<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 26, 1998
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
SUN APPAREL, INC.
(Exact Name of Registrant as Specified in Its Charter)
------------------------------
<TABLE>
<S> <C> <C>
TEXAS 2325 74-1890214
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number
</TABLE>
11201 ARMOUR DRIVE
EL PASO, TEXAS 79935
(915) 595-2800
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
DONA FISHER
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
SUN APPAREL, INC.
11201 ARMOUR DRIVE
EL PASO, TEXAS 79935
(915) 595-2800
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
COPIES TO:
<TABLE>
<S> <C>
STACY J. KANTER VINCENT PAGANO, JR.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP SIMPSON THACHER & BARTLETT
919 THIRD AVENUE 425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10017
TEL: (212) 735-3000 TEL: (212) 455-2000
FAX: (212) 735-2000 FAX: (212) 455-2502
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, 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,
please check the following box: / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF SECURITIES PROPOSED MAXIMUM AMOUNT OF
BEING REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $.01 par value............ $115,000,000.00 $33,925.00
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(o) of the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 26, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SHARES
SUN APPAREL, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
---------------
All of the shares of Common Stock offered hereby are being issued and
sold by the Company. Prior to the Offering, there has been no public market for
the Common Stock. It is currently estimated that the initial public offering
price per share will be between $ and $ . For factors considered in
determining the initial public offering price, see "Underwriting".
After consummation of the Offering, Eric A. Rothfeld, President, Chief
Executive Officer and Chairman of the Board, and his affiliates and Vestar
Capital Partners III, L.P. and its affiliates will beneficially own
approximately % and %, respectively, of the outstanding Common Stock.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
Application will be made to have the Common Stock quoted on the Nasdaq
National Market under the symbol " ".
----------------
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>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT (1) COMPANY (2)
------------------ ------------------ ------------------
<S> <C> <C> <C>
Per Share.......................................... $ $ $
Total (3).......................................... $ $ $
</TABLE>
- ---------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting".
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional shares of Common Stock at the initial public
offering price per share, less the underwriting discount, solely to cover
over-allotments. If such option is exercised in full, the total initial
public offering price, underwriting discount and proceeds to Company will be
, and , respectively. See "Underwriting".
----------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the shares
will be ready for delivery in New York, New York, on or about ,
1998, against payment therefor in immediately available funds.
JOINT LEAD MANAGERS
GOLDMAN, SACHS & CO. BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
----------------
<PAGE>
The date of this Prospectus is , 1998.
<PAGE>
[Inside Front Cover]
[Artwork]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
------------------------
"Polo Jeans Company Ralph Lauren" and the logos associated therewith are
trademarks of Polo Ralph Lauren Corporation and are licensed to the Company for
its use. "Todd Oldham Jeans" and "TO(2)" are trademarks of L7 Designs, Inc. and
are licensed to the Company for its use. "Sasson" is a trademark of Sasson
Licensing Corporation and is licensed to the Company for its use. "Code Bleu" is
a trademark of the Company. All other trademarks or trade names referred to in
the Prospectus are the property of their respective owners.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE
CONTEXT OTHERWISE REQUIRES, THE INFORMATION CONTAINED IN THIS PROSPECTUS: (I)
GIVES EFFECT TO A FOR ONE STOCK SPLIT OF THE COMMON STOCK, $.01 PAR VALUE
PER SHARE (THE "COMMON STOCK"), OF THE COMPANY TO BE EFFECTED SIMULTANEOUSLY
WITH THE CONSUMMATION OF THE OFFERING (SEE "DESCRIPTION OF CAPITAL STOCK"); (II)
GIVES EFFECT TO THE CONVERSION OF EACH OUTSTANDING SHARE OF THE ROTHFELD
PREFERRED STOCK AND THE VESTAR PREFERRED STOCK (EACH AS DEFINED HEREIN) INTO
APPROXIMATELY SHARES OF COMMON STOCK (THE "PREFERRED STOCK CONVERSION");
(III) ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF $ PER SHARE OF COMMON
STOCK; AND (IV) ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT
EXERCISED. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES IN THIS
PROSPECTUS TO THE "COMPANY" MEAN SUN APPAREL, INC. AND ITS SUBSIDIARIES.
THE COMPANY
Sun Apparel, Inc. is a leading designer, manufacturer and distributor of
jeanswear, sportswear, and related apparel for men, women and children under
licensed brands, private label brands and Company owned brands, the most
prominent of which is the POLO JEANS COMPANY RALPH LAUREN ("Polo Jeans")
licensed brand. The Company markets and distributes its products nationally
through a broad array of distribution channels, including department stores,
specialty stores and mass merchandisers. Through its brand marketing and
development expertise, diversified product offerings, manufacturing capabilities
and comprehensive distribution network, the Company reaches a broad range of
consumers and distinguishes itself from its competitors.
In late 1995, the Company entered into exclusive long-term license and
design agreements with Polo Ralph Lauren Corporation ("Polo Ralph Lauren") for
the design, manufacture and distribution of men's and women's jeanswear,
sportswear and related apparel (the "Polo Jeans Products") under the Polo Jeans
trademark in the United States and its territories. The Polo Jeans collection
targets youthful, brand conscious consumers, capitalizing on the distinctive
name recognition and lifestyle image created by Polo Ralph Lauren. The Polo
Jeans Products maintain the high quality standards and prestige of Polo Ralph
Lauren at price points that are competitive with other denim based designer
collections and lower than most apparel collections bearing the "Polo" name. The
Company markets its Polo Jeans line in leading department stores, specialty
stores and Polo Ralph Lauren retail stores. Launched at retail for Fall 1996,
the Polo Jeans collection is currently distributed to more than 3,000 department
and specialty store doors and generated $198.0 million in net sales in 1997, the
first full fiscal year of distribution of Polo Jeans Products.
Since its inception in 1979, the Company has focused primarily on the
design, manufacture and distribution of jeanswear and casual bottoms for all
size ranges, at various price points under private label brands, contract
manufacturing programs, licensed brands and Company owned brands (the "Sun
Division Products"). The Company manufactures Sun Division Products for leading
retailers and manufacturers such as Wal-Mart Stores, Inc. ("Wal-Mart"), The
Limited Inc. ("The Limited"), J.C. Penney Company, Inc. ("J.C. Penney"),
Federated Department Stores Inc. ("Federated") and Sara Lee Corp. ("Sara Lee").
While manufacturing high quality jeanswear and casual bottoms in diverse styles,
fits and finishes, the Company distinguishes itself from other denim based
apparel manufacturers by providing value-added services in design,
merchandising, production and inventory management. The Sun Division Products
are currently distributed nationwide to more than 18,000 store doors. In fiscal
1997, Sun Division Products generated $161.7 million in net sales.
Primarily as a result of the launch of the Polo Jeans line in fiscal 1996,
the Company has experienced rapid growth, with net sales increasing from $205.7
million in fiscal 1995 to $359.7 million in fiscal 1997. During the same period,
operating income increased from $16.0 million to $36.0 million, and the
3
<PAGE>
operating margin increased from 7.8% to 10.0%. In the first three months of
fiscal 1998, net sales and operating income increased from $80.5 million and
$7.9 million to $94.0 million and $11.8 million, respectively, while the
operating margin increased from 9.8% to 12.6%, compared to the corresponding
period of fiscal 1997.
The Company believes that its success is due to a number of fundamental
strengths, including: proven success in brand marketing and development, full
service design and merchandising expertise, modern and vertically integrated
jeanswear manufacturing and distribution facilities, international sourcing
capabilities and customer inventory management. The Company believes that these
strengths position the Company to execute its growth strategy.
GROWTH STRATEGY
The Company's core competencies position it to grow its existing businesses
and attract additional opportunities in brand licensing and ownership and
private label manufacturing.
CAPITALIZE ON THE STRENGTH OF THE POLO JEANS COMPANY RALPH LAUREN
BRAND. The Company believes that there are multiple opportunities to further
grow the Polo Jeans business, which was launched at retail for Fall 1996.
- EXPAND IN-STORE SHOPS. The Company expects to increase the retail presence
of Polo Jeans Products through the expansion of existing in-store shops
and the installation of additional in-store shops. In-store shops are
areas within department stores dedicated to Polo Jeans Products utilizing
signature Polo Jeans fixtures. The in-store shops, which range from 300 to
2,500 square feet, are designed to effectively display and merchandise
Polo Jeans Products. The Company believes that, in addition to increasing
sales, in-store shops enhance the consumer's shopping experience, promote
the Polo Jeans lifestyle image and build loyalty among consumers. As of
March 31, 1998, there were 682 Polo Jeans in-store shops covering more
than 243,000 square feet of fixtured retail selling space. The Company
currently expects to have over 1,200 in-store shops covering more than
500,000 square feet of fixtured retail selling space in department stores
by the end of 1998.
- INCREASE DOOR PENETRATION. Within the Company's existing customer base,
management believes it has significant opportunity in both its men's and
women's Polo Jeans lines to increase penetration in its existing
department store doors and expand to additional doors. The Company
anticipates that by the end of 1998 the Polo Jeans collection will be
distributed to more than 3,200 department and specialty store doors.
- INCREASE SALES TO POLO RALPH LAUREN RETAIL STORES. The Company anticipates
that retail stores owned and operated by Polo Ralph Lauren will provide
significant opportunities to grow the Polo Jeans business. Polo Ralph
Lauren currently owns and operates more than 70 Polo Ralph Lauren Factory
Outlets, all of which carry certain Polo Jeans Products, and two Polo
Jeans Company Factory Outlets. In late 1997, Polo Ralph Lauren opened its
first full-price Polo Jeans Company retail store dedicated to the
Company's Polo Jeans Products. Polo Ralph Lauren has announced plans to
open two additional such stores as well as four additional Polo Jeans
Company Factory Outlets by the end of 1998 and expects to open five
full-price Polo Jeans Company retail stores and ten Polo Jeans Company
Factory Outlets during 1999. The Company believes that the continued
roll-out of outlet and retail stores by Polo Ralph Lauren will augment
Polo Jeans Products sales and enhance consumer recognition of the Polo
Jeans brand.
- SELECTIVELY EXPAND ACCOUNT BASE. Based on the strong demand for Polo Jeans
Products, the Company believes that additional growth can be achieved by
selectively expanding the Polo Jeans business account base in both
department stores and specialty stores.
4
<PAGE>
- BROADEN PRODUCT OFFERINGS. The Company will continue to expand product
offerings within its Polo Jeans collection to attract youthful, brand
conscious consumers and enhance its image as a lifestyle brand. In
addition to expanding its denim product offerings, the Company intends to
broaden offerings of Polo Jeans Products in casual bottoms, knitwear,
sweaters and outerwear.
EXPAND SUN DIVISION BUSINESS. The Company believes that the Sun Division
business is well positioned for controlled growth through increasing customer
penetration, expanding distribution and broadening product offerings.
- INCREASE EXISTING CUSTOMER PENETRATION. The Company manufactures its Sun
Division Products for a broad array of established retailers, including
department stores, specialty stores and mass merchandisers. The Company
manufactures these products under well recognized brands, such as FADED
GLORY (Wal-Mart), EXPRESS (The Limited), THE ARIZONA JEANS COMPANY (J.C.
Penney), and BADGE (Federated). By virtue of the Company's ability to
produce basic and fashion jeanswear and casual bottoms for all size
ranges, the Company believes that there are significant opportunities for
further penetration within the Company's existing customer base by
expanding to new departments and offering additional merchandise within
existing departments.
- SELECTIVELY EXPAND ACCOUNT BASE. The Company's longstanding reputation as
a manufacturer and distributor of high quality jeanswear, together with
the success of the Polo Jeans business, position the Company to expand its
Sun Division Products account base. In 1997, the Company began a new
contract manufacturing program with the JUST MY SIZE division of Sara Lee
and recently began new private label programs for Dayton Hudson
Corporation ("Dayton Hudson"), Sears Roebuck and Co. ("Sears"), The
Talbots, Inc. ("Talbots") and The Wet Seal, Inc. ("Wet Seal"). In
addition, as the Polo Jeans line has been launched internationally by Polo
Ralph Lauren, the Company has become the primary jeanswear contractor for
many Polo Jeans Company Ralph Lauren international licensees. The Company
will continue to explore opportunities to develop additional accounts for
its Sun Division Products business with department stores, specialty
stores, mass merchandisers and manufacturers.
- BROADEN PRODUCT OFFERINGS. The Company will continue to expand Sun
Division Products offerings to attract new customers. In addition to
expanding its jeanswear offerings, the Company intends to broaden its
offerings of casual bottoms.
PURSUE ADDITIONAL OPPORTUNITIES IN LICENSING AND BRAND OWNERSHIP. Building
on its success in brand marketing and development, together with its jeanswear
manufacturing and distribution expertise, the Company believes it is
well-positioned to pursue additional opportunities in licensing and brand
ownership. For example, the Company is presently the exclusive worldwide
licensee for TODD OLDHAM JEANS, a collection of jeanswear and sportswear
targeted toward the sophisticated, fashion forward consumer and distributed to
better department stores and specialty stores. In the Fall 1998 season, the
Company is scheduled to introduce at Nordstrom, Inc. ("Nordstrom"), Wet Seal and
other select department and specialty stores a more moderately priced Todd
Oldham jeanswear and sportswear line under the TO(2) brand name for the junior
market. The Company intends to continue to evaluate and pursue new opportunities
in licensing and brand ownership.
INCREASE PRODUCTION CAPACITY AND FURTHER REDUCE MANUFACTURING COSTS. The
Company owns and operates five modern jeanswear sewing and finishing facilities
in Mexico and intends to expand these facilities in the near future. In
addition, the Company plans to shift cutting and portions of its other
operations from the United States to Mexico to further reduce manufacturing
costs. The Company owned facilities, combined with an established network of
contractors, provide production flexibility, while maintaining the Company's
position as a low cost and high quality supplier of jeanswear and casual
bottoms.
5
<PAGE>
THE RECAPITALIZATION
On September 26, 1997, the Company consummated a series of transactions to
effect a recapitalization of the Company and transfer a controlling interest in
the Company from the Former Partner (as defined herein) to Eric A. Rothfeld,
President, Chief Executive Officer and Chairman of the Board of Directors of the
Company. As a result of the Recapitalization (as defined herein), (i) certain
companies formerly under the common control of Mr. Rothfeld and the Former
Partner became direct or indirect wholly-owned subsidiaries of the Company (the
"Reorganization"); (ii) following the Reorganization, Mr. Rothfeld and the
Rothfeld Family Trust (as defined herein) increased their equity interest in the
Company to 60%; and (iii) Vestar/Sun Holding Company, L.L.C. ("Vestar"), an
affiliate of Vestar Capital Partners III, L.P., acquired a 40% equity interest
in the Company. In connection with the Recapitalization, the Company and such
affiliated companies terminated their S corporation status under Subchapter S of
the Internal Revenue Code of 1986, as amended (the "Code"), and, as a result,
are now fully subject to federal and state income taxes at the corporate level.
The Reorganization, together with the other transactions referred to above, are
hereinafter referred to as the "Recapitalization". See "Company History, the
Recapitalization and Prior S Corporation Status".
The Company is a Texas corporation with its principal executive office
located at 11201 Armour Drive, El Paso, Texas 79935, and its telephone number is
(915) 595-2800.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Shares of Common Stock Offered by
the Company..................... shares.
Common Stock to be outstanding
after this Offering............. shares of Common Stock(1)
Use of proceeds................... The Company intends to use the estimated net proceeds of
approximately $ from this Offering to repay certain
indebtedness, including $45 million to repay the Vestar
Note (as defined herein). See "Use of Proceeds".
Proposed Nasdaq National Market
symbol..........................
</TABLE>
- ------------------------
(1) Excludes shares of Common Stock reserved for issuance under the Sun
Apparel, Inc. 1998 Stock Incentive Plan (the "1998 Stock Incentive Plan"),
including shares of Common Stock subject to outstanding options granted
at the initial public offering price of the Common Stock. See
"Management--1998 Stock Incentive Plan".
RISK FACTORS
See "Risk Factors" beginning on page 10 for a discussion of certain risks
that should be considered in connection with an investment in the Common Stock
offered hereby.
7
<PAGE>
SUMMARY FINANCIAL DATA
The following summary historical financial data for the three years ended
December 31, 1997 have been derived from the audited financial statements of the
Company. The following summary historical financial data for 1993 and 1994 are
derived from the audited combined financial statements of Sun Apparel, Inc. and
Greater Texas Finishing Corporation, which were controlled by Mr. Rothfeld and
the Former Partner. The financial data for the three month periods ended March
31, 1997 and 1998 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and the results of operations for those periods. Operating
results for the three months ended March 31, 1998 are not necessarily indicative
of the results that may be expected for the entire year ending December 31,
1998. The summary pro forma financial data set forth below is not necessarily
indicative of the results that would have been achieved or that may be achieved
in the future. The summary historical and pro forma financial data should be
read in conjunction with "Selected Historical Financial Data", "Pro Forma
Financial Data", "Company History, The Recapitalization and Prior S Corporation
Status", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements of the Company and related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO PRO FORMA
FORMA THREE MONTHS ENDED THREE MONTHS
FISCAL YEAR(1) FISCAL ------------------------ ENDED
----------------------------------------------------- YEAR MARCH 31, MARCH 31, MARCH 31,
1993(2) 1994(2) 1995 1996 1997 1997(3) 1997 1998 1998(4)
--------- --------- --------- --------- --------- --------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT
DATA:
Net sales.......... $ 203,737 $ 214,057 $ 205,657 $ 281,668 $ 359,672 $ 359,672 $ 80,475 $ 93,973 $ 93,973
Gross profit....... 50,684 48,206 52,144 90,267 126,337 126,337 27,814 37,344 37,344
Selling, general
and
administrative
expenses......... 31,715 26,870 33,295 64,329 84,044 84,419 18,432 23,695 23,695
Depreciation and
amortization..... 1,700 2,013 2,846 6,853 6,292 6,292 1,459 1,830 1,830
Operating income... 17,269 19,323 16,003 19,085 36,001 35,626 7,923 11,819 11,819
Interest and bank
charges.......... 1,860 2,392 3,228 4,213 10,375 11,326 1,303 5,678 2,678
Provision for
income taxes..... 756 758 542 863 3,674 11,117 282 2,425 3,625
Net income before
extraordinary
item............. 15,902 16,469 13,951 14,475 23,932 15,163 6,460 3,786 5,586
Loss on
extinguishment of
debt (net of tax
benefit)(5)...... -- -- -- -- 566 -- -- -- --
Net income......... $ 15,902 $ 16,469 $ 13,951 $ 14,475 $ 23,366 $ 15,163 $ 6,460 $ 3,786 $ 5,586
Net income per
share............
Weighted average
shares(6)........
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-------------------------
<S> <C> <C>
HISTORICAL ADJUSTED(7)
----------- ------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................................................... $ 76,847 $ 84,733
Total assets............................................................................ 178,283 176,075
Total long term indebtedness (including current portion)(8)............................. 209,744 134,744
Shareholders' deficit(8)................................................................ ($82,644) ($2,241 )
</TABLE>
- ------------------------
(SEE FOOTNOTES ON FOLLOWING PAGE)
8
<PAGE>
(1) From 1993 through 1996, the Company's fiscal year consisted of the 52 or 53
week period that ended the last Saturday in December. Fiscal years 1993,
1995 and 1996 are 52 week periods and fiscal 1994 is a 53 week period.
Beginning in 1997, the Company changed its fiscal year to the twelve
calendar months ending on December 31.
(2) The 1993 and 1994 fiscal year financial data include the combined balances
and results of Sun Apparel, Inc. and Greater Texas Finishing Corporation
only.
(3) The pro forma income statement data for fiscal year 1997 gives effect to the
Recapitalization, the Preferred Stock Conversion, the consummation of the
New Credit Facility (as defined herein), this Offering and the application
of the estimated net proceeds therefrom to extinguish the Vestar Note and
related interest and penalties and to repay other long-term debt as if such
transactions had been consummated on December 29, 1996. See "Use of
Proceeds", "Capitalization" and "Pro Forma Financial Data". The pro forma
condensed consolidated statement of income excludes approximately $13.1
million of extraordinary charges, net of tax benefit. The extraordinary
charges consist of $0.9 million of loss on early extinguishment of debt
related to the Recapitalization and a $13.7 million penalty related to the
early retirement of the Vestar Note with the estimated net proceeds from
this Offering, and a $7.3 million writeoff of debt issuance costs related to
the refinancing of the Bank Credit Facility (as defined herein). The tax
benefits of these extraordinary charges are $0.3 million, $5.5 million and
$2.9 million, respectively.
(4) The pro forma income statement data for the three months ended March 31,
1998 reflects adjustments as if the Preferred Stock Conversion, the
consummation of the New Credit Facility, this Offering and the application
of the estimated net proceeds therefrom to extinguish the Vestar Note and
related interest and penalties and to repay other long-term debt as if such
transactions had been consummated on December 29, 1996. See "Use of
Proceeds", "Capitalization" and "Pro Forma Financial Data". The pro forma
condensed consolidated statement of income excludes approximately $11.6
million of extraordinary charges, net of tax benefit, which would have been
incurred if these transactions had occurred during the quarter ended March
31, 1998. The extraordinary charges consist of a $12.3 million penalty
related to the early retirement of the Vestar Note with the estimated net
proceeds from this Offering and a $7.0 million write-off of debt issuance
costs related to the refinancing of the Bank Credit Facility. The tax
benefits of these extraordinary charges are $4.9 million and $2.8 million,
respectively.
(5) The loss on extinguishment of debt, shown net of a tax benefit of $0.3
million, includes penalties paid for the retirement of certain debt
instruments in connection with the Recapitalization. See "Company History,
the Recapitalization and Prior S Corporation Status".
(6) Weighted average shares outstanding assumes that:
(7) The pro forma balance sheet data gives effect to the Preferred Stock
Conversion, the consummation of the New Credit Facility, this Offering and
the application of the estimated net proceeds therefrom to extinguish the
Vestar Note and related interest and penalties and to repay other long-term
debt as if such transactions had been consummated on March 31, 1998. See
"Use of Proceeds", "Capitalization" and "Pro Forma Financial Data".
(8) On September 26, 1997, the Company completed the Recapitalization, which
substantially changed its capital structure. See "Company History, the
Recapitalization and Prior S Corporation Status".
9
<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CONSIDER
CAREFULLY THE FACTORS SET FORTH BELOW, AS WELL AS OTHER INFORMATION SET FORTH IN
THIS PROSPECTUS, IN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK
OFFERED HEREBY.
FASHION RISKS
The apparel industry in the United States is subject to rapidly changing
consumer demands and preferences. The Company's revenues are largely generated
from a denim based line of sportswear products. Although denim products have
historically been less sensitive to both fashion trends and cyclical downturns
than the apparel market as a whole, there can be no assurance that the overall
demand for denim products will remain relatively constant or increase. The
Company believes that its success depends in large part upon its ability to
anticipate, gauge and respond to changing consumer demands and fashion trends in
a timely manner. Failure by the Company to identify and respond appropriately to
changing consumer demands and fashion trends could adversely affect consumer
acceptance of its products and leave the Company with a significant amount of
unsold finished goods inventory, which could have a material adverse effect on
the Company's business, results of operations and financial condition.
HIGHLY COMPETITIVE INDUSTRY
The apparel industry is highly competitive and the Company competes with
numerous manufacturers of jeanswear, sportswear and casual apparel, including
both brand name and private label producers. The Company's Polo Jeans Products
compete with a number of designer product lines, including Calvin Klein, Tommy
Hilfiger, Donna Karan and Guess?, as well as certain brand name products,
including those manufactured by Levi Strauss & Co. and VF Corporation. The
Company's Sun Division Products compete with products manufactured by numerous
brand name and private label producers as well as retailers that have
established, or may establish, internal product development and sourcing
capabilities. Certain of the Company's competitors have greater financial,
manufacturing and other resources than the Company. Although factors may differ
by product line, the Company believes that it competes primarily on the basis of
brand image, quality of design and workmanship, price, advertising and its
ability to respond quickly to the needs of retail customers. Any increased
competition could result in reduced sales or prices, or both, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Competition".
DEPENDENCE ON POLO JEANS LICENSE AGREEMENT; RESTRICTIONS ON COMPETITION
The Company's recent growth has resulted primarily from the sale of Polo
Jeans Products under exclusive long-term license and design agreements entered
into with Polo Ralph Lauren in 1995 (collectively the "Polo Jeans License").
Under the Polo Jeans License, Polo Ralph Lauren has granted the Company an
exclusive license for the design, manufacture and sale of men's and women's
jeanswear, sportswear, and related apparel under the Polo Jeans trademarks in
the United States and its territories. Sales of merchandise under the Polo Jeans
License represented approximately 36.8%, 55.1% and 60.9% of the Company's net
sales for 1996, 1997 and the first three months of 1998, respectively. The loss
or termination of the Polo Jeans License or a significant decline in popularity
of the Polo Jeans Products would have a material adverse effect on the Company's
business, results of operations and financial condition.
The initial term of the license agreement expires on December 31, 2000 and
may be renewed by the Company in five year increments for up to 30 additional
years if certain minimum sales requirements are met. Subject to the Polo Ralph
Lauren purchase option described below, renewal of the Polo Jeans License by the
Company after 2010 requires a one-time payment of $25.0 million or, at the
Company's
10
<PAGE>
option, a transfer of a 20.0% interest in its Polo Jeans business to Polo Ralph
Lauren, with no fees required for subsequent renewals. Polo Ralph Lauren has an
option exercisable on or before June 1, 2010, to purchase the Company's Polo
Jeans business at the end of 2010 for 80.0% of the then fair value of the
business as a going concern, assuming continuation of the Polo Jeans License
through 2030, payable in cash.
The Company's ability to produce and distribute Polo Jeans Products is
dependent upon the retention of the Polo Jeans License, which contains
provisions that, under certain circumstances, could permit Polo Ralph Lauren to
terminate the Polo Jeans License. Such provisions include, among other things,
(i) the failure to meet specified minimum levels of annual sales for the
licensed products after the initial term; (ii) a default in the payment of
certain amounts payable under the Polo Jeans License, such as royalties, annual
advertising and shop expenditures; and (iii) a change in control of the Company
or transfer of substantially all of the Company's property, such that Mr.
Rothfeld or members of his immediate family, or estates or trusts created for
their benefit, no longer control, directly or indirectly, a controlling interest
in the Company or any successor entity. This Offering will not result in a
change in control under the Polo Jeans License.
Pursuant to the terms of the Polo Jeans License, the Company is prohibited,
during the term of the license agreement, from selling, advertising or promoting
the sale of any items which are comparable and/or competitive with the Polo
Jeans Products and which bear the name of any fashion apparel designer (other
than Todd Oldham or Robert Stock), subject to certain limited exceptions. The
license agreement specifically prohibits the Company from, directly or
indirectly, acting as a manufacturer, contractor or supplier of or for
merchandise comparable or competitive with the Polo Jeans Products bearing or
associated with certain specified designer and brand names. In addition, the
Polo Jeans License provides that the Company is subject to certain design,
marketing and distribution restrictions in order to ensure the quality and
prestige associated with Polo Ralph Lauren. See "Business--License
Agreements--Polo Jeans Company License".
DEPENDENCE ON KEY PERSONNEL
The continued success of the Company currently depends, to a significant
extent, on the abilities and continued service of Mr. Rothfeld and Mindy F.
Grossman, Executive Vice President of the Company and President and Chief
Executive Officer of the Company's Polo Jeans division. Mr. Rothfeld is also the
beneficial owner of a substantial portion of the Common Stock of the Company.
See "Principal Shareholders". In September 1997, Mr. Rothfeld entered into a
four-year employment agreement with the Company. This agreement contains a
non-competition provision effective through the term of such employment or three
years after certain events of termination of employment. Ms. Grossman has an
employment agreement with the Company that expires in December 1998. The Company
and Ms. Grossman are negotiating a new employment agreement. However, there can
be no assurance that the Company will be able to retain the services of Mr.
Rothfeld or Ms. Grossman and the loss of either of their services could have a
material adverse effect upon the Company's business, results of operations and
financial condition. See "Business--License Agreements--Polo Jeans Company
License". The Company maintains "key man" life insurance policies in the amounts
of approximately $15 million for Mr. Rothfeld and approximately $10 million for
Ms. Grossman.
DEPENDENCE ON KEY CUSTOMERS
The Company sells its products on a nationwide basis to retail accounts in
various distribution channels, including department stores, specialty stores and
mass merchandisers. The Company's five largest customers, Federated, Wal-Mart,
Dillard Department Stores, Inc. ("Dillard's"), May Department Stores Company
("May Co.") and Fashions Outlet of America, which is owned by Polo Ralph Lauren,
accounted for approximately 35.9% of gross sales in 1997. Sales to Federated,
including divisions and affiliated stores of Federated (including Bloomingdale's
and Macy's), represented approximately 13% of
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total gross sales in 1997. The Company does not have long-term contracts with
any of its customers, and sales to customers generally occur on an
order-by-order basis. Customer orders are generally subject to certain rights of
cancellation and rescheduling by the customer or by the Company. The Company's
future results of operations and financial condition will depend to a
significant extent upon the continued willingness of major customers to purchase
the Company's products. Any significant downturn in the business of the
Company's major customers or their commitment to the Company's products could
have a material adverse effect on the Company's business, results of operations
and financial condition.
ABILITY TO ACHIEVE AND MANAGE FUTURE GROWTH
As part of its growth strategy, the Company seeks to continue to expand its
Polo Jeans Products distribution and increase door penetration, expand its
network of in-store shops, expand its account base and broaden its product
offerings. In addition, the Company seeks to grow its Sun Division business
through increasing customer penetration, expanding distribution and broadening
product offerings. Factors beyond the Company's control may affect the Company's
ability to grow, including general economic and business conditions affecting
consumer spending. The actual number and type of in-store shops to be opened and
their success will depend on various factors, including, but not limited to, the
strength of the Polo Jeans brand name, competitive conditions, the acceptance by
consumers of the Company's retail concepts, the ability of the Company to manage
such expansion, the availability of desirable locations and the economic terms
negotiated with department stores and retailers in which such shops are located.
The successful implementation of the Company's Sun Division growth strategy is
dependent on various factors, including, but not limited to, competitive
conditions, the strength of the private label jeans market and the financial
stability of the Company's key customers. There can be no assurance that the
Company's growth strategies will be successful, that sales will not decline or
that the Company will be successful in increasing sales in the future.
In order to manage anticipated levels of demand for its products, the
Company will be required to continue to (i) expand its distribution
capabilities; (ii) develop its financial management systems and controls,
including inventory management; and (iii) attract and retain qualified
personnel. Growth could place an increasing strain on the Company's management,
financial, product design and marketing resources. Any disruption or slow down
in the Company's order processing and fulfillment systems could cause orders to
be shipped late, resulting in retailers canceling orders and refusing to receive
goods on account of late shipment. Late shipments and unfulfilled orders could
also adversely affect the volume of future orders and could result in the loss
of existing customers. Such cancellation of orders, returns of refused goods and
late shipments could reduce revenue, increase administrative and shipping costs,
and add costs associated with liquidating inventory out of season.
CYCLICALITY OF APPAREL INDUSTRY; RECENT APPAREL INDUSTRY TRENDS
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 is low. A
difficult retail environment could result in higher than normal levels of
promotional sales which could adversely affect the Company's gross profit
margins. There can be no assurance that the current retail environment will
continue or that the retail environment will not deteriorate.
In recent years, the retail industry has experienced significant
consolidation and other ownership changes. In addition, many retailers have
experienced financial difficulties, with some operating under the protection of
the federal bankruptcy laws. Financial difficulties of a customer could cause
the Company to curtail business with such customer or require the Company to
assume more credit risk relating to such customer's receivables. The Company's
inability to collect on its trade accounts receivable relating to any one of its
principal customers could have a material adverse effect on the Company's
12
<PAGE>
business, results of operations and financial condition. In the future,
retailers may consolidate, undergo restructurings or reorganizations, or realign
their affiliations, any of which could decrease the number of stores that carry
the Company's products or increase the ownership concentration within the retail
industry.
PRICE AND AVAILABILITY OF RAW MATERIALS
The principal fabrics used in the Company's apparel consist of denim, cotton
twill, wool, and synthetic and blended fabrics. The prices paid by the Company
for such fabrics are largely dependent on the market prices for the raw
materials used to produce them, particularly cotton, the primary component of
denim fabric and cotton twill. The price and availability of such raw materials
and, in turn, the fabrics used in the Company's apparel may fluctuate
significantly, depending on a variety of factors, including crop yields and
weather patterns. Increase in denim prices would directly affect the Company's
costs and earnings. Although alternative competitive sources of fabric are
available and the Company does not anticipate significant difficulty in meeting
its supply requirements, the quality of available fabrics from sources other
than its current suppliers may fluctuate significantly. The Company generally
enters into denim purchase order contracts at specified prices for three months
to six months at a time. Fluctuations in price, availability and quality of the
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 material adverse effect on the Company's
business, results of operations and financial condition. There can be no
assurance that the Company will be able to pass along to its customers all, or
any portion of, any future increases in the prices paid for the fabrics used in
the manufacture of the Company's products.
USE OF INDEPENDENT MANUFACTURERS
The Company relies upon independent third parties for the manufacture of a
substantial portion of its apparel products. The inability of a manufacturer to
ship orders of the Company's products in a timely manner or to meet the
Company's quality standards could cause the Company to miss the delivery date
requirements of its retail customers for those items, which could result in
cancellation of orders, refusal to accept deliveries or a reduction in purchase
prices, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition. See
"Businesses--Manufacturing, Sourcing and Distribution".
The Company requires its independent manufacturers to operate in compliance
with applicable labor laws and regulations. Although the Company seeks to
actively monitor the compliance of its contractors with applicable labor and
wage standards and the Company's staff and its purchasing agents periodically
visit and monitor the operations of its independent manufacturers, the Company
does not control such manufacturers or their labor practices. The violation of
labor or other laws by an independent manufacturer of the Company or by one of
the Company's licensing partners, or the divergence of an independent
manufacturer's labor practices from those generally accepted as ethical in the
United States, and the resulting publicity relating to such violations, could
have an adverse effect on the Company.
RISKS AFFECTING FOREIGN OPERATIONS AND SOURCING
In an effort to minimize production costs, the Company has shifted a
significant portion of its jeanswear manufacturing capacity to Mexico, where the
Company maintains three sewing plants and two finishing plants. Approximately
3,480 of the Company's approximately 5,000 employees are based in Mexico. In
addition, fabric cut in the Company's United States plants is sewn into finished
products through arrangements with independent Mexican contractors, and the
Company imports finished apparel meeting its quality standards from suppliers in
the Far East, Central America and other areas. The Company purchases thread and
trim (e.g., buttons, zippers and snaps) from numerous suppliers,
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<PAGE>
some of which have foreign distribution centers or warehouses. Risks inherent in
foreign operations include changes in social, political and economic conditions
which could result in the disruption of trade from the countries in which the
Company's manufacturers or suppliers are located, the imposition of additional
regulations relating to imports, the imposition of additional duties, taxes and
other charges on imports, significant fluctuations on the value of the dollar
against foreign currencies, or restrictions on the transfer of funds, any of
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
In addition, the Company's import operations are subject to constraints
imposed by bilateral textile agreements between the United States and a number
of foreign countries. These agreements, which have been negotiated bilaterally
either under the framework established by the Arrangement Regarding
International Trade in Textiles, known as the Multifiber Agreement, or other
applicable statutes, impose quotas on the amounts and types of merchandise that
may be imported into the United States from these countries. These agreements
allow the signatories to adjust the quantity of imports for categories of
merchandise that, under the terms of the agreements, are not currently subject
to specific limits. The Company's imported products are also subject to United
States customs duties which are included in the cost of the merchandise. The
United States and the countries in which the Company's products are produced or
sold may, from time to time, impose new quotas, duties, tariffs, or other
restrictions, or may adversely adjust prevailing quota, duty or tariff levels,
any of which could have a material adverse effect on the Company's business,
results of operations and financial condition.
SEASONALITY
Demand for the Company's apparel products and its level of sales fluctuate
during the course of the calendar year as a result of seasonal buying trends. An
increase in sales of jeans and casual apparel generally occurs during the Fall
and Holiday selling seasons (the Company's third and fourth quarter,
respectively). Accordingly, the Company's operating results will fluctuate from
quarter to quarter.
CONTROL BY EXISTING SHAREHOLDERS AND ANTI-TAKEOVER PROVISIONS
Immediately after the Offering, Mr. Rothfeld and Vestar will beneficially
own and shares, respectively, of the Company's outstanding Common
Stock. Accordingly, Mr. Rothfeld and Vestar will be able to elect a majority of
the Company's directors and, if they vote in the same manner, determine the
disposition of all matters submitted to a vote of the Company's shareholders,
including mergers, going private transactions and other extraordinary corporate
transactions and the terms thereof. The Company, Mr. Rothfeld and Vestar entered
into a Stockholders' Agreement (as defined herein) to govern their relationship
as shareholders of the Company. The Stockholders' Agreement provides, among
other things, (i) that Mr. Rothfeld, the Rothfeld Family Trust and Vestar (the
"Existing Shareholders") will vote all of their voting securities of the Company
in favor of a Board of Directors consisting of five designees of Mr. Rothfeld
and two designees of Vestar; (ii) that the approval of a majority of the entire
Board of Directors, including at least one of Vestar's director designees, will
be required for the Board of Directors to approve and authorize certain
significant corporate actions; (iii) for certain restrictions on transfers of
the Existing Shareholders' interests in the Company; and (iv) for certain rights
of first offer, tag-along rights and drag-along rights, all of which may
perpetuate the control of the Existing Shareholders. See "Management","Certain
Transactions -- Stockholders' Agreement", "Principal Shareholders" and
"Description of Capital Stock".
Certain provisions of the Company's Restated Articles of Incorporation and
Bylaws may have the effect of inhibiting a third party from making an
acquisition proposal for the Company or of impeding a change in control of the
Company. Such provisions include, but are not limited to, (i) the division of
the Board of Directors into three classes, the initial terms of which expire in
1999, 2000 or 2001, with directors of a given class chosen for three-year terms
upon expiration of the applicable term; (ii) removal of members of the Board of
Directors only for cause; (iii) actions by written consent may only be effected
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<PAGE>
with the unanimous consent of shareholders; and (iv) that special meetings of
shareholders may only be called by the Chairman of the Board of Directors, the
President of the Company, the Board of Directors or the holders of 50.0% or more
of the outstanding shares entitled to vote at such meeting.
BENEFITS TO EXISTING SHAREHOLDERS
A significant portion of the net proceeds of this Offering will be paid to
or directly benefit the Company's existing shareholders and will not be
available for use by the Company for other purposes. The Company will use
approximately $45.0 million of the net proceeds to repay the Vestar Note
(including prepayment penalties and accrued interest) and approximately $0.3
million to partially repay a note to an affiliate of Mr. Rothfeld. See "Use of
Proceeds", "Certain Transactions" and "Principal Shareholders".
SUBSTANTIAL LEVERAGE
At March 31, 1998 on a pro forma basis, after giving effect to this Offering
and the application of the net proceeds therefrom, the Company would have had
approximately $134.7 million of indebtedness as compared to the Company's
shareholders' deficit of $2.2 million. See "Use of Proceeds" and
"Capitalization". The Company may incur additional indebtedness under the Bank
Credit Facility (as defined herein). See "Description of Certain Indebtedness".
The Company's high level of debt could have important effects on its future
operations, including, but not limited to, the following: (i) the Company will
have significant cash requirements to service debt, reducing funds available for
operations, capital expenditures, acquisitions and future business
opportunities, and increasing the Company's vulnerability to adverse general
economic and industry conditions and (ii) the financial covenants and other
restrictions contained in the Bank Credit Facility will require the Company to
meet certain financial tests and will restrict its ability to borrow additional
funds, to dispose of assets or to pay cash dividends.
HOLDING COMPANY STRUCTURE AND DEPENDENCE ON SUBSIDIARIES
The Company is a holding company and, therefore, conducts its operations
through its subsidiaries. The primary internal source of cash for the Company is
its subsidiaries. The Company's ability to distribute dividends and to service
its debt is dependent upon the earnings of its subsidiaries and the distribution
of those earnings to, or upon loans or other payments of funds by those
subsidiaries to, the Company. The subsidiaries are separate and distinct legal
entities and have no obligation, contingent or otherwise, to pay or make funds
available to the Company, whether by dividends, loans or other payments. In
addition, the payment of dividends and the making of loans and advances to the
Company by its subsidiaries may be subject to statutory or contractual
restrictions, are dependent upon the earnings of those subsidiaries and are
subject to various business considerations.
ABSENCE OF DIVIDENDS
The Company anticipates that all of its earnings in the foreseeable future
will be retained to finance the continued growth and expansion of its business
and does not currently intend to pay cash dividends on the Common Stock in the
foreseeable future. The payment of any dividends in the future will be
determined in the sole discretion of the Company's Board of Directors and would
depend upon, among other things, the future earnings, operations, capital
requirements and general financial condition of the Company and its subsidiaries
and prevailing business and economic conditions, as well as contractual and
statutory restrictions on the Company's ability to pay dividends. See "--
Holding Company Structure and Dependence on Subsidiaries" and "Dividend Policy".
15
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution of $ in the net tangible book value per share of
Common Stock. See "Dilution".
NO PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Application will be made to have the Common Stock quoted on the Nasdaq National
Market, however, there can be no assurance that an active trading market will
develop or be sustained. The initial public offering price for the Common Stock
has been determined by negotiations between the Company and the Underwriters
based on several factors, and may not be indicative of the market price for the
Common Stock after the Offering. The Company believes that various factors
unrelated to the Company's performance, such as general economic conditions,
changes or volatility in the financial markets and changing market conditions in
the apparel industry, as well as various factors related to the Company's
performance, such as quarterly or annual variations in the Company's financial
results, could cause the market price of the Common Stock to fluctuate
substantially. See "Underwriting".
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ADVERSE EFFECT ON STOCK PRICE
Sales of a substantial number of shares of Common Stock in the public
market, or the perception that such sales may occur could adversely affect
prevailing market prices for the Common Stock. Upon completion of the Offering,
the Company will have outstanding a total of shares of Common Stock. Of
such shares, shares of Common Stock being sold in the Offering (together
with any shares sold upon exercise of the Underwriters' over-allotment options)
will be immediately eligible for sale in the public market without restriction,
except for shares purchased by or issued to any affiliate (an "Affiliate") of
the Company (within the meaning of the Securities Act of 1933, as amended (the
"Securities Act")). For so long as any shareholder remains an Affiliate of the
Company, any shares of Common Stock held by such person will only be available
for public sale if such shares are registered under the Securities Act or sold
in accordance with an applicable exemption from registration, such as Rule 144,
and any sales by an affiliate under Rule 144 would be subject to the volume and
other limitations under such rule. The Company, Vestar and the executive
officers and directors of the Company have agreed not to offer, sell, contract
to sell or otherwise dispose of any shares of Common Stock or any securities of
the Company that are substantially similar to the Common Stock, including but
not limited to any securities that are convertible into or exchangeable for, or
that represent the right to receive, Common Stock or any such substantially
similar securities (other than pursuant to employee or director stock or stock
option plans existing on the date of this Prospectus) for a period of 180 days
after the date of this Prospectus without the prior written consent of Goldman,
Sachs & Co. as representative of the Underwriters, except for the shares of
Common Stock offered in connection with this Offering. See "Description of
Capital Stock" and "Shares Eligible for Future Sale".
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<PAGE>
USE OF PROCEEDS
The net proceeds received by the Company from the Offering are estimated to
be approximately $92 million (approximately $ million if the
Underwriters' over-allotment option is exercised in full), after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The Company intends to use such proceeds as follows: (i) to
repay approximately $45.0 million due under the Vestar Note; (ii) to repay
approximately $0.3 million due under a note held by Sun Apparel Manufacturing
Corp., an entity wholly-owned by Mr. Rothfeld (the "Rothfeld Note"); (iii) to
repay approximately $44.7 million of the borrowings outstanding under the
Tranche A Term Loan and Tranche B Term Loan (each as defined herein); and (iv)
to pay approximately $2.0 million in fees and expenses relating to the New
Credit Facility, which the Company is currently negotiating. Any proceeds to the
Company from the exercise of the Underwriters' over-allotment option will be
used to repay the additional borrowings outstanding under the Bank Credit
Facility.
In connection with the Recapitalization, the Company issued to Vestar
subordinated notes in the aggregate principal amount of $30.0 million (the
"Vestar Note"). The Vestar Note matures in 2007 and accrues interest at a rate
of 17.9% per annum. The Rothfeld Note is an interest free note with
approximately $1.6 million outstanding. The Bank Credit Facility arranged by the
Chase Manhattan Bank ("Chase") consists of (i) a $45.0 million six-year Tranche
A Term Loan; (ii) a $110.0 million seven-year Tranche B Term Loan; and (iii) a
$80.0 million six-year Revolving Credit Facility. Borrowings under the Tranche A
Term Loan bear interest at one of two rates to be selected by the Company: (i) a
margin over Chase's Alternate Base Rate (the "Base Rate") or (ii) a margin over
LIBOR for specified interest periods. The margin for each rate varies based on
the Company's Consolidated Ratio of Funded Debt to EBITDA. The Tranche A Term
Loan bear interest at LIBOR plus 2.75% or the Base Rate plus 1.75%. The Tranche
B Term Loan bears interest at LIBOR plus 3.25% or the Base Rate plus 2.25%. See
"Description of Certain Indebtedness".
DIVIDEND POLICY
The Company currently intends to retain its earnings for use in the business
and does not anticipate declaring and paying dividends in the foreseeable
future. Payment of future dividends, if any, will be determined in the sole
discretion of the Company's Board of Directors and would depend upon, among
other things, the future earnings, operations, capital requirements and general
financial condition of the Company and its subsidiaries and prevailing business
and economic conditions, as well as contractual and statutory restrictions on
the Company's ability to pay dividends. The Company is prohibited (subject to
certain limited exceptions) by the terms of its Bank Credit Facility from paying
dividends, and it may in the future enter into loan or other agreements or issue
debt securities or preferred stock that restrict the payment of dividends. See
"Risk Factors -- Holding Company Structure and Dependence on Subsidiaries" and
"Description of Certain Indebtedness".
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DILUTION
As of March 31, 1998, the Company had a negative book value of approximately
$82.6 million or $ per share of Common Stock and a deficit in net
tangible book value of approximately $92.4 million, or $ per share of
Common Stock. "Net tangible book value" per share of Common Stock represents the
difference between the net tangible assets and the liabilities of the Company,
on a consolidated basis, divided by the total number of shares of Common Stock
outstanding. Without taking into account any changes in net tangible book value
after March 31, 1998, other than to give effect to the sale by the Company of
shares of Common Stock pursuant to the Offering and the application of the
estimated net proceeds therefrom, the pro forma net tangible book value of the
Company at March 31, 1998 would have been approximately $ million, or
$ per share. This represents an immediate dilution of $ per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share................. $
Actual deficit in net tangible book value per share as
of March 31, 1998..................................... $ ()
---------
Increase in net tangible book value per share
attributable to the Offering..........................
Pro forma net tangible book value per share as of March
31, 1998..............................................
---------
Immediate dilution per share to new investors in the
Offering.............................................. $
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the number of shares of Common Stock purchased from the Company, the estimated
value of the total consideration or value paid or deemed attributable thereto
and the average price per share paid by or attributable to the existing
shareholders and the new investors purchasing shares in the Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ----------- ----------- ----------- ---------------
Existing Shareholders................ % $ % $
New Investors........................ % $ % $
</TABLE>
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CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1998 and as adjusted to give effect to (i) the issuance of the
Common Stock being offered hereby, (ii) the receipt by the Company of the
estimated net proceeds of $92.0 million therefrom and the application of the
estimated net proceeds as described under "Use of Proceeds", (iii) the Preferred
Stock Conversion and (iv) the New Credit Facility. This table should be read in
conjunction with "Selected Historical Financial Information", "Pro Forma
Financial Data" and the consolidated financial statements of the Company and
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(1)
--------- ---------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash............................................................ $ 543 $ 543
--------- ---------------
--------- ---------------
Long term indebtedness:.........................................
Bank indebtedness, including current portion.................. $ 174,000 $ 129,275
Real estate and other debt (2)................................ 5,744 5,469
Subordinated debt............................................. 30,000 --
--------- ---------------
Total long term indebtedness.................................... $ 209,744 $ 134,744
Shareholders' equity (deficit):
Common Stock, no par value; 1,000,000 shares authorized;
101,000 shares issued and outstanding, actual; 0 shares
issued and outstanding as adjusted.......................... 417 --
Common Stock, par value $0.01 per share; shares
authorized; 0 shares issued and outstanding, actual;
shares issued and outstanding as adjusted................... -- 183,096
Preferred stock................................................. 90,679 --
Paid-in capital................................................. --
Retained deficit................................................ (173,740) (185,337)
Total shareholders' deficit................................... (82,644) (2,241)
--------- ---------------
Total capitalization.......................................... $ 127,100 $ 132,503
--------- ---------------
--------- ---------------
</TABLE>
- ------------------------
(1) The adjusted balance sheet data gives effect to the New Credit Facility,
Preferred Stock Conversion, this Offering and the application of the net
proceeds therefrom to extinguish the Vestar Note and related interest and
penalties and to repay other long-term debt as if such transactions had been
consummated on March 31, 1998. The Company is currently negotiating a new
bank credit facility, (the "New Credit Facility") which it anticipates will
consist of approximately $105.0 million in term loans and a maximum
availability of $80.0 million under a revolving credit facility. See "Use of
Proceeds" and "Pro Forma Financial Data".
(2) Includes related party indebtedness.
19
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data for the three years ended
December 31, 1997 have been derived from the audited financial statements of the
Company. The following summary historical financial data for 1993 and 1994 are
derived from the combined financial statements of Sun Apparel, Inc. and Greater
Texas Finishing Corporation, which were controlled by Mr. Rothfeld and the
Former Partner (as defined herein). The financial data for the three month
periods ended March 31, 1997 and 1998 are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which the Company considers necessary
for a fair presentation of the financial position and the results of operations
for these periods. Operating results for the three months ended March 31, 1998
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1998. The following selected historical
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements of the Company and related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR (1) THREE MONTHS ENDED
----------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MARCH 31, MARCH 31,
1993 (2) 1994 (2) 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................ $ 203,737 $ 214,057 $ 205,657 $ 281,668 $ 359,672 $ 80,475 $ 93,973
Cost of goods sold............... 153,053 165,851 153,513 191,401 233,335 52,661 56,629
--------- --------- --------- --------- --------- ----------- -----------
Gross profit................... 50,684 48,206 52,144 90,267 126,337 27,814 37,344
Selling, general and
administrative expenses........ 31,715 26,870 33,295 64,329 84,044 18,432 23,695
--------- --------- --------- --------- --------- ----------- -----------
Depreciation and amortization.... 1,700 2,013 2,846 6,853 6,292 1,459 1,830
Operating income................. 17,269 19,323 16,003 19,085 36,001 7,923 11,819
Other expenses (income):
Interest and bank charges...... 1,860 2,392 3,228 4,213 10,375 1,303 5,678
Other expense (income), net.... (1,249) (296) (1,718) (466) (1,980) (122) (70)
--------- --------- --------- --------- --------- ----------- -----------
611 2,096 1,510 3,747 8,395 1,181 5,608
Income before provision for
income taxes................... 16,658 17,227 14,493 15,338 27,606 6,742 6,211
Provision for income taxes....... 756 758 542 863 3,674 282 2,425
--------- --------- --------- --------- --------- ----------- -----------
Net income before extraordinary
item........................... 15,902 16,469 13,951 14,475 23,932 6,460 3,786
Loss on extinguishment of debt
(net of tax benefit) (3)....... -- -- -- -- 566 -- --
--------- --------- --------- --------- --------- ----------- -----------
Net income....................... $ 15,902 $ 16,469 $ 13,951 $ 14,475 $ 23,366 $ 6,460 $ 3,786
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Net income per share.............
Weighted average shares (4)......
BALANCE SHEET DATA:
Working capital.................. $ 18,914 $ 27,405 $ 43,935 $ 80,850 $ 82,712 $ 81,093 $ 76,847
Total assets..................... 63,051 89,431 88,292 152,615 174,241 155,260 178,283
Total long-term indebtedness
(5)............................ 26,296 45,546 34,219 70,486 218,218 69,686 209,744
Shareholders' equity (deficit)
(5)............................ 22,081 29,998 37,006 48,076 (86,430) 50,636 (82,644)
</TABLE>
- ------------------------
(1) From 1993 through 1996, the Company's fiscal year consisted of the 52 or 53
week period that ended the last Saturday in December. Fiscal years 1993,
1995 and 1996 are 52 week periods and fiscal 1994 is a 53 week period.
Beginning in 1997, the Company changed its fiscal year to the twelve
calendar months ending on December 31.
(2) The 1993 and 1994 fiscal year financial data include the combined balances
and results of Sun Apparel, Inc. and Greater Texas Finishing Corporation
only.
(3) The loss on extinguishment of debt, shown net of a tax benefit of $0.3
million, includes penalties paid for the retirement of certain debt
instruments in connection with the Recapitalization. See "Company History,
the Recapitalization and Prior S Corporation Status".
(4) Weighted average shares outstanding assumes that:
(5) On September 26, 1997, the Company completed a Recapitalization, which
substantially changed its capital structure. See "Company History, the
Recapitalization and Prior S Corporation Status".
20
<PAGE>
PRO FORMA FINANCIAL DATA
The pro forma income statement for the year ended December 31, 1997 gives
effect to the New Credit Facility, the Recapitalization, the Preferred Stock
Conversion, this Offering and the application of the estimated net proceeds
therefrom to extinguish the Vestar Note and related interest and penalties and
to repay other long-term debt as if such transactions had been consummated on
December 29, 1996. The pro forma financial statements for the three months ended
and as of March 31, 1998 give effect to the New Credit Facility, Preferred Stock
Conversion, this Offering and the use of the estimated net proceeds therefrom as
if such transactions had been consummated on December 29, 1996, in the case of
the income statement, and March 31, 1998, in the case of the balance sheet.
The pro forma adjustments are based upon available information and certain
assumptions that the management of the Company believes are reasonable. The pro
forma financial data do not purport to represent the results of operations or
the financial position of the Company that actually would have occurred had the
transactions described above been consummated on the dates indicated, or project
the results of operations or financial position of the Company and its
subsidiaries for any future date.
SUN APPAREL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA ADJUSTMENTS
ADJUSTMENTS FOR THE FOR THE FOR THE
HISTORICAL RECAPITALIZATION RECAPITALIZATION OFFERING PRO FORMA
----------- ------------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales........ $ 359,672 $ 359,672 $ 359,672
Cost of goods
sold........... 233,335 233,335 233,335
----------- -------- ---------------- ------------- ------------
Gross profit..... 126,337 126,337 126,337
Operating
expenses:
Selling,
general and
administrative
expenses..... 84,044 $ 375(a) 84,419 84,419
Depreciation
and
amortization.. 6,292 6,292 6,292
----------- -------- ---------------- ------------- ------------
Operating
income......... 36,001 (375) 35,626 35,626
Interest
income......... (227) (227) (227)
Interest and bank
charges........ 10,375 13,313(b) 23,688 ($ 12,362)(d) 11,326
Other income,
net............ (1,753) (1,753) (1,753)
----------- -------- ---------------- ------------- ------------
Income before
taxes.......... 27,606 (13,688) 13,918 12,362 26,280
Income taxes..... 3,674 2,498(c) 6,172 4,945(c) 11,117
----------- -------- ---------------- ------------- ------------
Income from
continuing
operations..... $ 23,932 ($ 16,186) $ 7,746 $ 7,417 $ 15,163
----------- -------- ---------------- ------------- ------------
----------- -------- ---------------- ------------- ------------
</TABLE>
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
The pro forma financial data has been derived by the application of pro
forma adjustments to the Company's historical financial statements for the
periods noted.
The pro forma condensed consolidated statement of income excludes
approximately $13.1 million of extraordinary charges, net of tax benefit. The
extraordinary charges consist of $0.9 million of loss on early extinguishment of
debt related to the Recapitalization and a $13.7 million penalty related to the
early retirement of the Vestar Note with the estimated net proceeds from this
Offering, and a $7.3 million write-off of debt issuance costs related to
refinancing the existing Bank Credit Facility. The tax benefits of these
extraordinary charges are $0.3 million, $5.5 million and $2.9 million,
respectively.
(a) The adjustment to selling, general and administrative expenses reflects
the management fees of $0.1 million per quarter payable to Vestar Capital
Partners for the first three quarters of 1997.
(b) The recapitalization adjustment to interest and bank charges reflect the
following (in thousands):
<TABLE>
<CAPTION>
RATE AMOUNT
--------- ---------
<S> <C> <C>
Interest expense on long term debt--term loan A....................... 8.74% $ 3,933
Interest expense on long term debt--term loan B....................... 9.24% 10,164
Interest expense on revolving credit facility......................... 8.74% 2,360
Interest expense on subordinated debt................................. 17.90% 5,370
Interest expense on other debt........................................ Various 378
Amortization of capitalized financing fees............................ 1,266
Commitment fee on unused available credit............................. 217
Interest expense and bank charges on debt refinanced.................. (10,375)
---------
Total adjustment.................................................... $ 13,313
---------
---------
</TABLE>
Interest expense is computed by applying the rates in effect as of December
31, 1997. A 0.125% increase or decrease in the assumed interest rate on the term
loans and the revolving credit facility would change pro forma interest expense
by $0.2 million for the fiscal year ended December 31, 1997.
(c) Reflects the estimated income tax expense on pro forma earnings at an
effective rate of 40.0% for federal and state income taxes, plus foreign taxes.
This adjustment includes the effect of the Company changing their tax status
from S to C Corporation on the date of the Recapitalization.
(d) The pro forma adjustment to interest and bank charges reflect the
following (in thousands):
<TABLE>
<CAPTION>
RATE AMOUNT
--------- ---------
<S> <C> <C>
Interest expense on New Credit Facility(1)............................ 7.58% $ 10,405
Interest expense on subordinated debt................................. 17.90% --
Interest expense on other debt........................................ Various 378
Amortization of capitalized financing fees............................ 364
Commitment fee on unused available credit............................. 179
Recapitalization interest expense and bank charges.................... (23,688)
---------
Total adjustment...................................................... ($ 12,362)
---------
---------
</TABLE>
- ------------------------
(1) Reflects interest expense on the New Credit Facility, which is calculated
using rates expected to be in effect upon consummation of the New Credit
Facility.
22
<PAGE>
SUN APPAREL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDING MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
HISTORICAL FOR THE OFFERING PRO FORMA
----------- ----------------- -----------
<S> <C> <C> <C>
Net sales......................................... $ 93,973 $ 93,973
Cost of goods sold................................ 56,629 56,629
----------- ------- -----------
Gross profit...................................... 37,344 -- 37,344
Operating expenses:
Selling, general and administrative expenses.... 23,695 23,695
Depreciation and amortization..................... 1,830 1,830
----------- -----------
Operating income.................................. 11,819 -- 11,819
Interest Income...................................
Interest and bank charges......................... 5,678 ($ 3,000)(a) 2,678
Other expense (income), net....................... (70) (70)
----------- ------- -----------
Income before taxes............................... 6,211 3,000 9,211
Income taxes...................................... 2,425 1,200(b) 3,625
----------- ------- -----------
Income from continuing operations................. $ 3,786 $ 1,800 $ 5,586
----------- ------- -----------
----------- ------- -----------
</TABLE>
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
The pro forma financial data has been derived by the application of pro
forma adjustments to the Company's historical financial statements for the
periods noted.
The pro forma condensed consolidated statement of income excludes
approximately $11.6 million of extraordinary charges, net of tax benefit, which
would have been incurred if these transactions had occured during the quarter
ended March 31, 1998. The extraordinary charges consist of a $12.3 million
penalty related to the early retirement of the Vestar Note with the proceeds
from the Offering and a $7.0 million write-off of debt issuance costs related to
the restructuring of the Bank Credit Facility. The tax benefits of these
extraordinary charges are $4.9 million and $2.8 million, respectively.
(a) The pro forma adjustment to interest and bank charges reflect the
following (dollars in thousands):
<TABLE>
<CAPTION>
RATE AMOUNT
--------- -----------
<S> <C> <C>
Interest expense on New Credit Facility(1)............................. 7.58% $ 2,450
Interest expense on subordinated debt.................................. 17.90% --
Interest expense on other debt......................................... Various 85
Amortization of capitalized financing fees............................. 91
Commitment fee on unused available credit.............................. 52
-----------
Pro forma first quarter interest and bank charges...................... 2,678
Historical interest expense and bank charges........................... (5,678 )
-----------
Total adjustment....................................................... ($ 3,000 )
-----------
-----------
</TABLE>
- ------------------------
(1) Reflects interest expense on the New Credit Facility, which is calculated
using rates expected to be in effect upon consummation of the New Credit
Facility.
(b) Reflects the estimated income tax expense on pro forma earnings at an
effective rate of 40% for federal and state income taxes, plus foreign taxes.
24
<PAGE>
SUN APPAREL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
HISTORICAL FOR THE OFFERING PRO FORMA
-------------- ---------------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents................... $ 543 $ 543
Due from factors....................... 15,528 15,528
Trade receivables, net................. 47,265 47,265
Inventories............................ 64,782 64,782
Advances to contractors................ 1,136 1,136
Other receivables...................... 925 925
Prepaid expenses....................... 1,830 1,830
-------------- -----------
Total current assets................... 132,009 132,009
Net property, plant, and equipment....... 34,732 34,732
Debt issuance costs...................... 7,013 ($ 5,013)(a) 2,000
Deferred tax asset....................... 2,688 2,805(a) 5,493
Other assets............................. 1,841 1,841
-------------- -------- -----------
Total assets........................... $ 178,283 ($ 2,208) $ 176,075
-------------- -------- -----------
-------------- -------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................... $ 30,457 $ 30,457
Current portion of long-term debt...... 3,518 3,518
Accrued liabilities.................... 16,811 ($ 2,685)(b) 14,126
Due to related parties................. 1,607 (275)(b) 1,332
Taxes payable (receivable)............. 2,769 (4,926)(b) (2,157)
-------------- -------- -----------
Total current liabilities.............. 55,162 (7,886) 47,276
Long-term debt, net of current portion... 174,619 (44,725)(b) 129,894
Subordinated debt, net of current
portion................................ 30,000 (30,000)(b) --
Deferred tax liabilities................. 1,146 1,146
-------------- -------- -----------
Total liabilities........................ 260,927 (82,611) 178,316
Shareholders' equity (deficit):
Common stock........................... 417 90,679(c) 183,096
92,000(d)
Preferred stock........................ 90,679 (90,679)(c) --
Retained deficit....................... (173,740) (7,389)(b) (185,337)
(4,208)(a)
-------------- -------- -----------
Total shareholders' equity (deficit)... (82,644) 80,403 (2,241)
Total liabilities and shareholders'
equity (deficit)..................... $ 178,283 ($ 2,208) $ 176,075
-------------- -------- -----------
-------------- -------- -----------
</TABLE>
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The pro forma financial data has been derived by the application of pro
forma adjustments to the Company's historical financial statements for the
period noted.
(a) The Company estimates it will incur approximately $2 million in fees in
connection with the New Credit Facility. The $7.0 million of debt issuance costs
related to the existing Bank Credit Facility will be written off, net of an
income tax benefit of $2.8 million. Approximately $2.0 million in financing fees
for the New Credit Facility will be capitalized and amortized over the life of
the New Credit Facility.
(b) The net effect of the Offering, as if it occurred on March 31, 1998,
reflects the following (in thousands):
<TABLE>
<CAPTION>
AMOUNT
--------------
<S> <C>
(IN THOUSANDS)
Sources:
Proceeds from this Offering................................ $ 100,000
Uses:
Repayment of subordinated debt (1)......................... $ 30,000
Prepayment penalty (1)..................................... 12,315
Payment of accrued interest (1)............................ 2,685
Repayment of long-term debt................................ 44,725
Partial repayment of Rothfeld Note......................... 275
Fees for New Credit Facility............................... 2,000
Underwriting fees.......................................... 7,000
Other fees and expenses.................................... 1,000
--------------
Total.................................................. $ 100,000
--------------
--------------
</TABLE>
- ------------------------
(1) Reflects the repayment of the $30.0 million Vestar Note as well as payment
of $2.7 million of accrued interest and a $12.3 million early payment
penalty on the Vestar Note. The Company expects a tax benefit of $4.9
million related to such penalty.
(c) The adjustment reflects the conversion of $85.0 million of preferred
stock into shares of Common Stock and accumulated but unpaid preferred
stock dividends of $5.7 million into shares of Common Stock.
(d) The pro forma adjustment reflects the following (in thousands):
<TABLE>
<S> <C>
Equity contribution.............................................. $ 100,000
Estimated fees and expenses...................................... (8,000)
---------
$ 92,000
---------
---------
</TABLE>
26
<PAGE>
COMPANY HISTORY, THE RECAPITALIZATION AND PRIOR S CORPORATION STATUS
The Company was formed in 1979. In late 1982, a former business partner of
Mr. Rothfeld purchased a controlling interest in the Company and Mr. Rothfeld
became the Vice President of the Company in charge of all operations. In 1987,
Mr. Rothfeld purchased a one-third interest in the Company from his former
partner and his family (the "Former Partner") and became President of the
Company. The Company initially operated as a contract manufacturer of men's and
women's jeans. In the late 1980s, the Company's business expanded to include the
design, manufacture and distribution of jeanswear products in all size ranges
under licensed brands, private labels, and Company owned brands. The Company's
operations have historically been conducted through Sun Apparel, Inc. and
certain affiliated companies, including Greater Texas Finishing Corp. (which
conducts the Company's domestic finishing operations), (collectively, the
"Affiliated Companies"). Prior to the consummation of the transactions described
below, each of the Company and the Affiliated Companies was effectively owned
one-third by Mr. Rothfeld and the Rothfeld Family Trust and two-thirds by the
Former Partner. As a result of the transactions described below, the Affiliated
Companies, which were under common control with the Company, became direct or
indirect wholly-owned subsidiaries of Sun Apparel, Inc.
On September 26, 1997, the interests of the Former Partner in the Company
and the Affiliated Companies were repurchased by the Company for an aggregate
repurchase price of approximately $147 million plus the repayment of
approximately $9 million in debt owed to the Former Partner. In connection with
the repurchase of the interests of the Former Partner, Mr. Rothfeld entered into
an Investment Agreement, dated as of September 26, 1997, with Vestar, and the
Trustees of the Rothfeld Family Trust. Pursuant to the Investment Agreement, on
September 26, 1997, Vestar invested $75 million in the Company as part of a
recapitalization of the Company in which Vestar received (i) 40% of the
outstanding common stock of the Company; (ii) 215,000 shares of the Company's
13% Series A Cumulative Participating Preferred Stock (the "Vestar Preferred
Stock")(representing an aggregate liquidation preference of $43.0 million); and
(iii) the $30.0 million Vestar Note. As part of the Recapitalization, Mr.
Rothfeld and the Rothfeld Family Trust contributed to the Company a portion of
their interests in the Company and all of their interests in the Affiliated
Companies and received (i) additional shares of the Company's common stock
(increasing their collective ownership in the Company from one-third to 60% of
the Company's then outstanding common stock); (ii) 201,065 shares of the
Company's 13% Series B Cumulative Participating Preferred Stock and 8,935 shares
of the Company's 13% Series C Cumulative Participating Preferred Stock
(collectively, the "Rothfeld Preferred Stock")(representing an aggregate
liquidation preference of $42.0 million); and (iii) cash distributions totaling
approximately $30 million. In addition, approximately $130,000 in debt was
repaid to Mr. Rothfeld by one of the Affiliated Companies. The foregoing
transactions were financed with the proceeds of Vestar's $75.0 million
investment in the Company and $193.0 million in borrowings under the Bank Credit
Facility (as defined). See "Description of Certain Indebtedness--Bank Credit
Facility".
Prior to the Recapitalization, the Company and certain of the Affiliated
Companies elected to be treated for federal and certain state income tax
purposes as S corporations under Subchapter S of the Code. As S corporations,
the earnings of such corporations were included in the taxable income of the
shareholders thereof, since the corporations themselves were not subject to
income tax. Following consummation of the Recapitalization, the Company and the
Affiliated Companies ceased to have S corporation status and are now fully
subject to federal and state income taxes.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
consolidated financial statements and the related notes thereto and other
financial information included elsewhere in this Prospectus. Unless the context
otherwise requires (i) all references to the Company's Polo Jeans business
include the manufacture and distribution of products pursuant to the Polo Jeans
License, but do not include the manufacturing and distribution of jeanswear and
casual bottoms to Polo Jeans Company Ralph Lauren international licensees and
(ii) all references to the Company's Sun Division Products business include the
Company's manufacture and distribution of jeanswear and casual bottoms under
private label brands, contract manufacturing (including for Polo Jeans Company
Ralph Lauren international licensees), licensed brands (excluding the Polo Jeans
License) and Company owned brands.
OVERVIEW
The Company is a leading designer, manufacturer and distributor of
jeanswear, sportswear, and related apparel for men, women and children under
licensed brands, private label brands and Company owned brands, the most
prominent of which is the Polo Jeans licensed brand. The Company markets and
distributes its products nationally through a broad array of distribution
channels, including department stores, specialty stores and mass merchandisers.
In late 1995, the Company entered into exclusive long-term license and
design agreements with Polo Ralph Lauren for the design, manufacture and
distribution of men's and women's jeanswear, sportswear and related apparel
under the Polo Jeans trademark in the United States and its territories. The
Company markets its Polo Jeans line in leading department stores, specialty
stores and Polo Ralph Lauren retail stores. Launched at retail for Fall 1996,
the Polo Jeans collection is currently distributed in more than 3,000 department
and specialty store doors and generated $198.0 million in net sales in 1997, the
first full fiscal year of distribution of Polo Jeans Products.
Since its inception in 1979, the Company has focused primarily on the
design, manufacture and distribution of jeanswear and casual bottoms for all
size ranges, at various price points under private label brands, contract
manufacturing programs, licensed brands and Company owned brands. The Company
manufactures Sun Division Products for leading retailers and manufacturers, such
as Wal-Mart, The Limited, J.C. Penney, Federated and Sara Lee. The Sun Division
Products are currently distributed nationwide to more than 18,000 store doors.
In fiscal 1997, Sun Division Products generated $161.7 million in net sales.
On September 26, 1997, the Company consummated the Recapitalization. As a
result of the Recapitalization, (i) the Affiliated Companies became direct or
indirect wholly owned subsidiaries of the Company in the Reorganization; (ii)
following the Reorganization, Mr. Rothfeld and the Rothfeld Family Trust
increased their equity interest in the Company to 60.0%; and (iii) Vestar
acquired a 40.0% equity interest in the Company. In connection with the
Recapitalization, the Company and the Affiliated Companies terminated their S
corporation status under Subchapter S of the Code and, as a result, beginning in
the fourth quarter of fiscal 1997, have been fully subject to federal and state
income taxes at the corporate level. See "Company History, The Recapitalization
and Prior S Corporation Status".
In connection with the Recapitalization, the Company issued the Vestar Note
in the aggregate principal amount of $30.0 million. The Vestar Note is
redeemable, in whole or in part, subject to escalating prepayment penalties,
including accrued and unpaid interest, ranging from $15.0 million prior to
September 26, 1998 to $45.0 million after September 26, 2000. The Vestar Note is
subject to mandatory redemption (including applicable prepayment penalties) upon
the occurrence of certain events, including a public offering of equity
securities. The Company will use $45.0 million of the proceeds from this
Offering to repay amounts due under the Vestar Note. The repayment of the Vestar
28
<PAGE>
Note will result in a $12.3 million extraordinary expense associated with the
prepayment of the debt. See "Use of Proceeds", "Certain Transactions" and
"Description of Certain Indebtedness".
On April 1, 1998, the Company effected a reorganization of its subsidiaries.
The Company anticipates that as a result of this reorganization its effective
tax rate will be approximately 36%.
The Company is currently in negotiations to refinance its existing Bank
Credit Facility and expects that the refinancing will be completed concurrently
with the consummation of this Offering. As a result of such refinancing, the
Company expects to write off $7.0 million in deferred financing costs associated
with the existing Bank Credit Facility.
The Company's Polo Jeans division is currently in the process of relocating
its office and showroom to a new location within New York City. The Company
expects that such relocation will be completed during the third quarter of 1998.
The relocation of the office and showroom will involve capital expenditures and
will also result in a non-recurring charge of approximately $1.5 million to $2.0
million in the second quarter of 1998.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statement
of operations data for the Polo Jeans division, the Sun Division and the Company
as a whole, in dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
QUARTER
FISCAL YEAR ENDED
------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
% OF % OF % OF MARCH 31,
1995 NET SALES 1996 NET SALES 1997 NET SALES 1998
-------------- ------------- -------------- ------------- -------------- ------------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Polo Jeans.... -- -- $ 103,582 36.8% $ 198,002 55.1% $ 57,183
Sun
Division.... $ 205,657 100.0% 178,086 63.2 161,670 44.9 36,790
-------------- ----- -------------- ----- -------------- ----- -----------
Total......... 205,657 100.0 281,668 100.0 359,672 100.0 93,973
Cost of goods
sold:
Polo
Jeans(1).... -- -- 54,888 53.0 116,620 58.9 31,794
Sun
Division(2).. 153,513 74.6 136,513 76.7 116,715 72.2 24,835
-------------- -------------- -------------- -----------
Total......... 153,513 74.6 191,401 68.0 233,335 64.9 56,629
Gross profit:
Polo
Jeans(1).... -- -- 48,694 47.0 81,382 41.1 25,389
Sun
Division(2).. 52,144 25.4 41,573 23.3 44,955 27.8 11,955
-------------- -------------- -------------- -----------
Total......... 52,144 25.4 90,267 32.0 126,337 35.1 37,344
Selling, general
and
administrative
expenses...... 33,295 16.2 64,329 22.8 84,044 23.4 23,695
Depreciation and
amortization... 2,846 1.4 6,853 2.4 6,292 1.7 1,830
Operating
income........ $ 16,003 7.8% $ 19,085 6.8% $ 36,001 10.0% $ 11,819
<CAPTION>
<S> <C>
% OF
NET SALES
-------------
<S> <C>
Net sales:
Polo Jeans.... 60.9%
Sun
Division.... 39.1
-----
Total......... 100.0
Cost of goods
sold:
Polo
Jeans(1).... 55.6
Sun
Division(2).. 67.5
Total......... 60.3
Gross profit:
Polo
Jeans(1).... 44.4
Sun
Division(2).. 32.5
Total......... 39.7
Selling, general
and
administrative
expenses...... 25.2
Depreciation and
amortization... 1.9
Operating
income........ 12.6%
</TABLE>
- ------------------------------
(1) Percentages are of Polo Jeans Net Sales.
(2) Percentages are of Sun Division Net Sales.
29
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net sales increased 16.8% to $94.0 million in the first quarter of 1998 from
$80.5 million in the corresponding quarter of 1997. This increase was primarily
attributable to strong retail sales of Polo Jeans Products which resulted in a
29.7% increase in the net sales of Polo Jeans Products to $57.2 million in the
first quarter of 1998 from $44.1 million in the corresponding quarter of 1997.
Net sales of the Sun Division Products increased to $36.8 million in the first
quarter of 1998 from $36.4 million in corresponding quarter of 1997.
Gross profit as a percentage of net sales ("gross margin") increased to
39.7% in the first quarter of 1998 from 34.6% in the corresponding quarter of
1997. This increase was primarily attributable to increased gross margins in
both the Polo Jeans and Sun Division businesses and an increase in the net sales
of the Company's higher margin products. Net sales of Polo Jeans Products, which
represented 60.9% of total net sales in the first quarter of 1998 compared to
54.8% in the corresponding quarter of 1997, generate a higher gross margin than
the Sun Division Products. The Polo Jeans Products gross margin improved to
44.4% in the first quarter of 1998 from 41.9% in the corresponding quarter of
1997, as a result of improved sourcing and manufacturing efficiencies, as well
as a more favorable sales mix. The Sun Division Products gross margin increased
to 32.5% in the first quarter of 1998 from 25.6% in the corresponding quarter of
1997, as a result of improved manufacturing and distribution efficiencies and a
reduction in denim prices.
Selling, general and administrative expenses increased 28.6% to $23.7
million, or 25.2% of net sales, in the first quarter of 1998 from $18.4 million
or 22.9% of net sales in the corresponding quarter of 1997. This increase was
primarily attributable to the increase in net sales of Polo Jeans Products which
resulted in increased selling, royalty and advertising expenses.
Interest expense increased to $5.7 million in the first quarter of 1998 from
$1.3 million in the corresponding quarter of 1997. This increase was
attributable to increased borrowings and higher interest rates in connection
with the Recapitalization in September 1997.
Income tax expense increased to $2.4 million in the first quarter of 1998
from $0.3 million in the corresponding quarter of 1997. This increase was
attributable to the change in the tax status of the Company in connection with
the Recapitalization in September 1997. Prior to the Recapitalization, the
Company operated under Subchapter S of the Code and the Company's income was
taxable only at the stockholder level and not at the corporate level. If the
Company had paid federal income taxes as a C corporation under the Code in both
periods, the effective tax rates for the three month periods ended March 31,
1998 and 1997 would have been comparable.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 28, 1996
Net sales increased 27.7% to $359.7 million in 1997 from $281.7 million in
1996. This increase was primarily attributable to the continued growth of the
Company's Polo Jeans division, which began shipping Polo Jeans Products in the
second quarter of 1996. Net sales of Polo Jeans Products increased 91.2% to
$198.0 million in 1997 from $103.6 million in 1996 . Net sales of the Sun
Division business declined 9.2 % to $161.7 million in 1997 from $178.1 million
in 1996, due in part to the Company's strategic reduction of sales to or exit
from certain low margin accounts and certain financially distressed retailers
offset, in part, by additional sales to existing and new customers.
Gross margin increased to 35.1% in 1997 from 32.0% in 1996. This increase
was largely attributable to the first full year of sales of Polo Jeans Products.
Net sales of Polo Jeans Products, which represented 55.1% of total net sales in
1997, generate a higher gross margin than the Sun Division Products. Polo Jeans
Products generated a gross margin of 41.1% in 1997. The Sun Division Products
gross margin increased to 27.8% in 1997 from 23.3% in 1996, as a result of the
Company's reduction of sales to and
30
<PAGE>
exit from certain low margin accounts, improved manufacturing efficiencies and a
reduction in denim prices.
Selling, general and administrative expenses increased 30.6% to $84.0
million, or 23.4% of net sales, in 1997 from $64.3 million or 22.8% of net sales
in 1996. This increase was attributable to investments in organizational
infrastructure to support growth and increased design, advertising, marketing,
royalty and distribution expenses from a full year of Polo Jeans Products sales
and operations in 1997.
Interest expense increased to $10.4 million in 1997 from $4.2 million in
1996. This increase was attributable to the increased borrowings and higher
interest rates in connection with the Recapitalization in September 1997.
Income tax expense increased to $3.7 million in 1997 from $0.9 million in
1996. Substantially all of this increase was attributable to the change in tax
status of the Company in connection with the Recapitalization on September 26,
1997. Prior to the Recapitalization, the Company operated under Subchapter S of
the Code and the Company's income was taxable only at the stockholder level and
not at the corporate level. The net federal income tax provision of $1.8 million
in 1997 reflects federal income tax for the period of September 26, 1997 through
December 31, 1997, offset by a $2.0 million benefit recorded at the time of the
Company's conversion to a C corporation in accordance with Accounting Standards
Board No. 109, "Accounting for Income Taxes". In addition, the tax expense
reflects both a Texas franchise tax, based on the Company's Texas incorporation,
and a Mexican income tax. If the Company had paid federal income taxes as a C
corporation under the Code in both periods, the effective tax rates for 1997 and
1996 would have been comparable.
YEAR ENDED DECEMBER 28, 1996 COMPARED TO YEAR ENDED DECEMBER 30, 1995
Net sales increased 37.0% to $281.7 million in 1996 from $205.7 million in
1995. This increase was attributable to the launch of the Polo Jeans line in the
second and third quarter of 1996 which contributed $103.6 million in net sales.
Net sales from Sun Division Products decreased 13.4% to $178.1 million from
$205.7 million in 1995 due to financial difficulties at certain large retail
accounts as well as the Company's decision to reduce sales to certain of such
accounts.
Gross margin increased to 32.0% in 1996 from 25.4% in 1995. This increase
was largely attributable to the retail launch of the Polo Jeans line in the
third quarter of 1996. Net sales of Polo Jeans Products, which represented 36.8%
of total net sales in 1996, have a higher gross margin than the Sun Division
Products. The Sun Division Products gross margin decreased to 23.3% in 1996 from
25.4% in 1995, primarily as a result of competitive pressures for private label
brand manufacturing in specialty and discount stores and an increase in denim
prices.
Selling, general and administrative expenses increased 93.2% to $64.3
million, or 22.8% of net sales, in 1996 from $33.3 million or 16.2% of net sales
in 1995 due to a full year of start-up expenses relating to the launch of the
Polo Jeans line compared to only a half-year of Polo Jeans Products sales.
Start-up expenses relating to the launch of the Polo Jeans line included
investments in organizational infrastructure, selling, advertising, marketing
and distribution expense and royalty expense to Polo Ralph Lauren under the Polo
Jeans License.
Interest expense increased to $4.2 million in 1996 from $3.2 million in
1995. This increase was attributable to increased borrowings as a result of the
higher working capital requirements of the Polo Jeans Products business.
During 1995 and 1996 the Company operated as a Subchapter S Corporation and
therefore was not required to provide for federal income taxes. The Company did,
however, provide for both Texas franchise tax and foreign income tax. In total,
the expense increased to $0.9 million in 1996 from $0.5
31
<PAGE>
million in 1995. If the Company had paid federal income taxes as a C corporation
under the Code in both periods, the effective tax rates for 1996 and 1995 would
have been comparable.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash flows from
operations and borrowings under credit facilities. The Company's short term cash
needs are primarily for working capital to support growth in operations,
including inventory and receivables, and for capital expenditures, which include
the construction and renovation of Polo Jeans in-store shops, expansion of the
Company's Mexican manufacturing operations and investment in management
information systems. The Company's need for liquidity has increased as a result
of interest payable on the indebtedness incurred in connection with the
Recapitalization.
Net cash provided by operating activities increased to $28.6 million in 1997
from a use of cash of $19.3 million in 1996 primarily as a result of a
substantial growth in sales with a higher gross margin, resulting in improved
operating results. Furthermore, the 1996 results include start-up expenses and
investments in working capital associated with the launch of the Polo Jeans
line. The improved operating results were partially offset by changes in working
capital which include a $2.7 million increase in inventory to support the
significant increase in Polo Jeans Products projected sales for the first half
of 1998 and a $3.5 million increase in accounts receivable which can be
attributed to higher fourth quarter 1997 sales of the Polo Jeans division. Net
cash used in operating activities in 1996 is due to the growth in working
assets, particularly accounts receivable and inventory, in connection with the
launch of the Polo Jeans line in the second half of 1996. Specifically, accounts
receivable increased $28.5 million and inventory increased $28.9 million. Net
cash used in investing activities decreased to $10.5 million in fiscal 1997 from
$13.2 million in fiscal 1996 as a result of a decrease in capital expenditures,
which in 1996 were associated with the initial rollout of the Polo Jeans line.
Financing activities primarily consisted of the effects of the
Recapitalization and distributions to stockholders. Prior to the
Recapitalization, the Company was a Subchapter S Corporation and net income was
included in the stockholders' income for federal, and certain state tax filings.
To accommodate the payment of taxes, the Company generally made substantial
distributions to the stockholders throughout the years.
On September 26, 1997, the Company entered into a senior secured credit
facility arranged by Chase (the "Bank Credit Facility") that provides for up to
$235.0 million in committed credit by a group of participating banks. A
"swingline" loan facility of $10.0 million is provided within the Bank Credit
Facility to accommodate zero balance banking. The Bank Credit Facility provides
for aggregate term debt of $155.0 million, consisting of two term loans. The
first Term Loan (the "Tranche A Term Loan") provides for $45.0 million payable
in escalating quarterly payments beginning March 1998 through September 2003.
The second Term Loan (the "Tranche B Term Loan") provides for quarterly payments
aggregating $1.0 million per fiscal year through fiscal 2002 and $16.0 million
in fiscal 2003, with the balance of $90.0 million due in 2004. Interest is
generally payable quarterly on the outstanding term loans at interest rate
options selected by the Company. The interest rate options for all outstanding
amounts (term loans and revolving credit loans) are based upon the Prime Rate,
the Federal Funds Effective Rate, or LIBOR (plus applicable margin) as defined
by the Bank Credit Facility. At December 31, 1997, the Company's interest rate
was 8.74%, 9.24%, and 8.74% for the Tranche A Term Loan, the Tranche B Loan, and
the Revolving Loans (as defined herein), respectively. Borrowings under the Bank
Credit Facility are secured by factor receivable balances, accounts receivable,
inventories, machinery and equipment, real property, and intangibles.
In addition to the term loans, the Bank Credit Facility provides for
revolving credit loans (the "Revolving Credit Facility") to the Company from
September 26, 1997 to September 30, 2003, in aggregate amount outstanding at any
one time up to $80.0 million. The aggregate amount of all
32
<PAGE>
borrowings under the Revolving Credit Facility (including swingline loans) at
any time outstanding shall not exceed a specified borrowing base then in effect.
The Revolving Credit Facility is subject to a borrowing base generally
consisting of up to 85% of eligible accounts receivable, 55% of eligible
inventory and 50% of trade letters of credit, subject to certain sublimits. At
December 31, 1997, the Company had approximately $70.4 million available under
the borrowing base, of which $27.0 million was utilized under the Revolving
Credit Facility. The Bank Credit Facility also provides for irrevocable standby
letters of credit and irrevocable trade letters of credit to be issued under the
Revolving Credit Facility on behalf of the Company up to $5.0 million and $30.0
million, respectively, subject to certain borrowing limitations.
The Bank Credit Facility contains restrictive covenants relating to, among
other things, additional borrowings, additional liens, additional guarantees,
the declaration or payment of dividends, transactions with subsidiaries, mergers
or acquisitions, investments, asset sales, and capital expenditures. The Bank
Credit Facility includes certain financial covenants including, but not limited
to, minimum interest coverage, minimum fixed charge coverage, and a maximum
leverage ratio.
The Company has entered into certain interest rate protection agreements
covering approximately $77.5 million of its borrowings. As of December 31, 1997,
these agreements were in a net unfavorable position with a fair market value of
approximately $0.2 million.
The Company estimates that capital expenditures for 1998 will be
approximately $16 million. These expenditures are primarily for the expansion of
the Polo Jeans in-store shop program, the relocation of the Polo Jeans division
showroom and administrative offices, further expansion of manufacturing
operations in Mexico and continued investment in management information systems
including the implementation of a warehouse management system in for Sun
Division Products.
The Company owns and operates five jeanswear and casual bottoms sewing and
finishing facilities in Mexico and intends to expand these facilities in the
near future as part of its growth strategy. In addition, the Company plans to
shift cutting and portions of its other operations from the United States to
Mexico to further reduce manufacturing costs. While the Company believes that
the expansion of its manufacturing facilities and relocation of certain
operations to Mexico will ultimately reduce manufacturing costs, such activities
will also result in significant capital expenditures and certain charges,
primarily in fiscal years 1999, 2000 and 2001.
Based upon current operations and anticipated future growth, the Company
believes that its cash flow from operations together with available borrowings
under the revolving credit facility will be adequate to meet anticipated cash
requirements for working capital, capital expenditures and scheduled principal
and interest payments.
YEAR 2000 COMPLIANCE
The Company believes that its internal information systems are Year 2000
compliant or will be so after giving effect to upgrades or replacements in
connection with previously planned changes to its information systems prior to
the need to comply with Year 2000 requirements. Although the Company believes
that Year 2000 compliance will not have a material adverse effect, the Company
is uncertain as to the extent its customers and suppliers may be affected by
Year 2000 issues.
NEW ACCOUNTING STANDARDS
BUSINESS SEGMENTS
In June 1997, the FASB issued Statement No. 131, "Financial Reporting for
Segments of a Business Enterprise" ("FAS 131"). FAS 131 specifies the
computation, presentation, and disclosure requirements for business segment
information, and requires that segments be identified based on internal
financial reporting at the level reported to the chief operating decision maker.
FAS 131 supersedes FAS 14,
33
<PAGE>
"Financial Reporting for Segments of a Business Enterprise", but retains the
requirement to report information about major customers. FAS 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt FAS 131 for its December 31, 1998 financial statements, and
expects to disclose financial information for two operating segments, the Polo
Jeans business and the Sun Division business.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("FAS 130"). FAS 130 establishes new rules for the reporting and display
of comprehensive income and its components. These disclosures are required for
the first quarter of 1998. FAS 130 requires changes such as unrealized gains or
losses on available-for-sale securities and foreign currency translation
adjustments, which currently are reported in shareholders' equity, to be
included in other comprehensive income and has no transactions that generate
items of other comprehensive income, and the adoption of FAS 130 is not expected
to have a significant impact on the financial statement disclosures.
SEASONALITY
The following table sets forth, for the last nine fiscal quarters, certain
statement of operations data for the Polo Jeans business, the Sun Division
business and the Company as a whole:
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
--------------------------------------------------------------------------------------------------
MARCH 30, JUNE 29, SEPT. 28, DEC. 28, MARCH 31, JUNE 30, SEPT. 26, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Polo Jeans.......... -- $ 1,663 $ 55,912 $ 46,007 $ 44,083 $ 40,898 $ 46,182 $ 66,839
Sun Division........ $ 37,699 43,165 54,590 42,632 36,392 38,810 39,945 46,523
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Total............... 37,699 44,828 110,502 88,639 80,475 79,708 86,127 113,362
Cost of goods sold:
Polo Jeans.......... -- 843 28,925 25,120 25,595 25,910 25,950 39,165
Sun Division........ 28,468 34,063 40,876 33,106 27,066 28,886 29,852 30,911
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Total............... 28,468 34,906 69,801 58,226 52,661 54,796 55,802 70,076
Gross profit:
Polo Jeans.......... -- 820 26,987 20,887 18,488 14,988 20,232 27,674
Sun Division........ 9,231 9,102 13,714 9,526 9,326 9,924 10,093 15,612
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Total............... 9,231 9,922 40,701 30,413 27,814 24,912 30,325 43,286
Selling, general and
administrative
expenses............ 8,668 8,711 26,011 20,939 18,432 18,153 22,320 25,139
Depreciation and
amortization........ 846 1,374 1,097 3,536 1,459 1,482 1,418 1,933
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Operating income...... ($283) ($163 ) $ 13,593 $ 5,938 $ 7,923 $ 5,277 $ 6,587 $ 16,214
<CAPTION>
MARCH 31,
1998
-----------
<S> <C>
Net sales:
Polo Jeans.......... $ 57,183
Sun Division........ 36,790
-----------
Total............... 93,973
Cost of goods sold:
Polo Jeans.......... 31,794
Sun Division........ 24,835
-----------
Total............... 56,629
Gross profit:
Polo Jeans.......... 25,389
Sun Division........ 11,955
-----------
Total............... 37,344
Selling, general and
administrative
expenses............ 23,695
Depreciation and
amortization........ 1,830
-----------
Operating income...... $ 11,819
</TABLE>
Demand for the Company's apparel products and its level of sales fluctuate
during the course of the calendar year as a result of seasonal buying trends. An
increase in sales of jeans and casual apparel generally occurs during the Fall
and Holiday selling seasons (the Company's third and fourth quarter,
respectively). Accordingly, the Company's operating results will fluctuate from
quarter to quarter.
34
<PAGE>
BUSINESS
The Company is a leading designer, manufacturer and distributor of
jeanswear, sportswear, and related apparel for men, women and children under
licensed brands, private label brands and Company owned brands, the most
prominent of which is the POLO JEANS COMPANY RALPH LAUREN licensed brand. The
Company markets and distributes its products nationally through a broad array of
distribution channels, including department stores, specialty stores and mass
merchandisers. Through its brand marketing and development expertise,
diversified product offerings, manufacturing capabilities and comprehensive
distribution network, the Company reaches a broad range of consumers and
distinguishes itself from competitors.
In late 1995, the Company entered into exclusive long-term license and
design agreements with Polo Ralph Lauren for the design, manufacture and
distribution of men's and women's jeanswear, sportswear and related apparel
under the Polo Jeans trademark in the United States and its territories. Polo
Ralph Lauren is one of the world's most recognized consumer brands and has been
a leader in the design, marketing and distribution of premium lifestyle products
for over 30 years. The Polo Jeans collection targets youthful, brand conscious
consumers, capitalizing on the distinctive name recognition and lifestyle image
created by Polo Ralph Lauren. The Polo Jeans Products maintain the high quality
standards and prestige of Polo Ralph Lauren at price points that are competitive
with other denim based designer collections and lower than most apparel
collections bearing the "Polo" name. The Company markets its Polo Jeans line in
leading department stores, specialty stores and Polo Ralph Lauren retail stores.
Launched at retail for Fall 1996, the Polo Jeans collection is currently
distributed to more than 3,000 department and specialty store doors and
generated $198.0 million in net sales in 1997, the first full fiscal year of
distribution of Polo Jeans Products.
Since its inception in 1979, the Company has focused primarily on the
design, manufacture and distribution of jeanswear and casual bottoms for all
size ranges, at various price points under private label brands, contract
manufacturing programs, licensed brands and Company owned brands. The Company
manufactures Sun Division Products for leading retailers and manufacturers such
as Wal-Mart, The Limited, J.C. Penney, Federated and Sara Lee. While
manufacturing high quality jeanswear and casual bottoms in diverse styles, fits
and finishes, the Company distinguishes itself from other denim based apparel
manufacturers by providing value-added services in design, merchandising,
production and inventory management. The Sun Division Products are currently
distributed nationwide to more than 18,000 store doors. In fiscal 1997, Sun
Division Products generated $161.7 million in net sales.
Primarily as a result of the launch of the Polo Jeans line in fiscal 1996,
the Company has experienced rapid growth, with net sales increasing from $205.7
million in fiscal 1995 to $359.7 million in fiscal 1997. During the same period,
operating income increased from $16.0 million to $36.0 million, and the
operating margin increased from 7.8% to 10.0%. In the first three months of
fiscal 1998, net sales and operating income increased from $80.5 million and
$7.9 million to $94.0 million and $11.8 million, respectively, while the
operating margin increased from 9.8% to 12.6% compared to the corresponding
period of fiscal 1997.
The Company believes that its success is due to a number of fundamental
strengths, including: proven success in brand marketing and development, full
service design and merchandising expertise, modern and vertically integrated
jeanswear manufacturing and distribution facilities, international sourcing
capabilities and customer inventory management. The Company believes that these
strengths position the Company to execute its growth strategy.
The Company's management operating committee has an average of over 14 years
of experience in the apparel industry. Eric A. Rothfeld, Chairman, President and
Chief Executive Officer of the Company, has been leading the Company's
operations for over 15 years. The Company has built an
35
<PAGE>
experienced management team with expertise in all facets of the apparel
business. Through management's extensive knowledge of the jeanswear and
sportswear industry and its longstanding relationships with designers and
retailers, management has successfully grown the Company into a market leader
for brand development of jeanswear, sportswear and related apparel lines.
GROWTH STRATEGY
The Company's core competencies position it to grow its existing businesses
and attract additional opportunities in brand licensing and ownership and
private label manufacturing.
CAPITALIZE ON THE STRENGTH OF THE POLO JEANS COMPANY RALPH LAUREN BRAND. The
Company believes that there are multiple opportunities to further grow the Polo
Jeans business, which was launched at retail for Fall 1996.
- EXPAND IN-STORE SHOPS. The Company expects to increase the retail presence
of Polo Jeans Products through the expansion of existing in-store shops
and the installation of additional in-store shops. In-store shops are
areas within department stores dedicated to Polo Jeans Products utilizing
signature Polo Jeans fixtures. The in-store shops, which range from 300 to
2,500 square feet, are designed to effectively display and merchandise
Polo Jeans Products. The Company believes that, in addition to increasing
sales, in-store shops enhance the consumer's shopping experience, promote
the Polo Jeans lifestyle image and build loyalty among consumers. As of
March 31, 1998, there were 682 Polo Jeans in-store shops covering more
than 243,000 square feet of fixtured retail selling space. The Company
currently expects to have over 1,200 in-store shops covering more than
500,000 square feet of fixtured retail selling space in department stores
by the end of 1998.
- INCREASE DOOR PENETRATION. Within the Company's existing customer base,
management believes it has significant opportunity in both its men's and
women's Polo Jeans lines to increase penetration in its existing
department store doors and expand to additional doors. The Company
anticipates that by the end of 1998 the Polo Jeans Collection will be
distributed to more than 3,200 department and specialty store doors.
- INCREASE SALES TO POLO RALPH LAUREN RETAIL STORES. The Company anticipates
that retail stores owned and operated by Polo Ralph Lauren will provide
significant opportunities to grow the Polo Jeans business. Polo Ralph
Lauren currently owns and operates more than 70 Polo Ralph Lauren Factory
Outlets, all of which carry certain Polo Jeans Products, and two Polo
Jeans Company Factory Outlets. In late 1997, Polo Ralph Lauren opened its
first full-price Polo Jeans Company retail store dedicated to the
Company's Polo Jeans Products. Polo Ralph Lauren has announced plans to
open two additional such stores as well as four additional Polo Jeans
Company Factory Outlets by the end of 1998 and expects to open five
full-price Polo Jeans Company retail stores and ten Polo Jeans Company
Factory Outlets during 1999. The Company believes that the continued
roll-out of outlet and retail stores by Polo Ralph Lauren will augment
Polo Jeans Products sales and enhance consumer recognition of the Polo
Jeans brand.
- SELECTIVELY EXPAND ACCOUNT BASE. Based on the strong demand for Polo Jeans
Products, the Company believes that additional growth can be achieved by
selectively expanding the Polo Jeans business account base in both
department stores and specialty stores.
- BROADEN PRODUCT OFFERINGS. The Company will continue to expand product
offerings within its Polo Jeans collection to attract youthful, brand
conscious consumers and enhance its image as a lifestyle brand. In
addition to expanding its denim product offerings, the Company intends to
broaden offerings of Polo Jeans Products in casual bottoms, knitwear,
sweaters and outerwear.
36
<PAGE>
EXPAND SUN DIVISION BUSINESS. The Company believes that the Sun Division
business is well positioned for controlled growth through increasing customer
penetration, expanding distribution and broadening product offerings.
- INCREASE EXISTING CUSTOMER DOOR PENETRATION. The Company manufactures its
Sun Division Products for a broad array of established retailers,
including department stores, specialty stores and mass merchandisers. The
Company manufactures these products under well recognized brands, such as
FADED GLORY (Wal-Mart), EXPRESS (The Limited), THE ARIZONA JEANS COMPANY
(J.C. Penney), and BADGE (Federated). By virtue of the Company's ability
to produce basic and fashion jeanswear and casual bottoms for all size
ranges, the Company believes that there are significant opportunities for
further penetration within the Company's existing customer base by
expanding to new departments and offering additional merchandise within
existing departments.
- SELECTIVELY EXPAND ACCOUNT BASE. The Company's longstanding reputation as
a manufacturer and distributor of high quality jeanswear, together with
the success of the Polo Jeans business, position the Company to expand its
Sun Division Products account base. In 1997, the Company began a new
contract manufacturing program with the JUST MY SIZE division of Sara Lee
and recently began new private label programs for Dayton Hudson, Sears,
Talbots and Wet Seal. In addition, as the Polo Jeans line has been
launched internationally by Polo Ralph Lauren, the Company has become the
primary jeanswear contractor for many Polo Jeans Company Ralph Lauren
international licensees. The Company will continue to explore
opportunities to develop additional accounts for its Sun Division Products
business with department stores, specialty stores, mass merchandisers and
manufacturers.
- BROADEN PRODUCT OFFERINGS. The Company will continue to expand Sun
Division Products offerings to attract new customers. In addition to
expanding its jeanswear offerings, the Company intends to broaden its
offerings of casual bottoms.
PURSUE ADDITIONAL OPPORTUNITIES IN LICENSING AND BRAND OWNERSHIP. Building
on its success in brand marketing and development, together with its jeanswear
manufacturing and distribution expertise, the Company believes it is
well-positioned to pursue additional opportunities in licensing and brand
ownership. For example, the Company is presently the exclusive worldwide
licensee for TODD OLDHAM JEANS, a collection of jeanswear and sportswear
targeted toward the sophisticated, fashion forward consumer and distributed to
better department stores and specialty stores. In the Fall 1998 season, the
Company is scheduled to introduce at Nordstrom, Wet Seal and other select
department and specialty stores a more moderately priced Todd Oldham jeanswear
and sportswear line under the TO(2) brand name for the junior market. The
Company intends to continue to evaluate and pursue new opportunities in
licensing and brand ownership.
INCREASE PRODUCTION CAPACITY AND FURTHER REDUCE MANUFACTURING COSTS. The
Company owns and operates five modern jeanswear and casual bottoms sewing and
finishing facilities in Mexico and intends to expand these facilities in the
near future. In addition, the Company plans to shift cutting and portions of its
other operations from the United States to Mexico to further reduce
manufacturing costs. The Company owned facilities, combined with an established
network of contractors, provide production flexibility, while maintaining the
Company's position as a low cost and high quality supplier of jeanswear and
casual bottoms.
POLO JEANS COMPANY BUSINESS
POLO JEANS PRODUCTS. The Company's Polo Jeans Products consist primarily of
men's and women's jeanswear, sportswear and related apparel. The Polo Jeans line
is designed to maximize in-store impact while minimizing fashion risk. A major
portion of the Polo Jeans line is comprised of core, recurring styles which are
less susceptible to fashion obsolescence and less seasonal in nature than
fashion products.
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Polo Jeans Products are categorized into three groups: automatic
replenishment, basics, and fashion merchandise. The automatic replenishment
merchandise consist of the Company's core products and their styles reflect
little variation from season to season. These products include jeans, shorts, T-
shirts and caps and are shipped daily under the Company's quick response
automatic replenishment program, whereby customer orders are generally shipped
within 24 hours to one week from receipt of the orders (the "Replenishment
Program"). See "--Manufacturing, Sourcing and Distribution". Automatic
replenishment merchandise represented approximately 40% of the Company's Polo
Jeans Products net sales in 1997. The Company complements automatic
replenishment merchandise with its key item basics, which include items with
similar styles to the automatic replenishment merchandise but with a broader
range of colors and fabrics. These basics also consist of selected casual
bottoms and tops that are generally seasonal in nature and are carried on the
sales floor by retailers for an entire season. Certain best-selling basics may
ultimately be added to the Company's Replenishment Program. Basics represented
approximately 35% of Polo Jeans Products net sales in 1997. To appeal to fashion
conscious consumers, the Company continually updates the Polo Jeans Products
assortment by offering fashion merchandise which reflects current trends in
color, fabrication and styling. Fashion merchandise is sold and shipped on a
monthly basis and is generally ordered by customers well in advance of the
selling season. Fashion merchandise represented approximately 25% of the Polo
Jeans Products net sales in 1997.
Through the Polo Jeans line, the Company intends to leverage and further
develop the name recognition and lifestyle image created by Polo Ralph Lauren,
in order to capture the increasing buying power of youthful, brand conscious
consumers. The Polo Jeans business is focused primarily on a younger market and
serves to introduce this generation to the distinctive lifestyle image of Polo
Ralph Lauren in a contemporary manner. The Polo Jeans Products maintain the high
quality standards and prestige of Polo Ralph Lauren at price points that are
competitive with other denim based designer collections and lower than most
apparel collections bearing the "Polo" name. See "--License Agreements--Polo
Jeans Company License".
The Company employs its own in-house Polo Jeans design staff, which travels
throughout the United States and internationally in order to monitor and
interpret fashion trends and discover new fabrics. The designs of the Polo Jeans
Products are influenced by contemporary music, television, cinema and other
forms of artistic expression. The design staff collaborates with Ralph Lauren
and his design team on many of the Polo Jeans Products. In addition, as Polo
Ralph Lauren has launched the Polo Jeans line internationally, many of the Polo
Ralph Lauren international licensees have used the Company's designs of Polo
Jeans Products. The Company receives a design fee in connection with Polo Jeans
international sales.
SALES. The Company markets its Polo Jeans line in leading department
stores, specialty stores and Polo Ralph Lauren retail stores. Key customers
include Federated (including Macy's and Bloomingdale's), May Co. (including Lord
& Taylor and Foley's), Dillard's and Dayton Hudson. In addition, Polo Ralph
Lauren currently owns and operates more than 70 Polo Ralph Lauren Factory
Outlets, all of which carry certain Polo Jeans Products, and two Polo Jeans
Company Factory Outlets. In late 1997, Polo Ralph Lauren opened its first
full-price Polo Jeans Company retail store dedicated to the Company's Polo Jeans
Products. Polo Ralph Lauren has announced plans to open two additional such
stores as well as four additional Polo Jeans Company Factory Outlets by the end
of 1998 and expects to open five full-price Polo Jeans Company retail stores and
ten Polo Jeans Company Factory Outlets during 1999. The Company believes that
the continued roll-out of outlet and retail stores by Polo Ralph Lauren will
augment Polo Jeans Products sales and enhance consumer recognition of the Polo
Jeans brand. Although products for Polo Ralph Lauren full-price and outlet
stores are generally sold at a discount to the Company's wholesale prices, the
Company does not have any royalty, advertising or markdown expenses with respect
to such sales.
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MEN'S LINE. The Polo Jeans men's line is sold in approximately 1,400
department store doors and 1,500 specialty store doors. By the end of 1998 the
Company expects to have over 650 in-store shops in department stores. Menswear
products accounted for approximately 60% of net sales of Polo Jeans Products in
1997.
WOMEN'S LINE. The Polo Jeans women's line is sold in over 900 department
store doors and over 900 specialty store doors. By the end of 1998 the Company
expects to have over 600 in-store shops in department stores. Womenswear
represented approximately 40% of net sales of Polo Jeans Products in 1997. The
Company anticipates that womenswear will represent a greater percentage of Polo
Jeans Product sales by the end of 1998.
The Company employs a staff of in-house account managers and regional
account executives for both men's and women's sales who manage the department
store, specialty store and Polo Ralph Lauren retail store business. Each account
manager interfaces with a retail analyst to evaluate and plan growth for each
customer by door. The sales and retail planning group is integrated into the
merchandise planning process to ensure correct inventory flow. This team
integration approach maximizes sales and manages inventory throughout the
product development, sales and distribution process.
RETAIL DEVELOPMENT. In-store shops and fixtured environments are a critical
component of the Polo Jeans marketing strategy as they are designed to
effectively display and merchandise Polo Jeans Products. The Company believes
that, in addition to maximizing sales per square foot, in-store shops and
fixtured environments enhance the consumer's shopping experience, promote the
Polo Jeans lifestyle image and build loyalty among consumers. These shops also
serve to differentiate the youthful lifestyle image of Polo Jeans Products from
other Polo Ralph Lauren products through the use of distinctive fixturing and
visuals. The Company will spend approximately $8.5 million in 1998 both on
expanding existing shops and adding new in-store shops. The Company believes
that in-store shops stimulate long term commitments from retailers as well as
significantly improve sales productivity. The Company currently expects to have
over 1,200 in-store shops covering more than 500,000 square feet of fixtured
retail selling space in department stores by the end of 1998. Approximately 50%
of the department store doors will have fixtured environments, increasing the
amount of Polo Jeans fixtured retail real estate in one year by approximately
140%.
The Company has developed a sophisticated retail development program that
encompasses in-house shop planning and visual merchandising, state-of-the-art
shop imaging systems, a coordinator team of regional merchandisers, and in-store
specialists. Coordinators cover approximately 70% of the Polo Jeans department
store doors and ensure that the Polo Jeans Products are merchandised in the best
available locations and are prominently displayed to maximize sales volume. The
coordinators train the department store sales associates about the Polo Jeans
Products brand image and merchandising standards. The continued expansion of
retail development is a key element in the Company's growth strategy.
MARKETING AND ADVERTISING. The Company has been focused on creating
exciting marketing and advertising campaigns for Polo Jeans to build brand
awareness and appeal to its target market of youthful, brand conscious
consumers. The Company spent over $22 million on launch advertising during 1996
and 1997 to establish the Polo Jeans Products brand image. While Polo Ralph
Lauren maintains final authority in creating, producing and placing the
advertising, the Company works closely with Polo Ralph Lauren to develop
innovative advertising and integrated marketing efforts to heighten brand
awareness. In addition to advertising in a broad range of fashion magazines, the
Company has expanded Polo Jeans advertising into lifestyle publications, outdoor
advertising and radio advertising. Further, the Company has created the "Polo
Jeans Outdoor Cinema" to showcase independent films, developed at-counter movie
promotions with retailers in conjunction with Miramax Film Corp. and
ENTERTAINMENT WEEKLY, among others, and run a nationwide movie-short in Sony
Retail Entertainment's Loews theaters and other major theater chains. These
imaginative advertising and promotional venues
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are aimed to differentiate the brand and reach the target customer. In addition,
the Company benefits from the advertising campaigns of Polo Ralph Lauren and its
other licensees. During the 12 months ended March 31, 1998, Polo Ralph Lauren
and its licensing partners (including the Company) collectively spent more than
$ million worldwide to advertise and promote Polo Ralph Lauren products.
SUN DIVISION BUSINESS
SUN DIVISION PRODUCTS. The Company's Sun Division Products consist of
jeanswear and casual bottoms for men, women, and children, in all sizes ranging
from toddlers to men's big and tall and women's plus sizes. More than 40% of the
Sun Division Products business consists of basic five pocket jeans in core denim
fabrics distributed through the Company's Replenishment Program, with the
balance representing basic and fashion jeanswear and casual bottoms produced on
a cut-to-order basis only. The fashion component is derived from a broad range
of silhouettes, fabrications and finishes intended to appeal to younger, more
style conscious consumers. The Company is able to quickly produce fashion items
on a cut-to-order basis because of its flexible manufacturing process, thus
substantially reducing inventory risk and enabling the Company to respond to
fashion trends.
SALES. The Company markets its Sun Division Products nationally to major
retailers across numerous channels of distribution. The Sun Division Products
are currently distributed nationwide to more than 18,000 store doors. The
Company manufactures its products for such leading retailers and manufacturers
as Wal-Mart, The Limited, J.C. Penney, Federated and Sara Lee, each targeting
different channels of distribution. The Company's longstanding reputation as a
manufacturer and distributor of high quality jeanswear and casual bottoms,
together with the success of the Polo Jeans business, has fostered the expansion
of the Company's Sun Division Products account base. The Company is continuing
to explore opportunities to develop additional accounts with department stores,
specialty stores, mass merchandisers and manufacturers as well as further
penetrate its existing customer base.
Within the Sun Division, private label sales have become an increasingly
important component and currently represent approximately 80% of the Company's
Sun Division business. The balance of the Sun Division business consists
primarily of licensed brand sales under the Todd Oldham, Sasson and Robert Stock
labels, sales under the Company owned Code Bleu brand and contract
manufacturing, including Just My Size jeans for Sara Lee.
In its Sun Division, the Company concentrates on maintaining a balance of
customers across different distribution channels. In 1997, department stores
represented approximately 27% of sales, speciality stores represented
approximately 26%, mass merchandisers represented approximately 41% of net
sales, and manufacturers represented approximately 6% of net sales.
The Company employs a sales staff of in-house account managers with strong
backgrounds in retail, design and merchandising, production and distribution.
These highly trained specialists are able to respond to the diverse needs of the
buying, production and logistical staffs of retailers and manufacturers,
offering the technical expertise to facilitate and expedite the rapid conversion
of fashion concepts into samples, production, and retail sales. With respect to
the Replenishment Program, the account managers work closely with retail
analysts and production coordinators to ensure there are adequate and not
excessive inventory levels to meet consumer demands. For the fashion
cut-to-order business, the account managers interface with the design and
merchandising staff to create innovative, affordable merchandise.
TODD OLDHAM JEANS BUSINESS. The Company is the exclusive worldwide licensee
for Todd Oldham Jeans, a collection of jeanswear and sportswear targeted toward
the sophisticated, fashion forward consumer and distributed to better department
stores and specialty stores, at price points that are higher than Polo Jeans but
significantly lower than Todd Oldham's couture collection.
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In the Fall 1998 season, the Company is scheduled to introduce at Nordstrom,
Wet Seal and other select department and specialty stores a more moderately
priced Todd Oldham jeanswear and sportswear line under the TO(2) brand name for
the junior market.
MANUFACTURING, SOURCING AND DISTRIBUTION
The Company has devoted substantial resources to the development of
low-cost, high-quality and versatile manufacturing and sourcing. The Company's
modern and vertically integrated manufacturing and distribution facilities in
the United States and Mexico, combined with the global sourcing capabilities
developed through its Polo Jeans business, provide the Company with the
flexibility and efficiency necessary to offer its customers a broad variety of
products tailored to their specific design, pricing and delivery requirements.
The Company has distinguished itself from many of its jeanswear competitors
by virtue of its extensive control of the manufacturing process. The Company is
vertically integrated in manufacturing jeanswear and casual bottoms, beginning
with the design and merchandising process, through cutting, assembly, finishing
and distribution. Approximately 80% of the Company's jeanswear products are cut
in Company owned facilities, 40% are assembled in Company owned facilities, and
70% are finished in Company owned facilities. Virtually all of the remaining
jeanswear is assembled and finished through the Company's network of Mexican
contractors developed over the last ten years. In fiscal 1997, approximately 40%
of Polo Jeans Products consisting of jeanswear and casual bottoms were made at
Company owned and Mexican contract facilities. All other Polo Jeans
non-jeanswear products are sourced from a broad range of domestic and
international manufacturers.
RAW MATERIAL. The Company's primary raw material in its jeanswear business
is denim, of which approximately 95% is purchased from leading domestic mills,
including Swift Denim USA, Cone Mills Corp. and Thomaston Mills Inc. Denim
purchase commitments and prices are negotiated on a quarterly or semi-annual
basis. The Company has no long term supply contracts with any of its suppliers,
but has been conducting business with its primary denim suppliers for more than
five years. The Company performs its own extensive testing of denim, cotton
twill and other fabrics to insure consistency and durability. Most non-jeanswear
products are sourced on a finished product basis with raw materials furnished by
the suppliers.
PRE-PRODUCTION, CUTTING, ASSEMBLY AND FINISHING OF JEANSWEAR AND CASUAL
BOTTOMS. Beginning with the pre-production stage of jeanswear sample
development, the Company's in-house manufacturing staff is able to quickly
develop jeanswear and casual bottoms styles that satisfy customer specifications
and can be produced efficiently to meet customer pricing guidelines. Quality
assurance is built into all phases of the Company's jeanswear manufacturing
process, with the careful monitoring of cutting, assembly and finishing by
inspectors and auditors.
The Company utilizes a sophisticated computer aided design ("CAD") marking
system to maximize fabric utilization for jeanswear and casual bottoms
production. All of the fabric is warehoused and most of the cutting is done in a
Company owned 100,000 square foot facility in El Paso, Texas.
The six Company owned assembly and finishing facilities, comprising
approximately 380,000 square feet (five in Mexico and one in El Paso, Texas),
assemble approximately 200,000 jeans and casual bottoms and finish approximately
350,000 jeans and casual bottoms per week. These modern facilities, when
combined with the Company's network of Mexican contractors, provide significant
capacity for the quick turnaround of basic jeans and casual bottoms and are able
to rapidly execute small tests and large production runs of fashion designs and
finishes. Over the last ten years, the Company has moved substantially all of
its jeanswear assembly and most of its finishing from the United States to
Mexico, maintaining excellent quality and timely delivery while significantly
reducing manufacturing costs. In addition, the Company plans to shift cutting
and portions of its other operations from the United States to Mexico to further
reduce manufacturing costs.
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SOURCING OF NON-JEANSWEAR POLO JEANS PRODUCTS. While virtually all
jeanswear and most casual bottoms are produced in Company owned or contract
facilities in Mexico, the remaining Polo Jeans Products are sourced from a
variety of domestic and foreign manufacturers using sourcing agents and direct
representatives. The Polo Jeans division has developed an international and
domestic sourcing network of core vendors to ensure timely delivery, superior
quality and competitive pricing. In certain cases, the Company uses the same
agent and suppliers as Polo Ralph Lauren.
REPLENISHMENT INVENTORY MANAGEMENT. The Company's Replenishment Program is
a vital component of the Polo Jeans and Sun Division businesses. Approximately
40% of both the Polo Jeans business and the Sun Division business is generated
through such inventory Replenishment Program. A staff of retail analysts and
production coordinators monitor and proactively respond to retail sales trends
by SKU for each program to maximize sales and minimize inventory risks.
WAREHOUSING AND DISTRIBUTION. All Polo Jeans Products are distributed
through a 160,000 square foot leased modern warehouse facility in El Paso,
Texas. In 1997, this warehouse implemented a state-of-the-art computerized
warehouse management system to efficiently control inventory by SKU from receipt
into the warehouse through shipping and billing. In conjunction with this
system, the Company has developed a scan pack auditing procedure to ensure the
correct merchandise is being shipped.
All Sun Division Products are distributed through the Company owned 80,000
square foot modern warehouse facility also in El Paso. This facility is
implementing the same computerized warehouse management system as in the Polo
Jeans warehouse.
LICENSE AGREEMENTS
POLO JEANS COMPANY LICENSE. In August 1995, the Company entered into design
and license agreements with Polo Ralph Lauren (together and each as amended, the
"Polo Jeans License"). Under the Polo Jeans License, Polo Ralph Lauren granted
the Company an exclusive, long-term license for the design, manufacture and sale
of men's and women's jeanswear, sportswear, and related apparel under the Polo
Jeans trademarks in the United States and its territories. The Polo Jeans
License requires the Company to pay certain royalties to Polo Ralph Lauren and
to make certain expenditures for advertising, in each case based on the
Company's net sales of Polo Jeans Products. In addition, the Polo Jeans License
requires that certain activities of the Company under the Polo Jeans License,
including, among others, design, advertising and distribution of Polo Jeans
Products, are subject to review and approval by Polo Ralph Lauren.
The initial term of the Polo Jeans License expires on December 31, 2000 and
may be renewed by the Company in five year increments for up to 30 additional
years if certain minimum sales requirements are met. Beginning in the first
renewal term, the Company is required to make certain minimum royalty payments.
Renewal of the Polo Jeans License by the Company after 2010 requires a one-time
payment of $25.0 million or, at the Company's option, a transfer of a 20.0%
interest in its Polo Jeans business to Polo Ralph Lauren, with no fees required
for subsequent renewals. Polo Ralph Lauren has an option exercisable on or
before June 1, 2010, to purchase the Company's Polo Jeans business at the end of
2010 for 80.0% of the then fair value of the business as a going concern,
assuming the continuation of the Polo Jeans License through December 31, 2030,
payable in cash. The Company's Polo Jeans Products sales during fiscal 1997
exceeded the minimum contractual threshold for renewal through 2009, however,
such threshold must also be met at time of renewal. There can be no assurance
that the Company will continue to meet or exceed the minimum contractual
threshold.
The Company's ability to produce and distribute Polo Jeans Products is
dependent upon the retention of the Polo Jeans License, which contains
provisions that, under certain circumstances, could permit Polo Ralph Lauren to
terminate the Polo Jeans License. Such provisions include, among others, (i) the
failure to meet specified minimum levels of annual sales for the licensed
products after the initial term; (ii) a default in the payment of certain
amounts payable under the Polo Jeans License, such as
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royalties, annual advertising and shop expenditures; and (iii) a transfer of
substantially all of the Company's property or a change in control of the
Company; provided, however, that a change in control of the Company will be
deemed not to have occurred if an applicable change in ownership is the result
of (a) public offerings or sales to underwriters of capital stock of the Company
in anticipation thereof by the Company or any successor thereto or (b) any
acquisition of the Company through merger, purchase of assets or otherwise
effected in whole or part by issuance or reissuance of shares of capital stock,
if Mr. Rothfeld or members of his immediate family, or his estate, or trust
created for the benefit of such persons, will control, directly or indirectly,
and in the aggregate, a controlling interest in the Company and, in any event,
in excess of 25% of the issued and outstanding voting and equity interests in
such entity. The Offering will not result in a change of control under the Polo
Jeans License.
Pursuant to the terms of the Polo Jeans License, the Company is prohibited,
during the term of the license, from selling, advertising or promoting the sale
of any items which are comparable to and/or competitive with the Polo Jeans
Products and which bear the name of any fashion apparel designer (other than
Todd Oldham or Robert Stock), subject to certain limited exceptions. The Polo
Jeans License specifically prohibits the Company from, directly or indirectly,
acting as a manufacturer, contractor or supplier of or for merchandise
comparable or competitive with the Polo Jeans Products bearing or associated
with certain specified designer and brand names.
Pursuant to the terms of the Polo Jeans License, Polo Ralph Lauren is
prohibited from the use of or licensing others to use the "Polo" or "Ralph
Lauren" name in connection with men's or women's denim jean pants or shorts
(excluding the "Chaps" trademark), provided, however, that (i) Polo Ralph Lauren
may include such products in its "Polo" lines so long as the wholesale prices
for such products are at least 40% higher than the wholesale prices for
comparable Polo Jeans Products and (ii) Polo Ralph Lauren may include such
products in its "RRL" jeanswear line at price points that are higher than the
suggested retail, prices for comparable Polo Jeans Products.
TODD OLDHAM LICENSE. In March 1995, the Company entered into an exclusive
license agreement with L7 Designs, Inc., the owner of the Todd Oldham trademark
(as amended, the "Todd Oldham License") for the design, merchandising,
manufacturing and sale of men's and women's jeanswear, casual bottoms and tops
under the Todd Oldham Jeans name (or other Todd Oldham name identification
selected by L7 Designs, Inc.). Although the Todd Oldham License is scheduled to
expire on December 31, 1999, it is renewable at the option of the Company for a
series of two-year periods for a total of forty years in the aggregate, if
certain minimum sales requirements are met or minimum royalty payments are made.
The Company is the exclusive, worldwide licensee of Todd Oldham Jeans products.
The Todd Oldham License contains provisions that, under certain
circumstances, could permit the licensor to terminate the Todd Oldham License.
Such provisions include, among other things, (i) a default in the payment of
certain amounts payable under the Todd Oldham License that continues beyond the
specified grace period; and (ii) the failure to comply with the covenants
contained in the Todd Oldham License. The Company does not believe that the loss
or termination of the Todd Oldham License, or the decline in popularity of Todd
Oldham Jeans products, would have a material adverse effect on the Company's
financial condition.
MANAGEMENT INFORMATION SYSTEMS & TECHNOLOGY
Over the past three years, the Company has invested over $5.0 million in
upgrading its management information systems to support the rapid growth of the
Polo Jeans business. The Company has implemented and continues to add systems to
be more proactive to customer needs, to improve internal communication flow, to
increase process efficiency, and to support management decisions.
The Company's systems provide, among other things, comprehensive order
processing, production, accounting and management information for the marketing,
sales, manufacturing, and distribution
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functions of the Company. The Company has developed advanced software programs
to track customer orders, manufacturing schedules and sales. The Company also
utilizes an advanced computerized warehouse management system, as well as other
warehouse management technology, to efficiently manage inventory from receipt
into the warehouses through shipping and billing.
The Company believes that its management information system is Year 2000
compliant or will be so after giving effect to upgrades or replacements in
connection with previously planned changes to its information systems prior to
the need to comply with Year 2000 requirements.
BACKLOG
A large portion of sales are booked in advance of each season, and it is
therefore normal for the Company to maintain a significant order backlog. As of
March 31, 1998, the Company had booked orders amounting to approximately $204
million compared with $140 million at March 31, 1997. Automatic replenishment
orders, which are generally shipped within one week of receipt of order and
therefore excluded from the order backlog, have also increased for both the Polo
Jeans Products and Sun Division Products. Accordingly, a comparison of backlog
orders from period to period is not necessarily meaningful and may not be
indicative of eventual actual shipments.
FACTORING OF ACCOUNTS RECEIVABLE
The Company factors approximately 25% of its trade receivables with three
commercial financial companies. These receivables are factored without recourse
as to credit risk, but with recourse for any claims by customers for adjustment
in the normal course of business relating to pricing errors, shortages, and
damaged goods. Upon collection of the receivables or 120 days after payment is
due, the factors forward the related payment to the Company. Under this
arrangement, the Company is charged a factoring commission ranging from 0.50% to
0.75% of factored sales. The factor approves the credit for those orders
submitted by the Company prior to sale. If the factor disapproves a sale to a
customer and the Company decides to proceed with the sale, the Company bears the
credit risk.
SEASONALITY
Demand for the Company's products and its level of sales fluctuate during
the course of the calendar year as a result of seasonal buying trends. An
increase in sales of jeans and casual apparel generally occurs during the Fall
and Holiday selling seasons (the Company's third and fourth quarter,
respectively). Accordingly, the Company's operating results will fluctuate from
quarter to quarter.
COMPETITION
The apparel industry is highly competitive and the Company competes with
numerous manufacturers of jeanswear, sportswear and casual apparel, including
both brand name and private label producers. The Company's Polo Jeans Products
compete with a number of designer product lines, including Calvin Klein, Tommy
Hilfiger, Donna Karan and Guess?, as well as certain brand name products,
including those manufactured by Levi Strauss & Co. and VF Corporation. The
Company's Sun Division Products compete with products manufactured by numerous
brand name and private label producers, as well as retailers that have
established, or may establish, internal product development and sourcing
capabilities. Certain of the Company's competitors have greater financial,
manufacturing and other resources than the Company. Although factors may differ
by product line, the Company believes that it competes primarily on the basis of
brand image, quality of design and workmanship, price, advertising and its
ability to respond quickly to the needs of retail customers. Any increased
competition could result in reduced sales or prices, or both, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
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GOVERNMENT REGULATION
Apparel products are subject to regulation by the Federal Trade Commission
in the United States. Regulations relate principally to the labeling of the
Company's products. The Company's import operations are also subject to
constraints imposed by bilateral textile agreements between the United States
and a number of foreign countries. These agreements which have been negotiated
bilaterally either under the framework established by the Arrangement Regarding
International Trade in Textiles, known as the Multifiber Agreement, or other
applicable statutes, impose quotas on the amounts and types of merchandise which
may be imported into the United States from these countries. These agreements
also allow the signatories to adjust the quantity of imports for categories of
merchandise that, under the terms of the agreements, are not currently subject
to specific limits. The Company's imported apparel products are also subject to
United States customs duties which are included in the cost of the merchandise.
ENVIRONMENTAL LAWS
The Company's manufacturing process, particularly the finishing process,
uses laundering agents, softeners, dyes and other chemicals. Compliance with
federal, state and local and foreign laws enacted for the protection of the
environment has to date had no material effect upon the Company's capital
expenditures, earnings, or competitive position. Although the Company does not
anticipate any material adverse effects in the future based on the nature of its
operations and the thrust of such laws, no assurance can be given that such
laws, or any future laws enacted for the protection of the environment, will not
have a material adverse effect on the Company.
EMPLOYEES
As of March 31, 1998, the Company employed approximately 5,000 people, of
which approximately 3,480 are employed in Mexico. Of the 1,526 United States
employees, approximately 1,170 are hourly employees and 350 are salaried
employees. 107 of the United States employees, all of whom work in the Company's
cutting facility in El Paso, are covered by a collective bargaining agreement
with Local 360, Union of Needletrades, Industrial and Textile Employees,
AFL-CIO, which expires December 31, 1999. Under this Agreement the Company can
relocate portions or all of its cutting operations to Mexico. Management
believes its employee relations are satisfactory.
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PROPERTY
The Company's headquarters are located at 11201 Armour Drive, El Paso,
Texas. An executive office and the design and sales office for the Sun Division
Products is located at 111 West 40th Street, New York, New York. The Polo Jeans
division office and showroom is currently located at 595 Madison Avenue, New
York, New York and is in the process of relocating to 115 Fifth Avenue, New
York, New York. The general location, use and approximate size of the Company's
principal owned and leased properties are set forth below:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION OWNED/LEASED USE SQUARE FEET
- ----------------------------- ----------------- ----------------------------- -------------
<S> <C> <C> <C>
El Paso, Texas owned corporate headquarters and 50,000
pre-production facility
El Paso, Texas owned warehousing and cutting 100,000
El Paso, Texas owned finishing 170,000
El Paso, Texas owned warehousing and distribution 80,000
El Paso, Texas leased warehousing and distribution 160,000
New York, New York leased executive office, design and 11,500
sales office for Sun Division
Products
New York, New York (1) leased Polo Jeans division office 43,000
and showroom
New York, New York leased Todd Oldham Jeans division 2,900
office and showroom
Durango, Mexico owned finishing 86,000
Durango, Mexico owned assembly 38,600
Durango, Mexico owned assembly 34,500
Durango, Mexico owned assembly 34,500
Durango, Mexico owned finishing 16,000
</TABLE>
- ------------------------
(1) The Company expects to occupy this space by the end of the third quarter of
1998. The lease for the current Polo Jeans division office and showroom,
which expires in October 2006, has been assigned for the remainder of the
term.
LEGAL MATTERS
The Company is involved from time to time in various routine legal and
administrative proceedings and threatened legal and administrative proceedings
incidental to its business. In the opinion of the Company's management, the
resolution of such matters will not have a material adverse effect on its
business, financial condition or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the directors and executive officers of the Company upon
completion of the Offering and their respective ages and positions as of March
31, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Eric A. Rothfeld.......................... 46 Chairman, President and Chief Executive
Officer
Mindy F. Grossman......................... 40 Executive Vice President; President and
Chief Executive Officer, Polo Jeans
Division
Dona Fisher............................... 45 Chief Financial Officer and Executive Vice
President of Operations and Finance
Lainey Goldberg........................... 46 President, Sun Division
Kenneth C. Paulk.......................... 48 Executive Vice President of Manufacturing,
Sun Division
Daniel S. O'Connell....................... 44 Director
Sander M. Levy............................ 36 Director
Daniel H. Golden.......................... 46 Director
</TABLE>
The following is a biographical summary of the experience of the directors,
executive officers and certain key senior officers of the Company:
DIRECTORS AND EXECUTIVE OFFICERS
ERIC A. ROTHFELD has been President of the Company since 1986, and Chairman
and Chief Executive Officer since 1997. From 1983 through 1986, Mr. Rothfeld was
the Vice President of the Company in charge of all operations.
MINDY F. GROSSMAN has been the President and Chief Executive Officer of Polo
Jeans Division since 1995 and an Executive Vice President of the Company since
1997. Before joining the Company in 1995, Ms. Grossman was Vice President of New
Business Development at Polo Ralph Lauren L.P. From 1991 to 1994, Ms. Grossman
was employed by Warnaco, Inc. where she served as President of Chaps by Ralph
Lauren and Senior Vice President of Warnaco Menswear.
DONA FISHER has been Chief Financial Officer and Executive Vice President of
Operations and Finance since September 1996. Prior to joining the Company, Ms.
Fisher was the Senior Vice President of Worldwide Operations, Finance and
Systems for The Franklin Mint, where she worked for 14 years.
LAINEY GOLDBERG has been the President of the Sun Division since 1997. Prior
to that, Ms. Goldberg was Senior Vice President of Sales and Merchandising since
1994. Ms. Goldberg was employed by Knight Industries from 1989 to 1994.
KENNETH C. PAULK has been the Executive Vice President of Manufacturing, Sun
Division with full responsibility for jeanswear and casual bottoms manufacturing
and product development since 1996. Prior to joining the Company, Mr. Paulk was
Executive Vice President of operations at Hat Brands, Inc. from 1993 to 1996,
and Senior Vice President of Operations at VF Corporation's Marith & Francois
Girbaud division, from 1992 to 1993. Prior thereto, Mr. Paulk was employed by
Levi Straus & Co. for 13 years and Guess? for two years.
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<PAGE>
DANIEL S. O'CONNELL is the Chief Executive Officer and founder of Vestar
Capital Partners. Mr. O'Connell is a director of Advanced Organics, Inc., Aearo
Corporation, Clark-Schwebel, Inc., Cluett American Corp., Pinnacle Automation
Inc., Reid Plastic Holdings, Inc., Remington Products Company and
Russell-Stanley Holdings, Inc., all companies in which Vestar Capital Partners
or its affiliates have a significant equity interest.
SANDER M. LEVY is a Managing Director of Vestar Capital Partners and was a
founding partner of Vestar Capital Partners at its inception in 1988. Mr. Levy
is a director of Clark-Schwebel, Inc. and Cluett American Corp., companies in
which Vestar Capital Partners or its affiliates have a significant equity
interest.
DANIEL H. GOLDEN is a senior partner in the creditors' rights and insolvency
department at the law firm of Stroock & Stroock & Lavan LLP in New York City and
has been with the law firm since 1980.
SENIOR OFFICERS
CYNTHIA M. ROE, 35, has been the Chief Operating Officer of Polo Jeans
Division since January 1997. Previously, Ms. Roe was Executive Vice President of
the Sun Division and has been with the Company since 1989.
ALFREDO ESPINOZA, 44, is Executive Vice President of Mexican Operations and
has been with the Company since 1988.
FILEMON MALDONADO, 55, is Executive Vice President of Finishing Operations
and has been with the Company since 1987.
TAMI J. FERSKO, 27, has been the Vice President, Operations and Finance of
the Company since 1997. Before joining the Company in 1997, Ms. Fersko was Vice
President of the textile and apparel group at Fleet Bank.
ROSEMARY MYERS, 50, has been Vice President of Information Systems since
1996. Prior to joining the Company, Ms. Myers was Assistant Vice President of
Information Systems for MBNA America in 1996 and Director of Information Systems
for The Franklin Mint, where she worked for more than 10 years.
BOARD OF DIRECTORS
Upon consummation of this Offering the Company intends to increase the size
of the Board of Directors to seven members, two of whom will be neither officers
nor employees of the Company or Vestar.
Upon consummation of the Offering, the Company will have three classes of
directors elected for staggered terms of three years. The initial terms of each
class expire at the annual meeting of stockholders in 1999 (Class I), 2000
(Class II) and 2001 (Class III), respectively. will be Class I
directors, will be Class II directors and
will be Class III directors. Each director holds office until his or her
successor is duly elected and qualified or until his or her resignation or
removal, if earlier.
The Texas Business Corporation Act provides that a Company may indemnify its
directors and officers as to certain liabilities. The Company's Certificate of
Incorporation and By-Laws provide for the indemnification of its directors and
officers to the fullest extent permitted by law. The Company has directors and
officers liability insurance. The effect of such provisions is to indemnify, to
the fullest extent permitted by law, the directors and officers of the Company
against all costs, expenses and liabilities incurred by them in connection with
any action, suit or proceeding in which they are involved by reason of their
affiliation with the Company.
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<PAGE>
COMPENSATION OF DIRECTORS
Each non-employee director will receive an annual retainer of $ and
will be eligible to receive stock option grants under the Company's 1998
Non-Employee Director Option Plan. Non-employee directors also will be entitled
to receive $ for each board or committee meeting attended. Directors who
are employees of the Company or Vestar will receive no additional compensation
for service as a director.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors intends to establish an Audit Committee and a
Compensation Committee. The Audit Committee will be responsible for recommending
to the Board of Directors the engagement of the independent auditors of the
Company and reviewing with the independent auditors the scope and results of the
audits, the internal accounting controls of the Company, audit practices and the
professional services furnished by the independent auditors. The Compensation
Committee will be responsible for reviewing and approving all compensation
arrangements for officers of the Company, and will also be responsible for
administering the 1998 Stock Incentive Plan.
EXECUTIVE COMPENSATION
The following table sets forth, for the year ended December 31, 1997, the
cash compensation earned by the Company's Chief Executive Officer and its four
most highly-paid executive officers (collectively, the "Named Executive
Officers") for services rendered in all capacities in which they served during
such year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------
<S> <C> <C> <C>
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
- ----------------------------------------------------------------------------- --------- ----------- -------------
Eric A. Rothfeld............................................................. 1997 $ 937,500 $ --
Chairman, President and Chief Executive Officer
Mindy F. Grossman............................................................ 1997 $ 421,600 $ 1,277,383
Executive Vice President; President and Chief Executive Officer, Polo Jeans
Division
Lainey Goldberg.............................................................. 1997 $ 500,000 $ 100,000
President, Sun Division
Dona Fisher.................................................................. 1997 $ 350,000 $ 200,000
Chief Financial Officer and Executive Vice President of Operations and
Finance
Kenneth C. Paulk............................................................. 1997 $ 250,000 $ 25,000
Executive Vice President of Manufacturing
</TABLE>
EXECUTIVE COMPENSATION AGREEMENTS
ERIC A. ROTHFELD'S EMPLOYMENT AGREEMENT
The Company has entered into an agreement with Eric A. Rothfeld, dated
September 26, 1997 (the "Rothfeld Agreement"), providing for Mr. Rothfeld's
employment as Chairman and Chief Executive Officer of the Company until December
31, 2001 (the "Employment Period").
The Rothfeld Agreement provides for an annual base salary of $1,500,000
(subject to annual increases based upon certain Consumer Price Indices) and
annual bonus payments based upon
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<PAGE>
achievement of certain target EBITDA (as described in the Rothfeld Agreement).
The Rothfeld Agreement further provides that, during the Employment Period, Mr.
Rothfeld is entitled to participate in the welfare and benefit plans of the
Company (including life, medical and dental insurance), to receive split dollar
life insurance policies (to the extent the premiums do not exceed $25,000
annually) and to receive certain other perquisites.
Mr. Rothfeld's employment may be terminated under the Rothfeld Agreement by
the Company for Cause (as defined in the Rothfeld Agreement) or by Mr. Rothfeld
for Good Reason (as defined in the Rothfeld Agreement). In the event Mr.
Rothfeld's employment is terminated by the Company for Cause or by Mr. Rothfeld
(other than for Good Reason), then Mr. Rothfeld is entitled to receive all
compensation and benefits payable to him through the date of termination under
the terms of the Company's compensation and benefits plans, programs or
arrangements. If Mr. Rothfeld's employment is terminated by the Company other
than for Cause or by Mr. Rothfeld for Good Reason, then Mr. Rothfeld is entitled
to receive (i) his full salary through the date of termination, together will
all compensation and benefits payable to him through the date of termination
under the terms of the Company's compensation and benefits plans, programs or
arrangements; and (ii) his base salary with respect to a period ("Non-Compete
Period"), the length of which such Non-Compete Period is to be determined by the
Company at the time of the termination of Mr. Rothfeld's employment, but may not
be longer than the remainder of the Employment Period. A lump sum payment of
such base salary with respect to each six-month period of the Non-Compete Period
will be made by no later than the first day of such six-month period. During the
Non-Compete Period, Mr. Rothfeld will also continue to participate in all
employee welfare benefit plans and programs in which he was entitled to
participate prior to such termination of his employment and the Company will
continue to pay the premiums on his split dollar life insurance policies.
Pursuant to the Rothfeld Agreement, (A) Mr. Rothfeld may not compete with
the Company while he is employed with the Company and (B) for the period
commencing on the date of the termination of his employment and ending at the
end of (i) the Non-Compete Period (following a termination of Mr. Rothfeld's
employment by the Company without Cause or by him for Good Reason); or (ii) the
Employment Period (following any other termination of Mr. Rothfeld's
employment), Mr. Rothfeld will not, whether as an officer, director, owner,
employee, partner, investor, agent, shareholder, consultant who receives
remuneration of any kind, or advisor who receives remuneration of any kind,
directly or indirectly, engage in any of the businesses then actually conducted
by the Company and its affiliates. Notwithstanding anything to the contrary, Mr.
Rothfeld is not prohibited from holding, as a passive owner, less than 5% of the
outstanding shares of, or any other equity interest in, an entity engaged in a
business which is the same as the businesses then actually conducted by the
Company and its affiliates or any segment thereof.
MINDY F. GROSSMAN'S EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with Mindy F. Grossman,
dated January 1, 1996 (the "Grossman Agreement"), providing for Ms. Grossman's
employment as President and Chief Executive Officer of the Polo Jeans Business
until December 31, 1998 (the "Initial Term"). The Company and Ms. Grossman are
currently negotiating the terms of a new employment agreement and expect to
enter into such new agreement prior to the end of the Initial Term.
The Grossman Agreement provides for an annual base salary of $421,600 and
annual bonuses based upon the net sales of certain product and the pre-tax net
income from the Polo Jeans Business.
If Ms. Grossman's employment is terminated by the Company without Cause (as
defined in the Grossman Agreement) or by Ms. Grossman for Good Reason (as
defined in the Grossman Agreement), (A) the Company will (i) pay to her $421,600
in twelve equal monthly installments, (ii) pay to her the amount of any annual
bonus that would have been payable in respect of the year in which her
employment was terminated, pro rated for the portion of the year before such
termination and
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<PAGE>
(iii) reimburse her for up to $10,000 of expenses incurred in connection with
obtaining outplacement services and (B) Ms. Grossman will, for a period of one
year following such termination, continue to participate in all employee welfare
benefit plans and programs in which she was entitled to participate prior to
such termination.
During Ms. Grossman's employment and for a period of one year thereafter,
Ms. Grossman is subject to certain non-competition, non-solicitation and
non-disclosure provisions set forth in the Grossman Agreement.
DONA FISHER'S EMPLOYMENT AGREEMENT
The Company has entered an agreement with Dona Fisher, dated September 5,
1996 (the "Fisher Agreement"), providing for Ms. Fisher's employment with the
Company until December 31, 1999 (the "Employment Term").
The Fisher Agreement provides for an annual base salary of $350,000 and
annual bonuses up to $300,000, $400,000 and $500,000 for each of 1997, 1998 and
1999 (assuming certain targets are satisfied). Pursuant to the terms of the
Fisher Agreement, Ms. Fisher received a guaranteed minimum bonus in respect of
1997, in an amount equal to $200,000 (which minimum bonus was paid in four equal
quarterly installments commencing April 1, 1997). Ms. Fisher also received a
signing bonus of $75,000 and is entitled to participate in all employee benefit
welfare plans of the Company during the Employment Term.
If the Company terminates Ms. Fisher's employment without good cause, the
Company will pay to Ms. Fisher a lump sum cash payment equal to the sum of (i)
six months salary and (ii) the amount of any annual bonus that would have been
payable in respect of the year in which her employment was terminated, pro rated
for the portion of the year before such termination.
1998 STOCK INCENTIVE PLAN
The Company, with the approval of its shareholders, has adopted the Sun
Apparel, Inc. 1998 Stock Incentive Plan (the "Plan"). A maximum of shares
of Common Stock has been reserved for issuance under the Plan, generally subject
to equitable adjustment upon the occurrence of any stock dividend or other
distribution, recapitalization, stock split, reverse split, reorganization,
merger, consolidation, spin-off, combination, repurchase, or share exchange, or
other similar corporate transaction or event.
Pursuant to the Plan, there may be granted stock options (including
"incentive stock options" and "nonqualified stock options"), stock appreciation
rights (either in connection with stock options granted under the Plan or
independently of options), restricted stock, restricted stock units, dividend
equivalents and other stock- or cash-based awards ("Awards").
The Plan will be administered by a committee established by the Board of
Directors, consisting of two or more persons each of whom shall be an "outside
director" within the meaning of Section 162(m) and a "nonemployee director"
within the meaning of Rule 16b-3 (the "Committee"). The Committee shall have
full authority, subject to the provisions of the Plan, to, among other things,
determine the persons to whom Awards will be granted, determine the terms and
conditions (including any applicable performance criteria) of such Awards, and
prescribe, amend and rescind rules and regulations relating to the Plan.
Grants of Awards may be made under the Plan to selected employees,
independent contractors and directors of the Company and its present or future
affiliates, in the discretion of the Committee.
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<PAGE>
STOCK OPTIONS AND APPRECIATION RIGHTS
Stock options may be either "incentive stock options," as such term is
defined in Section 422 of the Code, or nonqualified stock options. The exercise
price of a nonqualified stock option may be above, at or below the fair market
value per share of Common Stock on the date of grant; the exercise price of an
incentive stock option may not be less than the fair market value per share of
Common Stock on the date of grant.
Stock appreciation rights may be granted alone or in tandem with stock
options. A stock appreciation right is a right to be paid an amount equal to the
excess of the fair market value of a share of Common Stock on the date the stock
appreciation right is exercised over either the fair market value of a share of
Common Stock on the date of grant (in case of a free standing stock appreciation
right) or the exercise price of the related stock option (in case of a tandem
stock appreciation right), with payment to be made in cash, Common Stock or
both, as specified in the Award agreement or determined by the Committee.
The maximum number of shares of Common Stock reserved for the grant or
settlement of Awards under the Plan shall be , subject to adjustment. No
more than shares of Common Stock (subject to adjustment) may be awarded in
respect of stock-based awards (including stock options, stock appreciation
rights, restricted stock and restricted stock units) to a single individual over
the term of the Plan. Stock options and stock appreciation rights will be
exercisable at such times and upon such conditions as the Committee may
determine, as reflected in the applicable Award agreement. In addition, all
stock options and stock appreciation rights will become exercisable in the event
of a "change in control" of the Company. The exercise period shall be determined
by the Committee except that, in the case of an incentive stock option, such
exercise period shall not exceed ten (10) years from the date of grant of such
incentive stock option.
Except to the extent that the applicable Award agreement provides otherwise,
in the event of the death, disability or retirement of a participant, all stock
options and stock appreciation rights will become fully vested and exercisable
and will remain exercisable until the earlier of one year from the date of such
death, disability or retirement and the expiration of such stock options or
stock appreciation rights. Except to the extent that the applicable Award
agreement provides otherwise, in the event that the employment of a participant
terminates other than for cause, all stock options and stock appreciation rights
then held (to the extent then exercisable) will remain exercisable until the
earlier of three months from the date of such termination and the expiration of
such stock options or stock appreciation rights.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS.
A restricted stock award is an award of Common Stock ("Restricted Stock")
and a restricted stock unit award is an award of the right to receive cash or
Common Stock ("Restricted Stock Unit") at a future date, in each case, that is
subject to such restrictions on transferability and other restrictions, if any,
as the Committee may impose at the date of grant or thereafter, which
restrictions may lapse separately or in combination at such times, under such
circumstances (including without limitation a specified period of employment or
the satisfaction of preestablished performance goals), in such installments, or
otherwise, as the Committee may determine. Except to the extent restricted under
the Award agreement relating to the Restricted Stock, a participant granted
Restricted Stock shall have all of the rights of a stockholder, including
without limitation the right to vote and the right to receive dividends thereon.
All restrictions affecting the awarded shares or units will lapse in the event
of a "change in control" of the Company.
Upon termination of employment or termination of the independent contractor
relationship during the applicable restriction period, Restricted Stock,
Restricted Stock Units and any accrued but unpaid dividends or Dividend
Equivalents (as defined below) that are then subject to restrictions will be
forfeited
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<PAGE>
unless the Committee provides that restrictions or forfeiture conditions
relating to Restricted Stock will be waived.
OTHER AWARDS. The Committee may grant to a participant the right to receive
cash, Common Stock equal in value to dividends paid with respect to a specified
number of shares of Common Stock ("Dividend Equivalents"). Dividend Equivalents
may be awarded on a free-standing basis or in connection with another Award, and
may be paid currently or on a deferred basis. The Committee is also authorized
to grant Common Stock as a bonus or to grant other Awards in lieu of Company
commitments to pay cash under other plans or compensatory arrangements, on such
terms as shall be determined by the Committee.
TRANSFERABILITY. Except as otherwise determined by the Committee, awards
granted under the Plan may not be transferred other than by will or by the laws
of descent and distribution.
AMENDMENT AND TERMINATION. The Plan may, at any time and from time to time,
be altered, amended, suspended, or terminated by the Board of Directors, in
whole or in part. In addition, no amendment may be made which adversely affects
any of the rights of a participant under any Award theretofore granted, without
such participant's consent.
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<PAGE>
CERTAIN TRANSACTIONS
SET FORTH BELOW IS A SUMMARY OF CERTAIN AGREEMENTS AMONG THE COMPANY, VESTAR
AND ITS AFFILIATES, MR. ROTHFELD AND THE ROTHFELD FAMILY TRUST. THE SUMMARY DOES
NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
AGREEMENTS, COPIES OF WHICH HAVE BEEN FILED AS EXHIBITS TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
INVESTMENT AGREEMENT
In connection with the Recapitalization and the Company's repurchase of the
Former Partner Interests, Mr. Rothfeld entered into an Investment Agreement,
dated as of September 26, 1997, with Vestar and the Trustees of the Rothfeld
Family Trust, pursuant to which Vestar invested $75.0 million in the Company as
part of the Recapitalization. As part of the Recapitalization Vestar received
(i) a 40.0% interest in the outstanding common stock of the Company; (ii)
215,000 shares of the Company's 13% Series A Cumulative Participating Preferred
Stock (the "Vestar Preferred Stock"); and (iii) subordinated notes in the
aggregate principal amount of $30.0 million. As part of the Recapitalization,
Mr. Rothfeld and the Rothfeld Family Trust contributed to the Company a portion
of their interests in the Company and all of their interests in the Affiliated
Companies and received (i) additional shares of the Company's common stock
(increasing their collective ownership interest in the Company to 60.0% of the
Company's then outstanding common stock); (ii) 201,065 shares of the Company's
13% Series B Cumulative Participating Preferred Stock and 8,935 shares of the
Company's 13% Series C Cumulative Participating Preferred Stock, respectively
(the "Rothfeld Preferred Stock", and together with the Vestar Preferred Stock
the "Preferred Stock"); and (iii) cash distributions totaling approximately $30
million. In addition, approximately $130,000 in debt was repaid to Mr. Rothfeld
by one of the Affiliated Companies. As a result of the acquisition of the Former
Partner Interests and the consummation of the Recapitalization, each of the
Affiliated Companies became direct or indirect wholly owned subsidiaries of the
Company. Prior to the Recapitalization, each of the Company and the Affiliated
Companies was effectively owned one-third by Eric Rothfeld and the Rothfeld
Family Trust and two-thirds by the Former Partner. See "Company History, the
Recapitalization and Prior S Corporation Status".
In connection with the Recapitalization, the Company issued 215,000 shares
of the Company's 13% Series A Cumulative Participating Preferred Stock, par
value $1.00 per share, to Vestar, 201,065 shares of the Company's 13% Series B
Cumulative Participating Preferred Stock, and 8,935 shares of the Company's 13%
Series C Cumulative Participating Preferred Stock, both with a $1.00 per share
par value and a liquidation preference of $200 per share, to Mr. Rothfeld and
the Rothfeld Family Trust, respectively. In addition to the 13% quarterly
dividend, the shares of the Vestar Preferred Stock are entitled to receive on a
pro rata basis, when, as and if declared by the Board out of funds legally
available for the purpose, 20.0% of the amount of any cash or non-cash dividends
declared and paid on the shares of Common Stock. The shares of the Rothfeld
Preferred Stock are entitled to receive on a pro rata basis 30.0% of the amount
of any cash or non-cash dividends declared and paid on the shares of Common
Stock. Upon consummation of this Offering, the Preferred Stock will be exchanged
for shares of Common Stock.
STOCKHOLDERS' AGREEMENT
Concurrently with the execution of the Investment Agreement, the Company,
Mr. Rothfeld, Vestar and the Trustees of the Rothfeld Family Trust entered into
a Stockholders' Agreement, dated as of September 26, 1997 (the "Stockholders'
Agreement"), to govern the relationship among Mr. Rothfeld, Vestar and the
Rothfeld Family Trust (the "Stockholders") as shareholders of the Company. Prior
to the consummation of the Offering, the Stockholders' Agreement will be amended
in certain respects. The following summary is of the Stockholders' Agreement as
it is proposed to be amended prior to the consummation of this Offering.
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BOARD COMPOSITION. The Stockholders' Agreement provides that the
Stockholders will vote all of their voting securities of the Company in favor of
a Board of Directors consisting of (i) five designees of Mr. Rothfeld, two of
whom will be "independent directors" (as defined by the rules of the Nasdaq
National Market) and (ii) two designees of Vestar. Upon notice by any party that
it desires to remove a director designated by it, each Stockholder will be
required to vote all of its voting securities in favor of the removal of such
director. The Stockholders' Agreement also provides that Mr. Rothfeld and Vestar
will be entitled to representation on committees of the Board of Directors
proportionate with their representation on the Board.
VESTAR APPROVAL REQUIREMENT FOR CERTAIN ACTIONS. The Stockholders'
Agreement provides that the approval of a majority of the entire Board of
Directors, including at least one of Vestar's director designees ("Vestar
Approval"), will be required for the Board of Directors of the Company to
approve and authorize certain significant corporate actions, including: (i)
amending the articles of incorporation or by-laws of the Company or any
subsidiary of the Company; (ii) taking certain actions under applicable
bankruptcy or insolvency laws; (iii) entering into any non-apparel related
business or materially changing the nature of the Company's business by entering
into an apparel related business that the Company was not engaged in on
September 26, 1997; (iv) changing the size or composition of the Board of
Directors or any committee thereof or creating any new committee; (v) changing
accounting policies (except as required by generally accepted accounting
principles); (vi) authorizing, issuing, selling, reclassifying, combining,
splitting or subdividing any debt or equity securities or other capital stock
(or any securities convertible into or exercisable or exchangeable for any class
or series of capital stock) of the Company or any subsidiary of the Company or
incurring any indebtedness (other than debt obligations with a principal amount
of less than $50 million in the aggregate in any given calendar year); (vii)
adopting any stock option, restricted stock or other equity-based compensation
plan (other than plans not involving the issuance of over 5% of the Company's
Common Stock then outstanding) or making any change to Mr. Rothfeld's
compensation or benefits (except as provided in Mr. Rothfeld's employment
agreement); (viii) declaring or paying dividends or redeeming or otherwise
acquiring shares of capital stock of the Company (except for repurchases from
management or dividends on the Company's outstanding preferred stock); (ix)
engaging in certain transactions with affiliates of the Company; (x) acquiring
any assets or businesses (other than acquisitions with an aggregate value in any
calendar year of less than the greater of (A) $50 million and (B) 25% of EBITDA
for the twelve month period ending on the most recently completed fiscal quarter
for which financial statements are available (the "Threshold Amount"); (xi)
entering into any merger, consolidation, business combination, joint venture or
other material corporate transaction involving value in excess of the Threshold
Amount; (xii) selling or transferring 20.0% or more of the Company's voting
securities or any other change in equity ownership triggering the termination
provisions of the Polo Jeans License; (xiii) entering into any material license,
contract or agreement that involves a capital commitment in excess of the
Threshold Amount; (xiv) disposing of any assets, securities or businesses (with
certain exceptions)unless the fair market value of all such dispositions in any
calendar year is less than the Threshold Amount; (xv) hiring a chief executive
officer of the Company other than Mr. Rothfeld; and (xvi) terminating or
materially and adversely modifying the Polo Jeans License.
LIMITATIONS ON TRANSFER. The Stockholders have agreed not to transfer,
prior to September 26, 2002, any securities of the Company held by them (other
than transfers in connection with a public offering of securities or pursuant to
Rule 144 under the Securities Act), without the prior written consent of the
other Stockholders. However, without such prior written consent, the
Stockholders may transfer securities to one or more of their affiliates,
provided that such affiliates agree to be bound by the Stockholders' Agreement
to the same extent as the Stockholder transferring securities.
RIGHT OF OFFER. In the event that any Stockholder desires to transfer
securities of the Company to a third party other than pursuant to an effective
registration statement, the transferring Stockholder will be required to offer
such securities to the other Stockholders at the same price and on the same
terms as
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<PAGE>
proposed to be transferred by the transferring Stockholder. If none of the other
Stockholders accepts such offer, the transferring Stockholder will be permitted
to transfer the securities to the proposed third party transferee at a price
equal to or greater than the price offered to the Stockholders and on the same
terms as were contained in the offer, subject to the limitations on transfer
described in the immediately preceding paragraph.
TAG-ALONG RIGHT. In the event that any Stockholder desires to transfer its
Common Stock or Preferred Stock to a third party, other than to one or more of
its affiliates or in connection with a public offering or pursuant to Rule 144
under the Securities Act, the other Stockholders will have the right (a
"Tag-Along Right") to require the proposed transferee to purchase from each
Stockholder a pro rata portion of the shares of Common Stock proposed to be
transferred at the same price and on the same terms as offered to the
transferring Stockholder. Any sale giving rise to a Tag-Along Right that
triggers (i) a sale of 20% or more of the Common Stock or (ii) the termination
provisions of the Polo Jeans License will require Vestar Approval.
DRAG-ALONG RIGHT. If any Stockholder receives an offer from a third party
to purchase all outstanding shares of Common Stock and Preferred Stock, (other
than shares not being purchased in order to preserve the availability of
recapitalization accounting treatment, up to 20% of the voting securities
outstanding) and such offer is accepted by Mr. Rothfeld or Vestar, then, subject
to Vestar Approval, each Stockholder will be required to transfer all of the
securities owned by it on the same terms as the offer accepted by Mr. Rothfeld
or Vestar.
REGISTRATION RIGHTS. The Company has granted to the Stockholders certain
registration rights with respect to the shares of Common Stock owned by them or
to be acquired by them upon conversion or exercise of securities convertible
into or exercisable for shares of Common Stock. Pursuant to the Stockholders'
Agreement, upon a demand registration request by any Stockholder, the Company is
required to use its best efforts to register the shares requested to be
registered. Each Stockholder has the right to request two demand registrations
of its Common Stock. The Company has also agreed, upon request, to use its
reasonable efforts to register shares of Common Stock held by the Stockholders
in certain other registrations of the Company's securities initiated by the
Company on its own behalf or on behalf of any other stockholder of the Company.
All reasonable out-of-pocket costs and expenses of any registration under the
Stockholders' Agreement, other than underwriting expenses, will be paid by the
Company. The Stockholders' Agreement also contains customary provisions with
respect to, among other things, registration procedures, blackout periods and
indemnification rights in connection with the registration of Common Stock on
behalf of the Stockholders.
TERMINATION. The Stockholders' Agreement will terminate upon the date on
which Vestar or Mr. Rothfeld and the Rothfeld Family Trust beneficially own less
than 12.5% of the shares of Common Stock then outstanding; provided, that (i) if
the reason for such termination is Vestar's beneficial ownership of less than
12.5% of the shares of Common Stock then outstanding, then Mr. Rothfeld and the
Rothfeld Family Trust will continue to have registration rights as set forth
above until they own, in the aggregate, less than 12.5% of the Common Stock then
outstanding and (ii) if the reason for such termination is Mr. Rothfeld's and
the Rothfeld Family Trust's beneficial ownership of less than 12.5% of the
shares of Common Stock then outstanding, then (a) Vestar Approval will continue
to be required for the Company to take the actions described under "--Vestar
Approval Requirement for Certain Actions" until Vestar owns less than 20% of the
Common Stock then outstanding and (b) Vestar will continue to have registration
rights as set forth above until it owns less than 12.5% of the Common Stock then
outstanding.
VESTAR NOTE
In connection with the Recapitalization, the Company issued to Vestar
subordinated notes in the aggregate principal amount of $30.0 million. The
Vestar Note matures in 2007 and accrues interest at a
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rate of 17.9% per annum. The Vestar Note is redeemable, in whole or in part,
subject to escalating prepayment penalties ranging from $15.0 million prior to
September 26, 1998 to $45.0 million after September 26, 2000. It is subject to
mandatory redemption (including applicable prepayment penalties) upon the
occurrence of certain events, including a public offering of equity securities.
Proceeds from this Offering will be used in part to repay approximately $45.0
million due under the Vestar Note. See "Description of Certain
Indebtedness--Vestar Note" and "Use of Proceeds".
MANAGEMENT AGREEMENT
The Company and Vestar Capital Partners entered into a Management Agreement,
dated as of September 26, 1997 (the "Management Agreement"), whereby Vestar
Capital Partners provides advisory and consulting services for the Company in
the areas of corporate management, finance, product strategy, investment,
acquisitions and other matters. Pursuant to the Management Agreement, Vestar
Capital Partners received a transaction fee of $3.3 million upon the closing of
the transactions contemplated by the Investment Agreement and will receive an
annual management fee equal to $0.5 million payable quarterly in advance. In
addition, Vestar Capital Partners is entitled to reimbursement from the Company
for its reasonable out-of-pocket expenses incurred in connection with the
rendered services. The Management Agreement is in effect until 2001 provided
that upon expiration, the Company and Vestar Capital Partners will enter into
good faith negotiations for the extension of the Management Agreement. However,
the Management Agreement will be terminated by the termination of the
Stockholder's Agreement, pursuant to the terms thereof.
ROTHFELD NOTE
The Company issued to Sun Manufacturing, Inc., a company wholly owned by Mr.
Rothfeld, an interest free note in the amount of $1.6 million. The Company will
repay approximately $0.3 million of such note with the net proceeds of this
Offering.
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PRINCIPAL SHAREHOLDERS
The following table sets forth as of March 31, 1998 the total number of
shares of Common Stock of the Company beneficially owned, and the percentage so
owned, by (i) each director of the Company; (ii) each person known to the
Company to be the beneficial owner of more than five percent of the outstanding
Common Stock of the Company; (iii) each of the executive officers listed in the
Summary Compensation Table; and (iv) all directors and officers as a group. The
number of shares owned are those "beneficially owned," as determined under the
rules of the Commission, and such information is not necessarily indicative of
beneficial ownership for any other purpose.
<TABLE>
<CAPTION>
SHARES COMMON STOCK PERCENTAGE OF
BENEFICIALLY OWNED COMMON STOCK
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C>
BEFORE AFTER
NAME OF BENEFICIAL OWNER OFFERING OFFERING
- ----------------------------------------- --------------- -------------------
Eric A. Rothfeld.........................
Vestar Capital Partners III, L.P.(1).....
All directors and executive officers as a
group (8 persons)......................
</TABLE>
- ------------------------
(1) Vestar Capital Partners III, L.P. holds its shares of Common Stock through
Vestar/Sun Holding Company, L.L.C., of which Goldman, Sachs & Co. and Bear,
Stearns & Co. Inc. own 1.7% and 2.7% of the outstanding equity,
respectively. Affiliates of Bear, Stearns & Co. Inc. and NationsBanc
Montgomery Securities LLC have 0.4% and 0.6% interests, respectively, in
Vestar Capital Partners III, L.P., which is the principal investor in
Vestar/Sun Holding Company, L.L.C. See "Underwriting".
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the acquisition, ownership and disposition
of Common Stock by a holder that, for United States federal income tax purposes,
is not a "United States person" (a "Non-United States Holder"). For purposes of
this discussion, a "United States person" means a citizen or resident of the
United States, a corporation or partnership created or organized in the United
States or under the laws of the United States or of any State, an estate whose
income is includible in gross income for United States federal income tax
purposes regardless of its source or a trust whose administration is subject to
the primary supervision of a United States court and which has one or more
United States persons who have the authority to control all substantial
decisions of the trust. This discussion does not address all aspects of United
States federal tax that may be relevant to Non-United States Holders in light of
their specific circumstances. Furthermore, the discussion below is based upon
the provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
and regulations, rulings and judicial decisions thereunder as of the date
hereof, and such authorities may be repealed, revoked or modified so as to
result in United States federal income tax consequences different from those
discussed below. Prospective investors are urged to consult their tax advisors
with respect to the particular tax consequences to them of acquiring, holding
and disposing of Common Stock, as well as any tax consequences which may arise
under the laws of any foreign, state, local or other taxing jurisdiction.
DIVIDENDS
The Company currently intends to retain its earnings for use in the business
and does not anticipate declaring and paying dividends in the foreseeable
future. In the event that the Company does pay dividends, dividends paid to a
Non-United States Holder will generally be subject to withholding of United
States federal income tax at the rate of 30.0% (or a lower rate prescribed by an
applicable treaty). This withholding tax generally will not apply to dividends
which are effectively connected with the conduct of a trade or business within
the United States by the Non-United States Holder, and, where a tax treaty
applies, is attributable to a United States permanent establishment of the
Non-United States Holder (provided such holder files certain tax forms with the
payor of the dividends), in which case the dividends will be subject to the
United States federal income tax on net income that applies to United States
persons (and in the case of corporate holders, such dividends might also be
subject to the United States branch profits tax). An applicable income tax
treaty may provide a lower rate of withholding. To determine the applicability
of a tax treaty, dividends paid to an address in a foreign country are presumed
under current interpretation of existing Treasury regulations to be paid to a
resident of that country. New Treasury regulations issued on October 6, 1997
applicable to payments made after December 31, 1999, however, would require
Non-United States Holders to file certain new forms to obtain the benefit of any
applicable tax treaty providing for a lower rate of withholding tax on
dividends. Non-United States Holders should consult their tax advisors
concerning the effect of such new Treasury regulations on an investment in the
Common Stock.
GAIN ON DISPOSITION
GENERAL RULE
Subject to special rules applicable to individuals as described below, a
Non-United States Holder will generally not be subject to United States federal
income tax on gain recognized on a sale or other disposition of Common Stock
except to the extent (i) the gain is effectively connected with the conduct of a
trade or business within the United States by the Non-United States Holder, and,
where a tax treaty applies, is attributable to a United States permanent
establishment of the Non-United States Holder, ("effectively connected"); or
(ii) the gain is treated as effectively connected because the Company is or
becomes a "United States real property holding corporation" for United States
federal income tax
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purposes and certain other requirements are met. The Company believes that it is
not currently, and is not likely to become, a United States real property
holding corporation. Provided that the Company is not a United States real
property holding company, any such gain that is (or is treated as being)
effectively connected; will not be subject to withholding, but will be subject
to United States federal income tax on a net income basis in the same manner as
if such Non-United States Holder were a resident of the United States (and, in
the case of corporate holders, possibly the United States branch profits tax).
Non-United States Holders should consult applicable treaties, which may provide
for different rules (including possibly the exemption of certain capital gains
from tax).
INDIVIDUALS
In addition to the rules described above, an individual Non-United States
Holder who holds Common Stock as a capital asset will generally be subject to
tax at a 30.0% rate on any gain recognized on the disposition of such stock
(which may be offset by United States source capital losses) if such individual
is present in the United States for 183 days or more in the taxable year of
disposition and (i) has a "tax home" in the United States (as specifically
defined under the United States federal income tax laws) or (ii) maintains an
office or other fixed place of business in the United States to which the gain
from the sale of the stock is attributable. Certain individual Non-United States
Holders may also be subject to tax pursuant to provisions of United States
federal income tax law applicable to certain United States expatriates.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is neither a
citizen nor a resident (as defined for United States federal estate tax
purposes) of the United States at the date of death will be subject to United
States federal estate tax imposed upon the estates of non-residents who are not
United States citizens, except to the extent that an applicable estate tax
treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company or its designated paying Agent (the "payor") must report
annually to the Internal Revenue Service (the "Service") and to each Non-United
States Holder the amount of dividends paid to, and the tax, if any, withheld
with respect to, such holder. That information may also be made available to the
tax authorities of the country in which the Non-United States Holder resides.
United States federal backup withholding (imposed at a 31.0% rate on certain
payments to nonexempt persons) and information reporting with respect to such
withholding will generally not apply to dividends paid to a Non-United States
Holder that are otherwise subject to withholding or taxed as effectively
connected income as described above under "Dividends".
The backup withholding and information reporting requirements also apply to
the payment of gross proceeds to a Non-United States holder upon the disposition
of Common Stock by or through a United States office of a United States or
foreign broker, unless the holder certifies to the broker under penalties of
perjury as to its name, address, and status as a Non-United States Holder or the
holder otherwise establishes an exemption. Information reporting requirements
(but not backup withholding if the payor does not have actual knowledge that the
payee is a United States person) will apply to a payment of the proceeds of a
disposition of Common Stock by or through a foreign office of (i) a United
States broker; (ii) a foreign broker 50.0% or more of whose gross income for
certain periods is effectively connected with the conduct of a trade or business
in the United States; or (iii) a foreign broker that is a "controlled foreign
corporation" for United States federal income tax purposes, unless the broker
has documentary evidence in its records that the holder is a Non-United States
Holder and certain other conditions are met, or the holder otherwise establishes
an exemption. Neither backup withholding nor information
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reporting will generally apply to a payment of the proceeds of a disposition of
Common Stock by or through a foreign office of a foreign broker not subject to
the preceding sentence.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States federal income tax liability, if any, provided
that required information is furnished to the Service.
On October 6, 1997, the United States Treasury Department issued final
Treasury regulations governing information reporting and the certification
procedures regarding withholding and backup withholding on certain payments made
to Non-United States Holders after December 31, 1999. The new Treasury
regulations would alter the procedures for claiming benefits of an income tax
treaty and change the certification procedures relating to the receipt by
intermediaries of payments on behalf of the beneficial owner of shares of Common
Stock. Non-United States Holders should consult their tax advisors concerning
the effect, if any, of such new Treasury regulations on an investment in the
Common Stock.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Immediately prior to the closing of the Offering, the Company will amend its
Restated Articles of Incorporation to increase its authorized capital stock to
shares of Common Stock, and shares of preferred stock, par value
$0.01 per share (the "Preferred Stock"). The following summary description of
the capital stock of the Company is qualified in its entirety by reference to
the form of Restated Articles of Incorporation of the Company (the "Restated
Articles") and Amended and Restated By-Laws of the Company (the "Amended
By-Laws"), a copy of each of which is filed as an exhibit to the Registration
Statement (as defined herein) of which this Prospectus forms a part.
COMMON STOCK
Each share of Common Stock entitles the holder of record to one vote at each
annual or special meeting of shareholders, in the case of any written consent of
shareholders, and for all other purposes. The holders of Common Stock do not
have cumulative voting or preemptive rights.
The holders of the Common Stock will be entitled to receive dividends and
other distributions as may be declared thereon by the Board of Directors of the
Company out of assets or funds of the Company legally available therefor,
subject to the rights of the holders of any series of Preferred Stock and any
other provision of the Amended Certificate.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Common Stock will be entitled to receive the assets and funds of
the Company available for distribution after payments to creditors and to the
holders of any Preferred Stock of the Company that may at the time be
outstanding, in proportion to the number of shares held by them, respectively,
without regard to class.
Application will be made to list the Common Stock on the Nasdaq National
Market under the symbol " ".
PREFERRED STOCK
The Board of Directors, without further shareholder authorization, is
authorized to issue, from time to time, Preferred Stock in one or more series,
to establish the number of shares to be included in any such series and to fix
the designations, powers, preferences and rights of the shares of each such
series and any qualifications, limitations or restrictions thereof, including
dividend rights and preferences over dividends on the Common Stock, conversion
rights, voting rights, redemption rights, the terms of any sinking fund therefor
and rights upon liquidation. The ability of the Board of Directors of the
Company to issue Preferred Stock, while providing flexibility in connection with
financing, acquisitions and other corporate purposes, could have the effect of
discouraging, deferring or preventing a change in control of the Company or an
unsolicited acquisition proposal, since the issuance of Preferred Stock could be
used to dilute the share ownership of a person or entity seeking to obtain
control of the Company. In addition, because the Board of Directors of the
Company has the power to establish the preferences, powers and rights of the
shares of any such series of Preferred Stock, it may afford the holders of any
Preferred Stock preferences, powers and rights (including voting rights) senior
to the rights of the holders of Common Stock, which could adversely affect the
rights of holders of Common Stock.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BY-LAWS AND
TEXAS LAW
The Restated Articles, the Amended By-laws and the Texas Business
Corporation Act (the "BCA") contain certain provisions that could make more
difficult the acquisition of control of the Company. The following description
is intended as a summary only and is qualified in its entirety by reference to
the Restated Articles, the Amended By-Laws and the BCA.
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CLASSIFIED BOARD OF DIRECTORS; REMOVAL OF DIRECTORS. The Restated Articles
provide for the Board of Directors to be divided into three classes of
directors, as nearly equal in number as is reasonably possible, serving
staggered terms so that directors' initial terms will expire at the 1999, 2000
or 2001 annual meeting of shareholders. Commencing with the 1999 annual meeting
of shareholders, one class of directors will be elected each year for a
three-year term.
The Company believes that a classified board of directors will help to
assure the continuity and stability of the Board of Directors and the Company's
business strategies and policies as determined by the Board of Directors, since
a majority of the directors at any given time will have had prior experience as
directors of the Company. The Company believes that this, in turn, will permit
the Board of Directors to represent more effectively the interests of
shareholders.
With a classified board of directors, at least two annual meetings of
shareholders, instead of one, generally will be required to effect a change in a
majority of the Board of Directors. Under the BCA, unless otherwise provided in
a corporation's articles of incorporation, a director on a classified board may
be removed by the shareholders of the corporation only for cause. The Restated
Articles provide that directors of the Company may only be removed for cause.
ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS OF SHAREHOLDERS. The Restated
Articles provide that any action required or permitted to taken by shareholders
of the Company may be taken by written consent, in lieu of a meeting, if
executed by the holders of all of the Company's outstanding shares entitled to
vote with respect to the action that is the subject of the consent. The Amended
By-laws further provide that special meetings may be called only by (i) the
Chairman of the Board; (ii) the President; (iii) the Board of Directors; or (iv)
the holders of at least 50.0% of the outstanding shares entitled to vote at the
proposed special meeting. In addition, the business permitted to be conducted at
any special meeting of shareholders is limited to the purpose or purposes
specified in the written notice of such meeting.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND PROPOSALS. The
Amended By-Laws establish advance notice provisions with regard to the
nomination, other than by or at the direction of the Board, of candidates for
election as directors, or the bringing any shareholder proposal before any
annual meeting of shareholders. The advance notice provisions provide that
business other than that proposed by the Board may be transacted and candidates
for director other than those selected by the Board may be nominated at the
annual meeting of shareholders only if the Secretary of the Company has received
a written notice identifying such business or candidates and providing specified
additional information not less than 60 nor more than 90 days before the
anniversary of the prior year's annual meeting of shareholders (or if the board
has set a different date for the annual meeting, not less than 60 nor more than
90 days before such other date, or, if such other date has not been publicly
disclosed or announced at least 75 days in advance, then not less than 15 days
after such public disclosure or announcement). In addition, not more than 10
days after receipt by the sponsoring shareholder of the Secretary's written
request, the sponsoring shareholder must provide the Secretary with such
additional information as the Secretary may reasonably require.
RESTRICTIONS ON AMENDMENT TO NUMBER OF DIRECTORS PROVISION IN BY-LAWS. The
Amended By-Laws fix the number of directors of the Board at seven. The Amended
By-Laws further provide that the approval of at least 75.0% of the outstanding
shares of the Company's Common Stock entitled to vote will be required to alter,
amend or repeal such provision of the Amended By-Laws or to adopt any other
provision of the Amended By-Laws or Restated Articles inconsistent with such
provision. Such provision will have the effect of making it more difficult for
shareholders to increase the size of the Board and fill vacancies created
thereby.
TEXAS BUSINESS COMBINATION STATUTE Article 13.03 of the BCA imposes a
three-year moratorium on business combinations between a Texas corporation and
an "affiliated shareholder" (in general, a
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shareholder owning 20.0% or more of a corporation's outstanding voting stock) or
an affiliate or associate thereof unless (a) prior to a shareholder becoming an
affiliated shareholder, the board of directors of the corporation approved
either the business combination or the purchase or acquisition of shares
resulting in the shareholder becoming an affiliated shareholder; or (b) not less
than six months after the affiliated shareholder becomes an affiliated
shareholder, the business combination is approved by the affirmative vote of the
holders of at least two-thirds of the outstanding voting shares of the
corporation (other than those shares beneficially owned by the affiliated
shareholder) at a meeting of shareholder and not by written consent. Article
13.03 of the BCA applies to any corporation incorporated in the State of Texas
unless the corporation expressly elects not be governed by such legislation. The
Company has not made such an election and is therefore subject to Article 13.03
of the BCA.
TRANSFER AGENT AND REGISTRAR
is the transfer agent and registrar for the Common Stock.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
SET FORTH BELOW IS A SUMMARY OF CERTAIN FINANCING INSTRUMENTS TO WHICH THE
COMPANY IS A PARTY. THE SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH AGREEMENTS, COPIES OF WHICH HAVE BEEN FILED
AS EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
BANK CREDIT FACILITY
In connection with the Recapitalization, the Company entered into a new
$235.0 million Bank Credit Facility arranged by The Chase Manhattan Bank
("Chase") which consists of (i) a $45.0 million six-year Tranche A Term Loan;
(ii) a $110.0 million seven-year Tranche B Term Loan; and (iii) a $80.0 million
six-year Revolving Credit Facility with a $30.0 million sublimit for letters of
credit.
The proceeds of the Term Loans, together with the proceeds from the issuance
of the Vestar Note and the accrual Series A Preferred Stock and approximately
$38 million in drawings under the Revolving Credit Facility, were used to fund
the cash paid upon the closing of the Recapitalization (including related fees
and expenses) and to repay in full all loans, accrued interest and other amounts
due under the Company's existing credit agreement. The Revolving Credit Facility
is also available for general corporate purposes, including working capital
needs and letters of credit. The Revolving Credit Facility is subject to a
borrowing base generally consisting of up to 85% of eligible accounts
receivable, 55% of eligible inventory and 50% of trade letters of credit,
subject to certain sublimits. See "Management Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources".
As at March 31, 1998, the Company had approximately $60.9 million available
under the borrowing base. As at March 31, 1998, the Company had borrowings under
the Tranche A Term Loan, the Tranche B Term Loan and the Revolving Credit
Facility of approximately $44.5 million, $110.0 million and $19.5 million,
respectively.
Borrowings under the Tranche A Term Loan and the Revolving Credit Facility
bear interest at one of two rates to be selected by the Company: (i) a margin
over Chase's Alternate Base Rate (the "Base Rate") or (ii) a margin over LIBOR
for specified interest periods. The margin for each rate varies based on the
Company's Consolidated Ratio of Funded Debt to EBITDA (as defined herein). The
Tranche A Term Loan and the Revolving Credit Facility initially bear interest at
LIBOR plus 2.75% or the Base Rate plus 1.75%. The Tranche B Term Loan initially
bears interest at LIBOR plus 3.25% or the Base Rate plus 2.25%. As at March 31,
1998, the Company's interest rate under the Tranche A Term Loan, the Tranche B
Term Loan and the Revolving Credit Facility was 8.44%, 8.94% and 8.44%,
respectively.
The Company is required to pay a commitment fee on the unutilized portion of
the Revolving Credit Facility at a rate based upon the Company's Consolidated
Ratio of Funded Debt to EBITDA. Initially this commitment fee was 0.5% per
annum, and as at March 31, 1998, the commitment fee was 0.5%. In addition, the
Company paid a fee in connection with the consummation of the Bank Credit
Facility and paid certain customary agency fees to the agents thereunder.
The Tranche A Term Loan provides for $45.0 million payable in escalating
quarterly payments beginning March 1998 through September 2003. The Tranche B
Term Loan provides for quarterly payments aggregating $1.0 million per fiscal
year through fiscal 2002 and $16.0 million in fiscal 2003, with the balance of
$90.0 million due in 2004. In addition to the scheduled amortization, additional
principal prepayments of the Term Loans are required to be made with the
proceeds of certain asset sales, certain debt and equity issuances and annual
excess cash flow (as defined).
As a result of the Offering, the Company's indebtedness will decrease
significantly. The Company intends to use the net proceeds received from the
Offering to repay approximately $44.7 million under the Bank Credit Facility and
$45.0 million due under the Vestar Note.
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The obligations of the Company under the Bank Credit Facility are secured by
a first priority security interest in substantially all of the Company's
tangible and intangible assets (other than mortgaged properties), including
without limitation, accounts receivable, factor receivable balances, inventory,
intellectual property, contract rights and equipment, as well as all of the
capital stock of the Company and each of its direct and indirect domestic
subsidiaries, and 65.0% of the capital stock of the Company's foreign
subsidiaries. Each of the Company's domestic subsidiaries have guaranteed the
obligations of the Company under the Bank Credit Facility.
The Bank Credit Facility contains certain financial covenants which require
the Company to meet certain financial ratios and tests including (i) a maximum
cash interest coverage test; (ii) a minimum fixed charge coverage test; and
(iii) a maximum leverage test. In addition, the Bank Credit Facility contains
covenants customarily found in credit agreements including, among other things,
limitations on indebtedness, liens, asset sales, sale and lease-back
transactions, distributions and other restricted payments (including cash
dividends), mergers and certain acquisitions, investments, transactions with
affiliates, capital expenditures, the prepayments or amendment of certain
indebtedness, and the amendment of material agreements. The Bank Credit Facility
also contains customary events of default, including certain changes of control
(as defined) of the Company.
As required by the Bank Credit Agreement, the Company has entered into
certain interest rate protection agreements covering 50.0% of its term loan
obligations under the Bank Credit Agreement.
VESTAR NOTE
In connection with Recapitalization, the Company issued to Vestar
subordinated notes in the aggregate principal amount of $30.0 million (the
"Vestar Note"). The Vestar Note matures in 2007 and accrues interest at a rate
of 17.9% per annum. Interest on the Vestar Note is payable in cash only to the
extent of 40.0% of the annual original issue discount accrual (the tax savings
achieved by the Company due to the deductibility of interest on the Vestar
Note), but only to the extent that the payment of interest does not violate any
senior debt obligations, including restrictions under the Bank Credit Agreement.
After September 25, 2003, interest is payable in cash if the Company meets
certain performance tests including the achievement of investment grade ratings.
The Vestar Note is redeemable, in whole or in part, subject to escalating
prepayment penalties ranging from $15.0 million prior to September 26, 1998 to
$45.0 million after September 26, 2000.
The Vestar Note is subject to mandatory redemption (including applicable
prepayment penalties) upon the occurrence of certain events, including changes
in ownership of equity interests, a public offering of equity securities, and
the payment of dividends on any class of its capital stock in any form other
than a dividend of similar equity securities. Proceeds from the Offering will be
used in part to repay amounts due under the Vestar Note. See "Use of Proceeds"
and "Certain Transactions".
The Vestar Note is subordinated in right of payment to all amounts due under
the Bank Credit Facility. The Vestar Note contains certain covenants including,
among other things, limitations on mergers and asset acquisitions, transactions
with affiliates and modifications to the Polo Jeans License. The Vestar Note
contains customary events of default for subordinated indebtedness, including
cross acceleration to other indebtedness of the Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering there has been no market for the shares of the Common
Stock. The Company can make no predictions as to the effect, if any, that sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of the
Common Stock in the public market, or the perception that such sales may occur,
may adversely affect prevailing market prices.
In general, under Rule 144, if a period of at least one year has elapsed
since the later of the date the "restricted securities" were acquired from the
Company and the date they were acquired from an Affiliate, then the holder of
such restricted securities (including an Affiliate) is entitled to sell a number
of shares within any three-month period that does not exceed the greater of 1%
of the then outstanding shares of the Common Stock (approximately shares
immediately after the Offering) or the average weekly reported volume of trading
of the Common Stock on the Nasdaq National Market during the four calendar weeks
preceding such sale. The holder may only sell such shares through unsolicited
brokers' transactions. Sales under Rule 144 are also subject to certain
requirements pertaining to the manner of such sales, notices of such sales and
the availability of current public information concerning the Company.
Affiliates may sell shares not constituting restricted shares in accordance with
the foregoing volume limitations and other requirements but without regard to
the one year holding period. Under Rule 144(k), if a period of at least two
years has elapsed between the later of the date restricted securities were
acquired from the Company and the date they were acquired from an Affiliate, as
applicable, a holder of such restricted securities who is not an Affiliate at
the time of the sale and has not been an Affiliate for at least three months
prior to the sale would be entitled to sell the shares immediately without
regard to the volume limitations and other conditions described above.
Upon completion of the Offering, assuming no exercise of the Underwriters'
over-allotment option, the Company will have outstanding a total of shares
of Common Stock. Of such shares, shares being sold in the Offering
(together with any shares sold upon exercise of the Underwriters' over-allotment
options) will be immediately eligible for sale in the public market without
restriction, except for shares purchased by or issued to any Affiliate of the
Company. So long as any shareholder remains an Affiliate of the Company, any
shares of Common Stock held by such person will only be available for public
sale if such shares are registered under the Securities Act or sold in
accordance with an applicable exemption from registration, such as Rule 144,
subject to the restrictions discussed above. The Company, Vestar, and the
executive officers and directors of the Company have agreed not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities of the Company that are substantially similar to the Common Stock,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Common Stock or any
such substantially similar securities (other than pursuant to employee or
director stock or stock option plans existing on the date of this Prospectus)
for a period of 180 days after the date of this Prospectus without the prior
written consent of Goldman, Sachs & Co., as representative of the Underwriters,
except for the shares of Common Stock offered in connection with this Offering.
In addition, certain restrictions on transfers of shares of Common Stock by the
shareholders of the Company are contained in the Stockholders' Agreement.
LEGAL MATTERS
Certain tax and other legal matters will be passed upon for the Company by
Skadden, Arps, Slate, Meagher & Flom LLP. Certain legal matters relating to
Texas law, including the validity of the issuance of the Common Stock registered
hereby, will be passed upon for the Company by Mayfield, Perrenot, Davie and
Dennis, P.C. Certain legal matters will be passed upon for the Underwriters by
Simpson Thacher & Bartlett. Certain partners of Simpson Thacher & Bartlett and
related persons have an indirect interest, through Vestar, in less than 1% of
the Common Stock of the Company. Simpson Thacher & Bartlett provides legal
services to the Company and Vestar on certain matters.
67
<PAGE>
EXPERTS
The consolidated financial statements of Sun Apparel, Inc. at December 31,
1997, and December 28, 1996, and for each of the three years in the period ended
December 31, 1997, appearing in this Prospectus and Registration Statement, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
Certain financial information of the Company for the years ended December
31, 1994 and December 25, 1993, appearing in this Prospectus, have been derived
from financial statements audited by other independent auditors. Ernst & Young
LLP replaced such other auditors in 1995. The decision to change accountants was
approved by the Company's Board of Directors, and report of such other auditors
does not contain any adverse opinion or a disclaimer of opinion, nor is it
qualified or modified as to uncertainty, audit scope or accounting principles.
During its engagement by the Company, there were no disagreements between the
Company and such other auditors on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus, which is part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain items of which are omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement and to the financial statements, schedules, and
exhibits filed as a part thereof. The Registration Statement, including all
schedules and exhibits thereto, may be inspected without charge at the public
reference facilities maintained by the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. and at the
Commission's regional offices at 7 World Trade Center, 13th floor, New York, New
York and 500 West Madison Street, Suite 1400, Chicago, Illinois. Copies of such
material may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such
material may also be accessed electronically by means of the Commission's home
page on the Internet at
http://www.sec.gov.
Statements contained in this Prospectus concerning the contents of any
contract or other document are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or otherwise with the Commission, each
such statement being qualified in all respects by such reference.
The Company will be subject to the periodic reporting and other
informational requirements of the Exchange Act. The Company will fulfill its
obligations with respect to such requirements by filing periodic reports with
the Commission. In addition, the Company intends to furnish its shareholders
with annual reports containing financial statements audited by independent
certified accountants.
68
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets as of December 28, 1996, December 31, 1997, and March 31,
1998 (Unaudited).................................................................... F-3
Consolidated Statements of Income for the Years Ended December 30, 1995, December 28,
1996, and December 31, 1997, and the Three Months Ended March 31, 1997 and 1998
(Unaudited)......................................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended December
30, 1995, December 28, 1996, and December 31, 1997, and the Three Months Ended March
31, 1998 (Unaudited)................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 30, 1995, December
28, 1996, and December 31, 1997, and the Three Months Ended March 31, 1997 and 1998
(Unaudited)......................................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sun Apparel, Inc.
We have audited the accompanying consolidated balance sheets of Sun Apparel,
Inc. as of December 28, 1996 and December 31, 1997, and the related consolidated
statements of income, shareholders' equity (deficit), and cash flows for the
years ended December 30, 1995, December 28, 1996, and December 31, 1997. 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sun
Apparel, Inc. as of December 28, 1996 and December 31, 1997 and the consolidated
results of its operations and its cash flows for the years ended December 30,
1995, December 28, 1996, and December 31, 1997 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Antonio, Texas
March 26, 1998
F-2
<PAGE>
SUN APPAREL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 31, MARCH 31,
1996 1997 1998
-------------- -------------- ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 3,674 $ 3,751 $ 543
Due from factors.................................................. 32,969 15,879 15,528
Trade receivables................................................. 26,215 46,822 47,265
Inventories....................................................... 54,960 57,704 64,782
Advances to contractors........................................... 387 1,670 1,136
Other receivables................................................. 2,237 1,619 925
Prepaid expenses.................................................. 891 1,299 1,830
-------------- -------------- ------------
Total current assets.............................................. 121,333 128,744 132,009
Property, plant, and equipment...................................... 47,615 59,249 61,699
Less accumulated depreciation....................................... 19,222 25,167 26,967
-------------- -------------- ------------
Net property, plant, and equipment.................................. 28,393 34,082 34,732
Loan origination costs, net......................................... 109 7,305 7,013
Deferred income taxes............................................... -- 2,503 2,688
Other assets........................................................ 2,780 1,607 1,841
-------------- -------------- ------------
Total assets...................................................... $ 152,615 $ 174,241 $ 178,283
-------------- -------------- ------------
-------------- -------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable -- trade......................................... $ 24,062 $ 23,228 $ 30,457
Current portion of long-term debt................................. 6,330 3,000 3,518
Accrued liabilities............................................... 8,681 13,552 16,811
Due to related parties............................................ 100 1,607 1,607
Taxes payable..................................................... 1,310 4,645 2,769
-------------- -------------- ------------
Total current liabilities......................................... 40,483 46,032 55,162
Debt:
Long-term debt, net of current portion............................ 27,299 156,611 155,119
Bank Credit Facility.............................................. 34,250 27,000 19,500
Subordinated debt, net of current portion......................... 2,507 30,000 30,000
Deferred income taxes............................................... -- 1,028 1,146
Shareholders' equity (deficit):
Common stock, no par value; 1,000,000 shares authorized; 101,000
shares issued; 101,000 shares issued and outstanding at December
28, 1996 and 3,780 shares issued and outstanding at December 31,
1997 and March 31, 1998 (unaudited)............................. 417 417 417
Preferred stock................................................... -- 87,916 90,679
Retained earnings (deficit)....................................... 47,491 (174,763) (173,740)
Subsidiary equity................................................. 168 -- --
-------------- -------------- ------------
Total shareholders' equity (deficit).............................. 48,076 (86,430) (82,644)
-------------- -------------- ------------
Total liabilities and shareholders' equity (deficit).......... $ 152,615 $ 174,241 $ 178,283
-------------- -------------- ------------
-------------- -------------- ------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
SUN APPAREL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
---------------------------------------------- ------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 31, MARCH 31, MARCH 31,
1995 1996 1997 1997 1998
-------------- -------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net sales................................ $ 205,657 $ 281,668 $ 359,672 $ 80,475 $ 93,973
Cost of goods sold....................... 153,513 191,401 233,335 52,661 56,629
-------------- -------------- -------------- ----------- -----------
Gross profit............................. 52,144 90,267 126,337 27,814 37,344
Operating expenses:
Selling, general, and administrative
expenses............................. 33,295 64,329 84,044 18,432 23,695
Depreciation and amortization.......... 2,846 6,853 6,292 1,459 1,830
-------------- -------------- -------------- ----------- -----------
Operating income......................... 16,003 19,085 36,001 7,923 11,819
Other (income) and expenses:
Interest income........................ (17) (31) (227) (22) (23)
Interest and bank charges.............. 3,228 4,213 10,375 1,303 5,678
Other income, net...................... (1,701) (435) (1,753) (100) (47)
-------------- -------------- -------------- ----------- -----------
Income before taxes and extraordinary
item................................... 14,493 15,338 27,606 6,742 6,211
Income tax expense....................... 542 863 3,674 282 2,425
-------------- -------------- -------------- ----------- -----------
Income before extraordinary item......... 13,951 14,475 23,932 6,460 3,786
Loss on early extinguishment of debt, net
of tax benefit of $291 in 1997......... -- -- 566 -- --
-------------- -------------- -------------- ----------- -----------
Net income............................... $ 13,951 $ 14,475 $ 23,366 $ 6,460 $ 3,786
-------------- -------------- -------------- ----------- -----------
-------------- -------------- -------------- ----------- -----------
Unaudited pro forma data (Note 11):
Income before taxes and extraordinary
item................................. $ 14,493 $ 15,338 $ 27,606 $ 6,742
Pro forma adjustments to reflect
federal, state and foreign income
taxes................................ 6,087 6,442 11,595 2,832
-------------- -------------- -------------- -----------
Pro forma income before extraordinary
item................................. 8,406 8,896 16,011 3,910
Loss on early extinguishment of debt,
net of tax benefit of $291 in 1997... -- -- 566 --
-------------- -------------- -------------- -----------
Pro forma net income................... $ 8,406 $ 8,896 $ 15,445 $ 3,910
-------------- -------------- -------------- -----------
-------------- -------------- -------------- -----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
SUN APPAREL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK RETAINED
---------------------- ---------------------- EARNINGS
SHARES AMOUNT SHARES AMOUNT (DEFICIT) TOTAL
--------- ----------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994................................ 101,000 $ 417 -- -- $ 30,685 $ 31,102
Issuance of satellite company common stock................ -- -- -- -- 8 8
Distributions to shareholders............................. -- -- -- -- (8,055) (8,055)
Net income................................................ -- -- -- -- 13,951 13,951
--------- ----- --------- ----------- --------- ---------
Balance at December 30, 1995................................ 101,000 417 -- -- 36,589 37,006
Issuance of satellite company common stock................ -- -- -- -- 4 4
Distributions to shareholders............................. -- -- -- -- (3,409) (3,409)
Net income................................................ -- -- -- -- 14,475 14,475
--------- ----- --------- ----------- --------- ---------
Balance at December 28, 1996................................ 101,000 417 -- -- 47,659 48,076
Cash distributions to shareholders........................ -- -- -- -- (45,737) (45,737)
Noncash distributions to shareholders..................... -- -- -- -- (557) (557)
Preferred stock exchanged for Sun stock................... (30,072) -- 198,891 $ 39,778 (39,778) --
Repurchase of interests in common stock of Sun and
Satellite Companies..................................... (67,337) -- -- -- (147,411) (147,411)
Preferred and common stock exchanged for Sun and Satellite
Company stock........................................... 189 -- 11,109 2,222 (2,222) --
Preferred stock issued for cash........................... -- -- 215,000 43,000 -- 43,000
Recapitalization fees..................................... -- -- -- -- (7,167) (7,167)
Preferred stock dividends................................. 2,916 (2,916) --
Net income................................................ -- -- -- -- 23,366 23,366
--------- ----- --------- ----------- --------- ---------
Balance at December 31, 1997................................ 3,780 417 425,000 87,916 (174,763) (86,430)
Preferred stock dividends................................. 2,763 (2,763) --
Net income (unaudited).................................... -- -- -- -- 3,786 3,786
--------- ----- --------- ----------- --------- ---------
Balance March 31, 1998 (unaudited).......................... 3,780 $ 417 425,000 $ 90,679 ($173,740) ($ 82,644)
--------- ----- --------- ----------- --------- ---------
--------- ----- --------- ----------- --------- ---------
</TABLE>
See accompanying notes.
F-5
<PAGE>
SUN APPAREL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
---------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 30, DECEMBER 28, DECEMBER 31, MARCH 31, MARCH 31,
1995 1996 1997 1997 1998
-------------- -------------- -------------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................... $ 13,951 $ 14,475 $ 23,366 $ 6,460 $ 3,786
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation......................... 2,800 6,578 5,703 1,428 1,800
Amortization......................... 123 275 881 139 323
Loss on debt extinguishment.......... -- -- 857 -- --
Federal income taxes--deferred....... -- -- (1,475) -- (67)
Changes in operating assets and
liabilities:
Due from factors................... 5,625 (13,759) 17,090 15,181 351
Trade receivables.................. (1,599) (14,776) (20,607) (19,527) (443)
Inventories........................ 5,254 (28,943) (2,744) 1,684 (7,078)
Advances to contractors............ 542 611 (1,283) (151) 534
Other receivables.................. (594) (1,643) 618 1,597 694
Prepaid expenses................... (1,052) 569 (408) (1,322) (531)
Other assets....................... (669) 285 (724) (345) (265)
Accounts payable--trade............ 531 12,756 (834) (1,917) 7,229
Accrued liabilities................ 1,818 3,858 4,871 2,749 3,259
Taxes payable...................... 170 371 3,335 53 (1,876)
-------------- -------------- -------------- ----------- -----------
Net cash provided by (used in) operating
activities............................. 26,900 (19,343) 28,646 6,029 7,716
INVESTING ACTIVITIES
Purchases of property, plant, and
equipment.............................. (5,655) (15,374) (10,525) (3,378) (2,450)
Proceeds from sales of property, plant,
and equipment.......................... -- 2,130 -- -- --
-------------- -------------- -------------- ----------- -----------
Net cash used in investing activities.... (5,655) (13,244) (10,525) (3,378) (2,450)
FINANCING ACTIVITIES
Proceeds from long-term debt and Bank
Credit Facility........................ 487,859 120,467 193,000 35,250 --
Payments on long-term debt and Bank
Credit Facility........................ (502,607) (84,200) (75,135) (41,050) (8,474)
Issuance of subordinated debt............ -- -- 30,000 5,000 --
Payments of subordinated debt............ (100) -- (1,000) -- --
Issuance of preferred stock.............. -- -- 43,000 -- --
Recapitalization fees.................... -- -- (7,167) -- --
Loan origination fees.................... -- -- (7,594) -- --
Issuance of satellite company common
stock.................................. 8 4 -- -- --
Repurchase of interests in common stock
of Sun and satellite companies......... -- -- (147,411) -- --
Distributions paid....................... (8,055) (3,409) (45,737) (3,900) --
-------------- -------------- -------------- ----------- -----------
Net cash (used in) provided by financing
activities............................. (22,895) 32,862 (18,044) (4,700) (8,474)
-------------- -------------- -------------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents............................ (1,650) 275 77 (2,049) (3,208)
-------------- -------------- -------------- ----------- -----------
Cash and cash equivalents at beginning of
year................................... 5,049 3,399 3,674 3,674 3,751
-------------- -------------- -------------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 3,399 $ 3,674 $ 3,751 $ 1,625 $ 543
-------------- -------------- -------------- ----------- -----------
-------------- -------------- -------------- ----------- -----------
Supplemental disclosures:
Interest and bank charges paid......... $ 3,295 $ 4,831 $ 8,066 $ 1,319 $ 4,391
Income taxes paid...................... 790 779 1,326 -- --
Assets acquired under capital leases... -- -- 867 -- --
Preferred stock exchanged for Sun and
Satellite Company stock.............. -- -- 42,000 -- --
</TABLE>
See accompanying notes.
F-6
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996, AND DECEMBER 31, 1997 AND
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION AS TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION/COMBINATION
The consolidated/combined financial statements include the operations of the
affiliated entities described below which were under common control prior to the
Reorganization (as defined) effected in September 1997 (see Note 2).
Sun Apparel, Inc. (Sun), a Texas corporation, is engaged in the manufacture
and sale of jeanswear and other apparel under its own labels, licensed labels,
and private labels.
Greater Texas Finishing Corporation (GTX), a Texas corporation, is engaged
in the business of processing and finishing jeanswear and other apparel for Sun.
Maquilas Pami S.A. de C.V. (Pami), a corporation organized and operating in
Mexico, sews, processes, and finishes jeanswear for Sun at agreed-upon prices
(see Note 12). Although the operations of Pami are located in Mexico, management
decisions are centralized with the management of Sun.
CNC West, Inc. (CNC), a Texas corporation, is a producer of chemicals used
in the apparel washing process. CNC is consolidated with CNC de Mexico, S.A. de
C.V., a Mexican corporation which was incorporated under the laws of Mexico in
1997 to support operations in Mexico. Substantially all products are sold to
Sun, GTX, and Pami.
Import Technology of Texas, Inc. (Import Technology), a Texas corporation,
is a holding company which has a 99% ownership interest in Pami. CNC holds the
remaining 1% interest in Pami.
Sun City Realty Group, Inc. (Sun City), a Texas corporation, is a real
estate holding company for Sun properties.
R.L. Management, Inc. (R.L.), a Delaware corporation, provides general and
administrative support related to the Polo line (see Note 15).
Lone Star Selling Group, Inc. (Lone Star), a New York corporation, provides
general and administrative support related to all apparel lines other than Polo.
GTX, Pami, CNC, Import Technology, Sun City, R.L., and Lone Star are
collectively referred to as the "Satellite Companies." As a result of the
Reorganization, the Satellite Companies became wholly-owned subsidiaries of Sun.
The financial statements of Sun have been consolidated with those of the
Satellite Companies for 1997. For 1995 and 1996, the financial statements of Sun
are combined with those of the Satellite Companies, and the equity of the
Satellite Companies is included in retained earnings. All intercompany balances,
sales, and transactions have been eliminated in the consolidated/combined
financial statements. The consolidated/combined entity is collectively referred
to as the Company.
F-7
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FISCAL YEARS
During 1997, the Company changed its fiscal year from a 52 or 53 week period
ending on the Sunday closest to December 31 to a twelve calendar month period
ending on December 31. All references to 1995, 1996, and 1997 herein are to the
fiscal years ended December 30, 1995, December 28, 1996, and December 31, 1997,
respectively, which are 52 week periods.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments readily convertible to
known cash amounts and with a maturity of three months or less at the date of
purchase to be cash equivalents.
TRADE RECEIVABLES
The allowance for doubtful accounts, if any, is established through a
provision charged to expense. Receivables are charged against the allowance when
management believes that collection is unlikely. Collections of previously
written-off receivables are credited to the allowance. The Company performs
periodic credit evaluations of its customers' financial condition and ability to
satisfy their obligations. The allowance, if any, is based upon management's
evaluation of the collectibility of outstanding receivables, including such
factors as credits, claims, prior experience, and economic conditions. The
Company's credit losses for the periods presented are insignificant and have not
exceeded management's estimates. The Company generally does not require
collateral or letters of credit when extending credit. However, from time to
time, the Company requires customer deposits or letters of credit as a condition
of extending credit. The allowance for doubtful accounts totaled approximately
$102,000, $205,000, and $256,000 at December 28, 1996, December 31, 1997, and
March 31, 1998, respectively.
Trade receivables are stated net of estimated chargebacks related to such
items as damaged goods, returns, markdowns, and any applicable trade discounts.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Cost of inventory represents the aggregate cost of direct materials, direct
labor, and manufacturing overhead. The manufacturing overhead included in the
inventories is based on the ratio of manufacturing expenses to direct labor for
each period. Purchased finished goods are recorded at invoice cost, including
duty, freight, and insurance.
F-8
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVANCES TO CONTRACTORS
Periodically, the Company advances funds to foreign sewing contractors
against specific cuts in order to provide those contractors with sufficient cash
to fund a portion of the costs of their sewing operations. Advances are deducted
from contractors' invoices when they are presented for payment.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost. Major renewals and
betterments are charged to property accounts while replacements, maintenance,
and repairs which do not improve or extend the lives of the respective assets
are expensed currently. Depreciation is calculated on the straight-line method
over the estimated useful economic lives of the assets. Leasehold improvements
are amortized on a straight-line method over the lease term.
Included in office furniture and other equipment (see Note 5) are
Company-owned displays and fixtures located in certain customer-owned retail
facilities. These displays and fixtures are amortized over their useful lives,
generally five years.
TRADEMARK
Sun purchased a trademark for $1,500,000 plus the unamortized portion of a
license fee for approximately $348,000, which aggregates to a total basis of
approximately $1,848,000. This amount is being amortized over fifteen years. At
December 28, 1996, December 31, 1997, and March 31, 1998 accumulated
amortization amounted to approximately $522,000, $645,000, and $678,000,
respectively.
REVENUE RECOGNITION
Sales are recorded at the time the product is shipped. Sales in the
consolidated statements of income are recorded net of a provision for trade,
volume, and other discounts, as well as for returns and allowances.
SALES TO MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
During 1995, 1996, and 1997 approximately 13%, 13%, and 9% of consolidated
net sales were made to one large discount retailer. During 1995, 1996, and 1997,
respectively, approximately 4%, 13%, and 14% of consolidated net sales were made
to a group of affiliated retailers. Amounts due from these customers at December
30, 1995, December 28, 1996, and December 31, 1997 totaled approximately
$6,691,000, $13,915,000, and $10,732,000, respectively, substantially all of
which was collected after year-end.
Sun purchases the majority of its piece goods inventory from five principal
suppliers. While these suppliers provide a significant share of the piece goods
used by Sun, piece goods used are substantially generic products and can be
provided by a number of other suppliers on comparable terms. Sun believes its
relationship with its existing suppliers is satisfactory.
F-9
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising expenses of Sun include costs related to print media, including
magazines, newspapers and industry publications, and television advertising.
Total advertising expense amounted to approximately $4,936,000, $12,143,000, and
$16,176,000 for the years ended 1995, 1996, and 1997, respectively, and
approximately $2,512,000 and $2,982,000 for the three months ended March 31,
1997 and 1998. Advertising costs are expensed as incurred.
LOAN ORIGINATION COSTS
In connection with the refinancing transaction (see Note 7), the Company
incurred approximately $7,600,000 in loan origination costs. Accumulated
amortization of these loan origination costs was approximately $292,000 and
$584,000 at December 31, 1997 and March 31, 1998, respectively. Loan origination
costs, which are being amortized using a method that approximates the effective
interest method over the term of the related debt, are included in other assets
in the balance sheet.
Loan origination costs totaling approximately $857,000 were expensed and
reported as an extraordinary item in the statement of income when the related
debt was retired concurrent with the recapitalization (see Note 2).
INCOME TAXES
Effective September 26, 1997, the Company terminated its Subchapter S tax
status (see Note 9). The Company became subject to the provisions of Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes," on
September 26, 1997. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting bases and tax bases
of assets and liabilities, and are measured using the enacted tax rates and laws
which will be in effect when the differences are expected to reverse. Prior to
the termination of its Subchapter S tax status, federal income tax expense was
not recognized in the financial statements of the Company. The federal tax
liability was the shareholders' rather than the Company's.
INTERIM FINANCIAL DATA
The consolidated financial statements and related information as of March
31, 1998, and for the three months ended March 31, 1997 and 1998, have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, such consolidated financial statements
reflect all adjustments (consisting of normal recurring entries) which are, in
the opinion of management, necessary for a fair presentation of the financial
position, results of operations, cash flows, and changes in shareholders' equity
of the Company for such periods. Interim period results are not necessarily
indicative of the results to be achieved for the entire year.
RECLASSIFICATIONS
Certain prior year amounts in the financial statements have been
reclassified to conform to current year presentation.
F-10
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS SEGMENTS
In June 1997, the FASB issued Statement No. 131, "Financial Reporting for
Segments of a Business Enterprise" (FAS 131). FAS 131 specifies the computation,
presentation, and disclosure requirements for business segment information, and
requires that segments be identified based on internal financial reporting at
the level reported to the chief operating decision maker. FAS 131 supersedes FAS
14, "Financial Reporting for Segments of a Business Enterprise", but retains the
requirement to report information about major customers. FAS 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt FAS 131 for its December 31, 1998 financial statements, and
expects to disclose financial information for two operating segments, the Polo
Jeans division and the Sun division.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("FAS 130"). FAS 130 establishes new rules for the reporting and display
of comprehensive income and its components. These disclosures are required for
the first quarter of 1998. FAS 130 requires changes such as unrealized gains or
losses on available-for-sale securities and foreign currency translation
adjustments, which currently are reported in shareholders' equity, to be
included in other comprehensive income and the disclosure of total comprehensive
income. Currently, the Company has no transactions that generate items of other
comprehensive income, and the adoption of FAS 130 is not expected to have a
significant impact on the financial statement disclosures.
2. REORGANIZATION AND RECAPITALIZATION
On September 26, 1997, the shareholders of Sun reorganized certain entities
under their common control (the "Reorganization") as a result of which the
Satellite Companies became wholly-owned subsidiaries of Sun. The Reorganization
involved exchanging all of the outstanding stock of the Satellite Companies for
stock of Sun (consisting of 189 shares of common stock, 2,174 shares of Series B
Preferred Stock totalling approximately $435,000, and 8,935 shares of Series C
Preferred Stock totalling $1,787,000) and cash. These transactions have been
accounted for as a combination of entities under common control and,
accordingly, the Satellite Companies are reflected at their historical carry
over basis in the consolidated financial statements.
Also on September 26, 1997, the Company completed a recapitalization
transaction (the "Recapitalization") under which Sun redeemed 67,336.67 shares
of its common stock held by an individual and his related family interests (the
"Selling Shareholders") and exchanged 30,072.33 shares of its common stock held
by the former minority shareholder and his family interests (the "Continuing
Shareholders") for 198,891 shares of Series B Preferred Stock totalling
$39,778,000. Additionally, Sun issued 215,000 shares of Series A Preferred Stock
to Vestar/Sun Holding Company LLC ("Vestar") for $43,000,000 in cash and Vestar
purchased 1,512 shares of Sun common stock directly from the Continuing
Shareholders such that, after the Recapitalization, Vestar owned 40% and the
Continuing Shareholders owned 60% of the common equity interests of the Company.
The above transactions have been accounted for as a recapitalization and, as
such, there was no change in the carrying values of the Company's net assets.
F-11
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. REORGANIZATION AND RECAPITALIZATION (CONTINUED)
As a result of the Reorganization and Recapitalization, the Selling
Shareholders and the Continuing Shareholders received total cash of $147,411,000
and $30,000,000, respectively. These distributions and related fees and expenses
were financed by using the proceeds from equity issuances, bank debt and
subordinated debt (see Notes 7 and 8).
3. DUE FROM FACTORS
Sun has agreements with three commercial finance companies which provide for
the factoring of certain trade receivables of its selling divisions. These
receivables are factored without recourse as to credit risk, but with recourse
for any claims by the customers for chargebacks in the normal course of business
relating to damaged goods, returns, markdowns, and any applicable trade
discounts. Such receivables sold without recourse are reflected in the
accompanying financial statements as due from factors. Sun is charged a
factoring commission ranging from .50% to .60% of factored sales. The factoring
commissions are included in factoring charges in the accompanying financial
statements. Upon collection of the receivables, the factors forward the related
payment to Sun's primary lender for credit to Sun's account.
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 31, MARCH 31,
1996 1997 1998
--------------- --------------- -----------
<S> <C> <C> <C>
Finished goods................... $ 31,501 $ 33,646 $ 38,044
Work-in-process.................. 10,274 12,746 13,460
Piece goods...................... 7,297 5,303 6,846
Trim and supplies................ 5,888 6,009 6,432
--------------- --------------- -----------
$ 54,960 $ 57,704 $ 64,782
--------------- --------------- -----------
--------------- --------------- -----------
</TABLE>
F-12
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following balances (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
DECEMBER 28, DECEMBER 31, MARCH 31, USEFUL LIFE
1996 1997 1998 IN YEARS
--------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Land............................... $ 1,418 $ 1,560 $ 1,560 --
Building and improvements.......... 12,599 13,203 12,937 30-31.5
Production equipment............... 16,174 16,504 16,578 5-7
Computer equipment................. 4,236 6,586 7,041 5
Office furniture and other
equipment........................ 7,977 15,040 17,283 5-7
Life of
Leasehold improvements............. 2,138 2,564 2,508 Lease
Processing and related equipment... 2,821 3,403 3,403 5-7
Autos and truck.................... 252 389 389 5-10
--------------- --------------- -----------
47,615 59,249 61,699
Less accumulated depreciation...... 19,222 25,167 26,967
--------------- --------------- -----------
$ 28,393 $ 34,082 $ 34,732
--------------- --------------- -----------
--------------- --------------- -----------
</TABLE>
Depreciation expense for 1995, 1996, and 1997 was approximately $2,800,000,
$6,578,000, and $5,703,000, respectively. Fully depreciated assets have been
written off the books, although some may still be in use. Computer equipment at
December 31, 1997 and March 31, 1998 includes $867,000 of assets held under
capital leases, and amortization of these leases is included in depreciation
expense.
6. GROUP HEALTH INSURANCE
The Company maintains self-insurance group health plans for U.S. employees.
The plans provide medical benefits coverage for qualified and participating
employees. For protection against significant claims, the Company has obtained
coverage for claims in excess of $20,000 per employee. The amount charged to
health insurance expense is based upon benefits paid and expected liabilities
and includes the insurance premiums. Management believes that the accrued
liability as of December 31, 1997 is adequate to cover future benefit payments
for claims that occurred prior to year-end.
7. BANK CREDIT COMMITMENT AND FACILITY
On September 26, 1997, Sun entered into a new Loan Agreement (the Facility)
that provides for up to $235,000,000 in committed credit by a group of
participating banks. A Swingline Loan facility of $10,000,000 is provided within
the Facility to accommodate zero balance banking. The Facility provides for
aggregate term debt, consisting of two term loans, of $155,000,000. The first
Term Loan (Term Loan A) provides for $45,000,000 payable in escalating quarterly
payments beginning March 31, 1998 at $500,000 and increasing to $1,250,000,
$1,750,000, $2,500,000, and $3,650,000 for the years 1999, 2000, 2001 -- 2002,
and 2003, respectively, with the final payment of $3,700,000 being due on
September 30, 2003. The second Term Loan (Term Loan B) provides $110,000,000
payable in sixteen quarterly payments of $250,000 from March 31, 1999 to
December 31, 2002, four quarterly payments of $4,000,000 from March 31, 2003 to
December 31, 2003, and three quarterly payments of $30,000,000 from March 31,
2004 to September 30, 2004. Interest is payable quarterly on the outstanding
term loans at interest rate options selected by Sun. The interest rate options
for all outstanding amounts (term loans and revolving credit loans) are based
upon the Prime Rate, the Federal Funds Effective Rate, or LIBOR (plus applicable
margin based on the leverage ratio as of the determination date) as defined by
the
F-13
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BANK CREDIT COMMITMENT AND FACILITY (CONTINUED)
Facility. At December 31, 1997, Sun's interest rate was 8.74%, 9.24%, and 8.74%
for Term Loan A, Term Loan B, and the revolving credit loans, respectively.
Borrowings under the Facility are secured by factor receivable balances, trade
receivables, inventories, machinery and equipment, real property, and
intangibles.
In addition to the term loans, the Facility provides for revolving credit
loans (Revolving Loans) to Sun from September 26, 1997 to September 30, 2003, in
aggregate amount outstanding at any one time up to $80,000,000. The aggregate
amount of all Revolving Loans (plus Swingline Loans) at any time outstanding
shall not exceed the Borrowing Base (as hereinafter defined) then in effect. The
Borrowing Base is defined as the sum of (i) eighty-five percent (85%) of (a) all
eligible nonpurchased accounts; plus (b) the lesser of (1) $3,000,000 or (2) all
eligible collectible chargebacks less collectible chargeback reserve; plus (c)
all eligible factored credit balances; and (ii) the lesser of (a) $1,000,000 or
(b) fifty percent (50%) of accrued settlements; and (iii) the lesser of (a) the
inventory cap or (b) the sum of (1) fifty-five percent (55%) of all eligible
inventory and (2) thirty-five percent (35%) of eligible inventory related to
"unwashed" finished goods; and (iv) an amount equal to (a) fifty percent (50%)
of the face amount of all issued and outstanding trade letters of credit less
(b) a reserve for estimated costs and expenses required to be paid in order to
take possession of any inventory which is then in transit. At December 31, 1997,
Sun had approximately $70,427,000 ($80,442,000 at March 31, 1998) available
under the Borrowing Base, of which $27,000,000 ($19,500,000 at March 31, 1998)
was utilized under the Revolving Credit Facility.
The Facility also provides for irrevocable letters of credit to be issued
against credit loans on behalf of Sun up to $30,000,000, subject to certain
borrowing limitations.
The Facility contains restrictive covenants relating to, among other things,
additional borrowings, additional liens, additional guarantees, the declaration
or payment of dividends, transactions with subsidiaries, mergers or
acquisitions, investments, asset sales, and capital expenditures. The Facility
includes certain financial covenants including, but not limited to, minimum
interest coverage, minimum fixed charge coverage, and a minimum leverage ratio.
As required by the Facility, the Company has entered into certain interest
rate protection agreements covering $77,500,000 (50%) of its borrowings under
the Facility. As of December 31, 1997, these agreements were in a net
unfavorable position with a fair market value of approximately $222,000.
Under its prior credit agreement as of December 28, 1996, Sun's interest
rate was 7.56% and 8.06% for a $25,000,000 term loan and a $34,250,000 revolving
credit loan, respectively. All amounts outstanding under the prior credit
agreement were repaid using proceeds from the new Facility.
8. DEBT
LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 31, MARCH 31,
1996 1997 1998
--------------- -------------- -----------
<S> <C> <C> <C>
Term Loan A--term note portion of the September 26,
1997 Loan Agreement (see Note 7)--payable in
graduating quarterly principal installments....... -- $ 45,000 $ 44,500
</TABLE>
F-14
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 31, MARCH 31,
1996 1997 1998
--------------- -------------- -----------
<S> <C> <C> <C>
Term Loan B--term note portion of the September 26,
1997 Loan Agreement (see Note 7)--payable in
graduating quarterly principal installments....... -- 110,000 110,000
Mortgages payable, secured by real property, payable
in monthly installments of $34,403 beginning in
1994 through 2006 plus interest at .5% below prime
(8% at December 31, 1997)......................... $ 2,723 2,490 2,437
Note payable--term note portion of the March 27,
1997 Loan Agreement (see Note 7)--payable in
quarterly installments of $1,250,000 beginning in
1997 through 2002 plus interest at the interest
rate option selected by Sun....................... 25,000 -- --
Note payable--trademark--payable in four annual
principal installments of $250,000 beginning in
1995 through 1998 plus interest at Bank of
America's prime (7.5% at December 28, 1996)....... 500 -- --
Mortgage payable, secured by real property, payable
in monthly installments of $27,550 including
interest at 11% per annum with a final installment
due on November 1, 2001........................... 1,267 1,066 1,012
Note payable to bank, secured by equipment, payable
in monthly installments of $95,007 through year
2000 plus interest at 2.54% over the federal funds
rate (8.06% at December 28, 1996)................. 3,432 -- --
Capital lease for computer and related equipment and
software, with interest rates varying from 3.39%
to 4.9%, payable in monthly installments of
$19,666 over five years, beginning April 1997..... -- 713 661
Other............................................... 707 342 27
--------------- -------------- -----------
33,629 159,611 158,637
Less current portion................................ 6,330 3,000 3,518
--------------- -------------- -----------
$ 27,299 $ 156,611 $ 155,119
--------------- -------------- -----------
--------------- -------------- -----------
</TABLE>
F-15
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT (CONTINUED)
SUBORDINATED DEBT
As a part of the Recapitalization (Note 2), on September 26, 1997, Sun and
all subsidiaries (through intercompany advances from Sun) repaid a majority of
third-party debt and all subordinated debt outstanding, except a
noninterest-bearing note payable to an affiliated entity for approximately
$1,607,000 which is subordinated through September 30, 1998.
Subordinated debt at December 28, 1996 included another note to a
shareholder for $700,000, with interest payable at 12% per annum, and a
shareholder note of $300,000, bearing interest at the rate of 10% per annum. As
of December 28, 1996, all interest had been paid, and $100,000 of the
subordinated debt was current.
Also as a part of the Recapitalization, Sun entered into two notes payable
to Vestar (the Vestar Notes) in the aggregate amount of $30,000,000, bearing
interest at 17.9%. A portion of interest (as defined in the agreement) is
payable annually in cash prior to September 25, 2003, but only to the extent
that payment of interest does not violate any senior obligations (any unpaid
interest accumulates as additional principal). After September 25, 2003,
interest is payable annually in arrears. The Vestar Notes have been subordinated
to all creditors until their due dates at September 25, 2007 and are subject to
prepayment penalties prior to maturity as follows:
<TABLE>
<CAPTION>
PERIOD OF PREPAYMENT PENALTY AMOUNT
- ---------------------------------------------------------- ----------------
<S> <C>
Prior to September 26, 1998............................... $ 15,000,000
September 26, 1998 -- September 25, 1999.................. 25,000,000
September 26, 1999 -- September 25, 2000.................. 35,000,000
September 26, 2000 -- September 25, 2001.................. 45,000,000
</TABLE>
These penalty amounts are considered to include accrued but unpaid interest,
and would be reduced by any cash interest paid.
The Vestar Notes are subject to mandatory redemption (including applicable
prepayment penalties) upon the occurrence of certain events as defined in the
note agreement, including changes in equity interests, a public offering of
equity securities, and the payment of dividend on any securities in any form
other than a dividend of similar equity securities.
Accrued interest on the Vestar Notes totaled $1,343,000 and $2,685,000 at
December 31, 1997 and March 31, 1998, respectively.
CAPITAL LEASES
In April 1997, Sun entered into two capital leases for computer equipment.
The minimum monthly lease payment, including interest, for both leases is
approximately $20,000 through March 2001.
F-16
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT (CONTINUED)
PRINCIPAL MATURITIES
Scheduled principal payments on all debt and capital leases as of December
31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL LEASE
SUBORDINATED PRINCIPAL LONG-TERM
DEBT PAYMENTS DEBT TOTAL DEBT
------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
1998................. $ 1,607 $ 214 $ 2,787 $ 4,608
1999................. -- 216 6,492 6,708
2000................. -- 223 8,540 8,763
2001................. -- 60 11,594 11,654
2002................. -- -- 11,306 11,306
2003 and
thereafter........... 30,000 -- 145,179 175,179
------------- -------------- ----------- -----------
$ 31,607 $ 713 $ 185,898 $ 218,218
------------- -------------- ----------- -----------
------------- -------------- ----------- -----------
</TABLE>
FAIR VALUE
Substantially all debt is floating rate or has been issued in the near term,
and the carrying value approximates market value.
9. INCOME TAXES
On September 26, 1997, the Company terminated its Subchapter S tax status
and converted to a C Corporation for federal income tax purposes.
Simultaneously, the Company became subject to the provisions of the Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" (FAS
109). FAS 109 requires that the deferred tax effects of a change in tax status
be included in income from continuing operations at the date of the change in
tax status. The effect of the change from S corporation to C corporation status
as of September 26, 1997 was to increase net income by approximately $1,958,000.
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of the assets and liabilities for
financial reporting purposes and the amounts used for income
F-17
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
tax purposes. Components of the Company's net deferred tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
--------------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciable property.......................... $ 768 $ 790
Display costs................................. 48 50
Polo royalty waiver........................... 212 306
------- -----------
Total deferred tax liabilities.................. 1,028 1,146
Deferred tax assets:
Depreciable property.......................... 577 594
Transaction fees, loan costs.................. 937 930
Inventory..................................... 398 410
Allowance for doubtful accounts............... 70 72
Patent costs.................................. 34 35
Fixture installation costs.................... 460 620
Other......................................... 27 27
------- -----------
Total deferred tax assets....................... 2,503 2,688
------- -----------
Net deferred tax asset.......................... $ 1,475 $ 1,542
------- -----------
------- -----------
</TABLE>
The current and deferred income tax provisions (benefits) included in income
tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
----------------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 30, DECEMBER 28, DECEMBER 31, MARCH 31, MARCH 31,
1995 1996 1997 1997 1998
----------------- ----------------- --------------- ------------- -----------
Current:
Federal............ -- -- $ 3,247 -- $ 2,125
State.............. $ 542 $ 706 1,297 $ 282 253
Foreign............ -- 157 605 -- 114
Deferred federal..... -- -- (1,475) -- (67)
----- ----- ------- ----- -----------
$ 542 $ 863 $ 3,674 $ 282 $ 2,425
----- ----- ------- ----- -----------
----- ----- ------- ----- -----------
</TABLE>
F-18
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The reconciliation of income tax attributable to continuing operations
computed at U.S. federal statutory rates to income tax expense is as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
--------------- -----------
<S> <C> <C>
Tax at statutory rate (34% for December 31, 1997
and 35% for March 31, 1998)................... $ 9,095 $ 2,174
Effect of S corporation status through September
25, 1997...................................... (5,053) --
Effect of change in tax status as of September
26, 1997...................................... (1,958) --
Permanent differences........................... 62 24
State tax expense, net of federal benefit....... 857 164
Excess of foreign over U.S. tax rate............ 380 106
Tax effect of loss on debt extinguishment--
separately stated............................. 291 --
Effect of increase in statutory rates on
existing temporary differences................ -- (43)
------- -----------
$ 3,674 $ 2,425
------- -----------
------- -----------
</TABLE>
10. PREFERRED STOCK
As of December 31, 1997 and March 31, 1998, preferred stock consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
--------------- -----------
<S> <C> <C>
Series A Preferred Stock, $1 par value; 215,000
shares authorized; 215,000 shares issued and
outstanding................................... $ 43,000 $ 43,000
Series B Preferred Stock, $1 par value; 201,065
shares authorized; 201,065 shares issued and
outstanding................................... 40,213 40,213
Series C Preferred Stock, $1 par value; 8,935
shares authorized; 8,935 shares issued and
outstanding................................... 1,787 1,787
--------------- -----------
85,000 85,000
Accumulated unpaid dividends.................... 2,916 5,679
--------------- -----------
$ 87,916 $ 90,679
--------------- -----------
--------------- -----------
</TABLE>
Series A Cumulative Participating Preferred Stock (Series A) is senior to
the Company's common stock and other preferred stock with respect to dividends,
distributions of assets, or liquidation. Series B Cumulative Participating
Preferred Stock (Series B) and Series C Cumulative Participating Preferred Stock
(Series C) are of equal parity, are junior to Series A, and are senior to the
Company's common
F-19
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PREFERRED STOCK (CONTINUED)
stock with respect to dividends, distributions of assets, or liquidation.
Dividends accrue at 13% on Series A, B, and C, are cumulative, and are payable
in cash when dividends are declared. At December 31, 1997 and March 31, 1998,
accumulated unpaid dividends on all preferred stock totaled approximately
$2,916,000 ($6.86 per share) and $5,679,000 ($13.36 per share), respectively.
The Series A shares are redeemable at the option of the Company at any time
at a price of $200 per share (Redemption Price) plus any accumulated and unpaid
dividends.
If the Company or any of its subsidiaries enters into an agreement which
constitutes a change of control as defined in the Statement of Designation of
Series A, the Company must offer to redeem the outstanding shares of Series A at
the Redemption Price plus any accumulated and unpaid dividends.
If the Company undergoes an initial public offering (IPO), the Company must
offer to redeem the outstanding shares of Series A, B, and C at the Redemption
Price plus any accumulated and unpaid dividends. Shares of Series A, B, or C not
redeemed will be converted to shares of common stock. The number of shares of
common stock issued will be determined by dividing the Redemption Price by the
IPO price.
The Redemption Price is subject to adjustment for any stock splits or
combinations.
Series A participates at a rate of 20%, payable in cash, of any dividends
declared on the common stock. Series B and C participate at a rate of 30%,
payable in cash, of any dividends declared on the common stock.
11. PRO FORMA DATA (UNAUDITED)
Pro forma Net income for the years ended December 30, 1995, December 28,
1996, and December 31, 1997, and for the three months ended March 31, 1997, have
been determined assuming that the Company had been taxed as a C corporation for
federal and certain state income tax purposes for such periods.
12. LEASES AND LEASE ARRANGEMENTS
On June 24, 1994, Lone Star entered into a ten year operating lease for
sales offices in New York City. The agreement provides for annual rentals of
approximately $266,000.
On November 17, 1995, R.L. entered into a ten year operating lease for sales
offices in New York with a graduating minimum annual rental of approximately
$383,000 for the first five years and approximately $435,000 for the second five
years. Additionally, R.L. has month-to-month arrangements totaling approximately
$34,000 per month.
On December 5, 1995, Sun entered into a three year operating lease for a
warehouse in El Paso. The agreement, as amended, provides for minimum annual
payments of $404,000.
On June 30, 1996, Lone Star entered into a five year operating lease for
sales offices in New York City for approximately $90,000 per month.
F-20
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LEASES AND LEASE ARRANGEMENTS (CONTINUED)
The minimum rental under all operating leases as of December 31, 1997 with
initial or remaining terms of more than one year are as follows:
<TABLE>
<CAPTION>
TOTAL
---------
<S> <C>
1998............................................................... $ 1,276
1999............................................................... 823
2000............................................................... 743
2001............................................................... 705
2002............................................................... 701
2003 and thereafter................................................ 2,354
---------
$ 6,602
---------
---------
</TABLE>
The total rent expense for Sun for the years ended December 28, 1996 and
December 31, 1997 was $1,177,000 and $2,069,000, respectively.
13. COMMITMENTS AND CONTINGENCIES
Approximately 9% and 5% of Sun's sales were made under trademark licensing
agreements, other than Polo/Ralph Lauren Companies (see Note 14), for the years
1996 and 1997, respectively. One such royalty agreement is currently in a
renewal term of forty-eight months ending December 31, 1999, and provides for
the payment of graduating royalties from 5.0% to 3.8% if certain net sales
levels are achieved. The other agreements call for minimum royalties and
advertising costs ranging from 1.5% to .75% of net sales. The total royalty and
advertising payments per these agreements in 1996, 1997, and for the three
months ended March 31, 1997 and 1998 amounted to approximately $1,444,000,
$1,174,000, $294,000, and $260,000, respectively, and are included in selling,
general, and administrative expenses. During the current renewal term of the
principal trademark licensing agreement, the minimum annual royalties are
$800,000, $600,000, and $400,000 for 1997 through 1999, respectively.
In 1990, GTX entered into an agreement with the owners of the Ricci acid
wash patent, under which GTX is licensed to use the process and to produce
products under a royalty arrangement, and pursuant to which GTX has undertaken a
licensing and patent protection program. GTX is required to pay royalties to the
patent owners on its own production and to make payments to them of a defined
portion of amounts generated through the licensing and patent protection
program. A number of companies have entered into licensing and settlement
agreements with GTX, and GTX has been involved in several lawsuits regarding
patent validity and recovery of damages from infringement. In October 1997, a
settlement was reached on all outstanding lawsuits related to patent
infringement, and GTX received a settlement of $1,386,000 which is included in
other income for 1997. GTX's and its licensees' use of the patented acid wash
process has declined significantly and was minimal in 1997.
The Company is party to several lawsuits in the normal course of business.
Management believes that the outcome of these claims is not determinable at
December 31, 1997, and that ultimate resolution will not have a material adverse
effect on the Company's financial position or results of operations.
F-21
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. LICENSE AGREEMENT WITH POLO/RALPH LAUREN COMPANIES
In September 1995, Sun entered into a license agreement and a design
services agreement covering men's apparel products with the Polo/Ralph Lauren
Companies (Polo), which were expanded in October 1995 to include women's apparel
products. Under the agreements, Polo has granted Sun an exclusive license to use
certain Polo trademarks. The initial term of the license agreement is from
August 1, 1995 to December 31, 2000 and may be renewed by Sun in five year
increments for up to 30 additional years if certain sales requirements are met.
Under the agreements, Sun is required to pay Polo royalties equal to 7% of
net sales of the licensed products. Approximately 35% and 55% of Sun's sales
were made under this agreement for the years 1996 and 1997, respectively. The
total royalty payment per this agreement amounted to $7,035,000 and $11,504,000
for the years 1996 and 1997, respectively. Commencing in 2001, certain minimum
annual royalty payments are required if Sun exercises its renewal options.
For the three months ended March 31, 1997 and 1998, approximately 55% and
61% of Sun's sales were made under the Polo agreement. Polo royalty expenses
aggregated approximately $2,175,000 and $3,356,000, respectively, for these
periods.
Sun is obligated to spend on advertising an annual amount equal to 3% of net
sales of licensed products, but not less than $20,000,000 for the launch of the
lines through December 31, 1997. Sun incurred launch advertising expense for the
two years ended December 28, 1996 and December 31, 1997 of approximately
$9,639,000 and $12,861,000, respectively, meeting the two year minimum launch
advertising requirements.
Renewal by Sun after 2010 requires a one-time payment of $25,000,000 or, at
Sun's option, a transfer of a 20% interest in its Polo jeanswear business to
Polo. Polo has the one-time right, in blockage of such renewal, to purchase
Sun's Polo jeanswear business at the end of 2010 for 80% of its then fair market
value, as defined, payable in cash.
15. YEAR 2000 ISSUE (UNAUDITED)
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by early 1999 and to cost between $750,000 and $1,000,000. This estimate
includes internal costs as well as consulting help. It also includes the cost of
software purchases where applicable. The Company does not expect this project to
have a significant effect on operations. This project started in early 1998. The
Company will continue to implement systems with strategic value simultaneously
with Year 2000 development.
F-22
<PAGE>
SUN APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. VALUATION AND QUALIFYING ACCOUNTS
Valuation and qualifying accounts included the following (in thousands):
<TABLE>
<CAPTION>
BALANCE CHARGED TO BALANCE
BEGINNING OF COSTS AND NET END OF
YEAR EXPENSES WRITE-OFFS YEAR
--------------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
1997
Allowance for doubtful
accounts.............. $ 102 $ 269 $ 166 $ 205
1996
Allowance for doubtful
accounts.............. 78 89 65 102
1995
Allowance for doubtful
accounts.............. -- 78 -- 78
</TABLE>
F-23
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters, for whom Goldman, Sachs & Co., Bear, Stearns & Co. Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and NationsBanc Montgomery
Securities LLC are acting as representatives, has severally agreed to purchase
from the Company the respective number of shares of Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
UNDERWRITER COMMON STOCK
- ---------------------------------------------------------- -----------------------
<S> <C>
Goldman, Sachs & Co.......................................
Bear, Stearns & Co. Inc. .................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................
NationsBanc Montgomery Securities LLC.....................
Total...............................................
------------
------------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and the other selling terms may from time
to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of
additional shares of Comon Stock solely to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each to
them, as shown in the foregoing table, bears to the shares of Common Stock
offered hereby.
The Company, its executive officers, directors and Vestar have agreed that,
during the period beginning from the date of the Underwriting Agreement and
continuing to and including the date 180 days after the date of this Prospectus,
they will not offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock or any securities of the Company that are substantially similar
to the Common Stock, including but not limited to any securities that are
convertible into or exchangeable for, or that represent the right to receive,
Common Stock or any such substantially similar securities (other than pursuant
to employee or director stock or stock option plans existing on the date of this
Prospectus) without the prior written consent of Goldman, Sachs & Co., as
representative of the Underwriters, except for the shares of Common Stock
offered in connection with the Offering.
The Underwriters have reserved for sale at the initial public offering price
up to shares of Common Stock which may be sold to the Company's management
employees, customers and suppliers and other persons associated with the Company
or affiliated with any director, officer or management employee of the Company.
The number of shares available for sale to the general public will be reduced to
the extent any reserved shares are purchased. Any reserved shares not so
purchased will be offered by the Underwriters on the same basis as the other
shares offered hereby.
U-1
<PAGE>
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Common Stock offered by them.
Prior to the Offering, there has been no public market for the shares. The
initial public offering price was negotiated among the Company and the
representatives of the Underwriters. Among the factors considered in determining
the initial public offering price of the Common Stock, in addition to prevailing
market conditions, were the Company's historical performance, estimates of the
business potential and earnings prospects of the Company, an assessment of the
Company's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock than
they are required to purchase from the Company in the Offering. The Underwriters
also may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Common Stock sold in the
offering for their account may be reclaimed by the syndicate if such Common
Stock is repurchased by the syndicate in stabilizing or covering transactions.
These activities may stabilize, maintain or otherwise affect the market price of
the Common Stock, which may be higher than the price that might otherwise
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
Application will be made to have the Company's Common Stock quoted on the
Nasdaq National Market under the symbol " ".
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
Certain of the Underwriters have provided from time to time, and may provide
in the future, investment banking services to the Company, for which such
Underwriters have received and will receive customary fees and commissions.
Goldman, Sachs & Co. and Bear, Stearns & Co. Inc. own 1.7% and 2.7%,
respectively, of the equity of the Vestar entity which holds Vestar's interest
in the Common Stock, the Preferred Stock and the Vestar Note. Goldman, Sachs &
Co. will receive $0.75 million and Bear, Stearns & Co. Inc. will receive $1.20
million in connection with the repayment of the Vestar Note. Affiliates of Bear,
Stearns & Co. Inc. and NationsBanc Mongomery Securities LLC have 0.4% and 0.6%
interests, respectively, in Vestar Capital Partners III, L.P., which is the
principal investor in Vestar. See "Description of Certain Indebtedness--Vestar
Note".
U-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO 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 REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OF THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 10
Use of Proceeds....................... 17
Dividend Policy....................... 17
Dilution.............................. 18
Capitalization........................ 19
Selected Historical Financial Data.... 20
Pro Forma Financial Data.............. 21
Company History, the Recapitalization
and Prior S Corporation Status...... 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 28
Business.............................. 35
Management............................ 47
Certain Transactions.................. 54
Principal Shareholders................ 58
Certain United States Federal Tax
Consequences to Non-United States
Holders............................. 59
Description of Capital Stock.......... 62
Description of Certain Indebtedness... 65
Shares Eligible for Future Sale....... 67
Legal Matters......................... 67
Experts............................... 68
Additional Information................ 68
Index to Consolidated Financial
Statements.......................... F-1
Underwriting.......................... U-1
</TABLE>
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
SUN APPAREL, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
---------------------
PROSPECTUS
---------------------
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY
SECURITIES LLC
REPRESENTATIVES OF THE UNDERWRITERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is a table of the registration fee for the Securities and
Exchange Commission, the filing fee for the National Association of Securities
Dealers, Inc., the listing fee for the Nasdaq National Market and estimates of
all other expenses to be incurred in connection with the issuance and
distribution of the securities described in this Registration Statement, other
than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee............................................. $ 33,925
NASD filing fee.................................................. 12,000
Nasdaq listing fee...............................................
Blue sky fees and expenses.......................................
Printing expenses................................................
Legal fees and expenses..........................................
Accounting fees and expenses.....................................
Transfer Agent and registrar fees................................
Miscellaneous....................................................
---------
Total...................................................... $
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Restated Articles of Incorporation, as amended, require the
Registrant to indemnify officers and directors of the Registrant to the fullest
extent permitted by Article 2.02-1 of the Business Corporation Act of the State
of Texas (the "TBCA"). The Restated Articles of Incorporation and the Articles
of Amendment to the Restated Articles of Incorporation of the Registrant are
filed as Exhibits 3.1 and 3.2 to the Registration Statement. Generally, Article
2.02-1 of the TBCA permits a corporation to indemnify a person who was, is, or
is threatened to be made a named defendant or respondent in a proceeding because
the person was or is a director or officer if it is determined that such person
(i) conducted himself in good faith, (ii) reasonably believed (a) in the case of
conduct in his official capacity as a director or officer of the corporation,
that his conduct was in the corporation's best interests, or (b) in other cases,
that his conduct was at least not opposed to be the corporation's best
interests, and (iii) in the case of any criminal proceeding, had no reasonable
cause to believe that his conduct was unlawful. In addition, the TBCA requires a
corporation to indemnify a director or officer for any action that such director
or officer is wholly successful in defending on the merits.
Pursuant to the Underwriting Agreement, a form of which is to be filed as
Exhibit 1.1 to this Registration Statement, the Underwriters have agreed to
indemnify the directors, officers and controlling persons of the Registrant
against certain civil liabilities that may be incurred in connection with this
Offering, including certain liabilities under the Securities Act.
The Registrant may provide liability insurance for each director and officer
for certain losses arising from claims or changes made against them while acting
in their capabilities as directors or officers of Registrant, whether or not
Registrant would have the power to indemnify such person against such liability,
as permitted by law.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
As part of the Recapitalization, Vestar invested $75 million in the
Registrant and received (i) 40% of the then outstanding common stock of the
Registrant, (ii) 215,000 shares of the Registrant's 13% Series A Cumulative
Participating Preferred Stock and (iii) the $30 million Vestar Note. As part of
the Recapitalization, Mr. Rothfeld and the Rothfeld Family Trust contributed to
the Registrant a portion of their interests in the Registrant and all of their
interests in the Affiliated Companies and received (i) additional shares of the
Registrant's common stock (increasing their collective ownership interest in the
Company from one-third to 60% of the Registrant's then outstanding common
stock), (ii) 201,065 shares of the Registrant's 13% Series B Cumulative
Participating Preferred Stock and 8,935 shares of the Registrant's 13% Series C
Cumulative Participating Preferred Stock, respectively and (iii) cash
distributions totaling approximately $30 million. The above referenced sales of
the securities to Vestar and Mr. Rothfeld and the Rothfeld Family Trust were
made in reliance on Section 4(2) of the Securities Act of 1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
*2.1 Stock Purchase Agreement dated June 19, 1997 for CNC Shares
*2.2 Stock Purchase Agreement dated June 19, 1997 for Pami Shares
*2.3 Stock Purchase Agreement dated June 19, 1997 for Sun City Shares
3.1 Restated Articles of Incorporation
3.2 Articles of Amendment to the Restated Articles of Incorporation
3.3 By-Laws of the Company
*3.4 Amendments to the By-Laws
*3.5 Statement of Designation Establishing Series of Shares of 13% A Cumulative Participating Preferred Stock
*3.6 Statement of Designation Establishing Series of Shares of 13% B Cumulative Participating Preferred Stock
*3.7 Statement of Designation Establishing Series of Shares of 13% C Cumulative Participating Preferred Stock
*4.1 Specimen Certificate for shares of Common Stock of the Registrant
*5.1 Opinion of Mayfield, Perrenot, Davie and Dennis, P.C. as to the legality of the securities being offered
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*10.1 Credit Agreement dated September 26, 1997, by and among Chase Manhattan Bank and the other lenders
identified therein and the Registrant (excluding schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request)
*10.2 Investment Agreement, dated as of September 26, 1997, by and between Vestar/Sun Holding Company, L.L.C.
Eric A. Rothfeld and the trustees of The Rothfeld Family Trust
*10.3 Stockholders' Agreement, dated as of September 26, 1997, among Vestar/Sun Holding Company, L.L.C., Sun
Apparel, Inc., Eric A. Rothfeld and The Rothfeld Family Trust
*10.4 Employment Agreement, dated as of September 26 1997, by and between Eric A. Rothfeld and Sun Apparel,
Inc.
*10.5 Employment Agreement, dated as of January 1, 1996, by and between Mindy F. Grossman and R. L. Management
*10.6 Employment Agreement, dated as of September 5, 1996, by and between Dona Fisher and Sun Apparel, Inc.
*10.7 Management Agreement, dated as of September 26, 1997, by and between Sun Apparel, Inc. and Vestar
Capital Partners
*10.8 License Agreement dated August 1, 1995 by and between the Registrant and Polo Ralph Lauren, as amended
*10.9 Design Services Agreement dated August 1, 1995 between Polo Ralph Lauren and Sun Apparel, Inc.
*10.10 License Agreement dated April 1, 1995 by and between the Registrant and L7 Designs, Inc., as amended
*10.11 Sun Apparel, Inc. 1998 Stock Option and Incentive Plan.
*10.12 $9,355,250 Subordinated Promissory Note by and between Sun Apparel, Inc. and
Vestar/Sun Holding Company, L.L.C.
*10.13 $20,644,750 Non-Recourse Promissory Note by and between Eric Rothfeld and Vestar/ Sun Holding Company,
L.L.C.
*10.14 $1,600,000 Note by and between Sun Apparel, Inc. and Sun Manufacturing, Inc.
*11.1 Statement regarding computation of per share earnings
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Mayfield, Perrenot, Davie and Dennis, P.C.
24.1 Power of Attorney (included on the signature pages to this Registration Statement)
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment
(b) Financial Statement Schedules:
All schedules have been omitted because they are not applicable or not
required under the instructions or the information requested is set forth
in the consolidated financial statements or related notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The Registrant undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the 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 the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<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 May 21, 1998.
SUN APPAREL, INC.
BY: /S/ ERIC A. ROTHFELD
-----------------------------------------
Eric A. Rothfeld
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each of the undersigned officers and directors of Sun Apparel, Inc., a Texas
corporation, hereby constitutes and appoints Eric A. Rothfeld and Tami J. Fersko
and each of them, severally, as his attorney-in-fact and Agent, with full power
of substitution and resubstitution, in his name and on his behalf, to sign in
any and all capacities this Registration Statement and any and all amendments
(including post-effective amendments) and exhibits to this Registration
Statement, any subsequent Registration Statement for the same offering which may
be filed under Rule 462(b) under the Securities Act of 1933, as amended, and any
and all amendments (including post-effective amendments) and exhibits thereto,
and any and all applications and other documents relating thereto, with the
Securities and Exchange Commission, with full power and authority to perform and
do any and all acts and things whatsoever which any such attorney or substitute
may deem necessary or advisable to be performed or done in connection with any
or all of the above-described matters, as fully as each of the undersigned could
do if personally present and acting, hereby ratifying and approving all acts of
any such attorney or substitute.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on May 21, 1998.
SIGNATURE TITLE
- ------------------------------ ---------------------------
/s/ ERIC A. ROTHFELD Chairman, President, and
- ------------------------------ Chief Executive Officer
Eric A. Rothfeld
/s/ DONA FISHER Chief Financial Officer,
- ------------------------------ Executive Vice President
Dona Fisher of Operations and Finance
/s/ DANIEL S. O'CONNELL Director
- ------------------------------
Daniel S. O'Connell
/s/ SANDER M. LEVY Director
- ------------------------------
Sander M. Levy
/s/ DANIEL H. GOLDEN Director
- ------------------------------
Daniel H. Golden
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
*2.1 Stock Purchase Agreement dated June 19, 1997 for CNC Shares
*2.2 Stock Purchase Agreement dated June 19, 1997 for Pami Shares
*2.3 Stock Purchase Agreement dated June 19, 1997 for Sun City Shares
3.1 Restated Articles of Incorporation
3.2 Articles of Amendment to the Restated Articles of Incorporation
3.3 By-Laws of the Company
*3.4 Amendments to the By-Laws
*3.5 Statement of Designation Establishing Series of Shares of 13% A Cumulative Participating Preferred Stock
*3.6 Statement of Designation Establishing Series of Shares of 13% B Cumulative Participating Preferred Stock
*3.7 Statement of Designation Establishing Series of Shares of 13% C Cumulative Participating Preferred Stock
*4.1 Specimen Certificate for shares of Common Stock of the Registrant
*5.1 Opinion of Mayfield, Perrenot, Davie and Dennis, P.C. as to the legality of the securities being offered
*10.1 Credit Agreement dated September 26, 1997, by and among Chase Manhattan Bank and the other lenders
identified therein and the Registrant (excluding schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request)
*10.2 Investment Agreement, dated as of September 26, 1997, by and between Vestar/Sun Holding Company, L.L.C.
Eric A. Rothfeld and the trustees of The Rothfeld Family Trust
*10.3 Stockholders' Agreement, dated as of September 26, 1997, among Vestar/Sun Holding Company, L.L.C., Sun
Apparel, Inc., Eric A. Rothfeld and The Rothfeld Family Trust
*10.4 Employment Agreement, dated as of September 26 1997, by and between Eric A. Rothfeld and Sun Apparel,
Inc.
*10.5 Employment Agreement, dated as of January 1, 1996, by and between Mindy F. Grossman and R. L. Management
*10.6 Employment Agreement, dated as of September 5, 1996, by and between Dona Fisher and Sun Apparel, Inc.
*10.7 Management Agreement, dated as of September 26, 1997, by and between Sun Apparel, Inc. and Vestar
Capital Partners
*10.8 License Agreement dated August 1, 1995 by and between the Registrant and Polo Ralph Lauren, as amended
*10.9 Design Services Agreement dated August 1, 1995 between Polo Ralph Lauren and Sun Apparel, Inc.
*10.10 License Agreement dated April 1, 1995 by and between the Registrant and L7 Designs, Inc., as amended
*10.11 Sun Apparel, Inc. 1998 Stock Option and Incentive Plan.
*10.12 $9,355,250 Subordinated Promissory Note by and between Sun Apparel, Inc. and
Vestar/Sun Holding Company, L.L.C.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*10.13 $20,644,750 Non-Recourse Promissory Note by and between Eric Rothfeld and Vestar/ Sun Holding Company,
L.L.C.
*10.14 $1,600,000 Note by and between Sun Apparel, Inc. and Sun Manufacturing, Inc.
*11.1 Statement regarding computation of per share earnings
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Mayfield, Perrenot, Davie and Dennis, P.C. (included in Exhibit 5.1)
24.1 Power of Attorney (included on the signature pages to this Registration Statement)
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment
<PAGE>
Exhibit 3.1
RESTATED ARTICLES OF INCORPORATION
OF
SUN APPAREL, INC.
To the Secretary of State
of the State of Texas
Pursuant to the provisions of Article 4.07 of the Texas Business Corporation
Act, the undersigned corporation submits the following resolution which was duly
adopted by the Board of Directors of the Corporation, and by the holders of
101,000 shares (representing 100%) of the outstanding Common Stock of the
Corporation, on March 20, 1996:
1. This Instrument accurately copies the Articles of Incorporation of the
Corporation and all amendments to date as in effect and this instrument
contains no change in the provisions thereof, except the following
amendments which have been effected in conformity with the Taxes Business
Corporation Act, which amendments are stated as follows:
(a) ARTICLE THREE, which corrects certain typographical errors in the
statement of the purpose for which the Corporation was organized;
(b) ARTICLE FOUR, which sets forth the authorized shares of the
Corporation, was inadvertently omitted from the Amended Articles of
Incorporation of the Corporation when such articles were filed with
the Secretary of State of the State of Texas on October 28, 1987 as
part of the Articles of Merger of the Corporation with Ralzada
Corporation;
(c) ARTICLE SEVEN, which provides for the limitation of liability of
directors of the Corporation, and for the Indemnification of certain
persons, to the extent permitted under the Texas Business Corporation
Act and permits actions required by such Act to be taken without a
meeting upon written consent of the holders of the minimum number of
shares necessary to take such action at a meeting;
<PAGE>
(d) ARTICLE EIGHT, which provides for amendments of the Articles of
Incorporation as authorized by the laws of the State of Texas and for
the effects of such amendments on shareholders; and
(e) ARTICLE NINE, which changes the name of the registered agent of the
Corporation in the State of Texas.
2. The adopted Restated Articles of Incorporation of the Corporation are as
follows:
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ARTICLE ONE
The name of the Corporation is SUN APPAREL, INC.
ARTICLE TWO
The period of the Corporation's duration is perpetual.
ARTICLE THREE
The purpose or purposes for which the Corporation is organized are:
To transact any or all lawful business for which corporations may be
incorporated under the Texas Business Corporation Act.
ARTICLE FOUR
The aggregate number of shares of capital stock which the Corporation
shall have authority to issue is one million five hundred thousand (1,500,000)
shares, consisting of one million (1,000,000) shares of Common Stock without par
value, and five hundred thousand (500,000) shares of Preferred Stock with a par
value of $1.00 per share.
Shares of Preferred Stock may be issued from time to time in one or
more series, each such series to have such designation and such relative rights,
preferences, qualifications, limitations and restrictions as shall be fixed and
determined by resolution adopted by the Board of Directors of the Corporation in
accordance with the laws of the State of Texas prior to the issuance of any
shares of such series. Each share of Preferred Stock shall be identical with
all other shares of Preferred Stock, except as to the following relative rights
and preferences, as to which there may be variations between different series:
(a) the rate of dividend;
(b) the price at and the terms and conditions on which shares may be
redeemed;
(c) the amount payable upon shares in the event of involuntary
liquidation;
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(d) the amount payable upon shares in the event of voluntary
liquidation;
(e) sinking fund provisions for the redemption or purchase of shares;
(f) the terms and conditions on which shares may be converted, if the
shares of any series are issued with the privilege of conversion;
and
(g) voting rights.
ARTICLE FIVE
The Corporation will not commence business until it has received for
the issuance of its shares consideration of the value of ONE THOUSAND AND NO/100
($1,000.00) DOLLARS, consisting of money, labor done or property actually
received.
ARTICLE SIX
All shareholders are granted the right of cumulative voting in all
elections. The pre-emptive right to acquire additional, unissued or treasury
shares of the corporation, or securities of the corporation convertible into or
carrying a right to subscribe to or acquire shares is hereby expressly denied.
ARTICLE SEVEN
The following provisions are inserted herein for the purpose of
defining, limiting, and regulating the powers of the Corporation and of the
directors and of the shareholders, provided, however, that said provisions shall
not be deemed exclusive of any rights or liabilities otherwise granted or
imposed by the State of Texas:
1. The liability of the directors of the Corporation is eliminated
to the fullest extent permitted by the provisions of the Texas Business
Corporation Act and by the provisions of the Texas Miscellaneous Corporation
Laws Act, as the same may be amended and supplemented.
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2. The Corporation shall, to the fullest extent permitted by the
provisions of Article 2.02-1 of the Texas Business Corporation Act, as the same
may be amended and supplemented, indemnify any and all persons whom it shall
have power to indemnify under said Article from and against any and all of the
expenses, liabilities, or other matters referred to or covered by said Article.
3. Any action required by the Texas Business Corporation Act to be
taken at an annual or special meeting of shareholders, or any action which may
be taken at an annual or special meeting of shareholders, may be taken without a
meeting, without prior notice, and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holder or
holders of shares having not less than the minimum number of votes that would be
necessary to take such action at a meeting at which the holders of all shares
entitled to vote on the action were present and voted.
ARTICLE EIGHT
From time to time any of the provisions of these Articles of
Incorporation may be amended, altered, or repealed, and other provisions
authorized by the laws of the State of Texas at the time in force may be added
or inserted in the manner and at the time prescribed by said laws, and all
contracts and rights at any time conferred upon the shareholders of the
Corporation by these Articles of Incorporation are granted subject to the
provisions of this Article.
ARTICLE NINE
The post office address of the registered office of the Corporation is
11201 Armour Drive, in the City of El Paso, County of El Paso, and the name of
its registered agent at said address is, Miles L. Rubin.
ARTICLE TEN
The number of directors constituting the board of directors of the
Corporation at the date hereof is two (2), and the names and the addresses of
the persons who are serving as directors until the next annual meeting of the
shareholders or until their successors are elected and shall qualify are:
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NAME ADDRESS
Eric A. Rothfeld 111 East 40th Street, New York, NY 10018
Miles L. Rubin 11264 Enid Wilson, El Paso, TX 77936
SUN APPAREL, INC.
By:
--------------------------------
Chairman of the Board
Dated: March 20, 1996
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Exhibit 3.2
ARTICLES OF AMENDMENT
TO THE
RESTATED ARTICLES OF INCORPORATION
OF
SUN APPAREL, INC.
---------------------------------
Pursuant to Section 4.04 of the
Texas Business Corporation Act
---------------------------------
Sun Apparel, Inc., a Texas corporation (hereinafter called the
"Corporation"), does hereby certify as follows:
FIRST: Article Four of the Corporation's Restated Articles of
Incorporation is hereby amended to read in its entirety as set forth below:
The aggregate number of shares of capital stock which the Corporation
shall have authority to issue is one million five hundred thousand
(1,500,000) shares, consisting of one million (1,000,000) shares of
Common Stock without par value, and five hundred thousand (500,000)
shares of Preferred Stock with a par value of $1.00 per share.
The Board of Directors is expressly authorized to provide for the
issuance of all or any shares of the Preferred Stock in one or more
classes or series, and to fix for each such class or series such
voting powers, full or limited, or no voting powers, and such
distinctive designations, preferences and relative, participating,
optional or
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other special rights and such qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors providing
for the issuance of such class or series and as may be permitted by
the laws of the State of Texas, including, without limitation, the
authority to provide that any such class or series may be (i) subject
to redemption at such time or times and at such price or prices; (ii)
entitled to receive dividends (which may be cumulative or
non-cumulative) at such rates, on such conditions, and at such times,
and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series; (iii)
entitled to such rights upon the dissolution of, or upon any
distribution of the assets of, the Corporation; or (iv) convertible
into, or exchangeable for, shares of any other class or classes of
stock, or of any other series of the same or any other class or
classes of stock, of the Corporation at such price or prices or at
such rates of exchange and with such adjustments; all as may be stated
in such resolution or resolutions.
SECOND: Article Six of the Corporation's Restated Articles of
Incorporation is hereby amended to read in its entirety as set forth below:
Except as otherwise agreed to by the Corporation, the pre-emptive
right to acquire additional, unissued or treasury shares of the
Corporation, or securities of the Corporation convertible into or
carrying a right to subscribe for or acquire shares is hereby
expressly denied.
THIRD: Article Nine of the Corporation's Restated Articles of
Incorporation is hereby amended to read in its entirety as set forth below:
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The post office address of the registered office of the Corporation is
11201 Armour Drive, in the City of El Paso, County of El Paso, and the
name of its registered agent at said address is Dona Fisher.
FOURTH: As of the date hereof, there are 3,780 shares outstanding and
all of such shares are entitled to vote on the foregoing amendments.
FIFTH: The foregoing amendments were unanimously approved by the
shareholders.
SIXTH: The foregoing amendments were duly adopted in accordance with
Section 4.04 of the Texas Business Corporation Act.
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<PAGE>
IN WITNESS WHEREOF, Sun Apparel, Inc. has caused this Certificate to
be duly executed in its corporate name this 26th day of September, 1997.
SUN APPAREL, INC.
By:
-------------------------
Name:
Title:
<PAGE>
Exhibit 3.3
BY-LAWS OF
SUN APPAREL, INC.
ARTICLE I
NAME
SECTION 1. The name of this corporation is Sun Apparel, Inc.
LOCATION
SECTION 2. The location of its principal office and place of
business shall be 11201 Armour Drive, El Paso, Texas 79935.
SECTION 3. The Corporation shall not have a corporate seal.
ARTICLE II
SHARES AND SHAREHOLDERS
SECTION 1. A statement of the aggregate number of shares which
this Corporation shall have authority to issue, the classes of such shares and
the par value of each of such shares, is stated in its Articles of
Incorporation, and reference is made thereto for all purposes.
SECTION 2. The shareholders of this Corporation shall be those who
appear on the books of the Corporation as the holders of one or more shares, or
fractional shares, of the stock of this Corporation, for the purpose of
determining the owners thereof for voting purposes and for the purpose of
payment of dividends.
<PAGE>
SECTION 3. All transfers of the shares of this Corporation shall
be made in accordance with the provisions of Chapter 8 -- Investment Securities
- -- of the Texas Business and Commerce Code. Certificates of shares shall be
surrendered and canceled at the time of transfer. No transfer of shares shall
be made within three days next preceding the date appointed for paying
dividends.
SECTION 4. In case of loss or destruction of a certificate of
shares, another may be issued in its place upon proof of such loss or
destruction, and the giving of a satisfactory bond of indemnity if so required
by the Board of directors.
SECTION 5. All certificates of shares of the Corporation, when
issued, shall be signed by the President or Vice President, and by the Secretary
or an Assistant Secretary.
A. Each certificate representing shares shall state upon the face
thereof:
(1) That the Corporation is organized under the laws of the State of
Texas;
(2) The name of the person to whom it is issued;
(3) The number and class of shares and designation of the series, if
any, which such certificates represent; and
(4) The par value of each share represented by such certificates, or
a statement that such shares are without par value.
2
<PAGE>
B. In the event any restriction on the transfer, or registration of
the transfer, of shares shall be imposed or agreed to by the Corporation, as
permitted by this Act, each certificate representing shares so restricted (1)
shall conspicuously set forth a full or summary statement of the restriction on
the face of the certificate, or (2) shall set forth such statement on the back
of the certificate and conspicuously refer to the same on the face of the
certificate, or (3) shall conspicuously state on the face or back of the
certificate that such a restriction exists pursuant to a specified document and
(a) that the corporation will furnish to the record holder of the certificate
without charge upon written request to the corporation at its principal place of
business or registered office a copy of the specified document, or (b) if such
document is one required or permitted to be and has been filed under this Act,
that such specified document is on file in the office of the Secretary of State
and contains a full statement of such restriction.
No certificate shall be issued for any share until the consideration
therefor fixed, as provided by law, has been fully paid.
SECTION 6. Subscriptions for shares shall be paid for in full at
such time or in such installments and at such times as shall be determined by
the Board of Directors. In case of default in the payments of any installment
or call when such payment is due, the corporation may proceed to collect the
amount due in the same manner as any debt due to the Corporation. The Board of
Directors shall have the right to provide that failure to pay installments or
calls shall work a forfeiture of a subscrip-
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<PAGE>
tion and all amounts paid thereon. Provided, however, no forfeiture of a
subscription shall be declared unless the amount due thereon shall remain unpaid
for a period of twenty (20) days after written demand has been made therefor.
ARTICLE III
SHAREHOLDERS MEETING
SECTION 1. The regular annual meeting of the Shareholders shall be
held at the registered office of the Corporation in El Paso, Texas, or at such
other place and at such date and time as the Board of Directors may determine.
SECTION 2. Special meetings of the Shareholders may be called by
the Chairman, the President, the Board of Directors, or the holders of not less
than ten percent (10%) of all the shares entitled to vote at the meeting.
SECTION 3. Written or printed notice stating the place, day and
hour of the meeting and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall be delivered to each Shareholder not less
than ten (10) nor more than fifty (50) days before the date of the meeting,
either personally or by mail, by or at the direction of the President, the
Secretary, or the officer or person calling the meeting. Notice may be waived
in writing before or after the time stated therein.
SECTION 4. Each meeting of the Shareholders shall be presided over
by the President of the Corporation, if present, or in his absence, by the
Chairman, or by a Vice President, or in the absence of all of the above, it
shall be organized by the
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<PAGE>
election of a chairman of the meeting, and the Secretary or an Assistant
Secretary of the Corporation shall attend such meeting of the Shareholders and
act as secretary thereof or the chairman of the meeting may at his discretion
appoint a secretary of the meeting. The quorum for a meeting of the
Shareholders shall consist of a simple majority of the shares entitled to vote,
represented in person or by proxy. The vote of the holders of a majority of the
shares entitled to vote and be represented at a meeting at which a quorum is
present shall be the act of the Shareholders' meeting.
SECTION 5. Any action required to be taken, or which may be taken,
at the meeting of the Shareholders, may be taken without a meeting, or by a
telephonic meeting, if a consent in writing, setting forth the action so taken,
shall be signed by all of the Shareholders entitled to vote with respect to the
subject matter thereof, and such consent shall have the same force and effect as
a unanimous vote of the Shareholders.
SECTION 6. All proxies shall be executed in writing by the
shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid
after eleven (11) months from the date of its execution unless otherwise
provided in the proxy. All proxies shall be filed with the secretary of the
meeting before being voted upon.
SECTION 7. Except as otherwise provided by the Articles of
Incorporation or the Texas Business Corporation Act, each outstanding share
shall be entitled to vote on each matter submitted to a vote at a meeting of
shareholders.
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ARTICLE IV
DIRECTORS
SECTION 1. The Directors of this Corporation shall have the
general management of the business and affairs of the Corporation.
SECTION 2. The number of Directors of the Corporation shall be not
less than one but not more than ten.
SECTION 3. A majority of the Directors qualified and acting shall
constitute a quorum. The act of the majority of the Directors present at a
meeting at which a quorum is present shall be the act of the Board of Directors.
SECTION 4. Each Director shall serve from his election until the
next succeeding annual meeting of the Shareholders and until his successor shall
have been duly elected and qualified, unless sooner removed pursuant to these
By-Laws.
SECTION 5. Within a reasonable time after the election of each new
Board of Directors, such newly elected Directors shall convene in meeting for
the purpose of election of officers, and for the purpose of conducting such
other business as may be desired by those present at the meeting. Such meeting
of the Directors shall be a general meeting of the Board of Directors and any
business of the Corporation may be transacted thereat.
SECTION 6. The Board of Directors of this Corporation may hold
special meetings at any time and at any place by unanimous consent. The
Chairman or
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<PAGE>
the President of the Corporation or any two (2) of qualified and acting
Directors may call a special meeting of the Board of Directors to be held at any
time and at any place. Notice of such special meetings so called shall be given
by the Secretary or an Assistant Secretary or by the President or Chairman in
either or by a combination of the following methods, to wit:
(a) Actual notice in person or by telephone to each Director at least
one day in advance of the date set for the meeting.
(b) Notice by mail or telegraph sent to each Director in time in
regular course of business to reach each respective Director at least one
(1) day prior to the date set for such meeting. In case of written or
telegraphic notices, the same shall be sufficient if sent charges prepaid
to the last address known to the Secretary as shown by the records of the
Corporation of each respective Director.
(c) Notice of any particular meeting may be given to a part of the
Directors in one manner and to the remaining Directors in a different
manner. Notice may be waived in writing before or after the time stated
therein.
SECTION 7. Any vacancy occurring in the Board of Directors may be
filled by the affirmative vote of a majority of the remaining Directors through
less than a quorum of the Board of Directors, unless otherwise provided by law.
A Director elected to fill a vacancy shall be elected for the unexpired term of
his predecessor in office.
SECTION 8. Any Director elected by the Shareholders, or elected by
the Board of Directors to fill a vacancy, may be removed by the Shareholders,
and such removal shall be in the sole discretion of the shareholders whenever in
their judgment
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<PAGE>
the best interests of the Corporation shall be served thereby, and in addition,
such removal may be without cause.
SECTION 9. The President of the Corporation shall act as chairman
of all meetings of the Board of Directors and in his absence by the Chairman, or
those present at the meeting of the Board of Directors shall organize by the
election of a chairman pro tem. The Secretary of the Corporation shall attend
all meetings of the Board of Directors. In his absence, an Assistant Secretary
may act as Secretary thereof or the President or Chairman may at any time
appoint any person including himself to act as secretary of the meeting.
SECTION 10. Any action required or permitted to be taken at a
meeting of the Board of Directors may be taken if a consent in writing setting
forth the action so taken shall be signed by all of the members of the Board of
Directors, and such consent shall have the same force and effect as a unanimous
vote at a meeting of the Directors.
ARTICLE V
OFFICERS AND THEIR DUTIES
SECTION 1. The officers of the Corporation shall be a Chairman, a
President, a Vice President, a Secretary and a Treasurer and such other officers
as the Board of Directors shall consider necessary or proper for the management
of the Corporation's affairs. Any two (2) or more offices may be held by the
same person.
8
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SECTION 2. The term of the of fice of each officer shall be one
year from his election, but each officer shall serve until his successor shall
have been duly elected, unless sooner removed by the Board of Directors.
SECTION 3. Each new Board of Directors, at its first meeting,
shall choose and elect also the officers of the Corporation for the ensuing year
and until their successors are elected. It shall not be necessary for any of
the officers to be members of the Board of Directors.
SECTION 4. Each officer of the Corporation shall have all of the
rights, powers, and duties and privileges usually incident to his respective
office in an ordinary corporation for profit.
ARTICLE VI
BOOKS, RECORDS, CHECKS, DRAFTS
SECTION 1. The general books, records and share certificate books
of this corporation shall be kept at its registered Office.
SECTION 2. Any person who shall have been a Shareholder of record
for at least six (6) months immediately preceding his demand, or who shall be
the holder of record of at least twenty percent (20%) of all of the outstanding
shares of the Corporation, upon written demand stating the purpose thereof,
shall have a right to examine, in person or by agent or attorney, at any
reasonable time or times, for any
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proper purpose, the Corporation's books, records, minutes and record of
Shareholders and shall be entitled to make extracts therefrom.
ARTICLE VII
OPERATION AS S CORPORATION
SECTION 1. It is the policy and intention of this Corporation that
all distributions and dividends declared or distributed or deemed to have been
declared or distributed, whether by express declaration, by operation of law, as
the result of audit by the Internal Revenue Service or otherwise shall be
distributed among the Shareholders of this Corporation in the proportions that
the numbers of shares of stock of the Corporation each of them holds bears to
the total number of shares of stock of the Corporation outstanding. To
implement such policy and intent, it is hereby affirmed that all Shareholders of
the Corporation are entitled to all dividends and distributions, whether
expressly declared or deemed to have been declared, and all distributions
thereof, in the proportions that the number of shares each of them holds bears
to the total number of shares of stock of the Corporation outstanding at the
time of the declaration of such dividend or at the time such dividend or
distribution is deemed to have been declared. To the extent any Shareholder
shall receive a distribution or dividend, whether expressly declared or deemed
to have been declared, by operation of law, as the result of audit by the
Internal Revenue Service or otherwise, which shall be in excess of the amount he
shall be entitled to hereunder, he shall hold such excess amount in trust for
10
<PAGE>
those other Shareholders who shall be entitled thereto in accordance with the
provisions hereof, and upon demand by any of them or by the corporation, shall
pay over such excess amount to the Shareholders entitled thereto, together with
interest at the applicable federal rate, determined in accordance with Section
1274 (d) (1) of the Internal Revenue Code of 1986, for the period from the date
the paying Shareholder shall have received or shall be deemed to have received
such excess amount until the date of payment. The Corporation shall not declare
or distribute or be deemed to have declared or distributed any dividends or
distributions inconsistent with provisions hereof.
ARTICLE VII
AMENDMENTS
SECTION 1. These By-Laws may be amended at any time and from time to
time as authorized by the laws of the State of Texas.
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<PAGE>
Exhibit 21.1
List of Subsidiaries
--------------------
Lone Star Selling Group, Inc. a New York corporation.
R.L. Management, Inc., a Delaware corporation.
Import Technology of Texas, Inc., a Texas corporation.
Sun Apparel, Inc., a Delaware corporation.
Sun Apparel of Texas, Ltd., a Texas limited partnership, also
doing business as Sun Apparel, Greater Texas Finishing, CNC West,
Sun City Realty Group.
Maquilas Pami, S.A. de C.V., a corporation organized and operating
in Mexico.
CNC West de Mexico, S.A. de C.V., a corporation organized and
operating in Mexico.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated March 26, 1998, in the Registration Statement on Form
S-1 and related Prospectus of Sun Apparel, Inc. dated May 26, 1998.
ERNST & YOUNG LLP
San Antonio, Texas
May 26, 1998
