
On May 17, 1996, the Company entered into an employment agreement with its
president, which expires on May 15, 2003. The agreement provides for an annual
salary of $1,700,000 for the first contract year, adjusted in the remaining
contract years at the discretion of the Company. In addition, the president
receives an annual discretionary expense account in the amount of $300,000.
During 1997, the employment agreement was amended to reduce total annual
compensation to approximately $1,500,000. In addition, effective January 1,
1998, the employment agreement was further amended to provide for base salary
of $500,000, a $450,000 performance based bonus and a $50,000 business expense
allowance.
In May 1998, the Company also entered into employment agreements with two of
its key executives. One agreement provides for annual base compensation of
$184,000 and additional compensation based on achieving certain performance
criteria. This agreement is for a three year term commencing on July 1, 1998.
The second agreement is for a five year term expiring in April 2003 and
provides for annual compensation of approximately $168,000.
Letters of Credit
The Company had approximately $2,300,000, $1,500,000 and $950,000 of open
letters of credit outstanding as of December 31, 1996 and 1997 and June 30,
1998, respectively.
11. PROFIT SHARING PLAN
The Company has a profit sharing plan which provides retirement benefits to
substantially all employees. Contributions are discretionary on the part of
the Company and are not allowed on the part of employees. There were no
contributions for the years ended December 31, 1995, 1996 and 1997 and for the
six months ended June 30, 1997 and 1998.
F-16
<PAGE>
PERISCOPE I SPORTSWEAR INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SIGNIFICANT CUSTOMERS
In 1995, Charming Shoppes and Lerner accounted for 16.0% and 14.9% of gross
sales, respectively. In 1996, Cato Stores, Charming Shoppes and Sears
accounted for 10.3%, 15.9% and 11.8% of gross sales, respectively. In 1997,
Charming Shoppes and Sears accounted for 13.4% and 12.1% of gross sales,
respectively. For the six months ended June 30, 1997, Charming Shoppes, Sears
and Wal-Mart accounted for 11.8%, 16.1% and 11.1% of gross sales,
respectively. For the six months ended June 30, 1998, Charming Shoppes, Costco
Wholesale, K-mart and Sears accounted for 10.4%, 10.5%, 30.1% and 13.3% of
gross sales, respectively.
13. RELATED PARTY TRANSACTIONS
On May 17, 1996, the Company converted advances totaling $950,000 due from
its president into a loan. The agreement provided for the loan to be forgiven
over a 20-year period in lieu of services provided to the Company by the
president. However, on April 17, 1997, the agreement was amended to charge
interest on the loan at a rate of prime plus 0.5% (9% at December 31, 1997)
and to provide for repayment of the loan in full in January 2000. Prior to the
amendment to the loan agreement, the Company recorded compensation expense of
$29,687, $13,854 and $13,854 for the years ended December 31, 1996 and 1997
and for the six months ended June 30, 1997, respectively.
Included in other receivable at December 31, 1997 and June 30, 1998 are
advances due from a manufacturing contractor utilized by the Company totaling
$364,000 and $1,066,000, respectively. The advances are due on demand and are
non-interest bearing.
The Company purchases manufacturing-related services from Leo Ashkinadze
Cutting ("LAC") and JC Cutting Inc. ("JC Cutting"). An employee of the Company
owns both LAC and JC Cutting. Total fees paid to LAC and JC Cutting for the
years ended December 31, 1995, 1996 and 1997 and for the six months ended June
30, 1997 and 1998 were $497,636, $179,664, $462,603, $218,841 and $333,355,
respectively.
The Company paid performance compensation to S.R.P. Sales, Inc. ("S.R.P.").
An executive officer of the Company controls S.R.P. Total fees paid to S.R.P.
for the years ended December 31, 1995, 1996 and 1997 and for the six months
ended June 30, 1997 and 1998 were $371,867, $560,702, $1,025,491, $405,993
and $317,649.
The Company purchases transportation-related services from Global Air, Inc.,
("Global"). The president of the Company is a principal shareholder of Global.
Total fees paid to Global for the years ended December 31, 1996 and 1997 and
for six months ended June 30, 1997 were $39,470, $64,101 and $36,216,
respectively. No such fees were paid to Global during the year ended December
31, 1995 and the six months ended June 30, 1998.
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest and income taxes were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ ---------------------
1995 1996 1997 1997 1998
-------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest............... $594,069 $2,435,538 $3,604,347 $1,654,015 $1,968,763
Income taxes........... 234,500 559,981 14,136 3,222 6,751
======== ========== ========== ========== ==========
</TABLE>
F-17
<PAGE>
PERISCOPE I SPORTSWEAR INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Noncash financing activity was as follows:
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEARS ENDED MONTHS
DECEMBER 31, ENDED JUNE 30,
----------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Capital lease obligation incurred. $ -- $ -- $ -- $ -- $283,000
======= ======= ======= ======= ========
</TABLE>
In May 1996, the remaining majority stockholder transferred 595,200 shares
of the Company's common stock to three individuals as consideration for
services provided to the Company in connection with the $18,000,000 financing
(see Note 1 and 6). Accordingly, the Company recorded the fair value of the
595,200 shares transferred and the services provided ($685,714) as deferred
financing costs and as a credit to additional paid-in capital to reflect the
contribution made by the majority stockholder (see Note 8). The Company has
reflected this transaction as a noncash financing activity and has excluded
these amounts from the consolidated statement of cash flows for the year ended
December 31, 1996.
15. SUBSEQUENT EVENTS
Reorganization
During May 1998, Periscope Sportswear, Inc., a wholly owned subsidiary was
incorporated in the State of Delaware. On July 21, 1988, Periscope I merged
with Periscope Sportswear, Inc. with the successor company being Periscope
Sportswear, Inc. In connection with this reincorporation, the Company
effectuated a 124,000-for-1 stock split of its Common Stock. The accompanying
consolidated financial statements retroactively reflect the stock split for
all periods presented.
Initial Public Offering
The Company intends to offer shares of its common stock to the general
public in an initial public offering (the "Offering"). At December 31, 1997
and June 30, 1998, deferred offering costs total $10,000 and $377,278,
respectively, of costs incurred in connection with the Offering of the
Company's common stock. These costs will be charged against additional paid-in
capital upon the successful completion of the Offering. If the Offering is
unsuccessful, such costs will be charged to expense.
The Company intends to utilize a portion of the net proceeds of the Offering
to repay the $15,000,000 term note payable and the $3,000,000 subordinated
note payable (see Note 6). If the Offering is successful and such repayment
occurs, the Company will expense the remaining deferred financing costs at
that date in the consolidated statement of operations.
Stock Option Plan
In May 1998, the Company adopted a Stock Option Plan (the "Stock Option
Plan"), pursuant to which officers, directors and key employees of the Company
and consultants to the Company are eligible to receive incentive stock options
and nonqualified stock options. The Stock Option Plan expires in May 2008. The
number of shares available for grant under the Stock Option Plan is 750,000.
The selection of participants, grant of options, determination of price and
other conditions relating to the exercise of options is determined by the
entire Board of Directors. Incentive stock options granted under the Stock
Option Plan are exercisable for a period of up to 10 years from the date of
grant at an exercise price which is not less than the fair market value of a
share of Common Stock on the date of the grant, except that the term of an
incentive stock option granted under the Stock Option Plan to a stockholder
owning more than 10% of the outstanding Common Stock may not exceed five years
and its exercise price may not be less than 110% of the fair market value of a
share of Common Stock on the date of the grant.
F-18
<PAGE>
[ COMPANY LOGO ]
The following customer names are super-imposed on a map of the United States:
Cato Corporation
Fashion Bug
Costco Wholesale
Kmart Corporation
Montgomery Ward
Sears, Roebuck and Co.
Shopko Stores Inc.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
----------------
TABLE OF CONTENTS
----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 1
Risk Factors............................................................... 8
Use of Proceeds............................................................ 13
Dividend Policy............................................................ 13
Capitalization............................................................. 14
Dilution................................................................... 15
Selected Financial Data.................................................... 16
Pro Forma Information...................................................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................ 21
Business................................................................... 27
Management................................................................. 39
Principal and Selling Stockholders......................................... 43
Certain Transactions....................................................... 44
Description of Capital Stock............................................... 45
Shares Eligible for Future Sale............................................ 47
Underwriting............................................................... 48
Legal Matters.............................................................. 50
Experts.................................................................... 50
Additional Information..................................................... 50
Special Note Regarding Forward-Looking Statements.......................... 51
Index to Financial Statements.............................................. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL BROKER-
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS, AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,195,200 SHARES
[LOGO OF PERISCOPE]
COMMON STOCK
PERISCOPE SPORTSWEAR, INC.
----------------
PROSPECTUS
----------------
SUTRO & CO. INCORPORATED
L.H. FRIEND, WEINRESS,
FRANKSON & PRESSON, INC.
SCOTT & STRINGFELLOW, INC.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the expenses of the issuance and distribution of the
securities being registered, other than underwriting commissions and expenses,
all of which will be paid by the Company. Other than the SEC registration fee
and the NASD filing fees all of such expenses are estimated.
<TABLE>
<S> <C>
Registration fee...................................................... $ 16,105
NASD fee.............................................................. $ 5,877
Printing expenses..................................................... $100,000
Accounting fees and expenses.......................................... $350,000
Legal fees and expenses............................................... $275,000
State securities law fees and expenses................................ $ 10,000
Transfer agent and registrar fees and expenses........................ $ 5,000
Miscellaneous......................................................... $ 63,018
--------
Total............................................................... $825,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Underwriting Agreement provides for reciprocal indemnification between
the Company and its controlling persons, on the one hand, and the Underwriters
and their respective controlling persons, on the other hand, against certain
liabilities in connection with this Offering, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
The Registrant's Certificate of Incorporation and By-Laws provide that the
Registrant shall indemnify its directors to the full extent permitted by the
General corporation Law of the state of Delaware (the "DGCL") and may
indemnify any such person with respect to proceedings, claims or actions
initiated or brought voluntarily by any such person and not by way of defense,
or for any amounts paid in settlement of an action indemnified against by the
Registrant without the prior written consent of the Registrant. The Registrant
intends to enter into indemnity agreements with each of its directors. These
agreements may require the Registrant, among other things, to indemnify such
directors against certain liabilities that may arise by reason of their status
or service as directors, and to advance expenses to them as they incurred,
provided that they undertake to repay the amount advanced if it is ultimately
determined by a court that they are not entitled to indemnification, and to
obtain directors' liability insurance if available on reasonable terms.
In addition, the Registrant's Certificate of Incorporation provides that a
director of the Registrant shall not be personally liable to the Registrant or
its stockholders for monetary damages for breach of his or her fiduciary duty
as director, except for liability (i) for any breach of the directors' duty or
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not
in good faith or which are intentional misconduct or a knowing violation of
law, (iii) for willful or negligent conduct in paying dividends or
repurchasing stock out of any other lawfully available funds or (iv) for any
transaction from which the director derives an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In May 1996, Glenn Sands, the Company's President and Chief Executive
Officer, sold 14 shares of Common Stock to BancBoston Ventures, Inc. for $2.0
million. At the time of such sale, Mr. Sands owned 100% of the outstanding
shares of the Company. Such shares were acquired for investment in a
transaction exempt from registration under the Securities Act of 1933 pursuant
to Section 4(2) thereof.
In May 1996, Glenn Sands, the Company's President and Chief Executive
Officer, sold 4.8 shares of Common Stock to three individuals unaffiliated
with the Company, in consideration for past services. At the time of such
sale, Mr. Sands owned 100% of the outstanding shares of the Company. Such
shares were acquired for investment in a transaction exempt from registration
under the Securities Act of 1933 pursuant to Section 4(2) thereof.
II-1
<PAGE>
On November 1, 1996, the Registrant issued .8 shares of Common Stock to
Scott Pianin, the Company's Executive Vice President and Chief Operating
Officer, in consideration for past services. Such shares were acquired for
investment in a transaction exempt from registration under the Securities Act
of 1933 pursuant to Section 4(2) thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Company+
3.2 By-Laws of the Company+
4.1 Specimen Stock Certificate*
5.1 Form of Opinion of Morse, Zelnick, Rose & Lander, LLP+
10.1 Stock Option Plan+
10.2 Employment Agreement between the Company and Glenn Sands*
10.3 Employment Agreement between the Company and Scott Pianin*
10.4 Employment Agreement between the Company and Raymond Kuslansky*
10.5 Lease between the Company and Gettinger Associates*
10.6 Lease between the Company and Hartz Mountain Industries, Inc. for
distribution facility*
10.7 Term Loan Agreement between Periscope I Sportswear, Inc. and
BankBoston, N.A. (formerly known as The First National Bank of
Boston), together with the Sixth Amendment thereto*
10.8 Securities Purchase Agreement among Periscope I Sportswear, Inc.,
Glenn Sands and BancBoston Ventures, Inc.*
10.9 Agreement between the Company and BancBoston Ventures, Inc. with
respect to contribution of shares of Common Stock to the capital of
the Company*
16.1 Letter regarding change in certifying accountant+
21.1 Subsidiaries of the Registrant*
23.1 Consent of Arthur Andersen LLP+
23.2 Consent of Friedman Alpren & Green LLP+
23.3 Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit
5.1)*
23.4 Consent of Standard & Poor's Apparel and Footwear Industry Survey+
24.1 Power of Attorney (included in signature page)
27.1 Financial Data Schedule+
</TABLE>
- --------
* To be filed by amendment
+ Previously filed
(B) FINANCIAL STATEMENT SCHEDULES:
<TABLE>
<S> <C>
Index to Financial Statement Schedules................................... S-1
Report of Independent Public Accountants................................. S-2
Independent Auditor's Report............................................. S-3
Schedule II--Valuation and Qualifying Accounts........................... S-4
</TABLE>
All other schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the Company's Consolidated
Financial Statements or the Notes thereto.
ITEM 17. CERTAIN UNDERTAKINGS
A. 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.
II-2
<PAGE>
B. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, 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
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
C. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the 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.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK,
STATE OF NEW YORK ON JULY 24, 1998.
Periscope Sportswear, Inc.
/s/ Glenn Sands
by: _________________________________
GLENN SANDS
President
ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Glenn Sands and George Lander, or any one of them,
his true and lawful attorney-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, to sign any and all pre- or post-effective amendments
to this Registration Statement, and to file the same with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any one of them,
or their or his substitutes, may lawfully do or cause to be done by virtue
hereof.
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS
AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED ON JULY 24, 1998.
SIGNATURE TITLE
--------- -----
/s/ Glenn Sands President, Chief Executive Officer
- ------------------------------------- and Director
GLENN SANDS
/s/ Raymond Kuslansky Chief Financial Officer (principal
- ------------------------------------- financial and accounting officer)
RAYMOND KUSLANSKY
/s/ Scott Pianin Director
- -------------------------------------
SCOTT PIANIN
II-4
<PAGE>
PERISCOPE I SPORTSWEAR, INC
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................... S-2
Independent Auditors' Report............................................... S-3
Schedule II--Valuation and Qualifying Accounts............................. S-4
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Periscope I Sportswear, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Periscope I Sportswear, Inc. and subsidiaries
included in this registration statement and have issued our report thereon
dated June 8, 1998. Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule listed in the
index above for the year ended December 31, 1997 is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
New York, New York
June 8, 1998
S-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Periscope I Sportswear, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Periscope I Sportswear, Inc. and subsidiaries
included in this registration statement and have issued our report thereon
dated March 3, 1997. Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule listed in the
index above for the years ended December 31, 1995 and 1996 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ FRIEDMAN ALPREN & GREEN LLP
New York, New York
March 3, 1997
S-3
<PAGE>
PERISCOPE SPORTSWEAR I AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING WRITE- END OF
OF YEAR PROVISION RECOVERIES OFFS YEAR
---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1995:
Allowance for doubtful
accounts............... $50,000 $102,441 $ 2,755 $(105,196) $50,000
------- -------- ------- --------- -------
Year Ended December 31,
1996:
Allowance for doubtful
accounts............... $50,000 $ 17,572 -- $ (17,572) $50,000
------- -------- ------- --------- -------
Year Ended December 31,
1997:
Allowance for doubtful
accounts............... $50,000 $196,847 $78,783 $(275,630) $50,000
------- -------- ------- --------- -------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these schedules.
S-4
