<PAGE>
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1999
REGISTRATION NO. 333-74439
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE PIETRAFESA CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 2311 22-3607757
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
7400 MORGAN ROAD
LIVERPOOL, NY 13090
(315) 453-4300
ATTN: MR. RICHARD C. PIETRAFESA, JR.
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
IT IS REQUESTED THAT COPIES OF COMMUNICATIONS BE SENT TO:
L. KEVIN SHERIDAN, JR., ESQ. STEPHEN T. BURDUMY, ESQ.
ROBERTS, SHERIDAN & KOTEL, KLEHR, HARRISON,
A PROFESSIONAL CORPORATION HARVEY, BRANZBURG & ELLERS LLP
12 EAST 49TH STREET, 30TH FLOOR 260 SOUTH BROAD STREET
NEW YORK, NEW YORK 10017 PHILADELPHIA, PENNSYLVANIA 19102-3163
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the Securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
Amount to Proposed Maximum Proposed Maximum Amount of
Title of each Class of be Offering Price Aggregate Offering Registration
Securities to be Registered Registered(1) Per Share Price(2) Fee
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock ......... 4,658,333 $ 13.00 $60,600,000 $ 16,847(3)
</TABLE>
================================================================================
(1) Includes up to 600,000 shares that may be purchased from The Pietrafesa
Corporation at the option of the underwriters solely to cover
over-allotments, if any, and 58,333 shares being registered for resale by
a stockholder of The Pietrafesa Corporation on a continuous basis.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(3) Previously paid.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 6, 1999
4,000,000 Shares
Class A Common Stock
[GRAPHIC OMITTED]
$ per share
The Pietrafesa Corporation is offering 4,000,000 shares of its Class A
Common Stock. Prior to this offering, there has been no public market for our
Class A Common Stock. We expect that the initial public offering price to the
public will be between $11.00 and $13.00 per share. The market price of the
shares after the offering may be higher or lower than the offering price. Our
Class A Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "BRND."
The Class A Common Stock is one of two classes of Common Stock of The
Pietrafesa Corporation. Holders of shares of Class A Common Stock will elect
25% of the directors. Holders of shares of Class B Common Stock will elect 75%
of the directors and will have the power to decide substantially all other
matters submitted to stockholders. The Class B Common Stock is not being
offered to the public and is currently held by a private limited partnership.
Holders of shares of Class A Common Stock will have limited voting rights until
all shares of Class B Common Stock are converted into Class A Common Stock.
Investing in the Class A Common Stock involves risks. See "Risk Factors"
beginning on page 14.
Per Share Total
----------- ------
Price to the public .............................
Underwriting discounts and commissions ..........
Proceeds to The Pietrafesa Corporation ..........
The Pietrafesa Corporation has granted an over-allotment option to the
underwriters. Under this option, the underwriters may elect to purchase up to
600,000 shares of Class A Common Stock from The Pietrafesa Corporation within
30 days following the date of this prospectus.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
JANNEY MONTGOMERY SCOTT INC.
FIRST SECURITY VAN KASPER
MORGAN SCHIFF & CO., INC.
Prospectus dated , 1999
<PAGE>
[Artwork]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary ................................................................... 5
Risk Factors ......................................................................... 14
Forward Looking Statements ........................................................... 21
Use of Proceeds ...................................................................... 22
Capitalization ....................................................................... 23
Dividend Policy ...................................................................... 24
Dilution ............................................................................. 24
Selected Historical Consolidated Financial Data ...................................... 26
Pro Forma Combined Financial Data .................................................... 29
Management's Discussion and Analysis of Financial Condition and Results of Operations 39
Business ............................................................................. 54
Management ........................................................................... 65
Certain Relationships and Related Transactions ....................................... 69
Principal Stockholders ............................................................... 71
Description of Capital Stock ......................................................... 73
Shares Eligible for Future Sale ...................................................... 76
Underwriting ......................................................................... 77
Legal Matters ........................................................................ 78
Experts .............................................................................. 78
Additional Information ............................................................... 79
Index to Financial Statements ........................................................ F-1
</TABLE>
---------------------------------
You should rely only on the information contained in this prospectus. No
dealer, salesperson or other person is authorized to give information that is
not contained in this prospectus. This prospectus is not an offer to sell nor
is it seeking an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of these securities.
Our logo and name are trademarks of The Pietrafesa Corporation. Other
trademarks, trade names or service marks appearing in this prospectus are the
property of their respective owners.
<PAGE>
[This page intentionally left blank]
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, especially the
"Risk Factors" section, the financial statements and the notes to those
statements, before making your investment decision. This prospectus contains
market data, for the most recent periods for which such data is generally
available, that we obtained from industry trade groups and from industry
publications and other publicly available information.
The Pietrafesa Corporation was incorporated in 1998 and is the successor
to a business founded in 1922. In October 1998, MS Pietrafesa, L.P., our
predecessor operating partnership and sole Class B stockholder, transferred all
of its assets and liabilities to us. In April 1999, we acquired two independent
merchandising/sourcing businesses. We will complete two additional acquisitions
simultaneously with the consummation of this offering.
Unless otherwise indicated or the context otherwise requires, all share,
per share and business and financial information contained in this prospectus:
o gives effect to our acquisition of Diversified Apparel Group, Ltd.,
Global Sourcing Network, Ltd. and Components by John McCoy, Inc. and
our acquisition of all assets and liabilities of MS Pietrafesa, L.P.;
o gives effect to our acquisition of Windsong, Inc. and the issuance of
$4.0 million worth of Class A Common Stock valued at the initial
public offering price as part of the acquisition consideration;
o assumes that no shares of Class A Common Stock will be issued as part
of the consideration paid in the Diversified Apparel, Global Sourcing
Network and Components acquisitions;
o assumes no exercise of the underwriters' over-allotment option; and
o gives effect retroactively to the issuance to MS Pietrafesa, L.P., our
sole stockholder immediately prior to the offering, of an additional
3,775,567 shares of Class B Common Stock prior to the consummation of
the offering.
The Pietrafesa Corporation
General. We believe that we are the only major apparel business that
offers companies that license brand names and major retailers "one-stop
shopping" for dress apparel products for men. By providing design,
merchandising, sourcing and other services, we act as "The Brand behind the
Brand." Our product line includes everything that a man might wear to the
office Monday through Friday and on formal occasions. Our products include
suits, sport jackets, dress shirts, woven sport shirts, casual pants, knitwear,
neckwear and topcoats, at a wide range of price points. Our strategy is to
satisfy all the product needs of our customers who otherwise might have to
maintain separate purchasing or licensing arrangements with different suppliers
for each product.
One of our key strengths is the ability to satisfy our customers' cost,
quality, construction and delivery requirements through a worldwide network of
third party manufacturers. This capability is referred to as "sourcing."
We sell men's apparel to a variety of well-known retailers, including:
Belk Neiman Marcus
Bergdorf Goodman Nordstrom
Bijan S&K Famous Brands
Bloomingdale's Saks Fifth Avenue
Brooks Brothers Sam's Club
Dillards Sulka
Filene's Basement The Men's Wearhouse
Jos.A.Bank Today's Man
5
<PAGE>
In 1998, we generated 70% of our net revenues from our seven largest
customers, Brooks Brothers, Dillards, Jos.A.Bank, Nordstrom, Polo Retail, S&K
Famous Brands and Sam's Club. None of these customers individually accounted
for more than 20% of our net revenues in 1998. Sales to Polo Retail, which
accounted for 6% of our net revenues in 1998, terminated with the spring 1999
season, but the loss of such revenues is not expected to have a material
adverse effect on our overall revenues because we anticipate that our revenues
from other customers will increase.
Industry. Retail sales of men's apparel in the United States in 1998 were
approximately $54 billion, an increase of 6.8% over the prior year, as compared
to increases of 3.7% in women's apparel and 4.7% in all apparel. The men's
apparel industry is highly fragmented and includes a large number of small,
privately-held merchandising/sourcing companies that specialize in specific
products, price points or distribution channels. We believe that two important
trends among our customers benefit us:
o private label apparel sales are increasing; and
o the concentration of more business with fewer suppliers to achieve
greater efficiency in merchandising, purchasing and inventory
management.
The apparel industry is intensely competitive and includes companies that
are larger and better capitalized than we are.
Business, Growth and Acquisition Strategies. We seek to be the most
efficient source of men's apparel products for major retailers and companies
that license brand names by offering:
o "one-stop shopping";
o the ability to develop customized lines of men's apparel in a variety
of styles;
o the lowest available cost for each product line, by using third party
manufacturers throughout the world;
o design, merchandising, statistical quality control, inventory
management and other services;
o technological innovations that enable us to compress delivery
schedules; and
o the scale and financial stability required by major retailers in
connection with long-term supply arrangements.
We believe that our business strategy will create numerous growth
opportunities. The principal components of our growth strategy include:
o achieving greater penetration among our existing customers and
developing new customer relationships;
o acquiring, developing and licensing brands in order to leverage our
merchandising and sourcing capabilities;
o expanding internationally by offering our merchandising/sourcing
services to foreign retailers; and
o growing revenues through selective acquisitions that are consistent
with our business strategy.
To increase the range of products, price points and sourcing options
available to our customers and to add new customers, we intend to identify and
acquire leading merchandising/sourcing companies. The major elements of our
acquisition strategy include:
o making, whenever possible, the payment of a significant portion of the
purchase price contingent on achieving projected results for the
acquired business over several years following the acquisition. We
will also include other performance-based incentives for the sellers
of each business;
6
<PAGE>
o operating each newly-acquired business as an independent unit and
holding it accountable for its utilization of capital and overhead;
and
o improving and standardizing the financial controls, quality control
practices and back-office functions of each acquired business and
eliminating duplicative operational facilities.
Recent Acquisitions and Licensing Arrangements. Upon the completion of this
offering, we will have completed four acquisitions and will have entered into,
or acquired as a result of these acquisitions, four new licensing arrangements.
These transactions expand our product offerings and customers.
The acquisitions are:
o Diversified Apparel Group, Ltd., which merchandises and sources men's
suits, dress shirts, neckwear and knits primarily from the Caribbean
Basin, the United States and Europe;
o Global Sourcing Network, Ltd., which designs and imports low-to-mid
priced men's suits primarily from Eastern Europe and Asia;
o Components by John McCoy, Inc., which merchandises and sources
higher-priced tailored clothing, sportswear, dress shirts, neckwear,
topcoats and casual slacks from Italy; and
o Windsong, Inc., which merchandises and sources men's sportswear
worldwide.
Our licenses cover tailored and other categories of men's apparel bearing
the Alexander Julian and other well-known trademarks. Sales of Alexander Julian
licensed products constituted 27% of our 1998 pro forma combined revenues. All
of our licenses require us to pay royalties to the licensors at rates which we
believe to be consistent with other license arrangements in the industry.
Risk Factors. See the section of this prospectus entitled "Risk Factors"
for a discussion of factors that you should consider before investing in the
Class A Common Stock offered by this prospectus. These risk factors include our
customer concentration, the significance to our business of revenues from sales
of Alexander Julian licensed products, our reliance on third party
manufacturers, the unpredictability of our operating results, the challenges
raised by our acquisition strategy and the fact that holders of the Class A
Common Stock will have limited voting rights.
The Pietrafesa Corporation is a Delaware corporation. Our principal
executive offices are located at 7400 Morgan Road, Liverpool, New York 13090
and our telephone number is (315) 453-4300.
7
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock offered by The
Pietrafesa Corporation .............. 4,000,000 shares of Class A Common Stock
Common Stock to be outstanding
after our offering .................. 4,333,333 shares of Class A Common Stock(1)(2)
3,775,667 shares of Class B Common Stock, all of which are owned
by MS Pietrafesa, L.P., our sole stockholder prior to the offering.
Holders of Class B Common Stock may convert their shares at any
time on a one-for-one basis into shares of Class A Common Stock.
Use of proceeds ....................... To pay the purchase price of the Components and Windsong
acquisitions, to fund the escrow in connection with the Windsong
acquisition and to repay indebtedness in connection with the
Diversified Apparel and Global Sourcing Network acquisitions and
under our revolving credit line.
Voting rights ......................... Holders of Class A Common Stock, voting as a class, are entitled to
elect 25% of the members of our Board of Directors. Other than such
right to elect directors, holders of Class A Common Stock will have
very limited voting rights until all of the shares of Class B Common
Stock are converted into shares of Class A Common Stock or
otherwise cease to be issued and outstanding. See "Description of
Capital Stock."
Nasdaq National Market symbol ......... BRND
</TABLE>
- --------------------
(1) Excludes:
o shares of Class A Common Stock equal to 10% of our outstanding shares
after the offering which may be issued in the future under our Stock
Option Plan;
o shares of Class A Common Stock which may be issued as deferred
purchase price to the sellers of Diversified Apparel, Global Sourcing
Network, Components and Windsong; and
o up to 600,000 shares of Class A Common Stock which will be issued to
the underwriters if they exercise their over-allotment option.
See "Management," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Significant Acquisitions" and
"Underwriting."
(2) Includes 58,333 shares of Class A Common Stock being registered for resale,
from time to time, by Windsong, Inc. The shares may not be sold for 180
days after the offering pursuant to a lock-up agreement entered into with
the underwriters. See "Risk Factors -- The Market Price of our Class A
Common Stock could be Adversely Affected by Future Sales of Substantial
Amounts of Shares in the Public Market."
8
<PAGE>
Summary Historical Consolidated and Pro Forma Combined Financial Data
The following tables present our summary historical consolidated financial
data for each year in the five-year period ended December 31, 1998 and for the
three-month periods ended March 31, 1998 and 1999, as well as pro forma
combined and pro forma combined, as adjusted financial data. The summary
historical consolidated annual financial data were derived from our audited
consolidated financial statements. The summary historical consolidated
financial data as of March 31, 1998 and March 31, 1999 and for the three-month
periods then ended were derived from our unaudited interim financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which we consider necessary for a fair
presentation of the financial position and results of operations for these
periods. Operating results for the three-month period ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1999. You should read this financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical and pro forma financial
statements and the notes thereto, included elsewhere in this prospectus.
Our pro forma combined financial data includes our statement of operations
data which reflects our historical results after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions as if they had occurred on January 1, 1998, and also includes our
balance sheet data, which reflects our balance sheet and the balance sheets of
Diversified Apparel, Global Sourcing Network, Components and Windsong as if the
acquisitions of such businesses had occurred on the respective balance sheet
dates. Our 1998 pro forma combined, as adjusted financial data includes our pro
forma combined financial data as adjusted for this offering and the application
of the proceeds of this offering. The pro forma combined and pro forma
combined, as adjusted financial data are based upon preliminary estimates,
available information and assumptions that management deems appropriate, but
are not necessarily indicative of the results that would have been obtained had
such events occurred at the times assumed. See our Pro Forma Combined Financial
Statements included elsewhere in this prospectus.
Our statement of operations, balance sheet and other data include a number
of items that require further explanation. These items include:
o Impairment loss on fixed assets, which relates to the reduction of
property, plant, and equipment to their net realizable value less sale
costs based on independent appraisals. In 1995, we discontinued the
low price point tailored clothing segment of our business and closed
the related manufacturing facilities located in Carrollton, Georgia.
Accordingly, in 1995 we reduced the net book value of plant and
equipment, as well as furniture and fixtures, located at the
Carrollton facility to their net realizable value and recorded an
impairment loss of $2.3 million. The impairment loss of $170,000 in
1996 related to equipment which we disposed of at our former Sturgis,
Kentucky facility;
o Public offering costs, which relate to the abandonment of our public
offering in 1998 due to adverse market conditions;
o Provision for income taxes, which was not included in our statement of
operations data prior to October 1998 because our predecessor, MS
Pietrafesa, L.P., was not subject to state or federal income taxes;
o Extraordinary item, which relates to the forgiveness of all of our
outstanding subordinated debt in 1996;
o The pro forma weighted average number of common shares outstanding,
basic and diluted, consists of the 3,775,667 shares of Class B Common
Stock owned by our sole stockholder as of the date of the offering.
For 1998 and the first quarter of 1999, it also includes an additional
125,000 shares assumed to be issued at the initial public offering
price to pay the $1.5 million tax distribution to the partners of MS
Pietrafesa, L.P. in May 1999. See "Use of Proceeds" and "Certain
Relationships and Related Transactions;"
9
<PAGE>
o Pro forma combined weighted average number of shares outstanding,
basic and diluted, consists of the 3,775,667 shares of Class B Common
Stock owned by our sole stockholder as of the date of the offering,
the 333,333 shares of Class A Common Stock issued to Windsong at the
initial public offering price as part of our acquisition of Windsong,
based on an assumed offering price of $12.00 per share, and for 1998
and the first quarter of 1999, the 125,000 shares referred to in the
immediately preceding paragraph; and
o Pro forma combined, as adjusted weighted average number of common
shares outstanding, basic and diluted, consists of the shares of Class
A Common Stock which will be issued in the offering, the 333,333
shares of Class A Common Stock issued as part of the initial purchase
price in the Windsong acquisition, and the 3,775,667 shares of Class B
Common Stock owned by our sole stockholder as of the date of the
offering.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview" and " -- Results of Operations" for a more
detailed explanation of these items.
In addition, we have included under "Other Data" below and in our Selected
Historical Consolidated Financial Data, the line item "EBITDA plus public
offering costs," which represents income (loss) before provision (benefit) for
income taxes plus depreciation and amortization plus interest expense plus
public offering costs. EBITDA plus public offering costs is not intended to
represent cash flows from operations and should not be considered as an
alternative to net income as an indicator of our operating performance or to
cash flows as a measure of liquidity. We believe that EBITDA is a standard
measure commonly reported and widely used by analysts, investors and other
interested parties in the apparel industry. Accordingly, as modified to exclude
our public offering costs, it has been disclosed in this prospectus to permit a
more complete description of our performance relative to other companies in the
apparel industry. Our definition of EBITDA may not be identical to the
definitions used by other companies and, therefore, may not necessarily provide
an accurate basis for comparison.
10
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------
1994 1995 1996
---------- ------------ ----------
(in thousands, except share and per
share data)
Statement of Operations Data:
<S> <C> <C> <C>
Net revenues ............................. $54,859 $ 51,431 $44,000
Cost of sales ............................ 45,803 46,533 34,769
------- -------- -------
Gross profit ............................. 9,056 4,898 9,231
Operating expenses:
Selling, general and administrative
expenses .............................. 7,250 10,080 7,427
Impairment loss on fixed assets ......... -- 2,324 170
Depreciation and amortization
expenses .............................. 99 102 165
------- -------- -------
7,349 12,506 7,762
------- -------- -------
Operating income (loss) .................. 1,707 (7,608) 1,469
Interest expense ......................... 1,648 1,914 1,962
Public offering costs .................... -- -- --
------- -------- -------
Income (loss) before income taxes
and extraordinary item .................. 59 (9,522) (493)
Provision for income taxes ............... -- -- --
------- -------- -------
Income (loss) before extraordinary
item .................................... 59 (9,522) (493)
Extraordinary item ....................... -- -- 3,150
------- -------- -------
Net income (loss) ........................ $ 59 $ (9,522) $ 2,657
======= ======== =======
Pro Forma Income Data:
Income before income taxes ...............
Pro forma provision for income taxes .....
Pro forma net income .....................
Pro forma basic and diluted net
income per common share .................
Pro forma basic and diluted weighted
average number of common shares out-
standing ................................
<PAGE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------
Pro Forma
Pro Forma Combined,
Combined As Adjusted
1997 1998 1998 1998
---------- ------------- ------------- -------------
(in thousands, except share and per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C>
Net revenues ............................. $37,582 $ 56,763 $ 161,081 $ 161,081
Cost of sales ............................ 29,218 47,062 130,311 130,311
------- ----------- ----------- -----------
Gross profit ............................. 8,364 9,701 30,770 30,770
Operating expenses:
Selling, general and administrative
expenses .............................. 6,150 5,536 19,048 19,048
Impairment loss on fixed assets ......... -- -- -- --
Depreciation and amortization
expenses .............................. 151 222 1,982 1,982
------- ----------- ----------- -----------
6,301 5,758 21,030 21,030
------- ----------- ----------- -----------
Operating income (loss) .................. 2,063 3,943 9,740 9,740
Interest expense ......................... 1,507 1,209 5,952 2,385
Public offering costs .................... -- 823 823 823
------- ----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item .................. 556 1,911 2,965 6,532
Provision for income taxes ............... -- 514 1,186 2,612
------- ----------- ----------- -----------
Income (loss) before extraordinary
item .................................... 556 1,397 1,779 3,920
Extraordinary item ....................... -- -- -- --
------- ----------- ----------- -----------
Net income (loss) ........................ $ 556 $ 1,397 $ 1,779 $ 3,920
======= =========== =========== ===========
Pro Forma Income Data:
Income before income taxes ............... $ 1,911 $ 2,965 $ 6,532
Pro forma provision for income taxes ..... 764 1,186 2,612
----------- ----------- -----------
Pro forma net income ..................... $ 1,147 $ 1,779 $ 3,920
=========== =========== ===========
Pro forma basic and diluted net
income per common share ................. $ 0.29 $ 0.42 $ 0.48
Pro forma basic and diluted weighted
average number of common shares out-
standing ................................ 3,900,667 4,234,000 8,109,000
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
--------------------------------------
Pro Forma
Pro Forma Combined,
Actual Combined As Adjusted
--------- ----------- ------------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital ......................................... $ 9,239 $12,134 $13,710
Total assets ............................................ 29,375 86,913 86,913
Total long-term debt, net of current maturities ......... 12,561 45,802 4,178
Total stockholders' equity .............................. 2,383 6,383 49,583
</TABLE>
11
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<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------------------------------------
Pro Forma
Pro Forma Combined,
Combined As Adjusted
1994 1995 1996 1997 1998 1998 1998
----------- ------------ ---------- ---------- ---------- ----------- ------------
(in thousands)
Other Data:
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA plus public offering costs .. $ 2,719 $ (6,411) $ 2,415 $ 2,865 $ 4,731 $ 12,288 $ 12,288
Capital expenditures ............... 1,103 368 105 59 592 895 895
Cash (used in) provided by operating
activities ........................ (3,022) 3,779 2,445 3,056 (1,395) (4,581) (2,440)
Cash (used in) provided by investing
activities ........................ (1,035) (265) 419 2,185 (563) (36,501) (36,501)
Cash (used in) provided by financing
activities ........................ 4,540 (4,001) (2,866) (5,242) 1,969 39,581 39,581
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
----------------------------
1998 1999
------------- -------------
(in thousands, except share
and per share data)
Statement of Operations Data:
<S> <C> <C>
Net revenues ............................ $ 9,503 $ 17,803
Cost of sales ........................... 7,028 14,833
----------- -----------
Gross profit ............................ 2,475 2,970
Operating expenses:
Selling, general and administrative
expenses .............................. 1,305 1,201
Depreciation and amortization
expenses .............................. 64 68
----------- -----------
1,369 1,269
----------- -----------
Operating income ........................ 1,106 1,701
Interest expense ........................ 253 296
----------- -----------
Income before income taxes .............. 853 1,405
Provision for income taxes .............. -- 565
----------- -----------
Net income .............................. $ 853 $ 840
=========== ===========
Pro Forma Income Data:
Income before income taxes .............. $ 853 $ 1,405
Pro forma provision for income taxes..... 341 565
----------- -----------
Pro forma net income .................... $ 512 $ 840
=========== ===========
Pro forma basic and diluted net
income per common share ................ $ 0.14 $ 0.22
Pro forma basic and diluted weighted
average number of common shares
outstanding ............................ 3,775,667 3,900,667
<PAGE>
<CAPTION>
For the Three Months Ended March 31,
----------------------------------------------------------
Pro Forma Pro Forma
Pro Forma Pro Forma Combined, Combined,
Combined Combined As Adjusted As Adjusted
1998 1999 1998 1999
------------- ------------- ------------- -------------
(in thousands, except share and per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C>
Net revenues ............................ $ 37,774 $ 46,012 $ 37,774 $ 46,012
Cost of sales ........................... 29,698 37,445 29,698 37,445
----------- ----------- ----------- -----------
Gross profit ............................ 8,076 8,567 8,076 8,567
Operating expenses:
Selling, general and administrative
expenses .............................. 4,311 4,433 4,311 4,433
Depreciation and amortization
expenses .............................. 504 507 504 507
----------- ----------- ----------- -----------
4,815 4,940 4,815 4,940
----------- ----------- ----------- -----------
Operating income ........................ 3,261 3,627 3,261 3,627
Interest expense ........................ 1,343 1,448 350 539
----------- ----------- ----------- -----------
Income before income taxes .............. 1,918 2,179 2,911 3,088
Provision for income taxes .............. 767 875 1,164 1,235
----------- ----------- ----------- -----------
Net income .............................. $ 1,151 $ 1,304 $ 1,747 $ 1,853
=========== =========== =========== ===========
Pro Forma Income Data:
Income before income taxes .............. $ 1,918 $ 2,179 $ 2,911 $ 3,088
Pro forma provision for income taxes..... 767 875 1,164 1,235
----------- ----------- ----------- -----------
Pro forma net income .................... $ 1,151 $ 1,304 $ 1,747 $ 1,853
=========== =========== =========== ===========
Pro forma basic and diluted net
income per common share ................ $ 0.28 $ 0.31 $ 0.22 $ 0.23
Pro forma basic and diluted weighted
average number of common shares
outstanding ............................ 4,109,000 4,234,000 8,109,000 8,109,000
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 1999
---------------------------------------
Pro Forma
Pro Forma Combined,
Actual Combined As Adjusted
---------- ----------- ------------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital ......................................... $10,520 $14,392 $15,592
Total assets ............................................ 29,944 95,698 95,698
Total long-term debt, net of current maturities ......... 13,054 47,914 5,914
Total stockholders' equity .............................. 3,473 7,473 50,673
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
---------------------------------------------------------------------------
Pro Forma Pro Forma
Pro Forma Pro Forma Combined, Combined,
Combined Combined As Adjusted As Adjusted
1998 1999 1998 1999 1998 1999
--------- --------- ----------- ----------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Other Data:
EBITDA plus public offering costs ................. $1,308 $1,886 $ 3,904 $ 4,253 $ 3,904 $ 4,253
Capital expenditures .............................. 90 109 186 313 186 313
Cash (used in) provided by operating activities ... 28 (613) (9,665) (4,938) (11,471) (6,868)
Cash used in investing activities ................. (90) (109) (35,731) (35,858) (35,731) (35,858)
Cash provided by financing activities ............. 62 721 42,805 39,905 43,533 39,905
</TABLE>
13
<PAGE>
RISK FACTORS
You should consider carefully the risks described below and other
information in this prospectus before deciding to invest in shares of Class A
Common Stock.
Risks Associated With Our Business
Our Significant Reliance on a Limited Number of Customers may Subject us
to a Significant Decrease in Revenues if we Lose One or More Customers
S&K Famous Brands, Sam's Club, Brooks Brothers, Dillards, Jos.A.Bank,
Nordstrom and Polo Retail, our seven most significant customers in 1998,
accounted for 70% of our net revenues in 1998. S&K Famous Brands, Sam's Club,
Brooks Brothers and Dillards each accounted for over 10% of our net revenues in
1998. Sales to our six largest customers in 1997 accounted for 68% of our net
revenues in 1997.
Our licensing agreement with Polo Corporation expired in June 1999 and
sales to Polo Retail under this agreement terminated with the spring 1999
season. A failure to replace such lost business, the loss of or decrease in
business from any other significant customer or the replacement of lost
business with business that produces lower margins would result in a
significant decrease in our revenues. Various factors, including a
deterioration in the business or financial condition of one or more of our
customers or in our relationship with any of these customers, may cause their
level of business with us to decrease. In addition, consolidations,
restructurings and reorganizations involving our customers could reduce the
number of stores that carry our products and decrease our revenues. Any
increase in the ownership concentration within the retail industry could make
us more dependent on fewer customers and could increase the effect of losing a
customer. See "Business -- Industry Overview."
If our Alexander Julian License is Terminated our Revenues and
Profitability would Decrease Significantly
Approximately 27% of our pro forma combined revenues were attributable to
sales of products which we are entitled to produce and sell under a license
agreement with Alexander Julian, Inc. We have monetary and nonmonetary
obligations under the Alexander Julian license, as we do under our three new
licenses which were not in effect in 1998. If we fail to perform our
obligations, Alexander Julian and our other licensors could terminate the
licenses and we would lose the right to sell the products, which would
substantially reduce our revenues and net income. See "Business -- Intellectual
Property."
Our Foreign Sourcing of Products Exposes us to Delays in Production, which
may Result in Increased Costs and Reduced Profitability
A significant portion of the products we sell are produced by foreign
manufacturers. Products from Italy, the Dominican Republic, Mexico, Eastern
Europe and the Far East accounted for 66% of our 1998 revenues. Foreign
sourcing exposes us to numerous risks, including work stoppages, natural
disasters, transportation delays and interruptions, political instability,
economic disruptions and the imposition of increased tariffs and more stringent
import and export restrictions. If any of these events were to occur, we may
not have sufficient quantities of raw materials or products to meet our
customers' needs in a timely manner, which could cause us to lose material
revenues, customer orders and goodwill.
Bilateral textile agreements between the United States and a number of
other countries contain provisions that impose quotas on the amount and type of
goods that can be imported into the United States from those countries. These
agreements allow the United States to impose restraints at any time on the
importation of specified categories of merchandise. Substantially all of the
countries from which we import products are subject to these agreements. In
addition, the United States imposes customs duties on our imported products.
The United States may impose additional tariffs on products that are found to
have been manufactured by convict, forced or indentured labor. In addition, the
United States may withdraw the "most favored nation" status of countries in
which our products are manufactured, which could result in the imposition of
reduced
14
<PAGE>
quotas and/or higher tariffs on products imported from these countries. New or
less favorable quotas, duties, tariffs or import restrictions could result in
an increase in our cost of products. We may not be able to pass these increased
costs on to our customers, which would reduce our profitability. See "Business
- -- Imports and Import Regulations."
Our International Sourcing of Products and Raw Materials may Subject us to
Increased Costs and Unprofitable Transactions
We currently source production and purchase raw materials from providers
located outside the United States. As a result, we are exposed to various
risks, including:
o currency exchange rate fluctuations when our agreements are
denominated in currencies other than U.S. dollars;
o changes to foreign legal and regulatory requirements;
o deterioration in the stability of foreign governments or their trading
relationships with the United States;
o difficulties in staffing and managing foreign operations;
o variances in financial reporting standards; and
o differences in the manner in which different cultures do business.
Any of these risks could increase the costs of doing business in the
affected countries or preclude us from transacting business in the affected
countries, either of which could reduce our profitability.
The Adoption of the Euro may be Disruptive to our European Suppliers,
Impair their Ability to Satisfy their Obligations to us and Disrupt our
Deliveries of Products
On January 1, 1999, 11 member countries of the European Union replaced
their local currencies with a single currency, the Euro, in an effort toward
the economic and monetary union of Europe. During a three-year transition
period, the currencies of these countries will continue to circulate but only
as fixed denominations of the Euro. The Euro has become the predominant
currency to settle wholesale transactions previously denominated in the
participants' currencies.
In 1998, we purchased approximately 46% of our raw materials from
suppliers based in countries which are participating in the Euro in 1999. The
adoption of the Euro may be disruptive to the accounting and financial
reporting operations of some of these suppliers and may have an adverse impact
on the financial results of such suppliers or their ability to meet their
manufacturing obligations. Material delays in manufacturing by our significant
European suppliers could cause us to lose material revenues, customer orders
and goodwill. See " -- Failure by Third Party Manufacturers to Perform their
Obligations could Adversely Affect our Ability to Deliver Products in a Timely
Manner."
We may be Unable to Compete Successfully in the Highly Competitive Apparel
Industry
The men's tailored clothing and apparel businesses are intensely
competitive. We have experienced and will continue to experience competition
from domestic and international sources, including independent brand name and
private label producers. We also consider retailers' in-house product
development and sourcing capabilities to be a source of competition. Some of
our competitors and potential competitors have greater financial, manufacturing
and distribution resources than us.
Although factors may differ by product line, we believe that we compete
primarily on the basis of quality of design and workmanship, pricing and
customer service. We believe that our success depends in large part upon our
ability to anticipate, gauge and respond to our customers' changing needs in a
timely manner. If we fail to identify and respond appropriately to their
changing needs, or to otherwise compete successfully, we could lose our market
share, be required to reduce our prices or pay higher production costs.
15
<PAGE>
A Recession in the Apparel Industry could Increase our Bad Debt Expense
and Reduce our Revenues and Profitability
Apparel retailers have experienced significant financial difficulties over
the past several years, including restructurings, bankruptcies and
liquidations. These developments have increased our risk of extending credit to
our customers. If any of our customers were to suffer financial problems, it
could cause us to reduce or discontinue business with that customer, require us
to assume more credit risk relating to its receivables or result in excess
inventory requiring liquidation at discounted prices, each of which would
reduce our profitability.
Seasonal Fluctuations in Revenue and Net Income may Affect our Cash Flow,
Liquidity and Profitability
Some of our principal products are organized into seasonal lines in
response to the marketing strategies of our customers. As a result, our net
revenues and net income have fluctuated and may continue to fluctuate on a
seasonal basis. A disproportionate amount of our net revenues and a majority of
our net income are typically realized during the third quarter. Historically,
this seasonality has resulted in reductions in working capital during the first
and third quarters. If we are unable to finance our seasonal cash requirements
adequately, our ability to conduct business will be restricted. Moreover, as a
result of the seasonality of net revenues, if our net revenues decrease
substantially in the third quarter it could have a material adverse effect on
our liquidity and on our profitability for the entire year.
We will not be Able to Fulfill our Expansion Plans if we are Unable to
Obtain Additional Financing and Maintain a Strong Infrastructure
In 1998, we experienced rapid sales growth, expansion of our product and
service offerings and an increase in our customer base. Our continued growth
will depend on our ability to develop successful new product lines,
distribution channels and merchandise categories. The integration of
Diversified Apparel, Global Sourcing Network, Components and Windsong, as well
as our future growth objectives, will require increasing amounts of working
capital and financing and may place a significant strain on our management and
information processing systems. Our failure to respond effectively to the
demands associated with our business expansion could render our growth strategy
unsuccessful.
Variations in our Historical Financial Performance may Continue
We have experienced inconsistent financial results in recent years. For
example, during the years 1995 through 1998, excluding the financial results of
Diversified Apparel, Global Sourcing Network, Components and Windsong, our
operating income (loss) fluctuated between $(7.6) million and $3.9 million and
net income (loss) fluctuated between $(9.5) million and $1.4 million. See
"Summary Historical Consolidated and Pro Forma Combined Financial Data." Our
future financial performance depends on various factors, including successfully
implementing our growth strategy.
The Loss of any of our Key Management Personnel could Reduce our Revenues
and Profitability
Our ability to successfully implement our growth strategy and operate
profitably depends on the continued employment of our senior management team
led by Richard C. Pietrafesa, Jr., John McCoy, Jarrod Nadel, Joseph Sweedler
and Joseph J. Pietrafesa II, all of whom would be difficult to replace. The
termination of Mr. McCoy's, Mr. Nadel's or Mr. Sweedler's employment with us
would likely reduce revenues and profitability of our Components, Diversified
Apparel and Windsong divisions. In addition, these managers, as well as other
members of our senior management, have only recently been assembled and
management controls are still in their formative stages. We cannot assure you
that this team will perform well together.
Although we have entered into or will enter into multi-year employment and
non-competition agreements with Mr. McCoy, Mr. Nadel and Mr. Sweedler, it is
our general policy not to enter into such agreements with our executives. See
"Management." This policy could enable the members of our management team to
change jobs more freely. If the principal members of our management team become
unable or unwilling to continue in their present positions, it would become
more difficult for us to pursue our growth strategy, which could reduce our
revenues and profitability.
16
<PAGE>
If Richard Pietrafesa ceases to be our Chief Executive Officer, or if
Philip Ean Cohen ceases to control The Pietrafesa Corporation other than by
reason of death or disability, our deferred purchase price obligations under
the Components and Windsong acquisition agreements may be accelerated. The
accelerated payment of these deferred purchase price obligations could deplete
our capital resources. In addition, the Alexander Julian license terminates if
Mr. Cohen transfers control of the Pietrafesa Corporation without Alexander
Julian's consent. See " -- Some of our Acquisition Agreements Contain Terms
that could Prevent a Change of Control or a Change in Management and may
Discourage Transactions which would Benefit our Shareholders."
While we generally do not maintain key person life insurance covering our
executive officers or other employees, we intend to purchase key person life
insurance in the amount of $10 million covering Richard Pietrafesa prior to the
consummation of the offering. In addition, we intend to purchase key person
life insurance for Messrs. McCoy and Nadel in an amount equal to the up-front
portion of the purchase price for Components and Diversified Apparel,
respectively. We cannot assure you that we will be able to maintain such
policies in effect or that the proceeds of such policies would adequately
compensate us for the loss of the services of any of these people.
Our Significant Reliance on Two Fabric Manufacturers could Cause our Cost
of Sales to Increase, Impair our Ability to Meet our Customers' Demands and
Reduce our Revenues and Profitability
In 1998, we purchased 54% (by dollar value) of our total fabric
requirements directly from two suppliers, Burlington Industries and Loro Piana.
While we believe that we have had good relations with each of these two
suppliers for over 10 years, we do not have long-term formal supply contracts
with either of them. If our relationship with any significant supplier is
interrupted, we will have to purchase fabric from alternate suppliers. These
alternate suppliers might not provide us with fabrics at comparable prices,
comparable quality or on a timely basis. If the price, availability or quality
of fabrics or other raw materials used by us fluctuate significantly, it could
increase our cost of sales or impair our ability to meet our customers'
demands, each of which would reduce our revenues and profitability.
Failure by Third Party Manufacturers to Fulfill their Obligations could
Adversely Affect our Ability to Deliver Products in a Timely Manner and could
Reduce our Profitability
As of December 31, 1998, we sourced approximately 72% of total product
orders (by sales dollar value) with independent manufacturers. We intend for
this percentage to increase. If our independent manufacturers fail to finance
production adequately, maintain production capacity or otherwise produce
finished goods on schedule, it will adversely affect our ability to deliver
products to our customers in a timely fashion. Alternative manufacturers, if
available, may not be able to provide us with products or services of
comparable quality at an acceptable price or on a timely basis. Therefore, a
failure by our independent manufacturers to fulfill their obligations could
prevent us from meeting our clients' requirements in a timely manner, which
could result in cancelled purchases by our clients and impair our relationships
with them, each of which could reduce our profitability.
If our or our Customers' or Suppliers' Year 2000 Compliance Efforts are
not Successful, our Operations may be Disrupted and our Revenues and
Profitability could be Reduced
We are highly dependent upon the proper function of our computer systems
as well as those of our suppliers and customers. Arthur Andersen & Co. has
advised us that we will have to upgrade, modify or replace portions of our
financial systems to make them Year 2000 compliant. We currently estimate that
the total cost of implementing our Year 2000 program will be approximately
$200,000. If our computer systems or the computer systems of any of our
suppliers or customers are not Year 2000 compliant or are unable to recover
from system interruptions which may result from the Year 2000 date change, we
may experience a disruption to our operations which could adversely affect our
ability to process or fulfill orders from our customers, deliver products in a
timely manner, send invoices or engage in normal business activities for an
indefinite period of time. Such a disruption to our operations could result in
a loss of revenues and a reduction of our profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Impact of the Year 2000 Issue."
17
<PAGE>
Risks Relating To Our Acquisition Strategy And Future Acquisitions
Our Combined Operating History may not be Indicative of Future Operating
Results
We recently acquired Diversified Apparel and Global Sourcing Network and
will acquire Components and Windsong simultaneously with the consummation of
the offering. Accordingly, we have just begun to integrate the operations of
these businesses with our pre-existing operations. Our pro forma results of
operations and the historical results of Diversified Apparel, Global Sourcing
Network, Components and Windsong cover periods when these businesses were not
under our control or management and may not be indicative of our future
financial or operating results or the results that would have been achieved if
these businesses had been operating on a consolidated basis with us for the
periods presented.
Our management team has only recently been assembled and will be burdened
by the integration and supervision of our combined operations and the
implementation of our operating and growth strategies. We cannot assure you
that the managers of Diversified Apparel, Global Sourcing Network, Components
and Windsong will work effectively with our senior management or as part of a
larger entity. Our inability to successfully integrate and supervise the
operations, services, technologies and personnel of these acquired businesses,
or implement our operating or growth strategies, could reduce our profitability
and inhibit future growth.
Our Inability to Implement our Growth Strategy could Reduce our Revenues
and Profitability
Our growth strategy depends heavily on the identification, acquisition and
successful management of additional businesses. Pursuit of this growth strategy
will divert our management's attention from other business concerns. It is also
possible that our management, including the respective managers of our
Diversified Apparel, Global Sourcing Network, Components and Windsong
divisions, will not have the skills necessary to manage an aggressive
acquisition program. Although we may recruit additional managers to supplement
the existing management of any acquired businesses, we may not be able to
recruit additional managers with the skills necessary to enhance the management
of such businesses. Any or all of these factors could cause our growth strategy
to fail and reduce our revenues and profitability.
Unforeseen, Unknown Liabilities in Connection with the Operation of
Acquired Businesses may Adversely Affect our Working Capital and Liquidity and
Reduce our Profitability
Unforeseen, unknown liabilities may arise in connection with the ownership
and operation of Diversified Apparel, Global Sourcing Network, Components,
Windsong or any future acquired business. These liabilities could relate to
such matters as previously unasserted contract or tort claims against such
businesses and product liability claims relating to the design or production of
the apparel distributed by such businesses, among others. Although we believe
that the risk of pre-existing claims being successfully asserted against The
Pietrafesa Corporation has been minimized by the acquisition structures we have
employed, we cannot assure you that no such claims will be asserted or, if
asserted, that such claims will not result in material liabilities to us.
Contractual purchase price adjustments, as well as other contractual rights or
other remedies available to us, may not be sufficient to compensate us in the
event that such unforeseen liabilities arise. The occurrence of any such
liability could have a material adverse effect on our working capital and
liquidity and reduce our profitability.
Future Performance of the Acquired Businesses may not be Commensurate with
their Purchase Prices
Valuations of Diversified Apparel, Global Sourcing Network, Components and
Windsong were not established by independent appraisals, but were determined
through purchase price negotiations among the parties. The consideration paid
for each such business was based exclusively on these negotiations. A variety
of factors played a role in these negotiations, including the financial
performance of each business, its markets and its management. The consideration
paid does not necessarily bear any relationship to the net book value of the
acquired assets or to any other recognized measure of value. Independent
valuations of Diversified Apparel, Global Sourcing Network, Components and
Windsong may have been less than the consideration paid or to be paid by us for
the acquisition of any of these businesses.
18
<PAGE>
Reductions in our Future Net Income Caused by the Amortization of Goodwill
may Adversely Affect the Market Price of our Common Stock
Approximately $29 million, or 31%, of our pro forma combined, as adjusted
total assets as of March 31, 1999 consisted of goodwill arising from the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions. Goodwill is an intangible asset that represents the difference
between the aggregate purchase price for the assets acquired, including
deferred purchase price actually paid, and the amount of such purchase price
allocated to the identified assets for purposes of an as-adjusted balance
sheet. We are required to amortize the goodwill from the acquisitions over a
period of time, with the amount amortized in a particular period constituting
an expense that reduces our net income for that period.We plan to amortize
goodwill associated with the acquisitions over a period of 20 years for
Windsong, 15 years for Global Sourcing Network and Components and 10 years for
Diversified Apparel, in each case beginning at the closing of each such
acquisition. The amount amortized will not be less than $1.6 million per year
for 10 years, of which $167,000 per year will not give rise to a corresponding
tax benefit. We plan to evaluate continually whether events or circumstances
have occurred that could result in an acceleration of the amount to be
amortized. Such acceleration would reduce our net income by a corresponding
amount.
Further, each of the above-referenced acquisitions involves a deferred
purchase price which we will pay if the acquired business achieves specified
earnings targets. This deferred purchase price may result in additional
goodwill of up to $29.7 million that will be amortized over a period of time to
be determined at the date any deferred purchase price payments are made. The
initial goodwill plus the additional goodwill, if any, resulting from such
deferred purchase price provisions would result in an aggregate maximum
goodwill amortization of $2.1 million for the year ending December 31, 2000,
$2.3 million for the year ending December 31, 2001, $2.5 million for the year
ending December 31, 2002, $2.9 million for the year ending December 31, 2003,
$3.3 million for the year ending December 31, 2004 and $3.7 million for the
year ending December 31, 2005. In addition, we will also be required to
amortize the goodwill, if any, from any future acquisitions. Reductions in our
net income resulting from the amortization of goodwill may adversely affect the
market price of our Class A Common Stock.
If we are Unable to Successfully Implement or Realize Cost Savings Created
by our Acquisitions, our Operating Results may be Reduced
We believe that our integration of Diversified Apparel, Global Sourcing
Network, Components and Windsong will result in cost savings, including a
reduction in operating expenses as a result of the elimination of duplicative
administrative functions and personnel. Significant uncertainties, however,
accompany any business combination, and we cannot assure you that we will be
able to achieve our anticipated operating efficiencies or otherwise realize
cost savings from the Diversified Apparel, Global Sourcing Network, Components
and Windsong acquisitions or future acquisitions. The inability to achieve
anticipated operating efficiencies or cost savings could reduce our income or
cause us to sustain a loss.
Some of our Agreements Contain Terms that could Impede a Change in Control
or a Change in Management and may Discourage Transactions which would Benefit
our Shareholders
If Philip Ean Cohen ceases to control The Pietrafesa Corporation, other
than by reason of death or disability, we will immediately be required to pay
Windsong, Inc. up to $17.8 million, representing the net present value of all
unpaid amounts of the $22.0 million deferred portion of the purchase price for
the assets of Windsong, Inc. The Alexander Julian license terminates if Mr.
Cohen transfers control of The Pietrafesa Corporation without Alexander
Julian's prior consent. If Richard Pietrafesa is no longer our chief executive
officer, all unpaid amounts of the $4.7 million deferred portion of the
purchase price under the Components acquisition agreement will be accelerated.
These and other provisions included in the Components and Windsong acquisition
agreements may entrench management or discourage transactions in which we are
assigned an attractive valuation that would otherwise benefit our shareholders
because a change in control is involved.
19
<PAGE>
Risks Associated With Our Capital Structure
Holders of Class A Common Stock will have Limited Voting Rights
Following the offering, MS Pietrafesa, L.P., which is controlled by
Phillip Ean Cohen, will continue to own all of the outstanding shares of Class
B Common Stock. As such, MS Pietrafesa, L.P. will elect 75% of our directors
and, except in very limited circumstances, will have the power to decide all
other matters submitted to our stockholders. Holders of Class A Common Stock
will generally have no voting rights except the right to elect 25% of our
directors, until all shares of Class B Common Stock are converted into shares
of Class A Common Stock or otherwise cease to be outstanding. As a result, Mr.
Cohen will control the outcome of substantially all matters submitted to a vote
of our stockholders. See "Description of Capital Stock."
The Interests of our Controlling Stockholder may Conflict with the
Interests of the Holders of our Class A Common Stock
The interests of Mr. Cohen may conflict with the interests of holders of
Class A Common Stock. The concentration of voting power described above may
make us an unattractive takeover target and may discourage acquisition
proposals, even if such proposals are supported by holders of Class A Common
Stock. In addition, Mr. Cohen's voting power permits him to implement policies
not favored by, or in the best interests of, the holders of the Class A Common
Stock. In addition, as long as any Class B Common Stock is outstanding, Mr.
Cohen will be able to transfer voting control to a third party at a premium
that will not be enjoyed by holders of the Class A Common Stock. Voting power
will, in all likelihood, continue to be concentrated following conversion of
all of the outstanding shares of Class B Common Stock, since MS Pietrafesa,
L.P. would own approximately 46.6% of the outstanding shares of Class A Common
Stock following the full conversion.
Failure to Comply with Significant Covenant Restrictions in our Agreements
with our Lenders could Result in Acceleration of our Repayment Obligations
We may incur substantial additional indebtedness to fund our growth
strategy. Incurring substantial additional indebtedness would reduce our
financial flexibility and expose us to additional risks, including greater
vulnerability to economic downturns and competitive pressures.
Our agreements with our lenders contain significant operating and
financial restrictions. Our current credit agreements and other loan documents
contain restrictive covenants, including restrictions on incurrence of debt,
dividend payments, sales of assets, acquisitions and other business
combinations, transactions with affiliates, liens and investments. If we fail
to comply with existing or future debt covenants, we could default under these
agreements. If a default were to occur, the lender under such agreement could
accelerate our repayment of the indebtedness evidenced by that agreement.
Acceleration of our repayment obligations may also be required under any other
agreements then in effect containing cross-acceleration or cross-default
provisions. Any acceleration of our outstanding indebtedness could result in
foreclosure against our operating and working capital assets, the termination
of our license or other agreements and our bankruptcy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
The Market Price of our Class A Common Stock could be Adversely Affected
by Future Sales of Substantial Amounts of Shares in the Public Market
There will be an aggregate of 4,333,333 shares of Class A Common Stock
outstanding immediately after the offering, which amount could increase by up
to 600,000 shares if the underwriters exercise their over-allotment option. Of
these shares, the 4,000,000 shares of Class A Common Stock sold in this
offering and, commencing six months after the completion of this offering,
58,333 shares of Class A Common Stock registered for resale, from time to time,
by Windsong, Inc. will be freely tradable under the Securities Act of 1933.
The balance of the shares of Class A Common Stock issued to Windsong, Inc.
in connection with the Windsong acquisition and the up to 3,775,667 shares of
Class A Common Stock to be issued upon conversion
20
<PAGE>
of the 3,775,667 outstanding shares of Class B Common Stock will be "restricted
securities" and may, in the future, be sold in compliance with Rule 144 under
the Securities Act, subject, in the case of the shares issued to Windsong,
Inc., to the resale restrictions in the Windsong acquisition agreement. See
"Shares Eligible for Future Sale."
The sale or availability for sale of a large number of shares in the
market after the offering could cause a decline in the market price of the
Class A Common Stock. This could make it more difficult for us to raise funds
through future offerings of our stock.
Absence of Current Public Market, Determination of Public Offering Price
and Market Uncertainty may Cause the Market Price of the Class A Common Stock
to Fluctuate
There has not been a public market for the Class A Common Stock. We have
applied for listing of the Class A Common Stock on the Nasdaq National Market.
We do not know the extent to which investor interest in our stock will cause an
active trading market to develop or be sustained, or how liquid that market
might be. The market price for the Class A Common Stock could also fluctuate in
response to various factors and events, including liquidity of the market for
our shares, quarter-to-quarter variations in our results of operations and our
significant developments and of other industry participants, pricing and
competition in our industry, broad market fluctuations and economic and
political conditions not directly related to our business. The initial public
offering price of the Class A Common Stock will be determined by negotiation
between us and representatives of the underwriters. Investors may not be able
to resell their shares at or above the price that they pay in the initial
public offering.
Purchasers of Class A Common Stock will Experience Immediate Dilution and
will be Subject to Potential Future Dilution
Based upon our pro forma net tangible book value as of March 31, 1999,
purchasers of Class A Common Stock in the offering will experience an immediate
dilution of $9.37 in the pro forma net tangible book value per share of Class A
Common Stock from the initial public offering price of $12.00 per share.
Moreover, additional issuances of Class A Common Stock pursuant to the exercise
of stock options or warrants that we may issue from time to time, or as payment
of the deferred purchase price in connection with the Diversified Apparel,
Global Sourcing Network, Components and Windsong acquisitions, could cause
further dilution in the net tangible book value per share of the Class A Common
Stock. See "Dilution."
FORWARD-LOOKING STATEMENTS
An investment in the Class A Common Stock offered hereby is speculative in
nature and involves a high degree of risk. Some statements made in this
prospectus under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements. Forward-looking statements are identified by use of terms such as
"may," "will," "expect," "anticipate," "believe," "estimate," "intend," "plan"
and similar expressions, although some forward-looking statements are expressed
differently. Although we believe these statements are reasonable, there are
important risks and uncertainties, including those discussed in the "Risk
Factors" section above, that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements, including
changes in general economic and business conditions, actions of competitors,
changes in our business strategies and the factors set forth under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
21
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of 4,000,000 shares of Class A Common Stock
in this offering, after payment of expenses of this offering, are estimated to
be approximately $43.2 million, or $49.9 million if the underwriters'
over-allotment option is exercised in full, assuming an initial public offering
price of $12.00 per share, the midpoint of the range set forth on the cover
page of this prospectus. We intend to apply the net proceeds as follows:
(In thousands)
Windsong acquisition ............................ $ 22,000
Windsong escrow ................................. 4,250(1)
Notes due to sellers of Diversified Apparel and
Global Sourcing Network ......................... 1,200(2)
Components acquisition .......................... 4,695
Repay indebtedness .............................. 11,055(3)
---------
$ 43,200
=========
- ----------------
(1) Indicates the amount that we will deposit in escrow prior to the closing of
the Windsong acquisition to secure the payment of a performance-based
portion of the purchase price of the Windsong acquisition. These funds will
be released from escrow to Windsong, no later than March 31, 2000 if
Windsong achieves targeted performance results. If these results are not
achieved, the funds will be released to us and used for general corporate
purposes.
(2) These notes bear interest at a rate of 10% per annum and mature in May
2002.
(3) Indicates the amount of proceeds that will be used to repay indebtedness
under our revolving credit line with PNC Bank, National Association, which
matures April 15, 2002. Borrowings under the PNC Bank revolving credit line
bear interest, at our option, at a rate based on either the bank's
commercial lending rate plus 0.5% or LIBOR plus 2.75%. In addition to the
funding of our working capital requirements, borrowings under the PNC Bank
revolving credit line were used to fund a $1.56 million tax distribution,
the $1.4 million initial cash portion of the purchase price for Global
Sourcing Network and the $800,000 initial cash portion of the Diversified
Apparel purchase price. See "Certain Relationships and Related
Transactions" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Significant Acquisitions." As of
June 30, 1999, $11.8 million was outstanding under the revolving credit
line.
22
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1999:
(1) our actual capitalization, giving retroactive effect to the issuances
of Class B Common Stock to our sole stockholder which have occurred or
will occur prior to the completion of the offering;
(2) our pro forma combined capitalization after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions, including the issuance of 333,333 shares of Class A
Common Stock to Windsong, based on an assumed initial offering price
of $12.00 per share, as part of our acquisition of Windsong; and
(3) our pro forma combined capitalization, as adjusted to give effect to
the Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions, our sale of 4,000,000 shares of Class A Common
Stock pursuant to the offering, assuming an initial public offering
price of $12.00 per share, and the application of the net proceeds of
the offering as described under "Use of Proceeds." Our pro forma
combined capitalization, as adjusted, set forth below, excludes shares
of Class A Common Stock which may be issued as deferred purchase price
under the terms of the Diversified Apparel, Global Sourcing Network,
Components and Windsong acquisitions.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Pro Forma Combined
Financial Data" and the audited financial statements and the notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 1999
------------------------------------------------
Pro Forma
Combined,
Actual Pro Forma Combined As Adjusted
---------- -------------------- ------------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Long term debt, net of current maturities ............. $13,054 $47,914 $ 5,914
Stockholders' equity:
Class A Common Stock, par value $.001 per share;
12,000,000 shares authorized, no shares issued
and outstanding, 333,333 shares issued and
outstanding pro forma combined and 4,333,333
shares issued and outstanding pro forma
combined, as adjusted ................................ -- -- 4
Class B Common Stock, par value $.0002 per
share; 10,000,000 shares authorized, 3,775,667
shares issued and outstanding actual, pro forma
combined and pro forma combined, as adjusted ......... -- -- --
Additional paid-in capital ............................ 3,191 7,191 50,387
Retained earnings ..................................... 282 282 282
------- ------- -------
Total stockholders' equity ........................... 3,473 7,473 50,673
------- ------- -------
Total capitalization .................................. $16,527 $55,387 $56,587
======= ======= =======
</TABLE>
23
<PAGE>
DIVIDEND POLICY
We have not declared or paid any cash or other dividends on our capital
stock and we do not expect to pay dividends for the foreseeable future. We
anticipate that all of our earnings in the foreseeable future will be used for
the operation of our business, to support our growth strategy and to reduce our
indebtedness. Any future determination to pay dividends will be at the
discretion of our Board of Directors and will depend upon, among other factors,
our results of operations, financial condition and capital requirements. In
addition, our existing credit facility with PNC Bank, National Association, and
other loan agreements contain, and any successor facility will likely contain,
prohibitions on our ability to pay dividends. Please refer to the "Certain
Relationships and Related Transactions" section of this prospectus, however,
for a description of tax-related distributions required to be made by MS
Pietrafesa, L.P. to its partners under its partnership agreement. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DILUTION
Our net tangible book value as of March 31, 1999, was $3.3 million, or
$0.88 per share of Common Stock. Net tangible book value per share represents
the amount of total tangible assets less total liabilities, divided by the
aggregate number of shares of Common Stock outstanding. Dilution in the net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of Class A Common Stock in this offering and
the net tangible book value per share of Common Stock immediately afterwards.
After giving effect to the Diversified Apparel, Global Sourcing Network,
Components and Windsong acquisitions and our obligation to issue to Windsong,
Inc. as part of our acquisition of Windsong, $4.0 million worth of Class A
Common Stock at our initial public offering price, which would result in the
issuance of 333,333 shares of Class A Common Stock, our net tangible book value
as of March 31, 1999 would have been $(21.9) million or $(5.33) per share.
After giving effect to the sale of 4,000,000 shares of Class A Common Stock
offered hereby at an assumed initial public offering price of $12.00 per share,
and the application of the net proceeds therefrom, our pro forma net tangible
book value as of March 31, 1999 would have been approximately $21.3 million, or
$2.63 per share. This represents an immediate increase in net tangible book
value of $7.96 per share to the holder of our Class B Common Stock and an
immediate dilution in net tangible book value of $9.37 per share to purchasers
of Class A Common Stock in the offering. The following table illustrates this
per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share ....................................... $ 12.00
Net tangible book value per share of Common Stock as of March 31,1999 .............. $ 0.88
Decrease in net tangible book value per share of Common Stock attributable to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions ...................................................................... (6.21)
------
Pro forma net tangible book value per share of Common Stock
after the acquisitions ............................................................ (5.33)
Increase in pro forma net tangible book value per share of Common Stock
attributable to new investors ..................................................... 7.96
------
Pro forma net tangible book value per share of Common Stock after the acquisitions
and the offering .................................................................. 2.63
-------
Dilution per share of Class A Common Stock to new investors ........................ $ 9.37
=======
</TABLE>
24
<PAGE>
The following table sets forth, on the pro forma basis described above, as
of March 31, 1999, the difference between the number of shares purchased, the
total consideration paid and the average price per share paid by the existing
stockholder and new investors purchasing shares of Class A Common Stock in this
offering. The information presented is based upon an assumed initial public
offering price of $12.00 per share, the midpoint of the range set forth on the
cover page of this prospectus, before deducting the estimated offering expenses
and underwriting discounts and commissions:
<TABLE>
<CAPTION>
Shares Total Consideration
------------------------------ -------------------------
Average Price
Number Percent Amount Percent Per Share
------------------ --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholder ......... 3,775,667 46.6% $ 8,184,454 13.6% $ 2.17
Windsong, Inc. ............... 333,333(1) 4.1 4,000,000 6.6 12.00
New investors ................ 4,000,000 49.3 48,000,000 79.8 12.00
--------- ----- ----------- -----
8,109,000(2) 100.0% $60,184,454 100.0%
========= ===== =========== =====
</TABLE>
- ------------------
(1) Represents shares issued as part of the purchase price of the Windsong
acquisition.
(2) Excludes shares of Class A Common Stock to be reserved for issuance upon
the exercise of options which may be issued under our Stock Option Plan,
under which options to purchase a number of shares equal to 10% of our
outstanding capital stock immediately following the offering may be
granted. See "Management -- Stock Option Plan."
25
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables present our selected historical statement of
operations and historical balance sheet data for each year in the five-year
period ended December 31, 1998 and for the three-month periods ended March 31,
1998 and 1999. The selected annual historical financial data were derived from
audited consolidated financial statements. The selected historical financial
data as of March 31, 1998 and 1999 and for the three-month periods then ended
were derived from our unaudited interim financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which we consider necessary for a fair presentation of the financial
position, and the results of operations for these periods. Operating results
for the three-month period ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the entire year ending December 31,
1999.
Our statement of operations, balance sheet and other data include a number
of items that require further explanation. These items include:
o Impairment loss on fixed assets, which relates to the reduction of
property, plant, and equipment to their net realizable value less sale
costs based on independent appraisals. In 1995, we discontinued the
low price point tailored clothing segment of our business and closed
the related manufacturing facilities located in Carrollton, Georgia.
Accordingly, in 1995 we reduced the net book value of plant and
equipment, as well as furniture and fixtures, located at the
Carrollton facility, to their net realizable value and realized an
impairment loss of $2.3 million. The impairment loss of $170,000 in
1996 related to equipment which we disposed of at our former Sturgis,
Kentucky facility;
o Public offering costs, which relate to the abandonment of our public
offering in 1998 due to adverse market conditions;
o Provision for income taxes, which was not included in our statement of
operations data prior to October, 1998 because our predecessor, MS
Pietrafesa, L.P., was not subject to state or federal income taxes;
o Extraordinary item, which relates to the forgiveness of all of our
outstanding subordinated debt in 1996; and
o Pro forma weighted average number of common shares outstanding, basic
and diluted, which consists of the 3,775,667 shares of Class B Common
Stock owned by our sole stockholder as of the date of the offering.
For 1998 and the first quarter of 1999, it also includes an additional
125,000 shares assumed to be issued at the initial public offering
price to pay the $1.5 million tax distribution to the partners of MS
Pietrafesa, L.P. in May 1999. See "Use of proceeds" and "Certain
Relationships and Related Transactions." The issuance of the shares to
pay this tax distribution is assumed for earnings per share purposes
as required by Staff Accounting Bulletin Topic 1(B)3 issued by the
Securities and Exchange Commission. The 125,000 shares were not
actually issued.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and " -- Results of Operations" for a more detailed
explanation of these items.
In addition, we have included under "Other Data" below and in our Selected
Historical Consolidated Financial Data, the line item "EBITDA plus public
offering costs," which represents income (loss) before provision (benefit) for
income taxes plus depreciation and amortization plus interest expense plus
public offering costs. EBITDA plus public offering costs is not intended to
represent cash flows from operations and should not be considered as an
alternative to net income as an indicator of our operating performance or to
cash flows as a measure of liquidity. We believe that EBITDA is a standard
measure commonly reported and widely used by analysts, investors and other
interested parties in the apparel industry. Accordingly, as modified to exclude
our public offering costs, it has been disclosed in this prospectus to permit a
more complete description of our performance relative to other companies in the
apparel industry. Our definition of EBITDA may not be identical to the
definitions used by other companies and, therefore, may not necessarily provide
an accurate basis for comparison.
The selected historical financial data set forth below should be read in
conjunction with our financial statements and notes thereto included elsewhere
in this prospectus, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial data included herein.
26
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ------------- ----------- ----------- -------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues ...................... $54,859 $ 51,431 $ 44,000 $ 37,582 $ 56,763
Cost of sales ..................... 45,803 46,533 34,769 29,218 47,062
------- --------- -------- -------- -----------
Gross profit ...................... 9,056 4,898 9,231 8,364 9,701
Operating expenses:
Selling, general and
administrative expenses .......... 7,250 10,080 7,427 6,150 5,536
Impairment loss on fixed
assets ........................... -- 2,324 170 -- --
Depreciation and amortization
expense .......................... 99 102 165 151 222
------- --------- -------- -------- -----------
7,349 12,506 7,762 6,301 5,758
------- --------- -------- -------- -----------
Operating income (loss) ........... 1,707 (7,608) 1,469 2,063 3,943
Interest expense .................. 1,648 1,914 1,962 1,507 1,209
Public offering costs ............. -- -- -- -- 823
------- --------- -------- -------- -----------
Income (loss) before income
taxes and extraordinary item 59 (9,522) (493) 556 1,911
Provision for income taxes ........ -- -- -- -- 514
------- --------- -------- -------- -----------
Income (loss) before
extraordinary item ............... 59 (9,522) (493) 556 1,397
------- --------- -------- -------- -----------
Extraordinary item ................ -- -- 3,150 -- --
------- --------- -------- -------- -----------
Net income (loss) ................. $ 59 $ (9,522) $ 2,657 $ 556 $ 1,397
======= ========= ======== ======== ===========
Pro Forma Income Data:
Income before income taxes ........ $ 1,911
Pro forma provision for income
taxes ............................ 764
-----------
Pro forma net income .............. $ 1,147
===========
Pro forma basic and diluted net
income per common share .......... $ 0.29
Pro forma basic and diluted
weighted average number
of common shares
outstanding ...................... 3,900,667
<PAGE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------------
1998 1999
------------- -------------
(in thousands, except share
and per share data)
<S> <C> <C>
Statement of Operations Data:
Net revenues ...................... $ 9,503 $ 17,803
Cost of sales ..................... 7,028 14,833
----------- -----------
Gross profit ...................... 2,475 2,970
Operating expenses:
Selling, general and
administrative expenses .......... 1,305 1,201
Impairment loss on fixed
assets ........................... -- --
Depreciation and amortization
expense .......................... 64 68
----------- -----------
1,369 1,269
----------- -----------
Operating income (loss) ........... 1,106 1,701
Interest expense .................. 253 296
Public offering costs ............. -- --
----------- -----------
Income (loss) before income
taxes and extraordinary item 853 1,405
Provision for income taxes ........ -- 565
----------- -----------
Income (loss) before
extraordinary item ............... 853 840
----------- -----------
Extraordinary item ................ -- --
----------- -----------
Net income (loss) ................. $ 853 $ 840
=========== ===========
Pro Forma Income Data:
Income before income taxes ........ $ 853 $ 1,405
Pro forma provision for income
taxes ............................ 341 565
----------- -----------
Pro forma net income .............. $ 512 $ 840
=========== ===========
Pro forma basic and diluted net
income per common share .......... $ 0.14 $ 0.22
Pro forma basic and diluted
weighted average number
of common shares
outstanding ...................... 3,775,667 3,900,667
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of March 31,
------------------------------------------------------------ ----------------------
1994 1995 1996 1997 1998 1998 1999
--------- ------------- ------------ --------- --------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficiency) ......... $ 4,713 $ (3,287) $ (2,412) $ 4,642 $ 9,239 $ 5,707 $ 10,520
Total assets ......................... 40,035 27,116 23,627 19,673 29,375 21,838 29,944
Total long-term debt, net of
current maturities .................. 7,429 3,746 3,036 8,663 12,561 8,754 13,054
Total partners' capital and
stockholders' equity ................ 8,818 (704) 2,153 2,709 2,383 3,562 3,473
</TABLE>
<TABLE>
<CAPTION>
For the Three Months
For the Year Ended December 31, Ended March 31,
-------------------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
----------- ------------- ----------- ---------- ----------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data:
EBITDA plus public offering costs $ 2,719 $ (6,411) $ 2,415 $ 2,865 $ 4,731 $1,308 $1,886
Capital expenditures ............ 1,103 368 105 59 592 90 109
Cash (used in) provided by
operating activities ........... (3,022) 3,779 2,445 3,056 (1,395) 28 (613)
Cash (used in) provided by
investing activities ........... (1,035) (265) 419 2,185 (563) (90) (109)
Cash (used in) provided by
financing activities ........... 4,540 (4,001) (2,866) (5,242) 1,969 62 721
</TABLE>
28
<PAGE>
PRO FORMA COMBINED FINANCIAL DATA
Our pro forma combined financial data includes our statement of operations
data which reflects our historical results after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions as if they occurred on January 1, 1998, and also includes our
balance sheet data, which reflects our balance sheet and the balance sheets of
Diversified Apparel, Global Sourcing Network, Components and Windsong as if the
acquisitions of such businesses had occurred on March 31, 1999. The
acquisitions of Diversified Apparel and Global Sourcing Network were
consummated on April 15, 1999. We have entered into definitive agreements to
purchase the Components and Windsong businesses. Our acquisition of Components
and Windsong will occur simultaneously with this offering. The pro forma
combined, as adjusted financial data includes our pro forma combined
information as adjusted for this offering and the application of the proceeds
of this offering. The pro forma combined financial data are based upon
preliminary estimates, available information and assumptions that management
deems appropriate, but are not necessarily indicative of the results that would
have been obtained had such events occurred at the times assumed or our future
results. The pro forma combined financial statements should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this prospectus.
The acquisitions have been recorded in the pro forma financial statements
as a purchase in accordance with Accounting Principle Board Opinion No. 16.
Accordingly, the purchase price of each acquisition has been allocated to the
fair value of the assets acquired and the amount of the liabilities assumed,
with the remainder allocated to goodwill. No other intangible assets were
acquired as part of the acquisitions. The initial, non-deferred purchase price
of Components will be paid entirely in cash. The initial, non-deferred purchase
prices of Global Sourcing Network and Diversified Apparel were paid in cash and
by the issuance of notes. The initial, non-deferred purchase price of Windsong
will be paid in cash and $4.0 million worth of Class A Common Stock valued at
the initial public offering price, assumed to be $12.00 per share, or 333,333
shares. A summary of the initial, non-deferred purchase price of the
acquisitions and allocation of each such price to the fair value of assets
acquired and liabilities assumed is shown below:
Schedule of Allocation of Purchase Price of Acquisitions
<TABLE>
<CAPTION>
Global
Diversified Sourcing Total
Apparel Network Components Windsong Combined
------------- ------------ ------------ ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Purchase Price:
Cash portion ........................... $ 800 $ 1,400 $ 4,695 $ 22,000 $ 28,895
Equity portion ......................... -- -- -- 4,000 4,000
Sellers' notes ......................... 400 800 -- -- 1,200
Costs directly associated with the
acquisition ........................... 350 350 350 400 1,450
--------- -------- -------- --------- ---------
Total purchase price ................... $ 1,550 $ 2,550 $ 5,045 $ 26,400 $ 35,545
Allocation of Purchase Price:
Fair value of assets acquired .......... $ (2,457) $ (1,171) $ (8,660) $ (19,998) $ (32,286)
Assumption of liabilities .............. $ 1,955 $ 1,121 $ 6,021 $ 16,862 $ 25,959
--------- -------- -------- --------- ---------
Goodwill acquired ...................... $ 1,048 $ 2,500 $ 2,406 $ 23,264 $ 29,218
========= ======== ======== ========= =========
Pro forma amortization expense ......... $ 105 $ 167 $ 160 $ 1,163 $ 1,595
========= ======== ======== ========= =========
Pro forma amortization for quarter $ 26 $ 42 $ 40 $ 291 $ 399
========= ======== ======== ========= =========
</TABLE>
29
<PAGE>
Goodwill will be amortized over a period ranging from 10 to 20 years. The
principal assets acquired or to be acquired for each of the acquisitions are
accounts receivable, inventory and goodwill. We do not believe that any of the
identifiable intangible assets acquired in the acquisitions, including the
Alexander Julian license, have any independent value. Accordingly, we have not
allocated any of the purchase price to any identifiable intangible assets. The
principal liabilities assumed for each of the acquisitions are accounts payable,
accrued expenses and debt facilities. The amount of goodwill recorded in the pro
forma financial statements is based on the assets and liabilities of the
acquisitions as of March 31, 1999, which are estimated to approximate fair value
at that date. The actual amount of goodwill recorded when the acquisitions are
completed will vary depending on the actual amount of assets and liabilities of
the acquisitions on the acquisition dates. However, we do not believe there will
be a material difference between the assumed and actual amount of goodwill
recorded since the purchase agreements contain mandatory purchase price
adjustments to the extent that net assets or working capital do not meet
targeted amounts. In addition, a portion of the purchase price for each of the
above-referenced acquisitions will be deferred, which we will pay upon the
achievement by the acquired business of specified performance targets. These
deferred purchase price provisions may result in additional goodwill of $29.7
million that will be amortized over a period ranging from nine to 19 years. The
initial goodwill plus the additional goodwill, if any, resulting from such
deferred purchase price provisions would result in aggregate goodwill
amortization of $2.1 million for the year ending December 31, 2000, $2.3 million
for the year ending December 31, 2001, $2.5 million for the year ending December
31, 2002, $2.9 million for the year ending December 31, 2003, $3.3 million for
the year ending December 31, 2004 and $3.7 million for the year ending December
31, 2005.
In addition to the adjustments included in the pro forma combined
financial data, our acquisition and integration of the acquired businesses may
affect their operations in other ways. We expect the acquired businesses to be
able to use our existing merchandising, sourcing, sales and accounting staff to
perform certain functions performed for the acquired businesses historically by
third party consultants. For example, as a condition to our acquisition of
Global Sourcing Network, it agreed to stop paying royalties and commissions to
third party consultants who assisted in the development, merchandising and
international sourcing of apparel programs for S&K Famous Brands. These
terminated commissions and royalties totaled $870,000 in 1998. We expect that
our existing staff will perform these services for Global Sourcing Network at
no additional cost to us and without any loss of revenues. We also expect to
incur additional costs associated with being a public company which are
estimated to be $300,000 per year.
30
<PAGE>
Pro Forma Combined Statement of Operations Data
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
The Global
Pietrafesa Diversified Sourcing Total
Corporation Apparel Network Components Windsong Combined
------------- ------------- ---------- ------------ ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ............................ $56,763 $ 2,633 $18,062 $19,993 $63,630 $ 161,081
Cost of sales ........................... 47,062 1,590 16,768 15,007 49,884 130,311
------- ------- ------- ------- ------- ---------
Gross profit ............................ 9,701 1,043 1,294 4,986 13,746 30,770
Operating expenses:
Selling, general and administrative
expenses .............................. 5,536 765 1,390 3,107 10,917 21,715
Depreciation and amortization
expenses .............................. 222 3 4 1 157 387
------- ------- ------- ------- ------- ---------
5,758 768 1,394 3,108 11,074 22,102
------- ------- ------- ------- ------- ---------
Operating income (loss) ................. 3,943 275 (100) 1,878 2,672 8,668
Interest expense ........................ 1,209 1 -- 293 1,661 3,164
Public offering costs ................... 823 -- -- -- -- 823
------- ------- ------- ------- ------- ---------
Income (loss) before income taxes ....... 1,911 274 (100) 1,585 1,011 4,681
Provision for income taxes .............. 514 24 (46) 158 46 696
------- ------- ------- ------- ------- ---------
Net income (loss) ....................... $ 1,397 $ 250 $ (54) $ 1,427 $ 965 $ 3,985
======= ======= ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
Company Acquisition Pro Forma
Pro Forma Pro Forma Pro Forma Offering Combined,
Adjustments Adjustments Combined Adjustments As Adjusted
------------- ----------------- ------------- ----------------- ------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ................................ $ -- $ -- $ 161,081 $ -- $ 161,081
Cost of sales ............................... -- -- 130,311 -- 130,311
------ --------- ---------- --------- ----------
Gross profit ................................ -- -- 30,770 -- 30,770
Operating expenses:
Selling, general and administrative
expenses .................................. -- (2,667)(2) 19,048 -- 19,048
Depreciation and amortization
expenses .................................. -- 1,595)(3) 1,982 -- 1,982
------ --------- ---------- --------- ----------
-- (1,072) 21,030 -- 21,030
------ --------- ---------- --------- ----------
Operating income (loss) ..................... -- 1,072 9,740 -- 9,740
Interest expense ............................ -- 2,788(4) 5,952 (3,567)(5) 2,385
Public offering costs ....................... -- -- 823 -- 823
------ --------- ---------- --------- ----------
Income (loss) before income taxes ........... -- (1,716) 2,965 3,567 6,532
Provision for income taxes .................. 250(1) 240(1) 1,186 1,426(6) 2,612
------ --------- ---------- --------- ----------
Net income (loss) ........................... $ (250) $ (1,956) $ 1,779 $ 2,141 $ 3,920
====== ========= ========== ========= ==========
Basic and diluted net income (loss) per
common share ............................... $ 0.42 $ 0.48
Basic and diluted weighted average number
of common shares outstanding(7) ............ 4,234,000 8,109,000
</TABLE>
31
<PAGE>
Pro Forma Combined Statement of Operations Data
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
The Global
Pietrafesa Diversified Sourcing Total
Corporation Apparel Network Components Windsong Combined
------------- ------------- ---------- ------------ ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ......................... $17,803 $2,233 $6,040 $5,384 $14,552 $46,012
Cost of sales ........................ 14,833 1,697 5,622 4,123 11,170 37,445
------- ------ ------ ------ ------- -------
Gross profit ......................... 2,970 536 418 1,261 3,382 8,567
Operating expenses:
Selling, general and administrative
expenses ........................... 1,201 336 261 604 2,030 4,432
Depreciation and amortization
expenses ........................... 68 -- -- -- 40 108
------- ------ ------ ------ ------- -------
1,269 336 261 604 2,070 4,540
------- ------ ------ ------ ------- -------
Operating income ..................... 1,701 200 157 657 1,312 4,027
Interest expense ..................... 296 4 -- 76 334 710
Public offering cost ................. -- -- -- -- -- --
------- ------ ------ ------ ------- -------
Income before income taxes ........... 1,405 196 157 581 978 3,317
Provision for income taxes ........... 565 (1) -- -- 44 608
------- ------ ------ ------ ------- -------
Net income ........................... $ 840 $ 197 $ 157 $ 581 $ 934 $ 2,709
======= ======= ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Company Acquisition Pro Forma
Pro Forma Pro Forma Pro Forma Offering Combined, As
Adjustments Adjustments Combined Adjustments Adjusted
------------- -------------- ------------- --------------- -------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ................................ -- $ -- $ 46,012 $ -- $ 46,012
Costs of sales .............................. -- -- 37,445 -- 37,445
------ -------- ---------- ------- ----------
Gross profit ................................ -- -- 8,567 -- 8,567
Operating expenses:
Selling, general and administrative
expenses .................................. -- 1 4,433 -- 4,433
Depreciation and amortization
expenses .................................. -- 399(3) 507 -- 507
------ -------- ---------- ------- ----------
-- 400 4,940 -- 4,940
------ -------- ---------- ------- ----------
Operating income (loss) ..................... -- (400) 3,627 -- 3,627
Interest expense ............................ -- 738(4) 1,448 (909)(5) 539
------ -------- ---------- ------- ----------
Income (loss) before income taxes ........... -- (1,138) 2,179 909 3,088
Provision for income taxes .................. -- 267(1) 875 360(6) 1,235
------ -------- ---------- ------- ----------
Net income (loss) ........................... -- $ (1,405) $ 1,304 $ 549 $ 1,853
====== ======== ========== ======= ==========
Basic and diluted net income (loss) per
common share ............................... $ 0.31 $ 0.23
Basic and diluted weighted average number
of common shares outstanding(7) ............ 4,234,000 8,109,000
</TABLE>
32
<PAGE>
Pro Forma Combined Statement of Operations Data
For the Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
The Global
Pietrafesa Diversified Sourcing Total
Corporation Apparel Network Components Windsong Combined
------------- -------------- ---------- ------------ ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ......................... $9,503 $260 $5,831 $4,868 $17,312 $37,774
Cost of sales ........................ 7,028 18 5,372 3,596 13,684 29,698
------ ---- ------ ------ ------- -------
Gross profit ......................... 2,475 242 459 1,272 3,628 8,076
Operating expenses:
Selling, general and administrative
expenses ........................... 1,305 176 324 509 2,090 4,404
Depreciation and amortization
expenses ........................... 64 -- -- -- 41 105
------ ---- ------ ------ ------- -------
1,369 176 324 509 2,131 4,509
------ ---- ------ ------ ------- -------
Operating income ..................... 1,106 66 135 763 1,497 3,567
Interest expense ..................... 253 -- -- 67 448 768
Public offering cost ................. -- -- -- -- -- --
------ ---- ------ ------ ------- -------
Income before income taxes ........... 853 66 135 696 1,049 2,799
Provision for income taxes ........... -- 13 2 16 47 78
------ ---- ------ ------ ------- -------
Net income ........................... $ 853 $ 53 $ 133 $ 680 $ 1,002 $ 2,721
====== ==== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Company Acquisition Pro Forma
Pro Forma Pro Forma Pro Forma Offering Combined, As
Adjustments Adjustments Combined Adjustments Adjusted
------------- --------------- ------------- --------------- -------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenues ................................ $ -- $ -- $ 37,774 $ -- $ 37,774
Costs of sales .............................. -- -- 29,698 -- 29,698
------ ------- ---------- ------- ----------
Gross profit ................................ -- -- 8,076 -- 8,076
Operating expenses:
Selling, general and administrative
expenses .................................. -- (93)(2) 4,311 -- 4,311
Depreciation and amortization
expenses .................................. -- 399(3) 504 -- 504
------ ------- ---------- ------- ----------
-- 306 4,815 -- 4,815
------ ------- ---------- ------- ----------
Operating income (loss) ..................... -- (306) 3,261 -- 3,261
Interest expense ............................ -- 575(4) 1,343 (993)(5) 350
Public offering costs ....................... -- -- -- -- --
------ ------- ---------- ------- ----------
Income (loss) before income taxes ........... -- (881) 1,918 993 2,911
Provision for income taxes .................. 341(1) 348(1) 767 397(6) 1,164
------ ------- ---------- ------- ----------
Net income (loss) ........................... $ (341) $(1,229) $ 1,151 $ 596 $ 1,747
====== ======= ========== ======= ==========
Basic and diluted net income per common
share ...................................... $ 0.28 $ 0.22
Basic and diluted weighted average number
of common shares outstanding(7) ............ 4,109,000 8,109,000
</TABLE>
33
<PAGE>
(1) Reflects the income tax effect of the pro forma adjustments and the
additional tax expense necessary to adjust our historical income tax
expense to a combined effective federal and state tax rate of 40%. This pro
forma adjustment was made to reflect this effective rate as the income of
The Pietrafesa Corporation and the combining companies was not all taxable
in 1998 but would have been taxable had the transaction been consummated on
January 1, 1998. Prior to October 1, 1998, The Pietrafesa Corporation
operated as a limited partnership with income and loss included in the
taxable income of the individual partners. Diversified Apparel, Components
and Windsong operated as S-corporations for federal income tax purposes.
Accordingly, the income and loss of Diversified Apparel, Components and
Windsong were included in the taxable income of their shareholders. These
adjustments are summarized as follows:
<TABLE>
<CAPTION>
For the
Three Months For the
For the Year Ended Ended Three Months Ended
December 31, 1998 March 31, 1999 March 31, 1998
----------------------------- ---------------- ----------------------------
Company Acquisition Acquisition Company Acquisition
Pro Forma Pro Forma Pro Forma Pro Forma Pro Forma
Adjustments Adjustments Adjustments Adjustments Adjustments
------------- ------------- ---------------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
To adjust historical income tax
expense to an effective tax rate
of 40%
The Pietrafesa Corporation ......... $250 $341
Diversified Apparel ................ $ 86 $ 79 $ 13
Global Sourcing Network ............ 6 63 52
Components ......................... 476 232 262
Windsong ........................... 358 348 373
Tax effect of pro forma adjustments
assuming a 40% tax rate ............ (686) (455) (352)
---- ------ ------ ---- ------
Total .............................. $250 $ 240 $ 267 $341 $ 348
==== ====== ====== ==== ======
</TABLE>
(2) Reflects a reduction of selling, general and administrative expenses
totaling $2.7 million in 1998 representing the excess of actual 1998
compensation expense and benefits over the compensation and benefits to be
paid to the former owners of Diversified Apparel, Global Sourcing Network,
Components and Windsong, under their respective acquisition agreements.
This adjustment was an increase of $1,000 in the first quarter of 1999 and
a reduction of $93,000 in the first quarter of 1998 of selling, general and
administrative expenses. This pro forma information is shown solely to
demonstrate the changed circumstances that will exist following the
consummation of the acquisitions. Although the administrative expenses of
the acquired businesses will decline after the offering as a result of the
reduced compensation payable to the former owners of these businesses, the
roles and responsibilities and the administrative function of these
individuals will not be diminished as a result of the acquisitions. We do
not expect to incur any additional administrative expense beyond those
reflected in the adjustments going forward. We believe this information is
necessary for investors to realistically assess the impact of these
acquisitions.
(3) Reflects the amortization of goodwill resulting from the Diversified
Apparel, Global Sourcing Network, Components and Windsong acquisitions as
if the acquisitions occurred on January 1, 1998. The calculation of this
adjustment is shown in the table entitled, "Schedule of Allocation of
Purchase Price of Acquisitions."
(4) Reflects interest expense associated with the additional indebtedness
assumed to be outstanding as a result of the Diversified Apparel, Global
Sourcing Network, Components and Windsong acquisitions, less interest
expense on interest-bearing subordinated accounts payable which we will not
be assuming as part of the Windsong acquisition equal to $279,000 in 1998,
$28,000 in the first quarter of 1999 and $191,000 in the first quarter of
1998.
(5) Reflects the reduction of interest expense resulting from repayment of debt
with the proceeds of the offering, net of a fee for unused availability
under the PNC Bank credit facility.
34
<PAGE>
(6) Reflects the income tax effect of the pro forma adjustments assuming an
effective tax rate of 40%.
(7) Pro forma combined weighted average number of common shares outstanding,
basic and diluted, includes, in addition to the 3,775,667 shares of Class B
Common Stock owned by our sole stockholder as of the date of the offering,
333,333 shares of Class A Common Stock issued to Windsong at the initial
public offering price as part of our acquisition of Windsong, based on an
assumed offering price of $12.00 per share. For 1998 and the first quarter
of 1999, it also includes an additional 125,000 shares assumed to be
issued at the initial public offering price to pay the $1.5 million tax
distribution to the partners of MS Pietrafesa, L.P. in May 1999. See "Use
of Proceeds" and "Certain Relationships and Related Transactions." The
issuance of the shares to pay this tax distribution is assumed for earnings
per share purposes as required by Staff Accounting Bulletin Topic 1(B)3
issued by the Securities and Exchange Commission. The 125,000 shares were
not actually issued.
Pro forma combined, as adjusted weighted average number of common shares
outstanding, basic and diluted, includes, in addition to all shares of
Class A Common Stock to be issued in the offering and the initial portion
of the Windsong acquisition price, 3,775,667 shares of Class B Common Stock
owned by our sole stockholder as of the date of the offering.
35
<PAGE>
Pro Forma Combined Balance Sheet Data
As of March 31, 1999
<TABLE>
<CAPTION>
The Global
Pietrafesa Diversified Sourcing Total
Corporation Apparel Network Components Windsong Combined
------------- ------------- ---------- ------------ ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets
Current assets
Cash .................................... $ 13 $ 116 $ -- $ 187 $ 21 $ 337
Accounts receivable ..................... 8,488 1,471 589 5,199 8,527 24,274
Inventories ............................. 12,682 792 434 2,454 9,473 25,835
Prepaid expenses and other
assets ................................. 1,313 56 139 -- 1,308 2,816
------- ------ ------ ------ ------- -------
Total current assets ...................... 22,496 2,435 1,162 7,840 19,329 53,262
Property, plant and equipment, net ......... 6,523 13 9 312 598 7,455
Goodwill ................................... -- -- -- -- -- --
Other assets ............................... 925 9 -- 508 71 1,513
------- ------ ------ ------ ------- -------
Total assets ............................... $29,944 $2,457 $1,171 $8,660 $19,998 $62,230
======= ====== ====== ====== ======= =======
Liabilities and stockholders' equity
Current liabilities
Credit facility ......................... $ -- $ 150 $ -- $3,369 $10,707 $14,226
Accounts payable ........................ 7,166 1,300 898 2,494 6,365 18,223
Other current liabilities ............... 2,767 357 223 158 859 4,364
Tax distribution payable ................ 1,516 70 -- -- -- 1,586
Current maturities of long-term
debt .................................. 527 -- -- -- 124 651
------- ------ ------ ------ ------- -------
Total current liabilities ................. 11,976 1,877 1,121 6,021 18,055 39,050
Deferred tax liability ..................... 1,441 -- -- -- -- 1,441
Long-term debt, net of current
maturities ............................... 13,054 -- -- -- 187 13,241
Stockholders' equity
Common stock .............................. -- 1 1 300 1 303
Additional paid-in capital ................ 3,191 -- -- -- 6 3,197
Retained earnings ......................... 282 579 49 2,339 1,749 4,998
------- ------ ------ ------ ------- -------
Total stockholders' equity ................. 3,473 580 50 2,639 1,756 8,498
------- ------ ------ ------ ------- -------
Total liabilities and stockholders'
equity .................................... $29,944 $2,457 $1,171 $8,660 $19,998 $62,230
======= ====== ====== ====== ======= =======
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 1999
--------------------------------------------
Company Acquisition
Total Pro Forma Pro Forma
Combined Adjustments Adjustments
---------- ------------- -----------------
(in thousands)
<S> <C> <C> <C>
BALANCE SHEET DATA (Cont.):
Assets
Current assets
Cash ................................ $ 337 $ -- $ --
Accounts receivable ................. 24,274 -- --
Inventories ......................... 25,835 -- --
Prepaid expenses and other
assets ............................. 2,816 -- --
------- ----- ----------
Total current assets .................. 53,262 -- --
------- ----- ----------
Property, plant and equipment, net ..... 7,455 -- --
Goodwill ............................... -- -- 29,218(1)
Other assets ........................... 1,513 -- 4,250(2)
------- ----- ----------
Total assets ........................... $62,230 $ -- $ 33,468
======= ===== ==========
Liabilities and stockholders' equity
Current liabilities
Credit facility ..................... $14,226 $ -- $ --
Accounts payable .................... 18,223 -- (1,380)(3)
Other current liabilities ........... 4,364 -- 1,200(4)
Tax distribution payable ............ 1,586 -- --
Current maturities of long-term
debt ............................... 651 -- --
------- ----- ----------
Total current liabilities ............. 39,050 -- (180)
------- ----- ----------
Acquisitions payable:
Components ............................ 4,695
Windsong .............................. 22,000
Windsong escrow ....................... 4,250
----------
30,945(5)
Deferred tax liability ................. 1,441 -- --
Long-term debt, net of current
maturities
Components ............................ -- -- 4,695(5)
Windsong .............................. -- -- 22,000(5)
Windsong escrow ....................... -- -- 4,250(5)
Other ................................. 13,241 -- 3,728(6)
------- ----- ----------
13,241 -- 34,673
Stockholders' equity
Common stock .......................... 303 -- (303)(7)
Additional paid in capital ............ 3,197 -- 3,994(8)
Retained earnings ..................... 4,998 -- (4,716)(7)
------- ----- ----------
Total stockholders' equity ............. 8,498 -- (1,025)
------- ----- ----------
Total liabilities and stockholders'
equity ................................ $62,230 $ -- $ 33,468
======= ===== ==========
<PAGE>
<CAPTION>
As of March 31, 1999
----------------------------------------------
Pro Forma
Pro Forma Combined,
Combined Offering As Adjusted
----------- ------------------- ------------
(in thousands)
<S> <C> <C> <C>
BALANCE SHEET DATA (Cont.):
Assets
Current assets
Cash ................................ $ 337 $ -- $ 337
Accounts receivable ................. 24,274 -- 24,274
Inventories ......................... 25,835 -- 25,835
Prepaid expenses and other
assets ............................. 2,816 -- 2,816
------- ------------ -------
Total current assets .................. 53,262 -- 53,262
------- ------------ -------
Property, plant and equipment, net ..... 7,455 -- 7,455
Goodwill ............................... 29,218 -- 29,218
Other assets ........................... 5,763 -- 5,763
------- ------------ -------
Total assets ........................... $95,698 $ -- $95,698
======= ============ =======
Liabilities and stockholders' equity
Current liabilities
Credit facility ..................... $14,226 $ -- $14,226
Accounts payable .................... 16,843 -- 16,843
Other current liabilities ........... 5,564 (1,200)(10) 4,364
Tax distribution payable ............ 1,586 -- 1,586
Current maturities of long-term
debt ............................... 651 -- 651
------- ------------ -------
Total current liabilities ............. 38,870 (1,200) 37,670
------- ------------ -------
Acquisitions payable:
Components ............................ 4,695 (4,695) --
Windsong .............................. 22,000 (22,000) --
Windsong escrow ....................... 4,250 (4,250) --
------- ------------ -------
30,945 (30,945)(10) --
Deferred tax liability ................. 1,441 -- 1,441
Long-term debt, net of current
maturities
Components ............................ 4,695(5) (4,695)(10) --
Windsong .............................. 22,000(5) (22,000)(10) --
Windsong escrow ....................... 4,250(5) (4,250)(10) --
Other ................................. 16,929 (11,055)(10) 5,914
------- ------------ -------
47,914 (42,000) 5,914
Stockholders' equity
Common stock .......................... -- 4(9) 4
Additional paid in capital ............ 7,191 43,196(9) 50,387
Retained earnings ..................... 282 -- 282
------- ------------ -------
Total stockholders' equity ............. 7,473 43,200 50,673
------- ------------ -------
Total liabilities and stockholders'
equity ................................ $95,698 $ -- $95,698
======= ============ =======
</TABLE>
(1) Reflects goodwill as a result of the Diversified Apparel, Global Sourcing
Network, Components and Windsong acquisitions as calculated in the table
entitled, "Schedule of Allocation of Purchase Price of Acquisitions."
(2) Reflects the deposit of $4.25 million cash in escrow which will be paid to
the sellers of Windsong if Windsong achieves specified earnings targets
during 1999.
(3) Reflects the elimination of certain liabilities that are not being assumed
as part of the acquisition of Windsong.
(4) Reflects notes payable issued as part of the acquisitions of Diversified
Apparel and Global Sourcing Network.
37
<PAGE>
(5) For purposes of the acquisition pro forma adjustments, we have assumed an
acquisitions payable amount, which represents the initial purchase price
owed for the Components and Windsong acquisitions and the Windsong escrow
amount. We intend to fund the Components and Windsong acquisitions using
the proceeds of the offering.
(6) Reflects additional debt assumed to be necessary to finance the
acquisitions.
(7) Reflects the elimination of common stock and retained earnings of the
acquisitions.
(8) Reflects the issuance of $4.0 million worth of Class A Common Stock
associated with the acquisition of Windsong at an assumed price of $12.00
per share and the elimination of additional paid-in capital of Diversified
Apparel, Global Sourcing Network, Components and Windsong.
(9) Reflects assumed net proceeds of approximately $43.2 million from this
offering.
(10) Reflects our use of net proceeds of the offering. See "Use of Proceeds."
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Historical and Pro Forma Combined Financial Data and the Combined Financial
Statements and Notes thereto included in this prospectus.
Overview
We began our business in 1922 as a contract manufacturer of branded
tailored clothing, and in the 1970s started producing directly for large
retailers. In 1990, an investment group led by Richard C. Pietrafesa, Jr. and
Joseph J. Pietrafesa II created MS Pietrafesa, L.P. and acquired the business
in a management buyout from their father and uncle. In the early 1990s, we
formalized our growth strategy of focusing on developing proprietary brand
programs for major retailers. Our strategy at that time was to support these
programs by increasing production capacity to serve a broader range of price
points and to develop state-of-the-art manufacturing capabilities at our
Liverpool, New York facility. Our proprietary brand strategy produced
significant revenue growth.
Despite material revenue growth from 1993 to 1994, our profits grew only
modestly. Our profitability was adversely impacted during this period by the
costs of expanding operations and manufacturing facilities to support planned
growth and meet customers' expanding production needs, as well as by
competition from products supplied by foreign sources.
During the period 1995 through 1997, we divested all of our manufacturing
assets other than the Liverpool facility, refinanced our secured lending
arrangements and negotiated the forgiveness of our subordinated indebtedness.
Beginning in 1997, we developed a new business strategy designed to
leverage our reputation as a developer of innovative dress apparel programs for
retailers. This strategy was far less reliant on our own manufacturing assets,
and emphasized our expertise in garment design and production management
through sourcing arrangements with third party manufacturers. See "Risk Factors
- -- Failure by Third Party Manufacturers to Fulfill their Obligations could
Adversely Affect our Ability to Deliver Products in a Timely Manner and could
Reduce our Profitability," As part of this new strategy, in 1998 we commenced
acquisition discussions with various independent merchandising and sourcing
companies. See "Business -- Business Strategy" and "Business -- Acquisition
Strategy."
Significant Acquisitions
Terms of the Acquisitions. In addition to the measures described above and
taken during 1995 through 1997, we have completed the acquisitions of
Diversified Apparel and Global Sourcing Network. We will complete the
acquisitions of Components and Windsong simultaneously with the consummation of
this offering. We believe that the terms of each acquisition satisfy all
elements of our acquisition strategy. See "Business -- Reorganization,
Acquisitions and Operating Unit Structure." The terms of each acquisition are
as follows:
On April 15, 1999, we purchased all of the assets of Diversified Apparel.
Under the terms of the Diversified Apparel acquisition agreement, we paid
$800,000 in cash and issued a promissory note in the principal amount of
$400,000. In addition, we assumed some existing liabilities of Diversified
Apparel totaling $2.0 million as of March 31, 1999, which consisted of
approximately $1.3 million of trade payables, as well as third party
indebtedness. Diversified Apparel merchandises and sources apparel, including
lower to mid-priced suits and dress shirts, to value-priced apparel retailers.
The purchase price also includes a potential five-year earn-out of $800,000
payable in cash or, in limited circumstances, shares of Class A Common Stock at
our option, based on Diversified Apparel's achievement of specified annual
pre-tax earnings targets. These targets require aggregate growth of 46% in
pre-tax earnings over the five-year period from 1999 through 2003. These
targets are measured annually and, if an annual target is missed, the earn-out
payment for such year will be deferred or forfeited, depending on the extent to
which actual performance falls short of the target.
39
<PAGE>
On April 15, 1999, we purchased all of the issued and outstanding capital
stock of Global Sourcing Network. Under the terms of the Global Sourcing
Network acquisition agreement, the initial purchase price consisted of $1.4
million in cash and the issuance of a promissory note payable to the sole
stockholder of Global Sourcing Network, in the principal amount of $800,000.
Global Sourcing Network sources men's suits for S&K Famous Brands. The purchase
price also includes a potential five-year earn-out of $2.2 million payable in
cash based on Global Sourcing Network's achievement of specified annual pre-tax
earnings targets. These targets require aggregate growth of 31% in pre-tax
earnings over the five-year period from 1999 through 2003. These targets are
measured annually and, if an annual target is missed, the earn-out payment for
such year will be deferred or forfeited, depending on the extent to which
actual performance falls short of the target.
Concurrent with the closing of this offering, we will acquire all of the
assets of Components. The purchase price will consist of $4.7 million in cash.
In addition, we will assume some existing liabilities of Components totaling
$6.0 million as of March 31, 1999, consisting of approximately $5.0 million of
trade payables and factor advances, as well as third party indebtedness.
Components merchandises and sources St. Andrews tailored clothing, as well as
sportswear, dress shirts, neckwear, topcoats and casual slacks in Italy. The
purchase price also includes a potential six-year earn-out of $4.7 million
payable in cash or, in limited circumstances, shares of Class A Common Stock
based on Components' achievement of specified annual pre-tax earnings targets.
These targets require aggregate growth of 76.5% in pre-tax earnings over the
six-year period from 1999 through 2004. These targets are measured annually
and, if an annual target is missed, the earn-out payment for such year will be
deferred or forfeited, depending on the extent to which actual performance
falls short of the target.
Concurrent with the closing of this offering, we will acquire substantially
all of the assets of Windsong. Windsong merchandises and sources men's
sportswear worldwide. The purchase price will consist of $22.0 million in cash,
$4.0 million in shares of Class A Common Stock valued at the initial public
offering price, and our assumption of approximately $16.9 million of Windsong
liabilities as of March 31, 1999. See "Use of Proceeds." The liabilities to be
assumed include approximately $16.7 million of operating liabilities, including
the balance outstanding under Windsong's factoring agreement with FINOVA, which
was $10.7 million as of March 31, 1999 but exclude subordinated accounts payable
of $1.4 million as of March 31, 1999 and liabilities associated with Windsong's
defined benefit pension plan. As of June 30, 1999, the outstanding balance under
the Finova Factoring Agreement was $8.0 million. The purchase price also
includes a potential six-year earn-out of $22.0 million. Aside from $1.0 million
worth of shares of Class A Common Stock which Windsong, Inc. may earn in year
one of the earn-out, the earn-out is payable in cash or, in limited
circumstances, at our option, shares of Class A Common Stock, based on
Windsong's achievement of specified annual pre-tax earnings targets. These
targets require Windsong to achieve $6.3 million in pre-tax earnings during 1999
and to increase pre-tax earnings by approximately 33% by 2004 to receive the
entire $22.0 million earn-out payment. These targets are measured annually and,
if an annual target is missed, the earn-out payment, or a portion thereof, for
such year will be deferred or forfeited, depending on the extent to which actual
performance falls short of the target. If at any time Philip Ean Cohen ceases to
control The Pietrafesa Corporation, other than because of his death or
disability, the then present value of the remaining earn-out payments will
become immediately due to Windsong. Following the acquisition, the operations of
the Windsong unit will be under the day-to-day control of an advisory board
consisting principally of executives of Windsong, Inc.
Possible Impact of Acquisitions on Results of Operations. The consummation
of the Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions is expected to affect our results of operations in significant
respects. Our depreciation and amortization expense will be significantly
higher than the corresponding amounts from prior to the acquisitions and will
never be less than $1.6 million per year over the next 10 years. Additionally,
the earn-out portions of the purchase prices of Diversified Apparel, Global
Sourcing Network, Components and Windsong will be recorded as additional
goodwill to the extent they are earned. Accordingly, our depreciation and
amortization expense will increase as a result of the amortization of this
additional goodwill. See "Risk Factors -- Reductions in our Future Net Income
Caused by the Amortization of Goodwill may Adversely Affect the Market Price of
our Common Stock."
40
<PAGE>
Recent Developments
Based on preliminary estimates, we believe that the pro forma combined, as
adjusted net revenues for the six-month period ending June 30, 1999 are expected
to be slightly higher than net revenues for the six-month period ending June 30,
1998. Pro forma combined, as adjusted, net income and EBITDA of The Pietrafesa
Corporation, Diversified Apparel, Global Sourcing Network, Components and
Windsong will be lower for the six-month period ending June 30, 1999 than the
corresponding amounts for the six-month period ending June 30, 1998. The
decreases in net income and EBITDA were consistent with our business plan and
were due primarily to:
o a reduction in margins on sales of Polo tailored clothing due to the
higher than normal discounts and allowances in connection with the
termination of the Polo license agreement on June 30, 1999;
o an increase in selling, general and administrative expenses relating to
new employees hired during the second quarter to assist in the
development of certain new licensed brand clothing programs that
commenced in 1999;
o Windsong's decision in the fourth quarter of 1998 to reduce sales of low
margin private label products and sales to department stores due to the
increased markdowns and allowances associated with these customers, as
well as a reduction in net revenues due to seasonal returns to
accommodate a customer to refurbish product for reshipment in the third
and four quarters of 1999;
o a reduction in net revenues due to the conversion of "full service" sales
to commission sales by Global Sourcing Network in the second quarter; and
o a reduction of Components' gross margin due to increases in sales
allowances and discounts and the sale of lower margin product.
Results of Operations
As an aid to understanding The Pietrafesa Corporation's, Global Sourcing
Network's, Components' and Windsong's results of operations on a comparative
basis, we have prepared the following discussion setting forth items within The
Pietrafesa Corporation's, Global Sourcing Network's, Components' and Windsong's
statements of income as a percentage of net revenues for the periods indicated.
Cost of sales for The Pietrafesa Corporation include costs associated with
manufacturing and sourcing of product. Cost of sales for manufactured product
includes raw materials, direct and indirect labor, and manufacturing overhead.
The Pietrafesa Corporation's cost of sales for sourced product includes raw
materials and contractor costs. Global Sourcing Network's, Components' and
Windsong's cost of sales include raw materials and contractor costs. Selling,
general, and administrative expenses for The Pietrafesa Corporation and the
acquired companies primarily include payroll costs associated with selling and
administrative functions, licensing fees, travel, sample, rent, legal, and
other general office expenses. Financial information for Diversified Apparel
has not been included because its historical results of operations are not
material as compared to the results of operations of the other companies.
The following discussion of the results of operations and financial
position should be read in conjunction with the financial statements, including
the notes thereto, appearing elsewhere in this prospectus.
41
<PAGE>
- --THE PIETRAFESA CORPORATION
The following table sets forth financial data as a percentage of net
revenues for The Pietrafesa Corporation. This information may not be indicative
of our future results. For more information, see the financial statements of
The Pietrafesa Corporation, including the notes thereto, appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
For the Year Ended Three Months
December 31, Ended March 31,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues ................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 79.0 77.7 82.9 74.0 83.3
------ ------ ------ ------ ------
Gross profit ................................ 21.0 22.3 17.1 26.0 16.7
Selling, general and administrative ......... 16.9 16.4 9.8 13.7 6.7
Impairment loss on fixed assets ............. 0.4 -- -- -- --
Depreciation and amortization ............... 0.4 0.4 0.4 0.7 0.4
------ ------ ------ ------ ------
Operating income ............................ 3.3 5.5 6.9 11.6 9.6
Interest expense ............................ 4.5 4.0 2.1 2.7 1.7
Public offering costs ....................... -- -- 1.4 -- --
------ ------ ------ ------ ------
Income (loss) before income taxes and
extraordinary item ......................... ( 1.2) 1.5 3.4 8.9 7.9
Provision for income taxes .................. -- -- 0.9 -- 3.2
------ ------ ------ ------ ------
Income (loss) before extraordinary item . ( 1.2) 1.5 2.5 8.9 4.7
Extraordinary item .......................... 7.2 -- -- -- --
------ ------ ------ ------ ------
Net income .................................. 6.0% 1.5% 2.5% 8.9% 4.7%
====== ====== ====== ====== ======
</TABLE>
Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998
Net revenues. Net revenues for the three months ended March 31, 1999
increased by 87.4% to $17.8 million from $9.5 million for the three months
ended March 31, 1998. The increase in net revenues was due principally to our
commencement of sales to Jos.A.Bank under a long-term arrangement. This
increase represented approximately 63% of the increase in net revenues. The
balance of the increase in net revenues was due to increased sales to existing
customers.
In June 1999, our license with the Polo Corporation expired. We believe
that the loss of sales of Polo products will not have a material adverse effect
on our revenues. We anticipate replacing revenues generated from the sales of
Polo products with revenues from sales to other customers.
Cost of sales. Cost of sales for the three months ended March 31, 1999
increased by 111.4% to $14.8 million from $7.0 million for the three months
ended March 31, 1998, which amount is consistent with our increased net
revenues. Cost of sales as a percentage of net revenues for the three months
ended March 31, 1999 increased to 83.3% from 74.0% for the three months ended
March 31, 1998, due primarily to the new cost-plus sourcing/manufacturing
services arrangement with Jos.A.Bank. Under this long-term arrangement,
Jos.A.Bank receives a cost-plus pricing structure in consideration for minimum
annual purchase commitments. Gross margin on sales to Jos.A.Bank is less than
gross margin earned on seasonal business. However, this lower gross margin did
not reduce the operating income that we realized from such revenues because our
sales to Jos.A.Bank do not require us to make capital investments or overhead
expenditures.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended March 31, 1999 decreased by
7.7% to $1.2 million from $1.3 million for the three months ended March 31,
1998, due to the implementation of cost control programs. Despite this decline,
we anticipate that such expenses will continue to increase in the future to
support growth in revenues.
Operating income. Operating income for the three months ended March 31,
1999 increased by 54.5% to $1.7 million from $1.1 million for the three months
ended March 31, 1998, due primarily to increased gross profit associated with
increased revenues and the reduction of selling, general and administrative
expenses.
42
<PAGE>
Interest expense. Interest expense for the three months ended March 31,
1999 increased by 20.0% to $300,000 from $250,000 for the three months ended
March 31, 1998, due primarily to increased borrowing.
Provision for income taxes. Provision for income taxes for the three
months ended March 31, 1999 was $600,000 as compared to $0 for the three months
ended March 31, 1998, due to MS Pietrafesa, L.P.'s transfer of its assets and
liabilities to The Pietrafesa Corporation, a C-corporation, on October 1, 1998.
Net income. Net income remained constant at $800,000 for the three months
ended March 31, 1999 and for the three months ended March 31, 1998.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Net revenues. Net revenues for 1998 increased by 51.1% to $56.8 million
from $37.6 million for 1997. The increase in net revenues was due principally
to our commencement of sales to Jos.A.Bank under a long term arrangement. This
increase represented approximately 74% of the increase in net revenues. The
balance of the increase in net revenues was due to increased sales to existing
customers.
Cost of sales. Cost of sales for 1998 increased by 61.3% to $47.1 million
from $29.2 million for 1997 consistent with our increased net revenues. Cost of
sales as a percentage of net revenues for 1998 increased to 82.9% from 77.7%
for 1997, due primarily to the new cost-plus sourcing/manufacturing services
arrangement with Jos.A.Bank. Under this long-term arrangement, Jos.A.Bank
receives a cost-plus pricing structure in consideration for minimum annual
purchase commitments. Gross margin on sales to Jos.A.Bank is less than gross
margin earned on seasonal business. However, this lower gross margin did not
reduce the operating income that we realized from such revenues because our
sales to Jos.A.Bank do not require us to make capital investments or overhead
expenditures. Additionally, $500,000 or 0.8% of the increase in cost of sales
as a percent of net revenues resulted from an increase in inventory reserves
which resulted from our ordering excess raw materials and finished goods that
exceeded our forecasted sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses for 1998 decreased by 9.8% to $5.5 million from $6.1
million for 1997, due to the cost-plus nature of the Jos.A.Bank arrangement and
the elimination of advertising and licensing expenses incurred in 1997 under an
agreement with Polo Corporation which expired in June 1999. This decline in
selling, general and administrative expenses was partially offset by costs
associated with establishing new customer relationships. Despite this decline,
we anticipate that such expenses will increase in the future to support growth
in revenues.
Operating income. Operating income for 1998 increased by 85.7% to $3.9
million from $2.1 million for 1997, due primarily to increased gross profit
associated with increased revenue and the elimination of advertising and
license expenses to Polo Corporation.
Interest expense. Interest expense for 1998 decreased by 20.0% to $1.2
million from $1.5 million for 1997, due primarily to improved operating cash
flow which was used to reduce outstanding principal balances.
Public offering costs. In 1998, MS Pietrafesa, L.P. incurred $800,000 of
public offering costs. Such costs related to a public offering that was
abandoned due to adverse market conditions. The public offering costs include
costs for legal ($200,000), accounting ($300,000) and investment banking
services ($60,000), as well as travel-related expenses ($200,000).
Provision for income taxes. Provision for income taxes for 1998 was
$500,000 as compared to $0 for 1997, due to MS Pietrafesa, L.P.'s transfer of
its assets and liabilities to The Pietrafesa Corporation, a C-corporation, in
October 1998.
Net income. As a result of the above factors, net income for 1998
increased by 133.3% to $1.4 million from $600,000 for 1997.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Net revenues. Net revenues for 1997 decreased by 14.8% to $37.5 million
from $44.0 million for 1996, due principally to the discontinuance of Polo
Corporation's "Ralph Lauren" labeled products and a decline in sales to Brooks
Brothers. In 1996, our net revenues from sales to Brooks Brothers were
unusually high
43
<PAGE>
because of the launch of, and initial product deliveries for, the new
"Brooksease" product program. In 1997, our net revenues from sales to Brooks
Brothers for such program, although lower, were consistent with our past
experiences involving the production of replenishment inventory for existing
programs.
Cost of sales. Cost of sales for 1997 decreased by 16.1% to $29.2 million
from $34.8 million for 1996, primarily due to overall lower sales. Cost of
sales as a percentage of net revenues for 1997 declined to 77.7% from 79.0% for
1996 due to lower overhead costs and a shift in the business away from general
manufacturing to the sourcing of a greater percentage of total product.
Selling, general and administrative expenses. Selling, general and
administrative expenses for 1997 decreased by 19.7% to $6.1 million from $7.6
million for 1996, due primarily to the impact of reductions in management
personnel implemented in late 1996. This decrease was partially offset by a
reduction of bad debt expenses in 1996 of $180,000 due to lower bad debt
exposures in 1996. There was no similar reduction in 1997. Selling, general and
administrative expenses as a percentage of net revenues for 1997 decreased to
16.4% from 16.9% for 1996.
Impairment loss on fixed assets. At the end of 1996, it was determined
that assets held for sale at our Sturgis, Kentucky facility would be disposed
of at a loss of $170,000. The loss was recorded in 1996 and actually realized
in 1997 when the property was sold. The net realizable value of the assets was
determined using estimated selling prices less sale costs based on an
independent appraisal.
Interest expense. Interest expense for 1997 decreased by 25.0% to $1.5
million from $2.0 million for 1996, due primarily to lower outstanding
principal balances resulting from improved operating cash flow.
Income (loss) before income taxes and extraordinary item. Income (loss)
before income taxes and extraordinary item for 1997 increased to $600,000 from
$(500,000) for 1996, due to lower cost of sales and decreases in selling,
general and administrative expenses.
Extraordinary item.There was no extraordinary item for 1997 as compared to
an extraordinary item of $3.2 million for 1996. This item resulted from an
agreement between the owners of a predecessor company of MS Pietrafesa, L.P. to
forgive its subordinated indebtedness in exchange for an equity interest in a
limited partnership that is a limited partner of MS Pietrafesa, L.P.
Net income. As a result of the above factors, net income for 1997
decreased by 77.8% to $600,000 from $2.7 million for 1996.
- --GLOBAL SOURCING NETWORK
The following table sets forth financial data as a percentage of net
revenues for Global Sourcing Network. This information may not be indicative of
the future results of Global Sourcing Network's business. For more information,
see the financial statements of Global Sourcing Network, including the Notes
thereto, appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
For the
For the Year Ended Three Months Ended
December 31, March 31,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Net revenues ................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 93.4 92.8 92.1 93.1
----- ----- ------ ------
Gross profit ................................ 6.6 7.2 7.9 6.9
Selling, general and administrative ......... 1.5 1.7 0.9 0.9
Royalties and commissions ................... 5.2 6.1 4.7 3.4
----- ----- ------ ------
Operating (loss) income ..................... ( 0.1) ( 0.6) 2.3 2.6
Provision for income taxes .................. -- ( 0.3) -- --
----- ----- ------ ------
Net loss .................................... ( 0.1)% ( 0.3)% 2.3% 2.6%
===== ===== ====== ======
</TABLE>
44
<PAGE>
Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998
Net revenues. Net revenues for the three months ended March 31, 1999
increased by 3.4% to $6.0 million from $5.8 million for the three months ended
March 31, 1998. The increase in net revenues was due principally to earlier
sales of spring season products to S&K Famous Brands through March 31, 1999.
Cost of sales. Cost of sales for the three months ended March 31, 1999
increased by 3.7% to $5.6 million from $5.4 million for the three months ended
March 31, 1998 consistent with our increased net revenues. Cost of sales as a
percentage of net revenues for the three months ended March 31, 1999 increased
to 93.1% from 92.1% for the three months ended March 31, 1998, due primarily to
a sale of higher margin product during the three months ended March 31, 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended March 31, 1999 increased by
17.4% to $54,000 from $46,000 for the three months ended March 31, 1998, due to
increased legal and accounting expenses associated with the sale of Global
Sourcing Network.
Royalties and commissions. Royalties and commissions for the three months
ended March 31, 1999 decreased by 33.3% to $200,000 from $300,000 for the three
months ended March 31, 1998. Royalties and commissions decreased due to the
termination of the remaining commission relationship early in the three months
ended March 31, 1999. Historically, Global Sourcing Network has paid
significant royalties and commissions on its total net revenues. All such
royalties and commission costs were eliminated upon our acquisition, with no
anticipated adverse effect on the generation of sales.
Provision for income taxes. A provision for income taxes for the three
months ended March 31, 1999 was not established due to the anticipated sale of
the business. A provision for income taxes for the three months ended March 31,
1998 was $2,000.
Net income. As a result of the above factors, net income for the three
months ended March 31, 1999 increased by 23.1% to $160,000 from $130,000 for
the three months ended March 31, 1998.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Net revenues. Net revenues for 1998 decreased by 4.7% to $18.1 million
from $19.0 million for 1997, due principally to a decline in sales to Global
Sourcing Network's primary customer, S&K Famous Brands.
Cost of sales. Cost of sales for 1998 decreased by 5.6% to $16.8 million
from $17.8 million for 1997. Cost of sales as a percentage of net revenues for
1998 decreased to 92.8% from 93.4% for 1997. The reduction in cost of sales was
due to reduced revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses for 1998 remained constant at $300,000.
Royalties and commissions. Royalties and commissions for 1998 increased by
10.0% to $1.1 million from $1.0 million for 1997. Royalties and commissions
increased due to an increase in commission rate. Historically, Global Sourcing
Network has paid significant royalties and commissions on its total net
revenues. All such royalties and commission costs were eliminated upon our
acquisition, with no anticipated adverse effect on the generation of sales.
Net loss. As a result of the above factors, the net loss for 1998
increased to $(50,000) from a loss of $(10,000) for 1997.
45
<PAGE>
- --COMPONENTS
The following table sets forth financial data as a percentage of net
revenues for Components. This information may not be indicative of the future
results of Components' business. For more information, see the financial
statements of Components, including the Notes thereto, appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
For the
For the Year Ended Three Months
December 31, Ended March 31,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Net revenues ................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 78.8 75.1 73.9 76.6
------ ------ ------ ------
Gross profit ................................ 21.2 24.9 26.1 23.4
Selling, general and administrative ......... 14.1 15.5 10.5 11.2
------ ------ ------ ------
Operating income ............................ 7.1 9.4 15.6 12.2
Interest expense ............................ 1.6 1.5 1.4 1.4
------ ------ ------ ------
Income before taxes ......................... 5.5 7.9 14.2 10.8
Provision for income taxes .................. 0.5 0.8 0.3 --
------ ------ ------ ------
Net income .................................. 4.9% 7.1% 13.9% 10.8%
====== ====== ====== ======
</TABLE>
Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998
Net revenues. Net revenues for the three months ended March 31, 1999
increased by 10.2% to $5.4 million from $4.9 million for the three months ended
March 31, 1998. The increase in net revenues was due principally to increased
volume of sportswear sales through existing distribution channels.
Cost of sales. Cost of sales for the three months ended March 31, 1999
increased by 13.9% to $4.1 million from $3.6 million for the three months ended
March 31, 1998 due primarily to our increased net revenues. Cost of sales as a
percentage of net revenues for the three months ended March 31, 1999 increased
to 76.6% from 73.9% for the three months ended March 31, 1998, due primarily to
an increase in sales allowances and discounts. Sales allowances and discounts
increased $128,000 due to increases in sales discounts and advertising
allowances associated with sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended March 31, 1999 increased by
20.0% to $600,000 from $500,000 for the three months ended March 31, 1998, due
to increased commission and travel expenses.
Operating income. Operating income for the three months ended March 31,
1999 decreased by 12.5% to $700,000 from $800,000 for the three months ended
March 31, 1998, due primarily to increased sales volume offset by increases in
sales allowances and selling expenses.
Provision for income taxes. A provision for income taxes for the three
months ended March 31, 1999 was not established due to immateriality. Provision
for income taxes for the three months ended March 31, 1998 was $20,000.
Net income. As a result of the above factors, net income for the three
months ended March 31, 1999 decreased by 14.3% to $600,000 from $700,000 for
the three months ended March 31, 1998.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Net revenues. Net revenues for 1998 increased by 34.2% to $20.0 million
from $14.9 million for 1997, due principally to increased sales to Brooks
Brothers.
Cost of sales. Cost of sales for 1998 increased by 27.1% to $15.0 million
from $11.8 million for 1997, due primarily to overall increased sales. Cost of
sales as a percentage of net revenues for 1998 decreased to 75.1% as compared
to 78.8% for 1997, due primarily to cost efficiencies in sourcing larger
quantities of products.
46
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses for 1998 increased by 47.6% to $3.1 million from $2.1
million for 1997, due primarily to a $400,000 increase in salary payable to the
business owner, as well as bad debt expense and advertising expense.
Historically, such owner's salary has varied considerably because, as an
S-corporation, all year-end net cash balances were paid as salary. Selling,
general and administrative expenses as a percentage of net revenues for 1998
increased to 15.5% from 14.1% for 1997.
Operating income. Operating income for 1998 increased by 72.7% to $1.9
million from $1.1 million for 1997. The increase was due to increases in net
revenues and gross profit.
Net income. As a result of the above factors, net income for 1998
increased by 100% to $1.4 million from $700,000 for 1997.
- --WINDSONG
The following table sets forth financial data as a percentage of net
revenues for Windsong. This information may not be indicative of our future
results. For more information, see the financial statements of Windsong,
including the notes thereto, appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
For the
For the Year Ended Three Months Ended
December 31, March 31,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues ................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 87.8 78.7 78.4 79.0 76.8
----- ----- ----- ----- -----
Gross profit ................................ 12.2 21.3 21.6 21.0 23.2
Selling and distribution expenses ........... 6.4 6.1 7.1 5.8 5.9
General and administrative expenses ......... 5.5 12.8 10.3 6.5 8.3
----- ----- ----- ----- -----
Operating income ............................ 0.3 2.4 4.2 8.7 9.0
Interest expense ............................ ( 0.2) ( 1.3) ( 2.7) ( 2.6) ( 2.3)
Other income ................................ -- 0.2 0.1 -- --
----- ----- ----- ----- -----
Income before taxes ......................... 0.1 1.3 1.6 6.1 6.7
Provision for income taxes .................. ( 0.1) 0.1 0.1 0.3 0.3
----- ----- ----- ----- -----
Net income .................................. 0.0% 1.2% 1.5% 5.8% 6.4%
===== ===== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998
Net revenues. Net revenues for the three months ended March 31, 1999
decreased by 15.6% to $14.6 million from $17.3 million for the three months
ended March 31, 1998. The decrease in net revenues was a result of a management
decision to reduce low margin private label sales and reduce certain department
store sales due to the increased markdowns and allowances associated with these
customers. During the last quarter of 1998, Windsong's management decided to
reduce sales to department stores that took large markdowns and sales
allowances resulting from the department stores lower than anticipated retail
margins on these products. Windsong's decision to reduce sales to these stores
was based on the lower profitability of sales to these customers after taking
account of the markdowns and sales allowances, which totalled approximately
$1.4 million in 1998. Overall, sales to the most significant customer in the
three months ended March 31, 1999 amounted to 57.8% of total net revenues, as
compared to 33.8% for the three months ended March 31, 1998.
Cost of sales. Cost of sales for the three months ended March 31, 1999
decreased by 18.2% to $11.2 million from $13.7 million for the three months
ended March 31, 1998. This decline resulted from decreased net revenues. Cost
of sales as a percentage of net revenues for the three months ended March 31,
1999 decreased to 76.8% from 79.0% for the three months ended March 31, 1998,
due primarily to the reduction in low-margin private label and department store
sales in the three months ended March 31, 1999 compared to the three months
ended March 31, 1998.
47
<PAGE>
Selling and distribution expenses. Selling and distribution expenses for
the three months ended March 31, 1999 decreased by 10.0% to $900,000 from $1.0
million for the three months ended March 31, 1998. Selling and distribution
expenses as a percentage of net revenues for the three months ended March 31,
1999 increased to 5.9% from 5.8% for the three months ended March 31, 1998 as a
result of decreased sales, a net increase in royalty fees on license sales
offset by a decrease in warehouse expense due to less labor intensive
department store sales which decreased in the quarter compared to 1998.
General and administrative expenses. General and administrative expenses
for the three months ended March 31, 1999 increased by 9.1% to $1.2 million
from $1.1 million for the three months ended March 31, 1998. General and
administrative expenses as a percentage of net revenues for the three months
ended March 31, 1999 increased to 8.3% from 6.5% for the three months ended
March 31, 1998. This percentage increase was primarily due to a general
increase in the payroll and payroll-related expenses and lower sales.
Operating income. Operating income for the three months ended March 31,
1999 decreased by 13.3% to $1.3 million from $1.5 million for the three months
ended March 31, 1998 due to the factors described above. Operating income as a
percentage of net revenues for the three months ended March 31, 1999 increased
to 9.0% from 8.7% for the three months ended March 31, 1998. The 0.3%
improvement in operating income as a percentage of net revenues is attributable
to a 2.2% increase in gross profit margin compared to a 1.9% increase in
operating expenses for the three months ended March 31, 1999.
Interest expense. Interest expense for the three months ended March 31,
1999 decreased by 25.0% to $300,000 from $400,000 for the three months ended
March 31, 1998, due primarily to interest expense on accounts
payable-subordinated debt. Effective January 1, 1998, Windsong's management
agreed to pay a supplier interest at a rate of 8.5% per year on a subordinated
loan balance related to goods purchased prior to 1998 that Windsong owed to
such supplier. The interest was to accrue on Windsong's balance as of May 15,
1996. Accordingly, the liability for 1996 and 1997 interest expense was not
incurred or known before 1998 and is reflected as a retroactive interest
expense adjustment. In addition, commencing in 1998, Windsong agreed to pay
interest to the same supplier on Windsong's open accounts payable balance at an
interest rate equal to the supplier's bank borrowing rate.
Income before income taxes. As a result of the above factors, income
before income taxes remained constant at $1.0 million for the three months
ended March 31, 1999 and the three months ended March 31, 1998.
Net income. As a result of the above factors, net income for the three
months ended March 31, 1999 decreased by 10.0% to $900,000 from $1.0 million
for the three months ended March 31, 1998.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Net revenues. Net revenues for 1998 increased by 109.9% to $63.6 million
from $30.3 million in 1997. The increase in net revenues included an aggregate
increase in sales of $21.0 million to the most significant customer, $10.2
million to department stores, and $3.2 million to the second most significant
customer, primarily as a result of an increased volume of unit sales.
Cost of sales. Cost of sales for 1998 increased by 108.8% to $49.9 million
from $23.9 million for 1997 which is consistent with increased net revenues.
Cost of sales as a percentage of net revenues for 1998 decreased to 78.4% from
78.7% for 1997 due to a management decision to reduce low margin private label
sales and increase licensed product sales that carry higher margins.
Selling and distribution expenses. Selling and distribution expenses for
1998 increased by 136.8% to $4.5 million from $1.9 million in 1997. Selling and
distribution expenses as a percentage of net revenues for 1998 increased to
7.1% from 6.1% for 1997. This percentage increase is primarily due to the
opening of a new, expanded, computerized warehouse facility, higher royalty
expenses due to increased sales volume for all customers, and in particular,
increased sales with department stores that required increased expenses as
compared to other customers.
General and administrative expenses. General and administrative expenses
for 1998 increased by 66.7% to $6.5 million from $3.9 million for 1997. General
and administrative expenses as a percentage of net
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revenues for 1998 decreased to 10.3% from 12.8% for 1997. Overall, general and
administrative expenses for 1998 included increases in officer bonus accruals,
increased staffing, insurance, travel and entertainment, computer costs, and
training, offset by a decrease in the pension expense. The allowance for bad
debts includes an allowance for returns and discounts as well as bad debt
expense. Special officers' bonus accruals for 1998 were $1.6 million, including
payroll taxes, as compared to $0 for 1997. Windsong's management decided in
1998 to convert stockholder loans receivable into officers' bonuses at the end
of 1998 due to Windsong's profitability. Accordingly, the officers' bonuses
reflected in 1998 are higher than those in previous years.
Operating income. Operating income for 1998 increased by 285.7% to $2.7
million from $700,000 for 1997, due to increased sales to significant customers
and management's decision to reduce low margin private label sales and increase
licensed product sales that carry higher margins. Operating income as a
percentage of net revenues for 1998 increased to 4.2% from 2.4% for 1997. This
increase in operating income as a percentage of net revenues was due to the
increase in gross profit, which amounted to $7.3 million reduced by an increase
in selling and distribution expenses, which amounted to a $2.7 million and an
increase in general and administrative expenses of $2.7 million.
Interest expense. Interest expense for 1998 increased by 325.0% to $1.7
million from $400,000 for 1997, due primarily to increased borrowings and
factor costs consistent with sales growth.
Income before income taxes. Income before income taxes for 1998 increased
by 150.0% to $1.0 million from $400,000 for 1997 due to the factors described
above. Income before income taxes as a percentage of net revenues for 1998
increased to 1.6% from 1.3% for 1997 due to the factors described above.
Net income. As a result of the above factors, net income for 1998
increased by 150.0% to $1.0 million from $400,000 for 1997.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Net revenues. Net revenues for 1997 increased by 388.7% to $30.3 million
from $6.2 million for 1996. The increase in net revenues included an aggregate
increase in sales of $19.0 million to the primary customers.
Cost of sales. Cost of sales for 1997 increased by 342.6% to $23.9 million
from $5.4 million for 1996, and is consistent with increased net revenues. Cost
of sales as a percentage of net revenues for 1997 decreased to 78.7% from 87.8%
for 1996 due to better margins with significant customers.
Selling and distribution expenses. Selling and distribution expenses for
1997 increased by 375.0% to $1.9 million from $400,000 for 1996. Selling and
distribution expenses as a percentage of net revenues for 1997 decreased to
6.1% from 6.4% for 1996. The increase of $1.5 million is primarily due to an
increase in royalty and commission expenses, which amounted to 2.6% and 1.8% of
net revenues, respectively.
General and administrative expenses. General and administrative expenses
for 1997 increased by 1,200.0% to $3.9 million from $300,000 for 1996. General
and administrative expenses as a percentage of net revenues for 1997 increased
to 12.8% from 5.5% for 1996. This increase was primarily due to the significant
increase in sales growth in 1997.
Operating income. Operating income for 1997 increased to $700,000 from
$17,000 for 1996. Operating income as a percentage of net revenues for 1997
increased to 2.4% from 0.3% for 1996 due to the factors described above.
Interest expense. Interest expense for 1997 increased to $400,000 from
$15,000 for 1996. Interest expense as a percentage of net revenues for 1997
increased to 1.3% from 0.2% for 1996. This increase is primarily the result of
increased borrowings in working capital due to growth in 1997.
Income before income taxes. Income before income taxes for 1997 increased
to $400,000 from $3,000 for 1996. Income before income taxes as a percentage of
net revenues for 1997 increased to 1.3% from 0.1% for 1996. This increase in
income before income taxes as a percentage of net revenues was due to factors
discussed previously.
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Net income. Net income for 1997 increased to $400,000 from $0 for 1996 as
a result of the above factors.
Liquidity and Capital Resources
The following discussion of liquidity and capital resources is derived
from our historical consolidated financial statements.
Our primary capital requirements are the funding of operations and capital
expenditures. MS Pietrafesa, L.P. historically financed its growth in sales and
the resulting increases in inventory and receivables through a combination of
operating cash flow and borrowings under its working capital facilities.
During the three months ended March 31, 1999, we used $600,000 for
operating activities. This was primarily the result of net income of $800,000
offset by a $1.0 million decrease in current liabilities and a $500,000
increase in accounts receivable.
During the year ended December 31, 1998, we generated negative cash from
operations of $1.4 million. This was primarily the result of a $3.9 million
increase in accounts receivable and a $4.8 million increase in inventories
offset by net income of $1.4 million and a $4.6 million increase in other
current liabilities. The increase in accounts receivable was primarily the
result of a 51.0% increase in net revenues for the year ended December 31, 1998
as compared to the year ended December 31, 1997. The increases in other current
liabilities and inventories were due primarily to the sourcing of product for
Jos.A.Bank and other customers at manufacturing facilities managed by an
affiliate.
On April 15, 1999, we, together with our subsidiaries, entered into a
senior secured credit facility with PNC Bank, National Association. The PNC
Bank credit facility consists of an $18.0 million revolving credit line, $1.0
million of which can be utilized for the issuance of letters of credit, and a
$7.0 million term note. The amount available for borrowing under the revolving
credit line at any given time is determined by a formula based upon levels of
accounts receivable and inventory. The term note is payable in 33 monthly
payments of $116,667 which commenced on May 1, 1999, with a final payment of
all unpaid principal on April 15, 2002. As of June 30, 1999, $11.8 million was
outstanding under the revolving credit line and $6.8 million was outstanding
under the term note. The credit facility is secured by a senior lien on
substantially all of our assets. We have also pledged all of the stock of our
subsidiaries as collateral.
Borrowings under the PNC Bank credit facility bear interest, at our
option, based upon either domestic interest rates or Euro interest rates. Under
the revolving credit line, the domestic interest rate is 0.5% per annum above
the higher of (a) PNC Bank's base commercial lending rate and (b) 0.5% per
annum above the Fed Funds rate. Under the revolving credit line, the Euro
interest rate is a multiple of 2.75% above LIBOR, where the multiple is equal
to 1.00 minus the Federal Reserve's reserve requirement percentage. Under the
term note, the domestic interest rate is 1.0% higher than the domestic interest
rate calculated under the revolving credit line, and the Euro interest rate is
0.75% higher than the Euro interest rate calculated under the revolving credit
line. Upon consummation of the offering, all of the foregoing domestic and Euro
interest rates will decrease by 0.25% if we receive net proceeds of at least
$20 million from the offering.
The PNC Bank credit facility includes significant financial and operating
covenants, including prohibitions on our ability to pay dividends, to make
capital expenditures of more than $750,000, to assume additional indebtedness
exceeding $500,000 in total, except for trade debt and permitted capital
expenditures, and requirements that we maintain a minimum fixed charge coverage
ratio. The fixed charge coverage ratio requires us to maintain EBITDA plus
capital expenditures of at least 110% of required debt payments under the PNC
Bank credit facility. We are currently in compliance with all covenants under
the PNC Bank credit facility. The PNC Bank credit facility also contains
customary events of default, including a cross-default provision which provides
that if we or any of our subsidiaries fail to perform our obligations under the
Diversified Apparel and Global Sourcing Network acquisition agreements, then it
would result in a default under the PNC Bank credit facility.
In November 1996, Windsong entered into a factoring agreement with FINOVA
Capital Corporation whereby Windsong receives monthly advances from FINOVA. The
amount of these advances outstanding at
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any time may not exceed $20.0 million and is primarily determined based upon
the net face amount of Windsong's receivables and inventory. Windsong repays
the advances to FINOVA as the receivables are collected. As of June 30, 1999,
$8.0 million was outstanding under the FINOVA agreement.
FINOVA earns a factoring commission for services rendered under the FINOVA
agreement equal to 0.5% of assigned receivables. FINOVA also receives customary
charges in connection with letters of credit issued for Windsong's account to
its suppliers and the servicing of assigned receivables. The amounts of
outstanding balances due to or from FINOVA currently bear interest at a rate of
prime plus 0.5%, except that over-advances bear interest at a rate of prime plus
1.0%. All amounts due to FINOVA, as well as any outstanding letters of credit,
are secured by Windsong's trade receivables and inventory. Upon our acquisition
of Windsong, we will become a party to the FINOVA agreement. The FINOVA
agreement terminates on December 31, 2000 and is terminable by FINOVA at will
prior to that date on thirty days prior notice. The FINOVA agreement provides
that all extensions of credit are at the sole discretion of FINOVA so we cannot
assure you that we will always have funds available under this factoring
arrangement.
In November 1995, MS Pietrafesa, L.P. entered into a loan agreement with
the New York State Urban Development Corporation ("UDC"), pursuant to which MS
Pietrafesa, L.P. borrowed $1.0 million from UDC to finance the purchase of
machinery and equipment. As of June 30, 1999, $500,000 of the UDC loan was
outstanding. The UDC loan matures January 2003, bears interest at 1.0% and is
secured by a senior lien on specified machinery and equipment and a subordinate
mortgage on the Liverpool facility. The UDC loan agreement contains restrictive
covenants similar to those contained in the PNC Bank credit facility. We are
currently in compliance with all covenants under the UDC loan agreement.
Our capital expenditures were $600,000 for 1998, primarily for replacing
manufacturing equipment. We expect capital expenditures to be approximately
$700,000 during 1999. Capital expenditure spending in 1999 will primarily fund
technology investments and replacement in kind of manufacturing equipment. We
anticipate that operating income and the amounts available under the PNC Bank
credit facility will be sufficient to fund our capital expenditures in 1999.
We had working capital of $10.5 million at March 31, 1999 and $9.2 million
at December 31, 1998. The increase in working capital was due primarily to a
$1.0 million decrease in current liabilities, a $500,000 increase in accounts
receivable offset by a $400,000 decrease in inventory. We expect that our
working capital needs will continue to fluctuate based on seasonal increases in
sales and accounts receivable and seasonal decreases in trade accounts payable.
We had working capital of $9.2 million at December 31, 1998 and $4.6
million at December 31, 1997. The increase in working capital was due primarily
to a $3.9 million increase in accounts receivable. In addition, inventories
increased by $4.8 million, which was offset by a $4.6 million increase in
accounts payable. In part, the new sourcing/manufacturing services arrangement
with Jos.A.Bank accounted for the changes in accounts receivable, inventories
and other current liabilities. We expect that our working capital needs will
continue to fluctuate based on seasonal increases in sales and accounts
receivable and seasonal decreases in trade accounts payable.
Management believes that the combination of existing working capital,
funds anticipated to be generated from operating activities, the borrowing
availability under the PNC Bank credit facility, advances under the FINOVA
factoring agreement and the anticipated net proceeds of the offering will be
sufficient to fund both our short-term and long-term capital and our liquidity
needs, other than in respect of future acquisitions. As part of our growth
strategy, we intend to seek out and acquire merchandising/sourcing businesses.
These acquisitions may require additional capital in the form of equity, debt
or a combination of the two. We cannot assure you that additional capital will
be available to us if and when required, or, if available, that the terms of
such additional capital will be acceptable to us.
Market Risk
Our earnings are affected by changes in short-term interest rates as a
result of our variable rate debt instruments. If market interest rates for
similar debt obligations had averaged 10% more in 1998, interest expense for
The Pietrafesa Corporation, excluding any of the acquired businesses, would
have increased, and income before income taxes would have decreased by
$103,803. This analysis does not consider the effects of
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the reduced level of borrowings that could exist in such an environment if
management took actions to mitigate our exposure to the change. However, due to
the uncertainty of the specific actions that would be taken and their possible
effects, this sensitivity analysis assumes no change in our debt structure.
Backlog
Our backlog of orders is affected by a number of factors, including
revisions in the scheduling of manufacturing and shipment of product which, in
some instances, depends on the demands of the retail consumer. Accordingly, a
comparison of unfilled orders from period to period is not necessarily
meaningful, and the level of unfilled orders at any given time may not be
indicative of actual shipments.
Seasonality
Some of our principal products are organized into seasonal lines in
response to the seasonal marketing of such products by our customers. As a
result, our net revenues and net income may fluctuate on a seasonal basis. A
disproportionate amount of our net revenues and a majority of our net income
are typically realized during the third quarter. Given that orders are usually
placed six to nine months in advance of shipping, net revenues and net income
are generally weakest during the second and fourth quarters, the two peak
retail seasons of our customers. Our greatest cash requirements occur in the
later part of the first and third quarters to support production and sales
costs and a buildup in customer receivables, resulting in reductions in working
capital in each of those quarters. If we are unable to finance our seasonal
cash requirements adequately, our ability to conduct business will be
restricted. Moreover, as a result of this seasonality of net revenues, a
substantial decrease in our net revenues in the third quarter of the year could
have a material adverse effect on our liquidity and on our profitability for
the entire year. See "Risk Factor -- Seasonal Fluctuations in Revenue and Net
Income may Affect our Cash Flow, Liquidity and Profitability."
Effects of Inflation and Foreign Currency Fluctuations
We believe that inflation has not had a material impact on our results of
operations for the periods discussed herein. Because a significant portion of
our purchases of raw materials are denominated in U.S. dollars, to date we have
not been materially adversely affected by foreign currency fluctuations. See
"Risk Factors -- Our Foreign Sourcing of Products Exposes us to Delays in
Production, which may Result in Increased Costs and Reduced Profitability" and
" -- Our International Sourcing of Products and Raw Materials may Subject us to
Increased Costs and Unprofitable Transactions."
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement amends the accounting for
derivatives and hedging activities effective for fiscal years beginning after
June 15, 1999. We have not historically engaged in hedging activities to
mitigate foreign currency risk. In the event that we engage in hedging
activities in the future, SFAS No. 133 may have an impact on the accounting
treatment of these hedging activities.
Impact of the Year 2000 Issue
Many institutions around the world are currently reviewing and modifying
their computer systems to ensure that they are Year 2000 compliant. The issue,
in general terms, is that many existing computer systems and microprocessors
with date functions use only two digits to identify a year in the date field
with the assumption that the first two digits are always "19." Consequently, on
January 1, 2000, any computers that are not Year 2000 compliant may read the
year as 1900. The failure to correct any computers that calculate, compare or
sort using the incorrect date could result in system failures or malfunctions
causing disruptions of operations, including a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Our computerized production and sourcing systems are not reliant on
date-sensitive information. We are working to resolve the potential impact of
the Year 2000 on the ability of our computerized financial
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information systems to accurately process date-sensitive information. We
engaged Arthur Andersen & Co. for a fee of $33,400 to conduct an analysis of
our financial information processing systems to determine whether we are Year
2000 compliant. Based on their study it was determined that we need to upgrade,
modify or replace portions of our financial systems to make them Year 2000
compliant.
Modifications to our in-house software programs have been completed and
are Year 2000 compliant. Certain software programs of third parties require
installation of new versions that are Year 2000 compliant. All third party
software, except financial systems and production systems, has been installed
with Year 2000 compliant programs that are currently in use. We are in the
process of installing a new Year 2000 compliant version of our production
system. We have installed Year 2000 compliant software in our AS400 system,
completed systems testing, trained our staff and have tested our conversion
process. We have developed a detailed implementation plan and intend to
complete our conversion and implementation prior to September 30, 1999. We
believe that completing the program within the time-frame we have set will
avoid any adverse impact on our operating systems. We currently estimate that
the total cost of implementing our Year 2000 program will be approximately
$200,000, of which $160,000 had been spent as of June 30, 1999. We believe,
however, that such Year 2000 compliance costs will not have a material adverse
impact on our financial condition. Year 2000 compliance costs are expected to
be funded from our working capital.
We do not believe that there will be a need to outsource financial systems
and therefore we have not made detailed contingency plans. However, in the
event that we fail to correct our computerized financial information systems
prior to December 31, 1999, we intend to out-source appropriate aspects of our
financial systems and manually execute any functions we retain. We will
implement standardized financial controls and back-office functions of
Diversified Apparel, Global Sourcing Network, Components and Windsong and hope
to resolve all Year 2000 issues with regard to these acquired businesses at the
same time we resolve our own issues.
During 1997, MS Pietrafesa, L.P. initiated formal communications with its
customers to determine the business risk to it related to customer Year 2000
compliance issues. Communications with other third parties, such as suppliers,
commenced in 1998. The majority of our customers and suppliers have responded
positively to our Year 2000 inquiries. Contingency plans are in the process of
being formalized with customers and suppliers to assure the continuance of
business. We believe the majority of our customers and suppliers will be Year
2000 compliant and that any non-compliant customers or suppliers would have
minimal impact on our business.
In the worst case scenario in which our computer systems or the computer
systems of any of our suppliers or customers are not Year 2000 compliant and
are unable to recover from the resulting system failure or interruption, we
will engage alternative suppliers to manufacture and deliver products to our
customers. The founders of Diversified Apparel, Global Sourcing Network,
Components and Windsong have initiated formal communications with their
customers and other third parties to determine their business risks related to
Year 2000 compliance issues. Our failure, the failure of such founders or the
failure of third parties with which we do business or upon which we rely, to
address Year 2000 compliance issues in a timely manner could cause system
failures or a disruption in operations and could adversely affect our ability
to process or fulfill orders from our customers, deliver products in a timely
manner, send invoices or engage in similar normal business activities for an
indefinite period of time. Such a disruption in operations could result in a
loss of revenues and a reduction of our profitability.
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BUSINESS
General
The Pietrafesa Corporation develops and manages men's dress apparel
programs for proprietary and third party brands. Our brand development and
management programs include comprehensive design, merchandising and sourcing
services for apparel covering a broad range of price points and products,
including suits, sport jackets, dress shirts, woven sport shirts, casual pants,
knitwear, neckwear and topcoats.
We have been a contract manufacturer for branded tailored clothing since
1922 and started producing directly for large retailers after entering into a
contract with Brooks Brothers in the 1970s. As a result of this experience, we
have identified and responded to two significant trends among our customers:
o private label apparel sales are increasing; and
o the concentration of more business with fewer suppliers to achieve
greater efficiency in merchandising, purchasing and inventory management.
By capitalizing on these trends, we believe that we are positioned to best
address the men's dress apparel needs of national retailers and to increase our
market share across all price points and distribution channels.
One of our key strengths is our ability to satisfy our customers' cost,
quality, construction and delivery requirements through a worldwide network of
third party manufacturers. This capability is referred to as sourcing.
Industry Overview
Retail sales of men's apparel in the United States in 1998 were
approximately $54 billion, an increase of 6.8% over the prior year, as compared
to retail sales increases of 3.7% in women's apparel and 4.7% in all apparel.
The following important trends in the apparel industry have redefined the
manner in which our business must be conducted:
Private Label Sales are Increasing. Based upon our 1998 sales and the
announced store opening plans of our customers, we believe that there is an
increased consumer acceptance of and demand for high quality, private label
apparel such as that sold by Brooks Brothers and Jos.A.Bank. Private label
apparel bears the retailer's own name or a brand name exclusive to the
retailer.
Retailers are Concentrating More Business with Fewer Suppliers to Achieve
Greater Efficiency in Merchandising, Purchasing and Inventory Management. Many
larger retailers are concentrating more business with fewer suppliers to
achieve greater efficiency in distribution and quality control, to reduce the
retailers' merchandising costs and to ensure that their most important
requirements are satisfied with reliable and financially stable organizations.
Retailers are also requiring higher levels of service from all suppliers, such
as operating through network computer systems through which retailers
electronically submit purchase orders, receive invoices and pay bills,
maintaining strict quality control procedures, creating a system for
maintaining inventories of private label products at specified levels, as well
as placing size and price information on products and shipping to the retail
outlet. We believe that many merchandising/sourcing businesses, however, lack
the systems, capital or scale to comply with the increasing demands of larger
retailers.
Specialty Chains are Achieving Strong Sales Growth. Over the last five
years, sales of clothing by chain retailers and high-end specialty chains, many
of which sell private label brands primarily or exclusively, have grown
significantly due to both new store openings and comparable store sales
increases. In 1998, specialty chains reported dollar increases in sales of
men's clothing of 6.5% and captured 10.5% of all dollars spent on men's
clothing. This growth is evidenced by the growth of men's apparel retailers
such as The Men's Wearhouse and Today's Man and the publicly announced national
store opening plans of Brooks Brothers and Jos.A.Bank.
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Business Strategy
Our business strategy is to become the global leader in developing and
managing branded men's apparel products for major retailers and for companies
that license independent brands by offering:
o the ability to develop collections of men's apparel that are customized
to each retailer's quality, composition, styling and other needs. The
collections we develop span styles ranging from the traditional tailored
look of Savile Row to FUBU's urban contemporary look, at a full range of
price points;
o the lowest available cost for each product line, by using third party
manufacturers throughout the world to satisfy the specifications, country
of origin and delivery requirements of each customer. Unlike traditional
clothing manufacturers, this strategy permits us to seek the best
manufacturer worldwide for a specific product at the lowest marginal
cost, and minimizes our investments in plant and equipment;
o valuable services such as design and merchandising services, statistical
quality control and inventory management, which permit major retailers to
achieve greater efficiency by outsourcing many aspects of their private
label product offerings;
o technological innovations, such as interactive sales software and
inventory management and replenishment systems, that enable us to
compress delivery schedules and better manage product selection for our
customers; and
o the scale and financial stability required of vendors by major retailers
in connection with long-term supply arrangements.
We believe that our business strategy is unique in its focus on the
constantly changing merchandising and sourcing needs of retailers. By contrast,
our competitors continue to emphasize product lines and sourcing options that
are tied to the capabilities of their own manufacturing facilities.
Growth Strategy
We believe that our business strategy will create numerous growth
opportunities. The principal components of our growth strategy include:
o achieving greater penetration among our existing customers. In
particular, we believe that our ability to develop a broad range of
product lines, as well as our sophisticated services, scale and financial
stability, will result in increased sales to our existing customers;
o developing new customer relationships by aggressively marketing our
capabilities. We believe that our development of new relationships will
be enhanced by the Diversified Apparel, Global Sourcing Network,
Components and Windsong acquisitions, each of which has unique customer
relationships;
o acquiring, developing and licensing brands in order to leverage our
existing merchandising and sourcing capabilities. We believe that sales
of products for licensed brand programs and acquired brands have
significant growth potential and will complement our private label
business;
o expanding internationally by offering our merchandising/sourcing services
to foreign retailers. We believe that our strong global sourcing
relationships, along with our merchandising and production expertise,
position us to capitalize on the fundamental dynamics of the menswear
market in Europe both through securing foreign retailers as customers in
Europe and through participation in global distribution arrangements
involving merchandise supplied to our customers; and
o growing revenues through selective acquisitions. Our acquisition strategy
is to identify and acquire leading merchandising/sourcing companies that
specialize in specific menswear products and specific quality or price
segments. In addition to increasing revenues, these acquisitions will
increase the range of products, price points and sourcing options
available to our customers and add new customers. We believe this will
lead to significant opportunities to sell products to, and source
products for, customers of one business unit that were previously sold to
or sourced for customers of another business unit, thereby increasing the
value of each customer and sourcing relationship.
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Acquisition Strategy
We believe that the merchandising and sourcing industry is highly
fragmented. Our growth strategy includes selective strategic acquisitions
within this industry that expand and complement our product lines and sourcing
and distribution capabilities. Major elements of our acquisition strategy
include:
o identifying and acquiring leading merchandising and sourcing companies
that specialize in specific menswear products and specific quality or
price segments, in order to increase the range of products, price points
and sourcing options available to our customers and to add new customers;
o including in each acquisition, when possible, incentives for the sellers
of each acquired business that are realized only if the acquired business
meets or exceeds growth and profitability targets subsequent to the
closing of the acquisition, including by conditioning payment of a
substantial portion of the purchase price on the achievement of such
targets for several years;
o allowing newly acquired businesses to operate as an independent operating
unit, while holding each accountable for its profitability, utilization
of capital and overhead; and
o improving and standardizing the financial controls, quality control
practices and back-office functions of each acquired business and
eliminating duplicative operational facilities, such as leased office and
warehouse space and personnel, whenever possible.
We believe that many of our potential acquisition candidates are unable to
fully serve the needs of their customers or effectively market product lines
developed for one retailer to other customers. We believe that these
limitations are often due to their narrow product offerings, limited systems
expertise, capital constraints and lack of an industry-wide reputation. Our
acquisition strategy is intended to address these limitations and to provide
acquisition candidates with a compelling opportunity to leverage their existing
customer base and to build new customer relationships. Our acquisition strategy
offers each candidate:
o the opportunity to be a part of a diversified apparel products company,
thereby enhancing the candidate's competitive position in its particular
product segment through an expansion of distribution channels and
improved production and distribution capacities;
o greater purchasing power of raw materials and other supplies and
services, and other economies of scale;
o enhanced financial strength and visibility as part of a public company;
o the opportunity for its management to remain involved in, and to profit
from, future operations; and
o an opportunity for liquidity through the receipt of cash or securities.
See "Risk Factors -- Risks Relating To Our Acquisition Strategy And Future
Acquisitions" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Significant Acquisitions."
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Products
We produce high quality men's tailored clothing, trousers, outerwear,
sportswear and accessories across a variety of fashion directions, price points
and distribution channels. We focus primarily on developing a style for each
private label or licensed product line that is distinctive to the relevant
brand, yet not susceptible to fashion obsolescence. Key fabrics include 100%
wool, camel hair, cashmere, silk, cotton and linen. Key fabric constructions
include 100% mechanical stretch, 4-ply worsteds, storm proof wovens and worsted
camel hair. The table below sets forth our sales by product category, expressed
as a percentage of net revenues:
For the Year Ended
December 31,
-----------------------
1997 1998
---------- ----------
Sport shirts ...................... 28.4% 38.2%
Men's suits ....................... 33.6 25.7
Men's sport jackets ............... 13.5 14.0
Suit separates (trousers) ......... 7.9 7.9
Outerwear ......................... 4.2 5.1
Suit separates (jackets) .......... 4.4 4.8
Women's tailored .................. 3.4 2.3
Dress Shirts ...................... 1.3 1.1
Other ............................. 3.3 0.9
----- -----
100.0% 100.0%
===== =====
Our design staff examines domestic and international trends in the apparel
industry to determine trends in styling, color, consumer preferences and
lifestyle. Virtually all of our products are designed by our in-house staff,
utilizing computer-aided design technology, through which we can quickly
generate samples in response to customer input. The use of computer-aided
design technology minimizes the time and costs associated with producing sewn
samples prior to production and allows us to create custom designed products
meeting the specific needs of each customer.
Distribution Channels, Customers and Sales and Marketing
Distribution Channels. We market our products across all major apparel
retail channels. Because we market private label products designed specifically
for each of our customers, our sales are not constrained by competition among
our customers.
During 1997 and 1998, we generated our net revenues from the following
distribution channels:
For the Year Ended
December 31,
-----------------------
1997 1998
---------- ----------
Mass merchandise chains ...................... 37.2% 37.7%
National chains .............................. 16.7 22.9
Department stores ............................ 14.5 16.2
High-end specialty stores and chains ......... 19.0 13.3
Other ........................................ 12.6 9.9
----- -----
100.0% 100.0%
===== =====
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Customers. We sell to a variety of customers within each of the
distribution channels discussed above. The following table summarizes the
percentage of our net revenues attributable to each of our customers that
accounted for more than 5% of our net revenues in 1997 and 1998 after giving
effect to the Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions:
For the Year Ended
December 31,
-------------------
1997 1998
-------- --------
Sam's Club ...................... 10% 20%
S&K Famous Brands ............... 18 11
Brooks Brothers ................. 8 11
Dillards ........................ 12 10
Jos.A.Bank ...................... -- 9
Polo Retail ..................... 12 6
Nordstrom ....................... 8 3
-- --
Total .......................... 68% 70%
== ==
Sales and Marketing. In contrast to traditional apparel companies, which
attempt primarily to sell customers product that they manufacture, we apply our
sourcing relationships and contacts and our ability to provide sophisticated
design, raw material procurement, merchandising, statistical quality control
and other services to solve customer problems and/or create new retail
opportunities for our customers. We believe that this consultative approach to
sales and marketing results in long-term relationships with successful
retailers.
Our flexibility in sourcing products does not restrict us to offering
solutions that are dependent on our manufacturing capabilities. Our
consultative approach to sales and marketing has evolved over the last decade,
and involves providing both products and services. For example, in 1991 MS
Pietrafesa, L.P. analyzed a manufacturing facility owned by a major national
retailer, and we concluded that there were structural barriers that precluded
that facility from ever becoming an efficient manufacturing source. We proposed
closing the facility and moving the relevant production to our Liverpool
facility, where production lines were established specifically for that
product. In 1994, MS Pietrafesa, L.P. performed a similar analysis for a major
brand, resulting in the closure of the brand's manufacturing facility and the
sourcing of its product between the Liverpool facility and two other
contractors. Most recently, MS Pietrafesa, L.P. assisted a national chain in
phasing out its manufacturing division and its exclusive reliance on its
in-house merchandisers.
We assign each of our major customers their own sales teams -- which
include design, specification, quality control and sales administration
personnel -- focused on the needs and requirements of that particular customer.
In order to maintain exclusivity for each customer, all products remain unique
to their respective sales team. On a seasonal basis, merchandising concepts,
including exclusive or special fabrics, model enhancements and marketing ideas,
are presented to customers. When a customer adopts one of our merchandising
strategies, that strategy is executed exclusively for that customer unless
otherwise agreed.
Merchandising Technology
Systems Expertise. We continually develop new systems, services and
production methods that make buying from us more attractive to retailers. We
generally use computer-aided design systems to develop products and program
fabric cutting for all products to ensure color consistency and maximize
material yield. We employ a proprietary system to insure consistency of
products among production facilities. In addition, our interactive ordering,
invoicing and payment system significantly enhances customer order execution
and inventory tracking. All such systems are intended to enhance customer
profitability and loyalty. In addition, our sales forecasting, production
planning and logistics and inventory management are performed on systems that
are unique to us.
Made-to-Measure Software. In November 1998, we launched a point-of-sale
made-to-measure system at two retail stores and introduced the system in five
Brooks Brothers stores in the first quarter of 1999. This system, which uses
software developed exclusively by us, offers retailers the opportunity
simultaneously to electronically capture a customer profile and a
made-to-measure suit order, automatically alter a standard computer-aided
design pattern based on the customer's measurements, and is intended to deliver
a custom suit to the customer in less than four weeks.
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<PAGE>
Product Sourcing, Raw Materials Sourcing and Manufacturing
Product Sourcing. During 1998, we sourced approximately 72% (by sales
dollar volume) of our products with over 50 independent manufacturers
worldwide. Further, 66% (by sales dollar volume) of our products were produced
outside the United States in 1998, principally in Italy, the Dominican
Republic, Mexico, Eastern Europe and the Far East. No manufacturer accounted
for more than 10% of our total production in 1998. We monitor our selection of
independent factories to attempt to minimize the instances in which one
manufacturer or country is the source of a disproportionate amount of our
merchandise. These manufacturers are selected, monitored and coordinated by our
employees located in regional offices to assure conformity to strict quality
standards. We believe the use of dedicated sourcing personnel rather than
independent agents reduces our sourcing costs and cycle times. Personnel who
are focused narrowly on our interests are more responsive to our needs than
independent agents would be, and are more likely to build long-term
relationships with key vendors. We believe that the use of these independent
manufacturers increases our production capacity and delivery flexibility,
reduces our costs and allows us to match each of these criteria to specific
customer needs. See "Risk Factors -- Our Foreign Sourcing of Products Exposes
us to Delays in Production, which may Result in Increased Costs and Reduced
Profitability."
We have long-standing relationships with our most important independent
manufacturers. In a number of cases, we are the largest customer of our
independent manufacturers, providing as much as 50% of such manufacturers'
annual order volume (by unit). As a result, we are able to pass through to our
customers the benefits of the significant leverage we have with such
manufacturers and the resulting production, delivery and cost flexibility. For
many of our lower priced products, we have established numerous alternative
manufacturing sources. As a result, production of such products can be placed
on the most competitive delivery and price terms on a season-by-season basis,
and significant dependence on single manufacturers of such products is
minimized. We believe that our sourcing relationships enable us to offer our
customers valuable brand management services, including risk reduction achieved
through decreasing reliance on particular product sources.
Raw Materials Sourcing. We obtain our raw materials, which include fabric,
linings, thread, buttons and labels, from domestic and foreign sources based on
quality, pricing, customer requirements and availability. Our principal raw
material is fabric, including woolens, cashmere, camel hair, silks, linen,
cotton and blends of wool with other fibers, as well as thread, trim and
labeling and packaging materials. Whenever practicable, fabric is procured by
our contract manufacturers directly but in accordance with our specifications,
thus reducing capital employed by us in work-in-process inventory. For some of
our product offerings, we select fabric suppliers to jointly develop fabric for
our exclusive use. In order to assure quality control, we send samples of all
new fabrics to laboratories in order to test their sewing characteristics. For
a significant portion of the products we sell, the customer or manufacturer
purchases the raw materials. A substantial portion of these purchases are
denominated in U.S. dollars. We purchased 54% (by dollar value) of our total
fabric requirements in 1998 from two suppliers. No other supplier accounted for
more than 10% of our purchases. As is customary in our industry, we do not have
long-term contracts with our suppliers. We believe that there are alternative
sources of supply available to satisfy our raw material requirements.
Manufacturing. We have over 75 years of experience as a leading domestic
manufacturer of premium tailored clothing. As a result, unlike many of our
competitors, we have the expertise to offer retailers private label services
that include styling developments, quick replenishment, statistical quality
control, delivery reliability and systems integration that are competitive with
the largest domestic manufacturers. In addition, we believe that we can improve
retailer margins by leveraging our experience in manufacturing technology. In
particular, we believe that our fabric-maximizing manufacturing technology, our
unit production process, and "just-in-time" inventory and distribution
management systems, which reduce customers' working capital costs by lowering
stocking and warehousing requirements, will lower raw material and inventory
costs, and result in better customer order fulfillment.
In 1998, approximately 28% of our products (by sales dollar volume) were
produced at our manufacturing facility, located in Liverpool, New York, and at
two facilities in Baltimore, Maryland. The Baltimore facilities are operated by
SourceOne, L.L.C., a subsidiary of the general partner of MS Pietrafesa, L.P.
See "Certain Relationships and Related Transactions." Our business and growth
strategies focus on
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<PAGE>
growth through worldwide sourcing and diminished reliance on manufacturing
facilities owned and operated by us. See "Risk Factors -- Our Foreign Sourcing
of Products Exposes us to Delays in Production, which may Result in Increased
Costs and Reduced Profitability."
SourceOne took over operation of the Baltimore facilities in April 1998.
We are not financially liable, or otherwise obligated, for any overhead or
other operating expenses or liabilities of the Baltimore facilities. We source
approximately one-third of our production for Jos.A.Bank with SourceOne
pursuant to a subcontractor agreement. Under that agreement, SourceOne is paid
based on the production costs of the agreement, without mark-up. None of our
employees receive additional compensation from SourceOne. The Baltimore
facilities were formerly operated by Jos.A.Bank. As part of its announced plan
to phase out its domestic manufacturing operations and focus on a publicly
announced national five-year store opening plan, Jos.A.Bank sought our
assistance in executing this plan. SourceOne was established to ensure an
orderly continuation of the operations of the Baltimore facilities, without
exposing us to any associated overhead or other operating liabilities.
SourceOne is obligated to operate the Baltimore facilities through February
2000. In addition, SourceOne's obligations are contingent on Jos.A.Bank
satisfying its minimum order commitments to us for the corresponding period.
Quality Control. As of June 30, 1999 we had eight quality control
personnel in three foreign centers, as well as five additional inspectors for
United States and Caribbean based manufacturing contractors. In addition, as of
such date, we had nine people in our headquarters facility overseeing and
coordinating global quality control standards and efforts. We believe our
quality control program is an important component of our private label and
licensed brand product capabilities.
Our quality control program is designed to ensure that our products meet
high quality standards. This program is based on the "green seal/black seal"
process to ensure that all garments we source or produce meet specifications
and original expectations for the production of such garments. Before a new
product order is placed, an exact sample garment is sent to the customer. Upon
customer approval, a "green seal" tag is placed on the garment to indicate
acceptance by both us and the customer and to provide a standard for future
reference. Prior to shipping the first production unit of the green sealed
product, a size run from the order is shipped to the customer for "black seal"
approval. If the items sufficiently match the "green seal" garment, "black
seal" approval is given, and the balance of the order is completed and
distributed.
We also monitor the quality of fabrics and inspect each roll before
production runs are commenced. We perform in-line inspections during and after
production before garments leave the factory. Our quality control personnel
visit most of our independent manufacturers' facilities at least once every two
weeks.
Delivery and Customer Orders. In most cases, our independent manufacturers
are at risk for the quality and timely delivery of the products. Our
international production requirements are financed with letters of credit or
under open credit terms. Whenever possible, we push related financing
requirements down to our contractors, matching payment terms to the contractor
with payment terms from our customers. This minimizes inventory financing and
keeps the contractors vested in the process.
We transact business on an order-by-order basis and do not maintain any
long-term or exclusive commitments or arrangements to purchase from any vendor
other than SourceOne in respect of minimum product quantities for Jos.A.Bank.
We receive most of our customers' orders prior to placing our manufacturing
orders, except in instances where our customers have agreed to purchase
specific amounts of products in order to maintain desired inventory levels on a
continuing basis.
Operating Units
Upon the consummation of the offering, our operations will be divided into
five business units: the Windsong Unit, the Pietrafesa Unit, the Components
Unit, the Global Sourcing Network Unit and the Diversified Apparel Unit. Each
of our current business units operates, and it is intended that each new
business unit will operate, as a separate unit accountable for its own
profitability, utilization of capital and overhead. Each business unit's
operations will conform to our standardized financial controls, quality
practices and back-office functions.
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The following table summarizes the percentage of our 1998 net revenues
attributable to each operating business unit on a pro forma basis giving effect
to the acquisition of Diversified Apparel, Global Sourcing Network, Components
and Windsong as of January 1, 1998.
Percentage of Pro
Forma Combined Net
Revenues
for the Year Ended
Business Unit December 31, 1998
------------- -------------------
Windsong ................................. 39.5%
Pietrafesa ............................... 35.2
Components ............................... 12.4
Global Sourcing Network .................. 11.2
Diversified Apparel ...................... 1.7
-----
Total ................................... 100.0%
=====
The Windsong Unit supplies designer label and private label sportswear to
department stores, specialty stores and mass merchandise chains. This unit will
be headed by Joseph Sweedler, with whom we will enter into a five-year
employment contract upon the consummation of the offering. Windsong supplies
knit shirts at retail price points from $28 to $75, woven shirts from $35 to
$65 and sweaters from $55 to $150 to customers that include major retailers
such as Belk, Dillards and Sam's Club. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations -- Significant
Acquisitions."
The Pietrafesa Unit, our oldest unit, merchandises, sources and
manufactures tailored clothing, including suits, suit separates, sport coats,
dress trousers and formal wear. The Pietrafesa Unit consists primarily of a
Men's Division which is headed by Joseph J. Pietrafesa II, the brother of our
Chief Executive Officer. Mr. Pietrafesa joined the predecessor of MS
Pietrafesa, L.P. in 1979 as Director of Sales, becoming Vice President of Sales
and Merchandising when MS Pietrafesa, L.P. was formed in 1990. For the years
1993 through 1996 Mr. Pietrafesa served as President of our Polo Clothing Unit.
The Pietrafesa Unit also operates a Women's Division. The Women's Division is
headed by Alisa Rothstein, who joined MS Pietrafesa, L.P. in October 1991 as
President of the Women's Division. Ms. Rothstein is responsible for product
design, merchandising, and marketing of all products promoted by this Division.
Prior to joining MS Pietrafesa, L.P., Ms. Rothstein spent eight years as
President of Pincus Brothers-Maxwell's women's unit.
The Components Unit merchandises and sources tailored clothing, as well as
sportswear, dress shirts, neckwear, topcoats and casual slacks in Italy. This
unit will be headed by John McCoy with whom we will enter into a six-year
employment contract upon the consummation of the offering. Customers of
Components are the highest tier retailers including Bergdorf Goodman, Saks
Fifth Avenue, Brooks Brothers and Sulka, at retail price points from $695 to
$3,000 for men's suits, $125 to $400 for dress shirts and $65 to $95 for silk
neckwear. Mr. McCoy founded Components in 1985 after spending three years as an
independent sales representative for a variety of imported apparel lines. Mr.
McCoy served as President of Fitzgerald, Inc., a men's clothing unit of Warren
Sewell, for the years 1977 through 1979, and a unit of the Palm Beach Company
for the years 1979 through 1982. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Significant Acquisitions."
The Global Sourcing Network Unit designs and imports men's suits. This
unit is headed by Peter Lister with whom we have entered into a five-year
employment contract. Using manufacturers in Slovakia, the Czech Republic,
Bulgaria, Moldova, Indonesia, the Philippines, India and China, Global Sourcing
Network contracts for the production and delivery of men's suits. In all cases,
Global Sourcing Network takes ownership of products while in transit, but ships
directly to customers against firm orders. Global Sourcing Network's largest
customer is S&K Famous Brands. Typical retail price points are $99 to $295 for
men's suits. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations -- Significant Acquisitions."
The Diversified Apparel Unit merchandises and sources apparel, including
lower to mid-priced suits and dress shirts, to value-priced apparel retailers.
This unit is headed by Jarrod Nadel with whom we have entered into a five year
employment contract. Using manufacturers in the United States, Italy, the
Dominican Republic
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and Korea, Diversified Apparel merchandises a specific product around a
customer's need and executes the production and delivery, typically on a
commission basis without owning inventory. Customers of Diversified Apparel
include The Men's Wearhouse, Bloomingdales, S&K Famous Brands, K&G Men's
Center, Bachrach and Filene's Basement. Typical retail price points are $195 to
$495 for men's suits and $29.95 to $39.95 for dress shirts. Mr. Nadel founded
Diversified Apparel in 1994 as a full service sourcing, merchandising and
design company with offices in New York City and Italy. Prior to 1994, Mr.
Nadel spent two years as Director of Sourcing for After Six Ltd. For the years
1988 to 1992, Mr. Nadel served as Vice President of Sales and Merchandising for
the Pierre Balmain Division of Capital Fashions Corporation. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations --
Significant Acquisitions."
Imports and Import Regulations
We presently import garments under four separate scenarios having distinct
customs consequences: (1) imports of finished goods mostly from the Pacific Rim
and the Middle East; (2) imports from the Caribbean Basin and Central America;
(3) imports from Mexico and Canada; and (4) imports from Europe.
For direct importations, mostly from the Pacific Rim and the Middle East,
imported garments are normally assessed with customs duties at "most favored
nation" tariff rates. The tariffs for most of the countries from which we
currently import or intend to import have been set by international
negotiations under the auspices of the World Trade Organization and implemented
into U.S. law. These tariffs generally range between 17% and 35%, depending
upon the nature of the garment, such as shirt or pants, its construction and
its chief weight by fiber. Currently, the only countries not enjoying "most
favored nation" treatment are Afghanistan, Cuba, Laos, North Korea, and
Vietnam.
In addition to tariffs, merchandise from virtually all of the countries
from which we import is also subject to bilateral quota restraints, pursuant to
U.S. domestic law or the Multi-Lateral Agreement on Textile and Clothing, which
exists under the auspices of the World Trade Organization. Most bilateral
quotas are negotiated on a calendar year basis. After the United States and a
particular country agree to a particular level of exports in a particular quota
category (for instance, wool men's suits), the country that receives the quota
has the right to determine the method by which such quota is assigned to its
manufacturers. Some jurisdictions, such as Hong Kong, have a free market under
which quotas are bought and sold. Most countries, however, assign it to the
factories that actually produce the garments. Shipments which are exported to
the United States must, in addition to the usual commercial documentation, have
appropriate and official textile visas, in either an electronic or paper
format, which confirm their quota status. This documentation must be filed
prior to the admission and clearance of the merchandise into the United States.
Accordingly, we usually demand that this paperwork be submitted prior to
payment.
We also import garments from countries in the Caribbean Basin and Central
America, most notably the Dominican Republic and Costa Rica. Although
merchandise imported from these jurisdictions is potentially subject to tariffs
and quotas of the kind described for Far Eastern importations, there are
special programs which provide for reduced tariffs for some merchandise sourced
from the Caribbean Basin and Central America. The principal program is the
so-called "807" program. Under this program, merchandise described by tariff
subheading 9802.00.80, Harmonized Tariff Schedule ("HTS"), is admitted into the
United States with a substantial tariff reduction when the standards of
subheading 9802.00.80 are met. Specifically, in qualifying circumstances, the
provision exempts from collection that duty which would be based on the value
of exported U.S. components assembled into a product in a foreign jurisdiction
which is subsequently re-imported into the United States. In essence, the duty
reduction is equal to the duty that would otherwise be assessed on the value of
the components incorporated into these assembled goods plus southbound
international freight and insurance. For apparel products, such U.S. components
normally consist of cut-to-shape U.S. fabric parts, finishing and trim, such as
buttons or thread.
In addition, if the fabric which is cut to create the cut component parts
is also knitted, woven or formed in the United States, there is a special
program which provides for more liberalized access to the U.S. marketplace.
This program is applicable only to some Caribbean Basin, Central American and
northern Latin American countries which have signed special agreements with the
United States known as Guaranteed Access Level ("GAL") agreements. Under these
agreements, qualifying products, known in the trade as "807A" or
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"Super 807" or GAL products, are eligible to enter the United States free of
any quota restraints. Accordingly, a country such as the Dominican Republic
would have the normal advantages of the "807" process, as well as the
advantages of the GALS program if the GAL standards are met. We produce a
significant amount of garments that qualify for one or both of these particular
programs. In circumstances where garments qualify for both preferences, i.e.,
"807" and "807A," the merchandise is accorded both substantial and significant
quota and tariff advantage over Pacific Rim, Middle Eastern or non-qualifying
Western hemisphere goods.
We also import finished goods from Mexico and Canada under the North
American Free Trade Agreement, commonly known as NAFTA. Under NAFTA,
merchandise which qualifies, is accorded reduced or duty-free access, depending
upon the type of merchandise involved. For many garments, the key requirement
for NAFTA qualification is that the yarn, cloth, cut, sew and finish of the
garments all take place within North America. This is commonly known as the
"yarn-forward rule," which is a general guideline, not a legal rule.
Merchandise qualifying under NAFTA enters the United States at a preferential
or zero rate and is not subject to any quota.
In addition to our imports eligible for entry under the NAFTA program,
some imports made by us are also subject to a tariff preference which was
created and enacted as part of the NAFTA-enabling legislation. This tariff
provision, subheading 9802.00.90, HTS, provides for immediate duty-free entry
into the United States from Mexico of garments made from components which are
cut to shape in the United States from U.S. knit, woven or formed cloth. Such
articles enter quota-free. This duty-free, quota-free entry would be available
for articles produced in Mexico from U.S. components cut from U.S.
knitted/woven fabric. This merchandise, therefore, has an even more favorable
treatment than merchandise being imported from the Caribbean Basin. We
currently import a limited amount of such merchandise from Mexico.
Finally, non-NAFTA qualifying goods may be imported from Mexico. As noted,
this merchandise could be imported with reduced duties under the 807 program,
as well as under special tariff rate quotas called "TPLs." Otherwise, it is
subject to full "most favored nation" duty. Such merchandise may also be
subject to Mexican quotas which are effective for some products until 2004.
Competition
The apparel industry in the United States is highly competitive and
characterized by a relatively small number of multi-line manufacturers and a
larger number of specialty manufacturers, including brand name and private
label producers. We have the ability to compete with internal product
development and sourcing capabilities of retailers. Our products also compete
with a substantial number of designer and non-designer product lines. Some of
our competitors and potential competitors have greater financial, manufacturing
and distribution resources than us. We believe that we compete favorably based
on the quality and value of our programs and products, price, the production
flexibility resulting from of our cutting and sourcing network, and the
long-term customer relationships we have developed. See "Risk Factors -- We may
be Unable to Compete Successfully in the Highly Competitive Apparel Industry."
Intellectual Property
In connection with the Windsong acquisition, Windsong's license to the
"Colours by Alexander Julian" and "Coloursport Alexander Julian" trademarks will
be assigned to us. We do not believe that this license, or the other licenses
described below, have any independent value as identifiable intangible assets.
The Alexander Julian license covers sales of sport shirts, knit shirts and
sweaters in the United States. The initial term of the Alexander Julian license
agreement ends on December 31, 2001, but if our net sales of specified items of
"Colours by Alexander Julian" apparel exceed a specified sales target for the
twelve-month period ending December 31, 2000, we will have the option to extend
the term of the Alexander Julian license agreement until December 31, 2006.
Windsong's sales of such apparel were substantially in excess of this sales
target in 1998. We will be obligated under the license agreement to make annual
minimum payments to Alexander Julian, Inc., as well as royalty payments based on
net sales of "Colours by Alexander Julian" and "Coloursport Alexander Julian"
apparel. Sales of Alexander Julian products represent 27% of our pro forma
combined revenues for 1998.
Our exclusive sublicense of the FUBU trademark covers the sale of men's
tailored clothing and specified accessories in the United States and Canada.
The FUBU sublicense will terminate on June 30, 2004. We are entitled to renew
the FUBU sublicense for an additional five-year term if our net sales of
sublicensed products exceed a specified target during the twelve months
preceding our sending of a renewal notice. We will be obligated under the FUBU
sublicense to make royalty payments based on net sales of FUBU apparel.
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In connection with the Components acqusition, Components' nonexclusive
sublicense to the DKNY trademark covering the sale of overcoats in the United
States, Canada, Mexico and the Caribbean will be assigned to us. The initial
term of the DKNY sublicense agreement will terminate on December 31, 2000, but
if our net sales of specified items of DKNY apparel as of June 30, 2000 exceed
a specified target in connection with the Fall/Winter 1999 and Spring/Summer
2000 seasonal collections, we will have the option to extend the term of the
DKNY license agreement until December 31, 2002. We will be obligated under this
sublicense to make annual minimum payments, as well as royalty payments based
on net sales of DKNY apparel.
Our exclusive license of the Greg Norman Collection trademark covers the
sale of men's tailored clothing in the United States and Canada. The Greg
Norman Collection license will terminate on December 31, 2004, but we will have
the right to elect two three-year extensions so long as we obtain minimum sales
targets and make minimum royalty payments. We will be obligated under the Greg
Norman Collection license to make royalty payments based on net sales of Greg
Norman Collection apparel.
Although we have applied for a number of registered U.S. trademarks,
including the Pietrafesa name and the Pivot Rules brand name, such trademarks
do not represent a material asset of ours. In addition, we own the software
used in our point-of-sale made-to-measure programs.
Properties
We own our corporate headquarters, principal manufacturing facility and
warehouse facility, all of which are located in Liverpool, New York. Such
facilities are the subject of a lease and lease-back transaction with the
Onondaga County Industrial Development Authority, pursuant to which we received
a Payment In Lieu Of Taxes agreement which significantly reduced real estate
taxes on the facility, and fixed the assessment for a period of 18 years. Our
Liverpool facility is also subject to mortgages held by PNC Bank and the UDC
securing indebtedness owed to such parties. See "Management's Discussion and
Analysis of Results of Operations -- Liquidity and Capital Resources." During
1998, our Liverpool facility operated at approximately 62.5% of space capacity
and 75% of current machine capacity. We also lease one retail store in
Syracuse, New York, at which we operate under the name Learbury Clothes. This
store has been in continuous operation since 1941. The Learbury lease expires
in 2007. We also maintain an office in New York City. The lease on this space
commenced in July 1999 and expires in July 2009, with escalating annual rental
payments of $243,000 in year one and $345,000 in year ten.
Diversified Apparel, Global Sourcing Network, Components and Windsong each
lease office space in New York City and Windsong leases office space in
Connecticut, in each case to conduct administrative and sales operations. In
addition, Windsong leases warehouse space in New Jersey. None of these
businesses own any real property.
We believe that our existing facilities are adequate to meet our current
and forseeable needs. We also believe our existing facilities are well
maintained and in good operating condition.
Employees
As of June 30, 1999, we had 523 employees. Of the total, 55 hold executive
and administrative positions, eight are engaged in design and merchandising,
406 are engaged in production activities such as marking, cutting and labeling,
45 are engaged in sales, 17 are engaged in distribution and 22 are engaged in
quality control. Approximately 70% of our work force is covered under
collective bargaining agreements, which expire in 2002. We have not experienced
work stoppages in the past and believe that our relations with our employees
are satisfactory.
Legal Proceedings
From time to time, we are a party to litigation arising in the ordinary
course of our business. We are not currently a party to any litigation that, if
determined adversely to us, we believe would have a material adverse effect on
us.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth information as of June 30, 1999 with
respect to the members of our Board of Directors and our executive officers:
<TABLE>
<CAPTION>
Name Age Positions
- --------------------------------------- ----- ----------------------------------------------------
<S> <C> <C>
Richard C. Pietrafesa, Jr.(1) ......... 42 President, Chief Executive Officer, Director
Sterling B. Brinkley, Jr.(1) .......... 47 Chairman of the Board
Thomas A. Minkstein(1) ................ 52 Chief Operating Officer, Director
Eugene R. Sunderhaft .................. 51 Vice President -- Finance, Chief Financial Officer,
Secretary, Treasurer
David McDonough ....................... 35 Vice President -- Business Development
Mark C. Pickup(2) ..................... 47 Director
Robert J. Bennett(2)(3) ............... 58 Director
Paul M. McNicol(2)(3) ................. 43 Director
</TABLE>
- ------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
RICHARD C. PIETRAFESA, JR. has served as our President, Chief Executive
Officer and Director since June 1990. Mr. Pietrafesa is also a member of our
Executive Committee. Mr. Pietrafesa joined our predecessor in 1979 and became
Director of Operations in 1981. Over his 20 years in the men's apparel
industry, Mr. Pietrafesa has been awarded the U.S. Senate Medal for
Productivity in 1984, the Apparel Industry Magazine All Star Award in 1985 and
again in 1991, the Bobbin Magazine C.E.O. of the Year Award in 1994, and, along
with his brother Joseph J. Pietrafesa II, the President of the Pietrafesa for
Men Unit, the Sales and Marketing Association Award for Innovation in 1997. Mr.
Pietrafesa earned an honors degree in Economics and Government from Harvard
College.
STERLING B. BRINKLEY, JR. serves as our Chairman of the Board of Directors
and Chairman of our Executive Committee and has been a Director since June
1990. Mr. Brinkley was a Managing Director of Morgan Schiff & Co., Inc., one of
the underwriters of this offering, for the years 1986 to 1990. Since 1990, Mr.
Brinkley has been a consultant to Morgan Schiff. Prior to 1986, Mr. Brinkley
was a Managing Director in the Corporate Finance Department of Shearson Lehman
Brothers, Inc. Mr. Brinkley is also Chairman of the Board of Directors of
EZCORP, Inc., a publicly-traded pawnshop chain, and Friedman's Inc., a
publicly-traded retail jewelry chain, and Chairman of the Executive Committee
of the Board of Directors of The Farm Journal Corporation, a publisher of
agricultural information. All three companies are affiliates of The Pietrafesa
Corporation and Morgan Schiff. Mr. Brinkley also serves on the boards of
directors of various privately held companies that are affiliates of The
Pietrafesa Corporation and Morgan Schiff. Mr. Brinkley received a B.A. from
Yale University and an M.B.A. from the Stanford Graduate School of Business.
THOMAS A. MINKSTEIN joined us in August 1998 as Chief Operating Officer
and Director. Mr. Minkstein is also a member of our Executive Committee. Prior
to joining us, Mr. Minkstein served for 10 years as Chief Operating Officer of
Empire Vision, a division of Highmark, Inc., and the thirteenth largest optical
retailer in the United States. In this position, Mr. Minkstein was responsible
for the operation of over 4,000 distribution points and six manufacturing
facilities throughout the United States, and managed that division's rapid
growth and earnings expansion through acquisitions and the operations of large
managed care programs. For the years 1973 through 1988, Mr. Minkstein held
various management positions with Frank's Nursery & Craft, a division of
General Host, a publicly-traded company.
EUGENE R. SUNDERHAFT joined us in August 1998 as Vice President --
Finance, Chief Financial Officer, Secretary, Treasurer. Prior to joining us,
Mr. Sunderhaft served for four years as Senior Vice President-Finance, Chief
Financial Officer and Secretary of The Penn Traffic Company, a publicly-traded
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$3.2 billion retail, wholesale and manufacturing company, where he was
responsible for all accounting activities, treasury functions, strategic and
tactical planning, SEC compliance, investor relations and information
technology. For the years 1972 through 1993, Mr. Sunderhaft served P&C Foods, a
subsidiary of Penn Traffic, in a variety of management positions including
controller for the years 1982 through 1989, and Chief Financial Officer for the
years 1989 through 1993. Prior to joining P&C, Mr. Sunderhaft was employed by
Ernst & Ernst, the predecessor of Ernst & Young LLP. Mr. Sunderhaft is a
graduate of the University of Dayton.
DAVID McDONOUGH currently serves as our Vice President -- Business
Development. In this position, Mr. McDonough is responsible for financial and
structural analysis of all acquisitions, and implementation of consolidation
efficiencies and back office integration efforts. Mr. McDonough joined us in
January 1995 as Controller, and became Chief Financial Officer in 1996, a
position held until August of 1998. Prior to joining us, Mr. McDonough was Vice
President-Finance of Ferris Industries, a $14 million equipment manufacturer
for two years. Prior to that, Mr. McDonough was Corporate Finance Manager at
CIS Corporation, a publicly-traded company, where he worked for six years. Mr.
McDonough holds a B.S. in Economics from Cornell University.
MARK C. PICKUP serves as a Director and Chairman of our Audit Committee.
Mr. Pickup is also a director of EZCORP, Inc., Friedman's Inc. and The Farm
Journal Corporation, each an affiliate of ours and Morgan Schiff. Since 1995,
he has served as an independent business consultant with a variety of
companies. Mr. Pickup served as Vice Chairman of Crescent Jewelers, a
privately-held retail jewelry chain which is an affiliate of ours and Morgan
Schiff, from December 1994 until February 1995, and served as President and
Chief Executive Officer of Crescent Jewelers from August 1993 to December 1994.
From October 1992 until August 1993, Mr. Pickup served as the Senior Vice
President and Chief Financial Officer for Crescent Jewelers. For more than five
years prior to October 1992, Mr. Pickup held various positions with the
predecessors of Ernst & Young LLP, leaving as a partner in its San Francisco,
California office in October 1992. Mr. Pickup received a B.S. in mathematics
from Brigham Young University.
ROBERT J. BENNETT serves as a Director and member of our Audit Committee
and as Chairman of our Compensation Committee. Mr. Bennett is also Chairman of
the Board of M&T Bank Corporation, Vice-Chairman of the Board of Manufacturers
and Traders Trust Company and a director of Traders Mutual Life Insurance Co.
He also serves as Director for the Syracuse University School of Management,
Crouse Hospital, the Federal Home Loan Bank of New York, the Metropolitan
Development Association of Syracuse and Central NY, the Pan African Business
Association and the New York Bankers Association. Mr. Bennett was also the
Chairman, President and CEO of ONBANCorp, Inc. for the years 1987 until April
1998 when it merged with M&T Bank Corporation. Mr. Bennett received his B.S.
from Babson College and his M.B.A. from the University of Massachusetts,
Amherst, and holds a graduate degree from the Harvard Business School Advanced
Management Program.
PAUL M. McNICOL serves as a Director and member of our Audit and
Compensation Committees. Mr. McNicol is also Senior Vice President-Legal,
Cendant Corporation. For the years 1994 to 1996, Mr. McNicol served as Senior
Vice President-General Counsel of Six Flags Theme Parks, Inc. Mr. McNicol
received his B.A. from Harvard College and his J.D. from Fordham University
School of Law.
Our directors are currently elected annually, 25% by the holders of the
Class A Common Stock and 75% by the holders of the Class B Common Stock, to
serve during the ensuing year or until their respective successors are duly
elected and qualified. Officers serve at the discretion of our Board of
Directors. For a description of class voting rights see "Description of Capital
Stock."
Committees of the Board of Directors
Our Board of Directors currently has three committees: (1) the Audit
Committee; (2) the Executive Committee; and (3) the Compensation Committee.
The Audit Committee is comprised of Messrs. Pickup, Bennett and McNicol,
with Mr. Pickup as Chairman. The Audit Committee recommends the independent
accountants appointed by the Board to audit
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our financial statements which includes an inspection of our books and
accounts. The Audit Committee reviews with such accountants the scope of their
audit and their report thereon, including any questions and recommendations
that may arise relating to such audit and report or our internal accounting and
auditing procedures.
The Executive Committee is comprised of Messrs. Pietrafesa, Minkstein and
Brinkley, with Mr. Brinkley as Chairman. The Executive Committee exercises the
authority of the Board, to the extent permitted by law, in the management of
our business between meetings of the Board. The Executive Committee of the
Board also serves as the nominating committee in connection with annual
meetings of stockholders.
The Compensation Committee is comprised of Messrs. Bennett and McNicol,
with Mr. Bennett as Chairman. The function of the Compensation Committee is to
review and approve the compensation of executive officers and establish targets
and incentive awards under our incentive compensation plans.
Compensation of the Board of Directors
Sterling Brinkley, the Chairman of the Board and Chairman of our Executive
Committee, will receive fees of $100,000 per year. All other directors who are
not our current employees will receive an annual retainer of $10,000 payable
quarterly, plus an additional fee of $1,500 per meeting, and will be eligible
to receive stock option grants under our Stock Option Plan. See " -- Stock
Option Plan." Committee members, other than Mr. Brinkley, who are not our
current employees will receive an additional fee of $500 for each committee
meeting attended. In addition, our directors may be eligible to participate in
other incentive arrangements from time to time.
We will reimburse directors for travel and other out-of-pocket expenses
incurred in connection with their services as directors.
Compensation Committee Interlocks and Insider Participation
To date, executive compensation has been determined by our Chief Executive
Officer. Upon completion of this offering, the Compensation Committee will make
all compensation decisions. No interlocking relationship exists between the
Board or Compensation Committee and the board of directors or compensation
committee of any other company.
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Compensation of Executive Officers
The following table presents summary information concerning compensation
that we paid or accrued for services rendered in all capacities during the last
three years for our Chief Executive Officer, our other most highly compensated
executive officer and one additional individual who served as one of our
executive officers for a portion of the last completed year. With respect to
the persons and periods covered in the following table, we made no restricted
stock awards and had no long-term incentive plan pay-outs. Our contributions to
our 401(k) retirement plan, as well as premium amounts paid for Mr.
Pietrafesa's life insurance benefits, are included under "All Other
Compensation." 1998 bonus amounts include payments related to performance in
prior years.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------------
All Other
Name and Principal Positions Year Salary Bonus Compensation
- --------------------------------------- ------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Richard C. Pietrafesa, Jr. ............ 1998 $100,000 $255,600 $38,729
President, Chief Executive Officer 1997 100,000 100,000 33,650
and Director 1996 100,000 40,000 34,602
David McDonough ....................... 1998 $ 90,000 $ 30,000 $ 1,698
Vice President of Business Development 1997 90,000 20,000 1,683
1996 90,000 10,000 1,050
Ross W. Stefano(1) .................... 1998 $ 50,000 $155,000 $ 1,689
Chief Operating Officer and Director 1997 100,000 100,000 1,171
1996 100,000 100,000 1,546
</TABLE>
- ------------
(1) Mr. Stefano ceased to be an employee and director on June 22, 1998.
Stock Option Plan
We intend to establish our 1999 Stock Option Plan for key employees and
directors prior to the closing of the offering. Under the Stock Option Plan,
awards of options to purchase shares of Class A Common Stock may be made to our
key employees and directors, including employees who are also our officers or
directors. We may award options to purchase a number of shares equal to 10% of
our outstanding capital stock immediately following the offering. Options
awarded under the Stock Option Plan may be either "incentive stock options," as
that term is defined in Section 422 of the Internal Revenue Code of 1986, as
amended, or nonqualified stock options.
The Stock Option Plan will be administered by our Compensation Committee.
The Compensation Committee will have the authority to establish the terms and
conditions of the options in any manner not inconsistent with the terms of the
Stock Option Plan, adopt any rules it considers appropriate for the
administration of the Stock Option Plan, make interpretations of the Stock
Option Plan that it deems consistent with its provisions, and take any other
action it considers appropriate in connection with the Stock Option Plan. Each
option granted under the Stock Option Plan will be evidenced by an agreement
between The Pietrafesa Corporation and the employee and/or director to whom the
option is granted.
Prior to the adoption of the Stock Option Plan, we have made no provision
for the grant of options to purchase equity interests in The Pietrafesa
Corporation and no executive officer named in the above table holds or has ever
exercised any stock appreciation rights.
At the time of the offering, no options will have been granted to our
executive officers, employees or directors under the Stock Option Plan.
Retirement Plans
Our 401(k) Retirement Plan, as restated and amended, is a qualified
retirement plan available to all of our eligible employees (together, the
"Participants").
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Annual contributions to employees, if any, are declared by the Board at
the end of each year. Pursuant to the Retirement Plan, employees may also make
non-matching contributions. The contribution amounts for the executive officers
named in the Summary Compensation Table are included under "All Other
Compensation."
Contributions to the Retirement Plan are made to a trust where the funds
are invested in available investment options selected by the Participant and
managed by the trustee. The trust may be invested and reinvested in common or
preferred stocks, bonds, mortgages, leases, notes, debentures, mutual funds,
guaranteed investment contracts and other contracts and funds of insurance
companies, other securities and other real or personal property. The account
balances grow until finally distributed. Employee contributions to the
Retirement Plan are 100% vested upon contribution, and employer contributions
to the Retirement Plan vest over five years. Upon the occurrence of a
distributive event, a Participant may elect to receive funds according to the
respective plans' provisions. Pursuant to these provisions, a Participant is
also entitled to rollover eligible distribution amounts into another eligible
retirement plan.
We may amend the Retirement Plan and our associated trusts, retroactively
or prospectively, in our sole discretion, except where prohibited by the
Internal Revenue Code of 1986, as amended, or the Employee Retirement Income
Security Act of 1974, as amended, and so long as such amendment does not
exclude a Participant, reduce a Participant's account, reduce a Participant's
vested percentage or modify the vesting schedule for a Participant eligible
under the Retirement Plan prior to the effective date of the amendment. The
Retirement Plan may be merged or consolidated, or its assets and liabilities
may be transferred, in whole or in part, to another qualified retirement plan.
We also reserve the right to terminate the Retirement Plan and our associated
trusts, or to cease or suspend further contributions, upon which occurrence
accounts of Participants shall become nonforfeitable. The Retirement Plan is a
qualified retirement plan and trust under Section 401 of the Code, ERISA and
all regulations issued thereunder.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1998, MS Pietrafesa, L.P. transferred all of its assets and
liabilities to us in exchange for 100 shares of Class B Common Stock. To
establish our initial capital structure as a public company, immediately prior
to the consummation of the offering, we will issue an additional 3,775,567
shares of Class B Common Stock to our sole stockholder, MS Pietrafesa, L.P., in
exchange for nominal consideration.
We are controlled by Phillip Ean Cohen through his sole ownership of MS
Pietrafesa Acquisition Corporation, the general partner of MS Pietrafesa, L.P.
(the "General Partner"). See "Risk Factors -- The Interests of our Controlling
Stockholder may Conflict with the Interests of the Holders of our Class A
Common Stock." Morgan Schiff, which is owned by Mr. Cohen, is one of the
managing underwriters of the offering. We reimbursed Morgan Schiff for expenses
incurred, principally employee salary, legal and accounting fees of $192,300 in
1998, in connection with our formation and will continue to reimburse Morgan
Schiff for ongoing administrative expenses, principally legal and accounting
services rendered to us. In the future, we may engage Morgan Schiff for
business and financial advisory services. Mr. Brinkley, a consultant to Morgan
Schiff, is our Chairman of the Board. Morgan Schiff is acting as one of the
underwriters in the offering and, in such capacity, will receive an
underwriter's discount equal to 7.0% of the gross proceeds of the shares of
Class A Common Stock allocated to it.
Mr. Brinkley, Richard C. Pietrafesa, Jr., Mr. Minkstein and Joseph J.
Pietrafesa, II own indirect limited partnership interests in MS Pietrafesa,
L.P. through their ownership of limited partnership interests in MSJP, L.P., a
limited partner of MS Pietrafesa, L.P. See "Principal Stockholders." In
addition, Messrs. Pietrafesa own indirect limited partnership interests in MS
Pietrafesa, L.P. through their ownership of limited partnership interests in
RJP Investment Assoc., L.P. ("RJP"), a limited partner of MS Pietrafesa, L.P.
See "Principal Stockholders." In the event that the limited partners of MS
Pietrafesa, L.P. receive a specified minimum investment return, RJP, and, as a
result, Messrs. Pietrafesa will be allocated by MS Pietrafesa, L.P. shares of
Class B Common Stock and/or other property that would otherwise be allocated to
the other limited partners. MS Pietrafesa, L.P.'s Partnership Agreement
contains similar provisions in favor of the General Partner, which is owned by
Mr. Cohen. None of the foregoing provisions require that we issue additional
shares of Class A or Class B Common Stock or other securities of any kind.
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We lease a retail store facility in Syracuse, New York from Robert D.
Pietrafesa and Richard C. Pietrafesa, uncle and father, respectively, of our
President and Chief Executive Officer, under a 10-year lease expiring in 2007
requiring rental payments totaling $145,000 per year. A portion of this retail
store facility is subleased to a third party. The sublease will expire in 2000
and provides minimum rental income of $30,000 per year.
We source customer orders, including a substantial volume of the aggregate
orders for Jos.A.Bank, with an affiliate, SourceOne. SourceOne is owned by the
General Partner. SourceOne operates two manufacturing facilities in Baltimore,
Maryland of 54,000 and 125,000 square feet. SourceOne leases, directly and
through a sublease, these facilities from Jos.A.Bank. All production performed
for us by SourceOne is performed on a "cost" basis, without mark-up. None of
our employees receive compensation from SourceOne.
Morgan Schiff, an affiliate of the General Partner, provides financial
advisory and strategic consulting services to us under an agreement requiring
monthly retainer payments of $25,000. The agreement also requires us to pay
specified fees to Morgan Schiff when we consummate various acquisitions,
capital raising and financing transactions. The agreement may be terminated
annually by either party upon 30 days notice. Morgan Schiff has waived all
retainer payments otherwise payable to it for financial advisory services for
1996, 1997, 1998 and 1999, as well as all fees associated with the Diversified
Apparel, Global Sourcing Network, Components and Windsong acquisitions, the PNC
Bank credit facility and this offering. No such services were provided to us by
Morgan Schiff during those periods and in respect of those transactions, other
than investment banking and financial analyst services for which Morgan Schiff
was paid, and we received no benefit under the agreement during those periods.
Our agreement with Morgan Schiff does not compel Morgan Schiff to provide
any actual services in return for the $25,000 monthly retainer payment.
However, it was in our interest to enter into the agreement at the time of our
acquisition by MS Pietrafesa, L.P., an affiliate of Morgan Schiff, because it
was anticipated that we would be financially successful and that Morgan Schiff
would provide meaningful services in the form of merger and acquisition advice
and assistance in private capital raising activities and that the cost of those
services would be less than or equal to the cost of procuring those services
from an unaffiliated third party. However, after we were acquired in the early
1990s, our revenues increased rapidly, but our profitability declined. As a
result, during the period from 1995 through 1997, we divested our non-core
manufacturing assets, refinanced our secured lending arrangements and
negotiated the forgiveness of our subordinated indebtedness. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview." Financial analysis related to these transactions was provided by our
financial management and consultants and not by Morgan Schiff.
In April 1998, MS Pietrafesa, L.P. made a distribution of $207,000 to its
partners in accordance with its Amended and Restated Agreement of Limited
Partnership dated January 1, 1996, for the payment of income taxes incurred by
such partners on the portion of partnership income attributable to their
respective interests during 1997. In May 1999, we paid $1.5 million to MS
Pietrafesa, L.P. from amounts borrowed under the PNC Bank credit facility to
cover the tax distribution to be made by MS Pietrafesa, L.P. to its partners in
accordance with its Partnership Agreement for the payment of income taxes
incurred by such partners on the portion of partnership income attributable to
their respective interests during the period from January 1, 1998 through
September 30, 1998. A portion of the net proceeds of the offering will be
applied toward the repayment of the PNC Bank credit facility.
We reimburse, on a per-flight basis, operating expenses of an aircraft
owned by Twins Aviation, Inc., a corporation owned by our President and Chief
Executive Officer. We use this aircraft on a regularly scheduled, weekly basis
to fly staff to production meetings in New York City, as well as for customer
and contractor visits. Such reimbursements amounted to $225,000 for the year
ended December 31, 1996, $223,000 for the year ended December 31, 1997 and
$454,000 for the year ended December 31, 1998.
We believe that each of the affiliate transactions described above are on
terms no less favorable than would be generally available to us from
unaffiliated third parties. After the closing of the offering, all related
party transactions will be approved by our independent, disinterested
directors. See also "Management," "Principal Stockholders" and "Underwriting."
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PRINCIPAL STOCKHOLDERS
The table below sets forth information as of June 30, 1999 regarding the
beneficial ownership of Class A Common Stock and Class B Common Stock, as well
as the percentage ownership of our Class A Common Stock and Class B Common
Stock. Shares of Class B Common Stock are convertible into Class A Common Stock
on a one-for-one basis, as described under "Description of Capital Stock."
Percentage ownership numbers are based on shares of Class A Common Stock and
shares of Class B Common Stock outstanding immediately following the offering
and, in the case of Class B Common Stock, immediately prior to the offering.
Although shares of Class B Common Stock may be converted into shares of Class A
Common Stock at any time, the table below does not reflect the shares of Class
A Common Stock issuable to holders of Class B Common Stock upon conversion as
being beneficially owned by those holders.
Information is provided as to each of our directors, the executive
officers named in the Summary Compensation Table under "Management --
Compensation of Executive Officers," each person we know to own beneficially
more than 5% of the outstanding shares of Class A Common Stock or Class B
Common Stock and all of our directors and executive officers as a group. Except
as described below, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
MS Pietrafesa Acquisition Corporation is the general partner of MS
Pietrafesa, L.P. and has the sole right to vote the shares of Class B Common
Stock owned by MS Pietrafesa, L.P. and to direct the disposition of such
shares. Philip Ean Cohen is the sole stockholder of MS Pietrafesa Acquisition
Corporation. See "Risk Factors -- The Interests of our Controlling Stockholder
may Conflict with the Interests of the Holders of our Class A Common Stock."
MSJP, L.P. and RJP Investments Assoc., L.P. indirectly own shares of Class
B Common Stock through their respective ownership of limited partnership
interests in MS Pietrafesa, L.P. Neither MSJP nor RJP has any right to vote or
to direct the disposition of their respective shares. Shares of Class B Common
Stock indicated below as beneficially owned by MSJP and RJP exclude additional
shares of Class B Common Stock that MSJP and RJP are entitled to receive
pursuant to MS Pietrafesa, L.P.'s Partnership Agreement. See "Certain
Relationship and Related Transactions."
Shares of Class B Common Stock indicated below as beneficially owned by
Sterling B. Brinkley, Jr. and Thomas A. Minkstein are owned indirectly through
their ownership of limited partnership interests in MSJP, L.P. Such individuals
have no right to vote or to direct the disposition of these shares. Shares of
Class B Common Stock indicated below as beneficially owned by Richard C.
Pietrafesa, Jr. and Joseph J. Pietrafesa II are owned indirectly through their
ownership of limited partnership interests in MSJP, L.P. and RJP Investments
Assoc., L.P. Such individuals have no right to vote or to direct the
disposition of these shares.
<TABLE>
<CAPTION>
Shares of Class A Shares of Class B Percentage of
Common Stock Common Stock Class A and
----------------------- -------------------------- Class B
Beneficial Owner Number Percentage Number Percentage Common Stock
- ----------------------------------------------- -------- ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
MS Pietrafesa, L.P. ........................... -- -- 3,775,667 100.0% 46.6%
MSJP, L.P. .................................... -- -- 3,151,549 83.5% 38.9%
MS Pietrafesa Acquisition Corporation ......... -- -- 3,775,667 100.0% 46.6%
Phillip Ean Cohen ............................. -- -- 3,775,667 100.0% 46.6%
350 Park Avenue, 8th Floor
New York, NY 10022
Richard C. Pietrafesa, Jr. .................... -- -- 504,683 13.4% 6.2%
Thomas A. Minkstein ........................... -- -- 94,231 2.5% 1.2%
David McDonough ............................... -- -- -- -- --
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Shares of Class A Shares of Class B Percentage of
Common Stock Common Stock Class A and
------------------------- ------------------------ Class B
Beneficial Owner Number Percentage Number Percentage Common Stock
- ----------------------------------------- ---------- ------------ --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
RJP Investments Assoc., L.P. ............ -- -- 586,361 15.5% 7.2%
7400 Morgan Road
Liverpool, NY 13090
Sterling B. Brinkley, Jr. ............... -- -- 245,077 6.5% 3.0%
350 Park Avenue, 8th Floor
New York, NY 10022
Mark C. Pickup .......................... -- -- -- -- --
6734 Corte Segunda
Martinez, CA 94553
Robert J. Bennett ....................... -- -- -- -- --
M&T Bank Corp.
101 South Salina Street
Syracuse, NY 13202
Paul M. McNicol ......................... -- -- 47,131 1.3% *
305 Oakley Court
Mill Neck, NY 11765
Ross W. Stefano ......................... -- -- -- -- --
30 The Orchard
Fayetteville, NY 13066
Windsong, Inc. .......................... 333,333 7.7% -- -- 4.1%
1599 Post Road East
Westport, CT 06880
All executive officers and directors as a
group (eight persons) .................. -- -- 891,122 23.6% 11.0%
</TABLE>
- ------------
* Represents less than 1.0%.
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DESCRIPTION OF CAPITAL STOCK
General
The following summary describes the material provisions of our capital
stock and is subject to, and qualified in its entirety by, our Certificate of
Incorporation and By-laws that are included as exhibits to the Registration
Statement of which this prospectus is a part and by the provisions of
applicable law.
We have filed our Certificate of Incorporation to (1) authorize 12,000,000
shares of Class A Common Stock, 10,000,000 shares of Class B Common Stock and
5,000,000 shares of Preferred Stock; and (2) set forth the rights and
privileges of the Class A Common Stock, Class B Common Stock and Preferred
Stock as described below. Upon completion of the offering, 4,333,333 shares of
Class A Common Stock, 3,775,667 shares of Class B Common Stock and no shares of
Preferred Stock will be issued and outstanding. The discussion herein describes
our capital stock, Certificate of Incorporation and By-laws in effect upon
effectiveness of the Registration Statement of which this prospectus is a part.
Class A and Class B Common Stock
The holders of shares of Class A Common Stock and Class B Common Stock
have identical rights and privileges on a per share basis, except as set forth
below. The holders of shares of Common Stock have no preemptive rights to
maintain their respective percentage ownership interest in or other
subscription rights for our other securities. Shares of Common Stock are not
redeemable or subject to further calls or assessments. The shares of Common
Stock to be outstanding after the offering, including the shares of Class A
Common Stock to be issued hereby, when paid for and issued, will be fully paid
and non-assessable. Holders of shares of Common Stock are entitled to share pro
rata in dividends, if any, as may be declared by our Board of Directors out of
funds legally available therefor; provided, however, that any dividend upon the
Common Stock that is payable in Common Stock shall be paid only in Class A
Common Stock to the holders of Class A Common Stock, but is payable in Class A
or Class B Common Stock to the holders of Class B Common Stock. Upon our
liquidation, dissolution and winding up, holders of shares of Common Stock are
entitled to share ratably in the net assets available for distribution to such
holders. The consent of the holder or holders of a majority of the Class B
Common Stock is required to authorize the issuance of additional Class B Common
Stock.
Limited Voting Rights. The holders of Class A Common Stock have the right
as a class to elect that minimum number of directors constituting 25% of the
members of the Board, which presently represents two of the six directors. The
minimum number of directors shall be rounded to the next highest whole number
if such percentage is not equal to a whole number of directors. Directors
elected by the holders of Class A Common Stock will first be elected at the
annual meeting of stockholders to be held in 1999.
Other than the right to elect directors and as otherwise required by
Delaware law, the holders of Class A Common Stock will have very limited voting
rights until all of the shares of Class B Common Stock are converted into
shares of Class A Common Stock or otherwise cease to be issued and outstanding.
At such time, the holders of Class A Common Stock will be entitled to vote on
all matters submitted to a vote of the stockholders and will be entitled to one
vote per share held. Generally, the vote of the majority of the shares
represented at a meeting of the stockholders and entitled to vote is sufficient
for actions that require a vote of the stockholders. Our Certificate of
Incorporation does not provide for cumulative voting. Because sole voting power
has been granted to the holders of Class B Common Stock, except as stated above
and as otherwise required by Delaware law, substantially all corporate actions
can be taken without any vote by the holders of the Class A Common Stock
including, without limitation:
o amending our Certificate of Incorporation or By-laws, including
authorizing the issuance of additional shares of Class A Common Stock;
o authorizing stock options, restricted stock and other compensation plans
for employees, executives and directors;
o authorizing a merger or disposition or change in control;
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<PAGE>
o approving indemnification of our directors, officers and eligible
employees; and
o approving conflict of interest transactions involving our affiliates
which are approved by our disinterested directors.
The holders of the outstanding shares of Class A Common Stock will be
entitled, however, to vote as a class upon any proposed amendment to our
Certificate of Incorporation which would increase or decrease the par value of
the shares of Class A Common Stock, or alter or change the powers, preferences
or special rights of the shares of the Class A Common Stock so as to affect
them adversely. See "Risk Factors -- The Interests of our Controlling
Stockholder may Conflict with the Interests of the Holders of our Class A
Common Stock."
All of the shares of the Class B Common Stock are owned by MS Pietrafesa,
L.P. and can be voted by the General Partner, which is wholly-owned by Mr.
Cohen. See "Principal Stockholders" and "Underwriting."
Conversion Rights. At the option of any holder of shares of Class B Common
Stock, such holder may, at any time and from time to time, convert all or part
of such holder's shares of Class B Common Stock into an equal number of shares
of Class A Common Stock. The shares of Class B Common Stock are also subject to
mandatory conversion into an equal number of shares of Class A Common Stock, in
whole or in part, at any time and from time to time, at the option of the
holder or holders of a majority of the outstanding shares of Class B Common
Stock. If, and only if, all the outstanding shares of Class B Common Stock
converted into Class A Common Stock or are otherwise no longer outstanding, the
holders of the Class A Common Stock will have general voting power in the
election of all members of the Board and in all other matters upon which our
stockholders are entitled to vote. Holders of shares of Class A Common Stock
have no right to convert Class A Common Stock into any of our other securities.
Preferred Stock
Our Certificate of Incorporation authorizes 5,000,000 shares of Preferred
Stock. Upon the affirmative vote or the written consent of the holders of a
majority of the outstanding shares of Class B Common Stock, shares of Preferred
Stock may be issued in one or more series. Each such series will have such
distinctive designation as stated in resolutions adopted by the Board.
Authority is expressly vested in the Board to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series of the designation
of such series, without further vote or action by the stockholders. The
Preferred Stock may be granted voting powers provided, however that (1) so long
as any Class B Common Stock is outstanding, the holders of the Class B Common
Stock will always have the absolute right to elect a majority of the Board and
(2) if voting powers are granted, the holders of shares of Preferred Stock will
be entitled to vote together with the holders of the Class A Common Stock as a
class on all matters on which holders of Class A Common Stock are entitled to
vote. At present, we have no plans to issue any shares of the Preferred Stock.
Indemnification and Limitation of Liability
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law as currently or hereafter in effect.
Delaware law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duty as a director,
except for liability
(1) for breach of their duty of loyalty to the corporation or its
stockholders;
(2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the General Corporation Law
of the State of Delaware (the "DGCL"); or
(4) for any transaction from which the director derives an improper
personal benefit.
Our Certificate of Incorporation provides for the mandatory
indemnification of, and advancement of expenses to our directors and officers.
74
<PAGE>
Section 203 of the Delaware General Corporation Law
We are subject to Section 203 of the DGCL, which prevents an "interested
stockholder" from engaging in a "business combination" with a publicly-held
Delaware corporation for three years following the date such person became an
interested stockholder, unless
(1) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
(2) upon consummation of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced; or
(3) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of 66 2/3% of the
outstanding voting stock of the corporation not owned by the interested
stockholder.
The DGCL defines an "interested stockholder" as a person owning 15% or
more of a corporation's outstanding voting stock. A "business combination"
includes mergers, stock or asset sales and other transactions resulting in a
financial benefit to the interested stockholder.
The disproportionate voting rights between the Class A Common Stock and
the Class B Common Stock and the provisions of Section 203 of the DGCL could
have the effect of delaying, deferring or preventing a change in control. See
"Risk Factors -- The Interests of our Controlling Stockholder may Conflict with
the Interests of the Holders of our Class A Common Stock."
Transfer Agent
The transfer agent and registrar for the Class A Common Stock is American
Stock Transfer & Trust Company.
75
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have a total of 4,333,333 shares
of Class A Common Stock, 4,933,333 if the Underwriters' over-allotment option
is exercised in full, and 3,775,667 shares of Class B Common Stock outstanding.
All shares of Class A Common Stock sold in the offering and, after the
expiration of the 180 day lock-up period, described below, the 58,333 shares of
Class A Common Stock being registered for resale, from time to time, by
Windsong, Inc. will be freely tradable under the Securities Act unless they are
purchased or held by "affiliates" of ours as defined in Rule 144. The balance
of the shares of Class A Common Stock issued to Windsong, Inc. in connection
with the Windsong acquisition will be "restricted securities" within the
meaning of Rule 144 under the Securities Act and may, after the expiration of
the 180 day lock-up period, be sold in compliance with Rule 144 under the
Securities Act, subject to additional resale restrictions under the Windsong
acquisition agreement. In addition, all shares of Class B Common Stock and the
3,775,667 shares of Class A Common Stock issuable upon conversion thereof, all
of which are subject to the 180 day lock-up period, will be "restricted"
securities within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemption provided by
Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned "restricted" shares for at least one year, including
a person who may be deemed our affiliate, is entitled to sell within any
three-month period a number of shares of Class A Common Stock that does not
exceed the greater of 1% of the then-outstanding shares of our Class A Common
Stock or the average weekly trading volume of the Class A Common Stock on the
Nasdaq National Market during the four calendar weeks preceding such sale.
Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice and the availability of current public information about us. A person
who is not our affiliate and has not been such at any time during the 90 days
preceding a sale, and who has beneficially owned "restricted" shares for at
least two years, would be entitled to sell such shares immediately following
the offering without regard to the volume limitations, manner of sale
provisions or notice or other requirements of Rule 144 of the Securities Act.
However, the transfer agent, American Stock Transfer & Trust Company, may
require an opinion of counsel that a proposed sale of "restricted" shares comes
within the terms of Rule 144 of the Securities Act prior to effecting a
transfer of such shares. Such opinion would be provided by and at the cost of
the transferor.
Our officers and directors and certain other stockholders, including the
principal officers of Diversified Apparel, Global Sourcing Network, Components
and Windsong, have agreed, pursuant to the underwriting agreement and lock-up
agreement, that they will not sell any shares of our capital stock owned by
them, either publicly or privately, without the prior consent of Janney
Montgomery Scott Inc., as representative of the underwriters, for a period of
180 days from the date of this prospectus. See "Underwriting."
MS Pietrafesa, L.P. has offered its limited partners the right to withdraw
from the partnership under its Partnership Agreement and receive a distribution
of Class A Common Stock. Such right to withdraw may be exercised by a limited
partner at any time between the consummation of the offering and 14 days before
the expiration of the lock-up period. The withdrawal will be effective at the
end of the month in which the lock-up period expires. The shares acquired
through a limited partner's withdrawal will be subject to the resale
limitations under Rule 144.
Limited partners electing to withdraw from MS Pietrafesa, L.P. will
generally be deemed to have held the shares of Class A Common Stock distributed
to them from the date they acquired their partnership interest. Accordingly,
original investors in MS Pietrafesa, L.P. will be entitled to sell such shares
pursuant to Rule 144 immediately upon distribution of such shares from MS
Pietrafesa, L.P., subject to volume, manner of sale and other limitations.
Prior to the offering, there has been no public market for either class of
our Common Stock and no predictions can be made of the effect, if any, that the
sale or availability for sale of additional shares of our Common Stock or our
other securities, or the development of a public trading market for the Class B
Common Stock, will have on the market price of the Class A Common Stock.
Nevertheless, sales of substantial amounts of shares of Class A Common Stock in
the public market, the perception that such sales
76
<PAGE>
could occur, the development of a public trading market for the Class B Common
Stock or the issuance of other securities, could adversely affect the market
price of the Class A Common Stock and could impair our future ability to raise
capital through an offering of our equity securities.
UNDERWRITING
Subject to the terms of an underwriting agreement among Janney Montgomery
Scott Inc., First Security Van Kasper, Morgan Schiff & Co., Inc., as
representatives of the underwriters and The Pietrafesa Corporation, the
underwriters have each severally agreed to purchase from us and we have agreed
to sell to the underwriters the number of shares of Class A Common Stock set
forth opposite their respective names below. The underwriters will not be
purchasing any of the shares which may be offered, from time to time, by the
selling stockholder. Pursuant to the terms of the underwriting agreement, the
commitments of non-defaulting underwriters may be increased.
Underwriter Number of Shares
--------------------------------------- ----------------
Janney Montgomery Scott Inc. ..........
First Security Van Kasper .............
Morgan Schiff & Co., Inc. ............. ---------
Total ................................ 4,000,000
=========
The underwriting agreement provides that obligations of the underwriters
to pay for and accept delivery of the Class A Common Stock are subject to the
approval of specific conditions. The underwriters are obligated to take and pay
for all of the shares of the Class A Common Stock offered by this prospectus,
other than shares of Class A Common Stock covered by the over-allotment option
described below, if any shares are taken.
The underwriters propose to offer the shares of Class A Common Stock to
the public initially at the offering price per share shown on the cover page of
this prospectus and to dealers at such price, less a concession not in excess
of $ per share. The underwriters may allow, and such dealers may reallow,
a concession not in excess of $ per share to other dealers. After this
offering of the Class A Common Stock, the public offering price and the
concessions may be changed by the Representatives.
In addition to the discounts and commissions shown on the cover page of
this prospectus, we will pay to Janney Montgomery Scott Inc. a financial
advisory fee of $100,000 upon completion of the offering. In addition, we have
agreed to pay to Klehr, Harrison, Harvey, Branzburg & Ellers LLP, underwriters'
counsel, legal fees and expenses incurred in connection with the preparation of
a preliminary Blue Sky memorandum and the qualification of the securities for
sale in any state and in connection with securing any review or approvals by
the National Association of Securities Dealers.
We have granted to the underwriters an option for 30 days after the date
of this prospectus to purchase up to 600,000 additional shares of Class A
Common Stock, at the same price per share as the public offering price, less
the underwriting discounts and commissions shown on the cover page of this
prospectus. The underwriters may exercise the option only to cover
over-allotments in the sale of the shares of Class A Common Stock offered by
this prospectus. To the extent the underwriters exercise this option, each of
the underwriters has a firm commitment, subject to certain conditions, to
purchase a number of the additional shares of Class A Common Stock
proportionate to such underwriter's initial commitment as indicated in the
preceding table.
In connection with this offering and in compliance with applicable
securities laws, the underwriters may over-allot, or sell more shares of Class
A Common Stock than is shown on the cover page of this prospectus, and may
effect transactions on the Nasdaq National Market which stabilize, maintain or
otherwise affect the market price of the Class A Common Stock at prices above
those which might otherwise prevail in the open market. Such transactions may
include placing bids for the Class A Common Stock or effecting purchases of the
Class A Common Stock for the purpose of pegging, fixing or maintaining the
price of the Class A Commons Stock or for the purpose of reducing a short
position created in connection with the offering. A
77
<PAGE>
short position may be covered by exercise of the over-allotment option
described above in place of or in addition to open market purchases. The
underwriters are not required to engage in any of these activities and if the
underwriters commence any of these activities, they may discontinue them at any
time.
We and the underwriters make no representation or prediction as to the
direction or magnitude of any effect that the transactions described above may
have on the price of the Class A Common Stock. In addition, we and the
underwriters make no representation that the underwriters will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
The underwriters do not intend to confirm sales of the Class A Common
Stock to any accounts over which they exercise discretionary authority.
Our directors and executive officers and the sole holder of Class B Common
Stock have agreed that they will not, directly or indirectly, sell or otherwise
dispose of any Class A Common Stock or Class B Common Stock for a period of 180
days after the completion of this offering, without Janney Montgomery Scott
Inc.'s prior written consent. Together, this group directly and indirectly
owns, prior to the offering, all of the outstanding shares of the Class B
Common Stock.
We have agreed to indemnify the underwriters and persons who control the
underwriters against, or contribute to losses arising out of, some liabilities
that may be incurred in connection with this offering, including liabilities
under the Securities Act of 1933, as amended.
Morgan Schiff, one of the underwriters, is owned by Philip Ean Cohen. Mr.
Cohen has voting power over all of our outstanding Class B Common Stock and,
accordingly, has the power to determine virtually all matters submitted to our
stockholders and to appoint 75% of the members of our board of directors. See
"Certain Relationships and Related Transactions" and "Description of Capital
Stock." As a result of our affiliation with Morgan Schiff, the offering is
being conducted in accordance with the provisions of Rule 2720 of the National
Association of Securities Dealers, Inc. Conduct Rules. Rule 2720 requires that
the initial public offering price of the shares be no higher than the price
recommended by a "qualified independent underwriter" meeting specified
standards. In accordance with this requirement, Janney Montgomery Scott Inc. is
assuming the responsibilities of acting as a qualified independent underwriter
in pricing the offering and conducting due diligence. The price of the shares
will be no higher than the price recommended by Janney Montgomery Scott Inc.
There is no established trading market for the shares. The offering price
for the shares has been determined through negotiations between us and the
Representatives, based on the following factors:
o prevailing market conditions;
o our past and present operations;
o market capitalizations and stages of development of other companies which
we and the Representatives believe to be comparable to us;
o an assessment of our management;
o the history of, and prospects for, our business and the industry in which
it competes; and
o our prospects for future earnings.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed
upon by Roberts, Sheridan & Kotel, a Professional Corporation, which firm
provides legal services from time to time for Morgan Schiff and its affiliates.
The validity of the shares of Class A Common Stock will be passed upon for the
underwriters by Klehr, Harrison, Harvey, Branzburg & Ellers LLP.
EXPERTS
The Consolidated Financial Statements and schedule of The Pietrafesa
Corporation at December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998, appearing in this
78
<PAGE>
prospectus and the registration statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The Financial Statements of Components at December 31, 1997 and 1998, and
for each of the two years in the period ended December 31, 1998 included
elsewhere in this prospectus and the related financial statement schedules
included elsewhere in the registration statement have been audited by Lawrence
B. Goodman & Co., P.A., independent auditors, as stated in their reports
appearing herein and elsewhere in the Registration Statement, and are included
in reliance upon such report given upon their authority of such firm as experts
in accounting and auditing.
The Financial Statements of Global Sourcing Network at December 31, 1997
and 1998, and for each of the two years in the period ended December 31, 1998
included elsewhere in this prospectus and the related financial statement
schedules included elsewhere in the registration statement have been audited by
Pasquale & Bowers, LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the Registration Statement, and are included
in reliance upon the reports of such firm, given upon their authority as
experts in accounting and auditing.
The Financial Statements of Windsong at December 31, 1997 and 1998, and
for each of the three years in the period ended December 31, 1998 included
elsewhere in this prospectus and the related financial statement schedules
included elsewhere in the registration statement have been audited by
Weissbarth, Altman & Michaelson LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the Registration Statement, and are
included in reliance upon the reports of such firm, given upon their authority
as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Commission a Registration Statement on Form S-1,
including all amendments, exhibits, annexes and schedules thereto, pursuant to
the Securities Act, and the rules and regulations promulgated thereunder, with
respect to the Class A Common Stock being offered in the offering. This
Prospectus does not contain all the information set forth in the Registration
Statement. For further information with respect to The Pietrafesa Corporation
and the securities offered hereby, reference is made to the Registration
Statement. Statements made in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the document or matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement, may be inspected, without charge, and copies may be
obtained, at prescribed rates, at the public reference facilities of the
Commission maintained at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Copies of the Registration Statement may also be
inspected, without charge, at the Commission's regional office at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Chicago, Illinois 60661. In addition, copies of the
Registration Statement may be obtained by mail at prescribed rates, from the
Commission's Public Reference Section at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Commission
maintains a Web site at www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
Upon completion of the offering, we will become subject to the
informational requirements of the Exchange Act, and in accordance therewith
will be required to file periodic reports and other information with the
Commission. Such periodic reports, proxy statements and other information will
be available for inspection and copying at the public reference facilities,
regional offices and Web site referred to above.
We intend to furnish our stockholders with annual reports containing
consolidated financial statements audited by independent certified public
accountants.
79
<PAGE>
THE PIETRAFESA CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
THE PIETRAFESA CORPORATION
Report of Independent Auditors .......................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 ............................ F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1997
and 1998 ............................................................................... F-5
Consolidated Statements of Changes in Partners' Capital and Shareholder's Equity for the
years ended December 31, 1996, 1997 and 1998 ........................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998 ................................................................................... F-7
Notes to Consolidated Financial Statements .............................................. F-8
Consolidated Balance Sheets as of December 31, 1998 and at March 31, 1999 (unaudited) ... F-16
Consolidated Statements of Operations for the three months ended March 31, 1998 and 1999
(unaudited) ........................................................................... F-17
Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1999
(unaudited) ........................................................................... F-18
Notes to Quarterly Consolidated Financial Statements .................................... F-19
GLOBAL SOURCING NETWORK, LTD.
Independent Auditors' Report ............................................................ F-21
Balance Sheets as of December 31, 1997 and 1998 ......................................... F-22
Statements of Operations and Accumulated Deficit for the years ended December 31, 1997
and 1998. .............................................................................. F-23
Statements of Cash Flows for the years ended December 31, 1997 and 1998 ................. F-24
Notes to Financial Statements ........................................................... F-25
Balance Sheets as of December 31, 1998 and March 31, 1999 (unaudited) ................... F-28
Statements of Operations and Accumulated Deficit for the three months ended March 31,
1998 and 1999 (unaudited) .............................................................. F-29
Statements of Cash Flows for the three months ended March 31, 1998 and 1999 (unaudited) . F-30
Notes to Quarterly Financial Statements ................................................. F-31
COMPONENTS BY JOHN McCOY, INC.
Report of Independent Auditors .......................................................... F-32
Balance Sheets as of December 31, 1997 and 1998 ......................................... F-33
Statements of Income and Retained Earnings for the years ended December 31, 1997 and
1998 ................................................................................... F-34
Statements of Cash Flows for the years ended December 31, 1997 and 1998 ................. F-35
Notes to Financial Statements ........................................................... F-36
Balance Sheets as of December 31, 1998 and March 31, 1999 (unaudited) ................... F-39
Statements of Income and Retained Earnings for the three months ended March 31, 1998 and
1999 (unaudited) ....................................................................... F-40
Statements of Cash Flows for the three months ended March 31, 1998 and 1999 (unaudited) . F-41
Notes to Quarterly Financial Statements ................................................. F-42
WINDSONG, INC.
Independent Auditors' Report ............................................................ F-43
Balance Sheets as of December 31, 1997 and 1998 ......................................... F-44
Statements of Income and Retained Earnings (Accumulated Deficit) for the years ended
December 31, 1996, 1997 and 1998 ....................................................... F-46
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 ........... F-47
Notes to Financial Statements ........................................................... F-50
Balance Sheets as of December 31, 1998 and March 31, 1999 (unaudited) ................... F-59
Statements of Income and Retained Earnings (Accumulated Deficit) for the three months
ended March 31, 1998 and 1999 (unaudited) .............................................. F-60
Statements of Cash Flows for the three months ended March 31, 1998 and 1999 (unaudited) . F-61
Notes to Quarterly Financial Statements ................................................. F-62
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors
The Pietrafesa Corporation
We have audited the accompanying consolidated balance sheets of The
Pietrafesa Corporation (formerly MS Pietrafesa, L.P.) as of December 31, 1997
and 1998, and the related consolidated statements of operations, changes in
partners' capital and shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of The Pietrafesa Corporation at December 31, 1997 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Syracuse, New York
February 12, 1999, except as to Note 12
as to which the date is July 15, 1999
F-2
<PAGE>
THE PIETRAFESA CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of
December 31,
-------------------------
1997 1998
----------- -----------
(In thousands)
<S> <C> <C>
Assets
Current assets
Cash .............................................................. $ 3 $ 14
Accounts receivable, less allowance for doubtful accounts of $35 in
1997 and 1998 ................................................... 4,066 7,967
Inventories:
Finished goods .................................................. 3,510 4,273
Work-in-process ................................................. 1,902 3,865
Raw materials ................................................... 3,319 4,979
-------- --------
8,731 13,117
Prepaid expenses .................................................. 143 193
Deferred taxes .................................................... -- 938
-------- --------
Total current assets ............................................... 12,943 22,229
Property, plant, and equipment, at cost:
Land .............................................................. 297 297
Buildings and improvements ........................................ 3,157 3,215
Machinery and equipment ........................................... 6,199 6,485
Furniture and fixtures ............................................ 699 708
Construction in progress .......................................... -- 290
-------- --------
10,352 10,995
Accumulated depreciation .......................................... 3,806 4,409
-------- --------
6,546 6,586
Other assets ....................................................... 184 560
-------- --------
$ 19,673 $ 29,375
======== ========
</TABLE>
F-3
<PAGE>
THE PIETRAFESA CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of
December 31,
-------------------------
1997 1998
---------- ------------
(In thousands,
except share data)
<S> <C> <C>
Liabilities, partners' capital and shareholder's equity
Current liabilities:
Accounts payable ................................................... $ 6,610 $ 7,893
Other current liabilities .......................................... 1,204 3,054
Tax distribution payable ........................................... -- 1,516
Current maturities of long-term debt ............................... 487 527
-------- --------
Total current liabilities ........................................... 8,301 12,990
Deferred tax liability .............................................. -- 1,441
Long-term debt, net of current maturities ........................... 8,663 12,561
Partners' capital and shareholder's equity:
Partners' capital:
General partner .................................................. 27 --
Limited partners ................................................. 2,682 --
-------- --------
Total partners' capital ......................................... 2,709 --
Shareholder's equity:
Preferred stock, $.001 par value:
Authorized shares -- 5,000,000 ..................................
Issued shares -- none ...........................................
Common stock:
Authorized shares -- 12,000,000 Class A, $.001 par value.........
-- 10,000,000 Class B, $.0002 par value........
Issued shares -- 3,775,667 Class B .............................. -- --
Additional paid-in capital ....................................... -- 2,941
Retained earnings (accumulated deficit) .......................... -- (558)
-------- --------
Total shareholder's equity ...................................... 2,383
-------- --------
$ 19,673 $ 29,375
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
THE PIETRAFESA CORPORATION
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the
Year Ended December 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -------------
(In thousands, except share and per share
data)
<S> <C> <C> <C>
Net revenues ..................................................... $ 44,000 $ 37,582 $ 56,763
Cost of sales .................................................... 34,769 29,218 47,062
-------- -------- ----------
Gross profit ..................................................... 9,231 8,364 9,701
Operating expenses:
Selling, general, and administrative expenses ................... 7,427 6,150 5,536
Impairment loss on fixed assets ................................. 170 -- --
Depreciation and amortization expense (excludes amounts in
cost of sales) ................................................ 165 151 222
-------- -------- ----------
7,762 6,301 5,758
-------- -------- ----------
Operating income ................................................. 1,469 2,063 3,943
Interest expense ................................................. 1,962 1,507 1,209
Public offering costs ............................................ -- -- 823
-------- -------- ----------
Income (loss) before income taxes and extraordinary item ......... (493) 556 1,911
Provision for income taxes ....................................... -- -- 514
-------- -------- ----------
Income (loss) before extraordinary item .......................... (493) 556 1,397
Extraordinary item ............................................... 3,150 -- --
-------- -------- ----------
Net income ....................................................... $ 2,657 $ 556 $ 1,397
======== ======== ==========
Pro forma net income data (Note 2):
Income before income taxes, as reported above ................... $ 1,911
Pro forma provision for income taxes ............................ 764
----------
Pro forma net income ............................................ $ 1,147
==========
Pro forma basic and diluted earnings per share (Notes 2
and 12) ......................................................... $ 0.29
==========
Pro forma basic and diluted weighted average number of
common shares outstanding ....................................... 3,900,667
==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
THE PIETRAFESA CORPORATION
Consolidated Statements of Changes in Partners' Capital
and Shareholder's Equity
For the Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Additional
General Limited Common Paid-in Retained
Partner Partners Stock Capital Earnings Total
----------- ---------- -------- ----------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 .................. $ (6) $ (698) $ -- $ -- $ -- $ (704)
Year ended December 31, 1996
Net income .................................... 26 2,631 -- -- -- 2,657
Capital contribution .......................... 2 198 -- -- -- 200
------ -------- ---- ------- ------- --------
Balance at December 31, 1996 .................. 22 2,131 -- -- -- 2,153
Year ended December 31, 1997
Net income .................................... 5 551 -- -- -- 556
------ -------- ---- ------- ------- --------
Balance at December 31, 1997 .................. 27 2,682 -- -- -- 2,709
Year ended December 31, 1998
Net income (loss) ............................. 19 1,936 -- -- (558) 1,397
Distributions to partners for income taxes..... (17) (1,706) -- -- -- (1,723)
Incorporation of the Company .................. (29) (2,912) -- 2,941 -- --
Issuance of 3,775,567 shares of Class B
Common Stock for par value
(Note 12) .................................... -- -- -- -- -- --
------ -------- ---- ------- ------- --------
Balance at December 31, 1998 .................. $ -- $ -- $ -- $ 2,941 $ (558) $ 2,383
====== ======== ==== ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
THE PIETRAFESA CORPORATION
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the
Year ended December 31,
----------------------------------------------
1996 1997 1998
-------------- -------------- ------------
(In thousands)
<S> <C> <C> <C>
Operating activities
Net income .................................................. $ 2,657 $ 556 $ 1,397
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Extraordinary item ........................................ (3,150) -- --
Depreciation and amortization ............................. 946 802 788
Provision for doubtful accounts ........................... (179) -- 10
Impairment loss on fixed assets ........................... 170 -- --
Loss on fixed asset disposals ............................. 24 149 16
Deferred taxes ............................................ -- -- 503
Changes in operating assets and liabilities:
Accounts receivable ...................................... (392) 1,549 (3,911)
Inventories, prepaid expenses and other assets ........... 3,267 1,533 (4,847)
Accounts payable and accrued expenses .................... (898) (1,533) 4,649
-------- -------- ---------
Net cash provided by (used in) operating activities ......... 2,445 3,056 (1,395)
Investing activities
Purchases of property, plant, and equipment ................. (105) (59) (592)
Proceeds from disposal of fixed assets ...................... 524 2,244 29
-------- -------- ---------
Net cash provided by (used in) investing activities ......... 419 2,185 (563)
Financing activities
Borrowings under credit line ................................ 51,854 39,981 46,639
Repayments of credit line ................................... (52,419) (42,516) (43,348)
Proceeds from long-term debt ................................ 2,530 -- 1,115
Principal payments on long-term debt ........................ (4,581) (2,666) (596)
Payment of debt issuance costs .............................. (250) (41) (77)
Principal payments under capital lease obligations .......... -- -- (41)
Distributions payable to partners for income taxes .......... -- -- (1,723)
-------- -------- ---------
Net cash (used in) provided by financing activities ......... (2,866) (5,242) 1,969
-------- -------- ---------
(Decrease) increase in cash ................................. (2) (1) 11
Cash at beginning of period ................................. 6 4 3
-------- -------- ---------
Cash at end of period ....................................... $ 4 $ 3 $ 14
======== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements
Three years ended December 31, 1998
(In thousands, except share data)
1. The Company and Basis of Presentation
The Pietrafesa Corporation (the "Company") was formed on October 1, 1998
through the issuance of 3,775,667 shares of Class B common stock in exchange
for the net assets of MS Pietrafesa, L.P. (the "Partnership"). The exchange was
recorded at the Partnership's historical cost basis as both entities were under
common control.
The accompanying financial statements include the financial position and
operations of the Partnership for 1996 and 1997 and the Company and the
Partnership combined for 1998.
The Company operates principally in one business segment, the sourcing of
proprietary brands of men's and women's clothing for major domestic retailers.
Sourced products are manufactured by the Company and third parties.
Approximately 77% of the Company's work force is represented under collective
bargaining agreements. The Company also has one retail outlet whose operations
are not significant.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany transactions are
eliminated.
Revenue Recognition
Revenue is recognized when products are shipped or services have been
provided and is net of returns and allowances.
Cash
Cash consists of demand deposits at banks.
Inventories
Inventories are stated at the lower of standard costs (which approximate
cost determined on a first in, first out basis) or market.
Property, Plant, and Equipment
Depreciation is provided using the straight line method over the estimated
useful lives of the respective assets (buildings and improvements -- 25 years;
machinery and equipment -- 15 years; and furniture and fixtures -- 10 years).
The Company recorded losses on disposals of machinery and equipment in the
normal course of business of $24, $149 and $16 as of December 31, 1996, 1997
and 1998, respectively. These losses are recorded in the selling, general and
administrative expenses caption of the income statement.
Long-Lived Assets
The Company accounts for long-lived assets pursuant to Statement of
Financial Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment
losses to be recorded on long-lived assets used in operations when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Management reviews long-lived assets and the related intangible
assets for impairment whenever events or changes in circumstances indicate the
assets may be impaired. When such circumstances
F-8
<PAGE>
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements -- (Continued)
Three years ended December 31, 1998
(In thousands, except share data)
2. Summary of Significant Accounting Policies -- (Continued)
exist, the Company estimates expected future cash flows to determine whether an
asset is impaired by grouping assets at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows of other
groups of assets.
The Company recorded an impairment loss of $170 as of December 31, 1996.
The impairment loss of $170 relates to the reduction of the book value to net
realizable value of equipment which was to be disposed of at the Sturgis,
Kentucky facility. The net realizable value was determined based on estimated
selling price minus the costs to sell. The property was sold in 1997.
Other Assets
Other assets include debt issuance costs which are amortized over the
terms of the related debt using the interest method.
Income Taxes and Tax Distributions
Prior to October 1, 1998, the Company operated as a limited partnership
and income or loss of the Partnership was included in the taxable income of the
individual partners. The Company is required under the Partnership Agreement to
distribute cash to the partners which approximates the tax on taxable income
reported by the Partnership through September 30, 1998. The Company has accrued
a liability of $1,516 related to distributions for taxable income for the nine
month period ended September 30, 1998.
As of October 1, 1998, effective with the net asset transfer discussed in
Note 1, the Company is subject to federal and state corporate income taxes. The
Company accounts for income taxes using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred tax assets and liabilities are determined
based on differences between the tax basis of assets and liabilities and are
measured using currently enacted tax laws and rates.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions.
Those estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates and such differences could be
material.
Pro Forma Net Income and Earnings Per Share
Pro forma net income and earnings per share for 1998 reflect adjustments
for federal and state income taxes as if the Company were subject to these taxes
for the entire year. The weighted average number of shares issued and
outstanding includes the 3,775,567 shares of Class B Common Stock issued
subsequent to year for the nominal consideration of par value (see Note 12). It
also includes an additional 125,000 shares assumed to be issued at the initial
public offering price to pay the $1.5 million tax distribution to the partner of
MS Pietrafesa, L.P. in May 1999 as required by Staff Accounting Bulletin Topic
1(B)3 issued by the Securities and Exchange Commission.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
F-9
<PAGE>
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements -- (Continued)
Three years ended December 31, 1998
(In thousands, except share data)
3. Borrowing Arrangements
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
As of
---------------------
December 31,
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Revolving credit agreements due June 30, 2001 ................................. $6,147 $ 9,439
Equipment notes with monthly principal and interest payments ranging from $7 to
$13 through December of 2002 ................................................. 762 612
Capital equipment leases with monthly principal and interest payments ranging
from $1 to $4 through July 2002 .............................................. 107 234
Term notes with monthly principal payments of $16 and $10 through June 2005.... 2,134 2,803
------ -------
9,150 13,088
Less current maturities ....................................................... 487 527
------ -------
$8,663 $12,561
====== =======
</TABLE>
Substantially all of the Company's debt bears interest at variable rates
which range between prime plus .5% and prime plus 1% (8.25% and 8.75% at
December 31, 1998).
Under terms of a revolving credit agreement with a bank, the Company may
borrow up to $12,500, limited by levels of accounts receivable and inventory.
The unused credit line totaled approximately $2,311 at December 31, 1998.
Interest on the line is based on prime plus .5% or LIBOR plus 2.75% (8.25% at
December 31, 1998). The weighted average borrowing rate on the credit lines was
9.91% and 9.26% at December 31, 1997 and 1998, respectively. During the year
ended December 31, 1996, 1997 and 1998, the highest outstanding balance on the
credit line was $12,283, $10,787 and $11,782, respectively, and the average
outstanding balance was $10,344, $8,338 and $8,701, respectively. The credit
line is subject to renewal in 2001 and has been classified as long-term.
On June 19, 1998, the Company refinanced certain mortgage, equipment and
term loans with principal balances of $2,134 at December 31, 1997. The
refinanced loans are payable over 5 and 7 years with interest ranging from
prime plus 1% to prime plus .75%.
The Company's borrowing arrangements include certain restrictive covenants
which limit, among other things, additional indebtedness, capital expenditures
and dividends, and require that the Company maintain specified levels of
working capital, tangible net worth, debt-to-equity, debt service coverage and
net income. Amounts outstanding under these arrangements, including the working
capital facility, are secured by substantially all of the Company's assets.
Aggregate principal payments on long-term debt for each of the next five
years and thereafter are as follows as of December 31, 1998:
1999 ............... $ 527
2000 ............... 539
2001 ............... 9,987
2002 ............... 497
2003 ............... 660
Thereafter ......... 878
-------
$13,088
=======
F-10
<PAGE>
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements -- (Continued)
Three years ended December 31, 1998
(In thousands, except share data)
3. Borrowing Arrangements -- (Continued)
As further discussed in Note 9, certain subordinated indebtedness were
forgiven in June 1996.
Interest paid for the years ended December 31, 1996, 1997 and 1998
amounted to $1,630, $1,205 and $1,156, respectively.
The Company acquired $109 and $169 in assets under capital lease
obligations in 1997 and 1998, respectively.
4. Shareholder's Equity
The Company is authorized to issue two classes of common stock designated
Class A and Class B. The Class B elects 75% of the Board of Directors, has
voting rights on all corporate matters and is convertible, at any time, at the
option of the holder, into an equal number of Class A shares. The shares of
Class B common stock are also subject to mandatory conversion into an equal
number of Class A common stock at the option of the majority of the holder or
holders of Class B common stock. In connection with the incorporation of the
Company, 3,775,667 Class B shares were issued to the Partnership. Except in
limited instances, Class A shares will be non-voting except as to the election
of 25% of the Board of Directors. No Class A shares have been issued.
The Company is also authorized to issue up to, in one or more series,
5,000,000 shares of preferred stock upon the consent of the holders of a
majority of the outstanding shares of Class B common stock. The Board is
authorized to fix the rights, preferences, privileges and restrictions of each
series, without further vote or action by the stockholders. The preferred stock
may be granted voting powers provided that the Class B common stock will always
have the right to elect a majority of the Board and the preferred stock will be
entitled to vote with the Class A common stock as a class on any matters on
which holders of Class A common stock are entitled to vote.
5. Retirement Plans
The Company sponsors contributory defined contribution plans for employees
not covered by multi-employer plans. Employer contributions to the plans range
from no contribution to 50% of each participant's elective deferral for the
plan year, subject to certain restrictions as defined in the Plan documents.
Contributions for the years ended December 31, 1996, 1997 and 1998 were $97,
$125 and $141, respectively. The Company also contributes to two multi-employer
pension funds which cover certain union employees under a collective bargaining
agreement. Contributions for the years ended December 31, 1996, 1997, and 1998
were approximately $323, $173 and $156, respectively. Provisions of the
Multi-Employer Pension Plan Amendments Act of 1980 require participating
employers to assume a proportionate share of a multi-employer plan's unfunded
vested benefit in the event of withdrawal from or termination of the Plan.
6. Related Party Transactions
The Company leases a retail store facility from a related party under a
ten-year lease ending June 30, 2000 requiring rental payments totaling $146 per
year. A portion of this facility is subleased and provides minimum rental
income of $30 per year.
Beginning in 1998, the Company sources certain customer orders through
SourceOne, L.L.C, an affiliate of the General Partner of the Partnership. The
Company purchases product from SourceOne at SourceOne's actual cost to produce,
including selling, general, administrative and other overhead expenses. As the
Company is the only customer of SourceOne, substantially all the expenses of
SourceOne are reflected in the Company's financial statements. SourceOne has no
significant assets or liabilities and neither the Company nor its employees
receive any compensation from SourceOne. The Company purchased approximately
$10,614 of services from SourceOne during 1998 and has a net payable to
SourceOne of $591 at December 31, 1998.
F-11
<PAGE>
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements -- (Continued)
Three years ended December 31, 1998
(In thousands, except share data)
6. Related Party Transactions -- (Continued)
The Company has an agreement with an affiliate of the Partnership whereby
the affiliate would provide financial advisory and strategic consulting
services. The agreement contains a monthly retainer fee of $25 per month. This
agreement may be terminated annually by either party upon 30 days' notice. The
affiliate provided certain investment banking and financial analyst services to
the Company during 1998. Total expenses for these services were $192. Since no
other services were provided to the Company during 1996, 1997 and 1998, the
affiliate agreed to amend the agreement to eliminate the monthly retainer
payment in 1996, 1997 and 1998. Accordingly, no expense has been recognized in
the financial statements related to the monthly retainer payments.
The Company reimburses on a per-flight basis certain operating expenses of
an aircraft owned by a corporation owned by the Company's President and Chief
Executive Officer. Payments amounted to $225, $223 and $454 for the years ended
December 31, 1996, 1997 and 1998, respectively.
7. Revenue and Supplier Concentrations
The Company grants credit without collateral to customers and performs
periodic credit evaluations of their financial condition. The Company's
products are primarily sold to specialty retail stores. The Company makes
substantial sales to a relatively few, large customers. The following table
presents the percentage of net sales concentrated with certain customers:
For the
Year Ended December 31,
--------------------------
1996 1997 1998
------ ------ --------
Customer A ......... 27% 22% 26%
Customer B ......... 24 24 16
Customer C ......... 15 22 9
Customer D ......... -- -- 25
-- -- --
66% 68% 76%
== == ==
In April 1998, the Company entered into a five-year sourcing agreement
with a domestic clothing retailer and became the retailer's primary source for
tailored clothing. The Company's affiliate, SourceOne, manages the retailer's
manufacturing operations. The Company will receive an annual management fee for
the first three years of the agreement and purchased certain inventory owned by
the retailer at market value ($2,140), payable in installments. The agreement
requires the retailer to purchase a minimum number of units during the 5-year
term of the agreement.
The Company purchases a significant volume of fabric from two suppliers.
In 1996, 1997 and 1998, 51%, 54% and 62% of total purchases were purchased from
these two suppliers, respectively.
8. Income Taxes
On October 1, 1998, the Company recorded deferred income taxes due to its
incorporation. The recording of the deferred tax liability at October 1, 1998
resulted in additional tax expense of $516 in 1998.
F-12
<PAGE>
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements -- (Continued)
Three years ended December 31, 1998
(In thousands, except share data)
8. Income Taxes -- (Continued)
The provision for income taxes is as follows:
For the
Year ended December 31,
-------------------------
1996 1997 1998
------ ------ -------
Current:
Federal .................. $-- $-- $ 8
State .................... -- -- 3
--- --- ----
Total current ............. -- -- 11
Deferred:
Federal .................. -- -- 428
State .................... -- -- 75
--- --- ----
Total deferred ............ -- -- 503
--- --- ----
Total tax expense ......... $-- $-- $514
=== === ====
The difference between the United States federal statutory income tax rate
and the Company's effective tax rate were as follows:
<TABLE>
<CAPTION>
For the
Year ended December 31,
------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
U.S. federal statutory rate ...................................... 34.0% 34.0% 34.0%
Income attributed to period the Company was a partnership
that is not subject to federal or state corporate income tax . (34.0%) (34.0%) (34.0%)
Deferred taxes related to the change to a taxable entity ......... 27.0%
----- ----- -----
Effective tax rate ............................................... 0.0% 0.0% 27.0%
===== ===== =====
</TABLE>
Deferred tax assets and liabilities are comprised of the following:
As of
December 31,
--------------------------
1996 1997 1998
------ ------ --------
Deferred tax assets:
Bad debt and chargeback reserves ......... $-- $-- $ 131
Inventory related reserves ............... -- -- 292
Employee benefits ........................ -- -- 236
Other .................................... -- -- 279
--- --- ------
Total deferred tax assets ................. -- -- 938
Deferred tax liability:
Depreciation ............................. -- -- 1,441
--- --- ------
Net deferred tax liability ............... $-- $-- $ 503
=== === ======
F-13
<PAGE>
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements -- (Continued)
Three years ended December 31, 1998
(In thousands, except share data)
9. Forgiveness of Debt
In June 1996, the Company completed a transaction under which subordinated
notes with an outstanding principal and interest balance of $3,350 were
forgiven in exchange for a greater partnership interest in MSJP, L.P., a
limited partner of the Partnership. The value of the partnership interest
exchanged, $200, has been treated as a capital contribution, with the remainder
recorded as an extraordinary item in the statement of operations.
10. Fair Value of Financial Instruments
The carrying amounts of the Company's short-term borrowings and variable
rate long-term debt approximate their fair value. The difference between
carrying value and fair value on fixed rate long-term debt is not material.
11. Public Offering Costs
In 1998 the Company incurred costs related to a public offering that was
delayed due to adverse market conditions. Costs amounting to $823 related to
this offering have been charged off due to the extended delay of the offering.
12. Acquisitions, Public Offering and Stock Option Plan
On April 15, 1999, the Company acquired the assets and assumed certain
liabilities of Diversified Apparel Group, Ltd. for $3,500 in a transaction to
be accounted for as a purchase. Diversified Apparel merchandises and sources
apparel, including lower to mid-priced suits and dress shirts, to value-priced
apparel retailers. On April 15, 1999, the Company acquired all of the common
stock of Global Sourcing Network, Ltd. for $3,700 in a transaction to be
accounted for as purchase. Global Sourcing Network designs and imports men's
suits. Concurrent with the public offering, the Company will also acquire the
assets and assume certain liabilities of Components by John McCoy, Inc. for
$11,100 in a transaction to be accounted for as a purchase. Components
merchandises and sources tailored clothing, as well as sportswear, dress
shirts, neckwear, topcoats and casual slacks in Italy.
The Company has entered an agreement to acquire the assets and assume
certain liabilities of Windsong, Inc. for $43,300 in a transaction to be
accounted for as a purchase. Windsong is a supplier of designer and private
label sportswear to department store, specialty store and mass merchandising
chains.
The total purchase price of the acquired businesses is based upon an
estimate of the liabilities to be assumed of $1,955, $1,121, $6,021 and $16,862
for Diversified Apparel, Global Sourcing Network, Components and Windsong,
respectively. The Company does not believe the actual amount of liabilities
assumed will be materially different from the estimated amount. The portion of
the consideration assigned to goodwill in each transaction will represent the
excess of the cost over the estimated fair value of the net assets acquired.
The Company will amortize goodwill using the straight line method over a period
ranging from 10 to 20 years.
In each of the purchase agreements, there are specific contingent payments
based upon achieving specified earning levels. These payments will be
recognized as an adjustment to the purchase price when made.
In connection with the offering, on July 15, 1999 the Company issued
3,775,567 additional shares of Class B common stock for the nominal
consideration of the stock's par value. Shareholder's equity, earnings per
share and other share information has been restated to reflect the additional
shares of Class B Common Stock. Immediately prior to the closing of the
offering, the Company may adjust through redemption or additional issuance of
shares, the number of shares of Class B common stock outstanding to represent
the percentage of the Company that will be owned by the Company's sole
shareholder after the offering.
F-14
<PAGE>
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements -- (Continued)
Three years ended December 31, 1998
(In thousands, except share data)
12. Acquisitions, Public Offering and Stock Option Plan -- (Continued)
On July 15, 1999, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of Class A Common Stock from 5,000,000
to 12,000,000 shares and to change the par value of the Class B Common Stock to
$.0002, each of which has been reflected on the December 31, 1998 balance
sheet.
The Company intends to establish a Stock Option Plan for key employees and
directors prior to the closing of the offering. Under the Stock Option Plan,
awards of options to purchase shares of Class A Common Stock may be made to the
Company's key employees and directors, including employees who are also the
Company's officers or directors. The Company may award options to purchase a
number of shares equal to 10% of our outstanding capital stock immediately
following the offering. Options awarded under the Stock Option Plan may be
either "incentive stock options," as that term is defined in Section 422 of the
Internal Revenue Code of 1986, as amended, or nonqualified stock options.
The Stock Option Plan will be administered by the Company's Compensation
Committee. The Compensation Committee will have the authority to establish the
terms and conditions of the options in any manner not inconsistent with the
terms of the Stock Option Plan, adopt any rules it considers appropriate for
the administration of the Stock Option Plan, make interpretations of the Stock
Option Plan that it deems consistent with its provisions, and take any other
action it considers appropriate in connection with the Stock Option Plan. Each
option granted under the Stock Option Plan will be evidenced by an agreement
between the Company and the employee and/or director to whom the option is
granted.
Prior to the adoption of the Stock Option Plan, the Company has made no
provision for the grant of options to purchase equity interests in the Company.
At the time of the offering, no options will have been granted by the
Company to their executive officers, employees or directors under the Stock
Option Plan.
F-15
<PAGE>
THE PIETRAFESA CORPORATION
Consolidated Balance Sheet
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1999 1998
------------ -------------
(Unaudited)
(In thousands except share
and per share data)
<S> <C> <C>
Assets
Current assets
Cash .............................................................. $ 13 $ 14
Accounts receivable, net .......................................... 8,488 7,967
Inventories:
Finished goods .................................................. 4,862 4,273
Work-in-process ................................................. 3,224 3,865
Raw materials ................................................... 4,596 4,979
------- --------
12,682 13,117
Prepaid expenses .................................................. 375 193
Deferred Taxes .................................................... 938 938
------- --------
Total current assets ............................................... 22,496 22,229
Property, plant, and equipment, at cost:
Land .............................................................. 297 297
Buildings and improvements ........................................ 3,216 3,215
Machinery and equipment ........................................... 6,883 6,485
Furniture and fixtures ............................................ 709 708
Construction in progress .......................................... -- 290
------- --------
11,105 10,995
Accumulated depreciation .......................................... 4,582 4,409
------- --------
6,523 6,586
Other assets ....................................................... 925 560
------- --------
$29,944 $ 29,375
======= ========
Liabilities and shareholder's equity
Current liabilities:
Accounts payable .................................................. $ 7,166 $ 7,893
Other current liabilities ......................................... 2,767 3,054
Tax distribution payable .......................................... 1,516 1,516
Current maturities of long-term debt .............................. 527 527
------- --------
Total current liabilities .......................................... 11,976 12,990
Deferred tax liability ............................................. 1,441 1,441
Long-term debt, net of current maturities .......................... 13,054 12,561
Shareholder's equity:
Preferred stock, $.001 par value:
Authorized shares -- 5,000,000 ..................................
Issued shares -- none ...........................................
Common stock ......................................................
Authorized shares -- 12,000,000 Class A, $.001 par value.........
-- 10,000,000 Class B, $.0002 par value........
Issued shares -- 3,775,667 Class B ..............................
Additional paid-in capital ........................................ 3,191 2,941
Retained earnings (accumulated deficit) ........................... 282 (558)
------- --------
Total shareholder's equity ..................................... 3,473 2,383
------- --------
$29,944 $ 29,375
======= ========
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
THE PIETRAFESA CORPORATION
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
----------------------------
1999 1998
------------ -------------
(In thousands, except
share and per share data)
<S> <C> <C>
Net revenues ....................................................... $ 17,803 $ 9,503
Cost of sales ...................................................... 14,833 7,028
--------- ----------
Gross profit ....................................................... 2,970 2,475
Operating expenses:
Selling, general, and administrative expenses ..................... 1,201 1,305
Depreciation and amortization expense ............................. 68 64
--------- ----------
1,269 1,369
--------- ----------
Operating income ................................................... 1,701 1,106
Interest expense ................................................... 296 253
--------- ----------
Income before taxes ................................................ 1,405 853
Provision for income taxes ......................................... 565 --
--------- ----------
Net income ......................................................... $ 840 $ 853
========= ==========
Basic and diluted earnings per share ............................... $ 0.22
=========
Weighted average number of common shares outstanding ............... 3,900,667
=========
Pro forma net income data:
Income before income taxes, as reported above ..................... $ 853
Pro forma provision for income taxes .............................. 341
----------
Pro forma net income ............................................... $ 512
==========
Pro forma basic and diluted earnings per share ..................... $ 0.14
==========
Pro forma basic and diluted weighted average number of common shares
outstanding ....................................................... 3,775,667
==========
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE>
THE PIETRAFESA CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
----------------------------
1999 1998
-------------- -----------
(In thousands)
<S> <C> <C>
Operating activities
Net income .......................................................... $ 840 $ 853
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization ..................................... 185 202
Loss on sale of fixed assets ...................................... -- 12
Changes in operating assets and liabilities:
Accounts receivable .............................................. (521) (269)
Inventories, prepaid expenses and other assets ................... (103) (2,018)
Accounts payable and accrued expenses ............................ (1,014) 1,248
-------- ---------
Net cash (used in) provided by operating activities ............... (613) 28
Investing activities
Purchases of property, plant, and equipment ......................... (109) (90)
-------- ---------
Net cash used in investing activities ............................... (109) (90)
Financing activities
Borrowings under credit line ........................................ 19,302 10,496
Repayments of credit line ........................................... (18,679) (10,329)
Principal payments on long-term debt ................................ (117) (105)
Payment of debt issuance costs ...................................... (20) --
Principal payments under capital lease obligations .................. (15) --
Capital contribution ................................................ 250 --
-------- ---------
Net cash provided by financing activities ........................... 721 62
-------- ---------
(Decrease) increase in cash ......................................... (1) --
Cash at beginning of period ......................................... 14 3
-------- ---------
Cash at end of period ............................................... $ 13 $ 3
======== =========
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
The Pietrafesa Corporation
Notes to Quarterly Consolidated Financial Statements (Unaudited)
March 31, 1999
1. Organization and Basis of Presentation
The accompanying financial statements include the accounts of the Company
and its consolidated subsidiary. All significant intercompany transactions and
balances have been eliminated.
2. Summary of Significant Accounting Policies
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
of operations for the periods presented have been included.
The consolidated financial data at December 31, 1998 is derived from
audited financial statements at that date but does not include all of the
information and footnotes required by GAAP for complete financial statements
and should be read in conjunction with the audited financial statements and
notes thereto. Interim results are not necessarily indicative of results to be
expected for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statement and
accompanying notes. Actual results could differ from those estimates.
Pro forma net income and earnings per share reflect adjustments for
federal and state income taxes as if the Company were subject to these taxes
for the entire period.
The weighted average number of shares outstanding includes 3,775,667 shares
of Class B common stock outstanding to our sole shareholder. For the first
quarter of 1999, it also includes an additional 125,000 shares assumed to be
issued at the initial public price to pay the $1.5 million tax distribution to
the partners of MS Pietrafesa, L.P. in May 1999 as required by Staff Accounting
Bulletin Topic 1(B)3 issued by the Securities and Exchange Commission.
3. Subsequent Events
On April 15, 1999, the Company acquired the assets and assumed certain
liabilities of Diversified Apparel Group, Ltd. for $3.5 million in a
transaction to be accounted for as a purchase. Diversified Apparel merchandises
and sources apparel, including lower to mid-priced suits and dress shirts, to
value-priced apparel retailers. On April 15, 1999, the Company acquired all of
the common stock of Global Sourcing Network, Ltd. for $3.7 million in a
transaction to be accounted for as purchase. Global Sourcing Network designs
and imports men's suits. Concurrent with the public offering, the Company will
also acquire the assets and assume certain liabilities of Components by John
McCoy, Inc. for $11.1 million in a transaction to be accounted for as a
purchase. Components merchandises and sources tailored clothing, as well as
sportswear, dress shirts, neckwear, topcoats and casual slacks in Italy.
On May 12, 1999, the Company entered into an agreement to purchase the
assets and assume certain liabilities of Windsong, Inc. for $43.3 million in a
transaction to be accounted for as a purchase. Windsong is a supplier of
designer and private label sportswear to department store, specialty store and
mass merchandising chains.
The portion of the consideration assigned to goodwill in each transaction
will represent the excess of the cost over the estimated fair value of the net
assets acquired. The Company will amortize goodwill using the straight line
method over a period ranging from 10 to 20 years.
F-19
<PAGE>
The Pietrafesa Corporation
Notes to Quarterly Consolidated Financial Statements (Unaudited) -- (Continued)
March 31, 1999
3. Subsequent Events -- (Continued)
In each of the purchase agreements, there are specific contingent payments
based upon achieving specified earning levels. These payments will be
recognized as an adjustment to the purchase price when made.
On April 15, 1999, we entered into a senior secured credit facility with
PNC Bank, National Association. This facility replaced the Company's current
$12.5 million revolving credit facility. The PNC Bank credit facility consists
of (1) an $18.0 million revolving credit line, $1.0 million of which can be
utilized for the issuance of letters of credit, and (2) a $7.0 million term
note. The amount available for borrowing under the revolving credit line at any
given time is determined pursuant to a formula based upon the levels of
qualifying accounts receivable and eligible inventory and the credit balance
owed to us under our factoring agreement, subject to the $18.0 million maximum.
The term note is payable in 33 monthly payments of $116,667 commencing on May
1, 1999, with a final payment of all unpaid principal on April 15, 2002. The
new credit facility was used to repay amounts due under the Company's former
credit facility which had a balance of $12.8 million at March 31, 1999. Amounts
outstanding under the credit facility are secured by a senior lien on
substantially all of our assets. We have also pledged all of the stock of our
subsidiaries as collateral. Borrowings under the PNC Bank credit facility bear
interest, at our option, based upon either domestic interest rates or Euro
interest rates. Under the revolving credit line, the domestic interest rate is
0.5% per annum above the higher of (a) PNC Bank's base commercial lending rate
and (b) 0.5% per annum above the Fed Funds rate. Under the revolving credit
line, the Euro interest rate is a multiple of 2.75% above LIBOR, where the
multiple is equal to 1.00 minus the Federal Reserve's reserve requirement
percentage. Under the term note, the domestic interest rate is 1.00% higher
than the domestic interest rate calculated under the revolving credit line, and
the Euro interest rate is 0.75% higher than the Euro interest rate calculated
under the revolving credit line. Upon consummation of the offering, all of the
foregoing domestic and Euro interest rates shall decrease by 0.25%, provided
that we receive net proceeds of at least $20 million from the offering. The PNC
Bank credit facility includes significant financial and operating covenants,
including requirements that we maintain a minimum fixed charge coverage ratio,
prohibitions on our ability to incur additional indebtedness or to pay
dividends and restrictions on our ability to make capital expenditures and
acquisitions. We are currently in compliance with all covenants under the PNC
Bank credit facility. The PNC Bank credit facility contains customary events of
default, including a cross-default to our obligations under the Diversified
Apparel and Global Sourcing Network acquisition agreements.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND SHAREHOLDER
GLOBAL SOURCING NETWORK, LTD.
We have audited the accompanying balance sheets of GLOBAL SOURCING
NETWORK, LTD. as of December 31, 1998 and 1997, and the related statements of
operations and accumulated deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GLOBAL SOURCING NETWORK,
LTD. as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Pasquale & Bowers LLP
-----------------------------------
Syracuse, New York
February 2, 1999
F-21
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................ $ 153,598 $ 84,348
Accounts receivable .................................. 19,148 338,304
Note receivable, net of allowance of $90,000 ......... 0 0
Due from related party (Note 7) ...................... 0 55,000
Inventories .......................................... 907,500 0
Deferred taxes (Note 5) .............................. 57,600 0
---------- ---------
TOTAL CURRENT ASSETS .............................. 1,137,846 477,652
---------- ---------
PROPERTY AND EQUIPMENT-NET (Note 3) ..................... 10,204 10,161
---------- ---------
OTHER ASSETS
Due from shareholder (Note 7) ........................ 0 116,397
Deferred taxes (Note 5) .............................. 0 10,700
Other ................................................ 0 5,142
---------- ---------
0 132,239
---------- ---------
$1,148,050 $ 620,052
========== =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES
Accounts payable ..................................... $1,026,265 $ 275,828
Royalty fees payable (Note 4) ........................ 229,085 397,215
---------- ---------
TOTAL CURRENT LIABILITIES ......................... 1,255,350 673,043
---------- ---------
SHAREHOLDER'S DEFICIT
Common stock
No par value
Authorized -- 200 Shares
Issued and outstanding - 50 Shares ................ 1,000 1,000
Accumulated deficit .................................. (108,300) (53,991)
---------- ---------
(107,300) (52,991)
---------- ---------
$1,148,050 $ 620,052
========== =========
</TABLE>
See accompanying notes to the financial statements.
F-22
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
Statements Of Operations and Accumulated Deficit
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
SALES ........................................... $18,062,322 $19,043,296
COST OF SALES ................................... 16,767,880 17,781,789
----------- -----------
GROSS PROFIT .................................... 1,294,442 1,261,507
GENERAL AND ADMINISTRATIVE EXPENSES ............. 298,798 295,385
ROYALTIES AND COMMISSIONS ....................... 1,095,873 985,975
----------- -----------
LOSS FROM OPERATIONS ............................ (100,229) (19,853)
PROVISION FOR INCOME TAXES (Note 5) ............. (45,920) (8,019)
----------- -----------
NET LOSS ........................................ (54,309) (11,834)
ACCUMULATED DEFICIT - BEGINNING OF YEAR ......... (53,991) (42,157)
----------- -----------
ACCUMULATED DEFICIT - END OF YEAR ............... $ (108,300) $ (53,991)
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-23
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
Statements Of Cash Flows
Years Ended December 31, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................................ $ (54,309) $ (11,834)
---------- ----------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation ..................................................... 4,421 3,574
Bad debts ........................................................ 149,017 102,000
Deferred tax benefit ............................................. (46,900) (10,700)
Offset of amounts due from shareholder ........................... 116,397 0
Changes in assets and liabilities affecting cash flows from
operating activities:
Accounts receivable ........................................... 260,139 (225,022)
Inventories ................................................... (907,500) 0
Other assets .................................................. 5,142 2,134
Accounts payable .............................................. 750,437 267,909
Royalty fees payable .......................................... (168,130) 5,772
Accrued expenses .............................................. 0 (7,474)
---------- ----------
Total adjustments ........................................... 163,023 138,193
---------- ----------
Net cash provided by operating activities ................... 108,714 126,359
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ................................. (4,464) (6,004)
Advances on note receivable ......................................... (90,000) 0
Repayments on notes receivable ...................................... 0 144,000
---------- ----------
Net cash provided by (used in) investing activities ......... (94,464) 137,996
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party ......................................... 55,000 0
Payments to related party ........................................... 0 (313,200)
---------- ----------
Net cash provided by (used in) financing activities ......... 55,000 (313,200)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ......................................................... 69,250 (48,845)
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR ....................... 84,348 133,193
---------- ----------
CASH AND CASH EQUIVALENTS -- END OF YEAR ............................. $ 153,598 $ 84,348
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION --
Cash paid during the period for:
Income taxes: ..................................................... $ 680 $ 2,957
========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-24
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
1. Organization
Global Sourcing Network, Ltd. (the "Company") imports men's apparel for
distribution to retail apparel companies located principally throughout the
United States. Substantially all of the Company's sales in 1997 and 1998 are to
one customer.
2. Summary of Significant Accounting Policies
Revenue Recognition
Revenue is recognized when products are received by the customer. The
Company estimates accounts receivable to be fully collectible; accordingly, no
allowance for doubtful accounts is recorded.
Inventories
Inventories are valued at the lower of cost, determined on the specific
identification method, or market.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is provided using
accelerated methods over the estimated useful lives of the related assets.
Income Taxes
Income taxes have been provided using the liability method in accordance
with SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets are the
result primarily of net operating loss carryforwards the Company has available
to offset future taxable income and reserves for bad debts.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
Business Concentrations
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and trade accounts receivable. At times,
balances may be in excess of the FDIC insurance limit. Substantially all of the
Company's sales are to one customer. Essentially all accounts receivable at
December 31, 1998 and 1997 are from this customer.
3. Property and Equipment
Property and equipment, net of accumulated depreciation as of December 31,
1998 and 1997, consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Office equipment ........................ $ 19,347 $ 16,641
Furniture and fixtures .................. 7,496 5,738
--------- ---------
26,843 22,379
Less: Accumulated depreciation .......... (16,639) (12,218)
--------- ---------
$ 10,204 $ 10,161
========= =========
</TABLE>
F-25
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
Notes to Financial Statements -- (Continued)
Years Ended December 31, 1998 and 1997
4. Royalty Fees Payable
The Company has a license agreement with Emerald Rise Trading, Ltd. (ERT),
for technical knowledge and expertise in association with the sourcing,
production and delivery of apparel. The Company pays royalties equal to 3% of
gross sales. Royalty fees, included in general and administrative expenses, for
the years ended December 31, 1998 and 1997, were approximately $542,000 and
$571,000, respectively.
5. Provision For Income Taxes
Income taxes for the years ended December 31, 1998 and 1997 are summarized
as follows:
1998 1997
------------ -----------
Current:
State and city ........ $ 980 $ 2,681
--------- ---------
Deferred:
Federal ............... (39,900) (7,400)
State ................. (7,000) (3,300)
--------- ---------
(46,900) (10,700)
--------- ---------
$ (45,920) $ (8,019)
========= =========
The Company has unused net operating loss carryforwards available to
offset against future taxable income of approximately $54,000 at December 31,
1998, which expire from 2010 through 2018.
The components of the deferred tax asset as of December 31, 1998 and 1997
are as follows:
1998 1997
----------- ----------
Current deferred tax asset:
Net operating losses ............ $ 21,600 $ 0
Allowance for bad debts ......... 36,000 0
-------- -------
$ 57,600 $ 0
======== =======
Noncurrent deferred tax asset:
Net operating losses ............ $ 0 $10,700
======== =======
The reconciliation of the effective income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Federal income tax rate ................................. (34)% (34)%
State taxes, net of federal income tax benefit .......... (6) (6)
Adjustment to deferred tax rate ......................... (6) (0)
--- ---
(46)% (40)%
=== ===
</TABLE>
6. Commitments
The Company leases office space under an agreement accounted for as an
operating lease expiring July 31, 1999. The Company sublet a portion of its
office to a related entity. Rent expense for the years ended December 31, 1998
and 1997, net of sublease income was approximately $22,000 and $38,000,
respectively.
F-26
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
Notes to Financial Statements -- (Continued)
Years Ended December 31, 1998 and 1997
7. Related Parties
Due from Related Party
The Company provides management services and subleases office space to
Global Sourcing International (GSI), which is related through family
attribution. Management fees, sublease income and amounts due from GSI are
summarized as follows:
1998 1997
---------- ----------
Management fees ................. $ 36,000 $24,000
Sublease income ................. $ 26,700 $ 4,700
Due from related party .......... $ 0 $55,000
Due from Shareholder
The Company periodically makes advances to its president and sole
shareholder. Approximately $116,000 in advances outstanding at December 31,
1997 has been written off as commission expense in 1998. No interest has been
imputed on outstanding advances.
8. Financial Statement Presentation
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
F-27
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
Balance Sheets
March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................ $ 200 $ 153,598
Accounts receivable .................................. 588,962 19,148
Note receivable, net of allowance of $90,000 ......... 0 0
Inventories .......................................... 433,918 907,500
Prepaid expenses ..................................... 81,385 0
Deferred taxes ....................................... 57,600 57,600
---------- ----------
TOTAL CURRENT ASSETS .............................. 1,162,065 1,137,846
---------- ----------
PROPERTY AND EQUIPMENT-NET .............................. 8,859 10,204
---------- ----------
$1,170,924 $1,148,050
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable ..................................... $ 898,573 $1,026,265
Royalty fees payable ................................. 222,660 229,085
---------- ----------
TOTAL CURRENT LIABILITIES ......................... 1,121,233 1,255,350
---------- ----------
SHAREHOLDER'S EQUITY (DEFICIT)
Common stock
No par value
Authorized -- 200 Shares
Issued and outstanding -- 50 Shares .................. 1,000 1,000
RETAINED EARNINGS (ACCUMULATED DEFICIT) ................. 48,691 (108,300)
---------- ----------
49,691 (107,300)
---------- ----------
$1,170,924 $1,148,050
========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-28
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
Statements Of Operations and Retained Earnings (Accumulated Deficit)
(Unaudited)
Three Months Ended March 31, 1999 and March 31, 1998
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
-------------- -------------
<S> <C> <C>
SALES .............................................. $6,039,754 $5,831,482
COST OF SALES ...................................... 5,622,094 5,371,979
---------- ----------
GROSS PROFIT ....................................... 417,660 459,503
GENERAL AND ADMINISTRATIVE EXPENSES ................ 54,119 45,882
ROYALTIES AND COMMISSIONS .......................... 206,550 277,944
---------- ----------
INCOME FROM OPERATIONS ............................. 156,991 135,677
PROVISION FOR INCOME TAXES ......................... 0 2,288
---------- ----------
NET INCOME ......................................... 156,991 133,389
ACCUMULATED DEFICIT -- BEGINNING OF PERIOD ......... (108,300) (53,792)
---------- ----------
RETAINED EARNINGS -- END OF PERIOD ................. $ 48,691 $ 79,597
---------- ----------
</TABLE>
See accompanying notes to the financial statements.
F-29
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
Statements Of Cash Flows (Unaudited)
Three Months Ended March 31, 1999 and March 31, 1998
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ..................................................................... $ 156,991 $ 133,389
---------- ----------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation ................................................................ 1,345 199
Changes in assets and liabilities affecting cash flows from operating
activities:
Accounts receivable ...................................................... (569,814) 261
Inventories .............................................................. 473,582 0
Prepaid expenses ......................................................... (81,385) (8,500)
Other assets ............................................................. 0 594
Accounts payable ......................................................... (127,692) (31,298)
Royalty fees payable ..................................................... (6,425) (100,000)
---------- ----------
Total adjustments ..................................................... (310,389) (138,744)
---------- ----------
Net cash used in operating activities ................................. (153,398) (5,355)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ............................................ 0 (1,758)
Advances to related party ...................................................... 0 (18,000)
---------- ----------
Net cash used in investing activities ................................. 0 (19,758)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances to shareholder ........................................................ 0 (46,451)
---------- ----------
Net cash used in financing activities ................................. 0 (46,451)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............................. (153,398) (71,564)
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD .................................. 153,598 84,348
---------- ----------
CASH AND CASH EQUIVALENTS -- END OF PERIOD ........................................ $ 200 $ 12,784
========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-30
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
Notes to Quarterly Financial Statements (Unaudited)
Three Months Ended March 31, 1999 and March 31, 1998
1. Summary of Significant Accounting Policies
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
of operations for the periods presented have been included.
The financial data at December 31, 1998 is derived from audited financial
statements for the year ended December 31, 1998, and should be read in
conjunction with the audited financial statements and notes thereto. Interim
results are not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. Subsequent Events
On April 15, 1999, the Company was acquired by The Pietrafesa Corporation,
as more fully set forth in the prospectus.
F-31
<PAGE>
To the Board of Directors of
Components by John McCoy, Inc.
6040 Boulevard East -- Apt. 2G
West New York, New Jersey 07093
We have audited the accompanying balance sheets of Components by John
McCoy, Inc., a New Jersey corporation, as of December 31, 1998 and 1997, and
the related statements of income, retained earnings, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Components by John McCoy,
Inc., as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Lawrence B. Goodman & Co., P.A.
Certified Public Accountants
Fair Lawn, New Jersey
March 4, 1999
F-32
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Balance Sheets
December 31, 1998 and 1997
ASSETS
1998 1997
-------------- --------------
Current Assets
Cash ................................... $ 45,358 $ 10,335
Accounts Receivable -- net ............. 4,462,931 3,711,586
Inventory .............................. 2,311,177 829,833
Employee Loan .......................... -- 1,600
---------- ----------
Total current assets ................. 6,819,466 4,553,354
---------- ----------
Property & Equipment
Furniture and fixtures ................. 3,616 3,616
Leasehold improvements ................. 178,167 --
---------- ----------
181,783 3,616
Less: Accumulated depreciation ......... (1,086) (362)
---------- ----------
Net property and equipment .......... 180,697 3,254
---------- ----------
Other Assets
Security deposit ....................... 28,032 28,032
---------- ----------
Total Assets ........................ $7,028,195 $4,584,640
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
------------- -------------
Current Liabilities
Accounts payable and accrued expenses .. $2,459,127 $1,671,965
Loan payable ........................... 2,462,451 2,070,731
Taxes payable .......................... 48,868 66,890
---------- ----------
Total current liabilities ............ 4,970,446 3,809,586
---------- ----------
Stockholders' Equity
Common Stock, no par value (authorized
200 shares, issued and
outstanding 100 shares) .............. 300,000 300,000
Retained earnings ...................... 1,757,749 475,054
---------- ----------
Total stockholders' equity ........... 2,057,749 775,054
---------- ----------
Total Liabilities and Stockholders'
Equity .............................. $7,028,195 $4,584,640
========== ==========
See notes to financial statements and auditor's report.
F-33
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Statements of Income and Retained Earnings
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Revenues
Net Sales ............................................ $ 19,993,484 $ 14,916,695
------------ ------------
Cost of Sales
Beginning inventory .................................. 829,833 740,408
Purchases ............................................ 13,854,070 9,733,368
Freight-in ........................................... 681,339 505,506
Customs charges ...................................... 1,953,422 1,606,554
------------ ------------
17,318,664 12,585,836
Less: Ending inventory ............................... 2,311,177 829,833
------------ ------------
Total cost of sales ................................ 15,007,487 11,756,003
------------ ------------
Gross Profit ...................................... 4,985,997 3,160,692
General and Administrative Expenses
Advertising .......................................... 177,635 28,740
Bad debt expense ..................................... 253,565 113,856
Commissions .......................................... 588,879 675,204
Insurance ............................................ 27,881 34,130
Interest ............................................. 292,676 241,225
Professional services ................................ 66,404 24,729
Office supplies ...................................... 166,449 155,159
Outside services ..................................... 212,392 131,951
Payroll taxes ........................................ 41,983 24,106
Postage .............................................. 102,386 95,383
Profit sharing ....................................... 45,030 38,517
Rent ................................................. 166,951 110,792
Repairs and maintenance .............................. 521 11,615
Salaries -- Officer .................................. 606,154 180,000
Salaries and wages -- other .......................... 287,532 185,138
Storage .............................................. 108,694 64,092
Telephone and utilities .............................. 50,674 43,077
Travel and entertainment ............................. 134,910 161,884
Miscellaneous ........................................ 69,865 25,141
------------ ------------
Total general and administrative expenses .......... 3,400,581 2,344,739
------------ ------------
Income from operations ................................ 1,585,416 815,953
Other Income and (Expenses)
State and local income taxes ......................... (157,711) (81,595)
------------ ------------
Net income ............................................ 1,427,705 734,358
Retained earnings -- beginning ........................ 475,054 118,854
Distributions of undistributed taxable income ......... (145,010) (378,158)
------------ ------------
Retained earnings -- ending ........................... $ 1,757,749 $ 475,054
============ ============
</TABLE>
See notes to financial statements and auditor's report.
F-34
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Statements of Cash Flows
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 1,427,705 $ 734,358
------------- ------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ............................................. 724 362
Changes in assets and liabilities:
Increase in accounts receivable .......................... (751,345) (1,264,338)
Increase in inventory .................................... (1,481,344) (89,425)
Increase in employee loan ................................ -- (1,600)
Increase in security deposit ............................. -- (28,032)
Increase in accounts payable ............................. 787,162 179,879
Increase/(Decrease) in taxes payable ..................... (18,022) 54,923
------------- ------------
Total adjustments ...................................... (1,462,825) (1,148,231)
------------- ------------
Net cash used by operating activities ..................... (35,120) (413,873)
------------- ------------
Cash flows from investing activities:
Purchase of furniture and fixtures ....................... (178,167) (3,616)
------------- ------------
Cash flows from financing activities:
Borrowing on loan payable ................................ 19,494,135 10,120,000
Repayments on loan payable ............................... (19,102,415) (9,359,340)
Distributions to shareholder ............................. (143,410) (382,468)
------------- ------------
Net cash provided by financing activities ................. 248,310 378,192
------------- ------------
Net increase (decrease) in cash ........................... 35,023 (39,297)
Cash -- beginning of year ................................. 10,335 49,632
------------- ------------
Cash -- end of year ....................................... $ 45,358 $ 10,335
============= ============
Supplemental information
Interest paid ............................................ $ 292,676 $ 241,225
Taxes paid ............................................... $ 176,133 $ 29,889
</TABLE>
See notes to financial statements and auditor's report.
F-35
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Notes to Financial Statements
December 31, 1998 and 1997
DESCRIPTION OF BUSINESS
Components by John McCoy, Inc. is a distributor of men's clothing. The
Company was incorporated and commenced business on January 6, 1995. Its
principal place of business is located at 20 West 55th Street, New York, New
York.
Note 1: ACCOUNTING POLICIES
a) Accounts Receivable
In the normal course of business, the Company discounts or sells trade
accounts receivable without recourse to Heller Financial, Inc. At December 31,
1998 and 1997, the amount of such receivables was $3,239,184 and $3,162,716,
respectively.
b) Uncollectible Accounts
Uncollectible accounts receivable are estimated to be 4% for 1998 and 10%
for 1997 of non-factored receivables, based upon management's evaluation of
outstanding accounts receivable. At December 31, 1998 and 1997, uncollectible
accounts are estimated to be $56,779 and $60,986, respectively.
c) Inventory
Inventory is stated at the lower of cost determined by the first-in,
first-out method, or market.
d) Income Taxes
The shareholders have elected to be treated as a small business
corporation (Sub-Chapter "S" of the Internal Revenue Code) for Federal income
tax purposes as of January 6, 1995. Similarly, the shareholders have elected to
be treated as a small business corporation for New York and New Jersey State
income tax purposes. Accordingly, no provision has been made for Federal income
taxes, a provision has been made for the State income taxes for New York and
for New Jersey at the prevailing rates for 1998. Income will be reported by the
shareholder in his individual income tax returns.
New York City does not recognize Sub-Chapter "S" status, therefore, a tax
provision has been made based upon the income tax rates in effect for 1998.
There are no material differences in the calculation of net income for
book and income tax purposes, therefore, deferred income taxes have not been
recorded.
e) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
f) Revenue Recognition
Revenue is recognized when products are shipped or services have been
provided and is net of returns and allowances.
F-36
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Notes to Financial Statements -- (Continued)
December 31, 1998 and 1997
Note 2: LOAN PAYABLE
Loan payable represents a Collection Factoring Agreement with Heller
Financial, Inc., in which they "purchase" the receivables. However, the
transaction is accounted for as a secured loan facility because the underlying
structure is actually that of an asset-based loan. Specifically, the accounts
receivable purchase price is funded at a predetermined advance rate, Heller
requires a security interest in all the assets of the Company and pays interest
in all of the assets of the Company and pays interest on the amount advanced
and final risk of collection lies with the Company.
Under the Heller Factoring Agreement, the Company generates accounts
receivable in the ordinary course of business and Heller purchases these
accounts. The net purchase price is the face value of the receivable less
factoring commissions, credits, returns, allowances, chargebacks and other
allowances whose appropriateness is decided solely by Heller. Heller advances
the Company 80% of the gross purchase price and pays the remaining net purchase
price on the due date of each individual account.
In practice, Heller only purchases and advances on approved accounts,
determined by Heller in its sole discretion. Advances are wired to a non-Heller
bank account. Heller provides collection services on approved accounts and
collections on approved accounts are netted against amounts advanced by Heller.
Heller does not advance against, pay when due or otherwise compensate the
Company for the non-approved accounts. Non-approved do not appear on Heller's
ledger. The Company, not Heller, collects receipts for non-approved accounts
into a non-Heller bank account.
Therefore, all of the Company's accounts receivable remain on the balance
sheet and a loan payable equal to the amounts advanced by Heller also appears
on the balance sheet. The Company records and pays monthly an interest expense
computed daily at the rate of 2% over the current prime rate and factor fee
expense. Collection on approved accounts is applied to the open account
receivable and the Heller loan account.
Rates in effect were as follows:
01/01/96 through 03/26/97 ......... 10.25%
03/27/97 through 01/01/98 ......... 10.25%
02/02/98 through 09/29/98 ......... 10.00%
09/30/98 through 10/16/98 ......... 9.75%
10/17/98 through 11/17/98 ......... 9.50%
11/18/98 through 12/31/98 ......... 9.25%
Average outstanding loan balances for the years ended December 31, 1998
and 1997 were approximately $2.6 million and $1.9 million, respectively. The
high outstanding balances for those years were $4.0 million and $3.2 million,
respectively.
Note 3: STATE AND LOCAL INCOME TAXES
Taxes consist of the following:
1998 1997
----------- ----------
New York State income taxes ............ $ 15,841 $ 8,183
New Jersey State income taxes .......... 3,182 2,735
New York City income taxes ............. 138,688 70,677
--------- --------
$ 157,711 $ 81,595
========= ========
F-37
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Notes to Financial Statements -- (Continued)
December 31, 1998 and 1997
Note 4: NET SALES
Net sales consists of the following:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Sales ....................................... $ 20,340,045 $ 16,039,672
Less: Sales, returns and discounts .......... 346,561 1,122,977
------------ ------------
$ 19,993,484 $ 14,916,695
============ ============
</TABLE>
Note 5: INTEREST
Interest expense for 1998 and 1997 was $292,676 and $241,225,
respectively, all of which was charged to operations.
Note 6: RENT
The Company leases office space under a five-year operating lease which
expires January 31, 2007. Future minimum rentals are as follows:
1999 ............... $ 126,000
2000 ............... 126,000
2001 ............... 126,000
2002 ............... 132,417
2003 ............... 133,000
Thereafter ......... 410,083
----------
$1,053,500
==========
Note 7: PROFIT SHARING PLAN
The Company has a defined contribution Profit-Sharing Plan beginning
January 1, 1997, covering substantially all of its employees. Employees qualify
based on age and hours of service. The amount of the contribution is determined
by the Board of Directors. The profit sharing plan contributions for 1998 and
1997 were $45,030 and $38,517, respectively.
F-38
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Balance Sheets
March 31, 1999 and December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash ........................................................ $ 187 $ 45
Accounts Receivable -- net .................................. 5,199 4,463
Inventory ................................................... 2,454 2,311
------ ------
Total current assets ...................................... 7,840 6,819
------ ------
Net property and equipment .................................. 312 181
Other assets ................................................ 508 28
------ ------
Total Assets ............................................. $8,660 $7,028
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ............................................ $2,494 $2,459
Loan payable ................................................ 3,369 2,462
Other current liabilities ................................... 158 49
------ ------
Total current liabilities ................................. 6,021 4,970
------ ------
Stockholders' Equity
Common Stock, no par value (authorized 200 shares, issued and
outstanding 100 shares) ................................... 300 300
Retained earnings ........................................... 2,339 1,758
------ ------
Total stockholders' equity ................................ 2,639 2,058
------ ------
Total Liabilities and Stockholders' Equity ............... $8,660 $7,028
====== ======
</TABLE>
See notes to financial statements.
F-39
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Statements of Income and Retained Earnings (Unaudited)
Three Months Ended March 31, 1999 and March 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
-------------- -------------
<S> <C> <C>
Net Sales ............................................ $5,384 $4,868
Cost of Sales ........................................ 4,123 3,596
------ ------
Gross Profit ........................................ 1,261 1,272
Selling, general and administrative expenses ......... 604 509
------ ------
Income from operations .............................. 657 763
Interest expense ..................................... 76 67
------ ------
Income before provision for income taxes ............ 581 696
Provision for income taxes ........................... -- 16
------ ------
Net income .......................................... 581 680
Retained earnings
Beginning of period ................................. 1,758 475
Shareholders distributions .......................... -- (50)
------ ------
Retained earnings -- end of period .................. $2,339 $1,105
====== ======
</TABLE>
See notes to financial statements.
F-40
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1999 and March 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 581 $ 680
Adjustments to reconcile net income to net cash provided by
operating activities:
Accounts receivable ..................................... (736) (228)
Inventory and prepaid assets ............................ (143) (579)
Accounts payable and accrued expenses ................... 144 15
-------- --------
Net cash used by operating activities .................. (154) (112)
Cash flows from investing activities:
Purchases of furniture and fixtures ....................... (131) --
Cash flows from financing activities:
Borrowing on loan payable ................................. 5,330 4,000
Repayments on loan payable ................................ (4,423) (3,809)
Distributions to shareholder .............................. (480) (50)
-------- --------
Net cash provided by financing activities .................. 427 141
Net increase in cash ....................................... 142 29
Cash -- beginning of period ................................ 45 10
-------- --------
Cash -- end of period ...................................... $ 187 $ 39
======== ========
</TABLE>
See notes to financial statements.
F-41
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Notes to Quarterly Financial Statements
Three Months Ended March 31, 1999 and March 31, 1998
1. ORGANIZATION AND BASIS OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its consolidated subsidiary. All significant inter-company transactions and
balance have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results of
operations for the periods presented have been included.
The financial data at December 31, 1998 is derived from audited financial
statements for the year ended December 31, 1998, and should be read in
conjunction with the audited financial statements and notes thereto. Interim
results are not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. SUBSEQUENT EVENTS
The Company has entered a definitive agreement to be purchased by The
Pietrafesa Corporation as more fully described in this prospectus.
F-42
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Stockholders
Windsong, Inc.
We have audited the accompanying balance sheets of Windsong, Inc. as of
December 31, 1998 and 1997, and the related statements of income and retained
earnings (accumulated deficit) and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Windsong, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Weissbarth, Altman & Michaelson LLP
New York, New York
May 7, 1999
F-43
<PAGE>
WINDSONG, INC.
Balance Sheets December 31, 1998 and 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Current assets
Cash (Note 2) ................................................. $ 126,179 $ 700
Accounts receivable (Note 1,2,3) .............................. 5,643,217 5,573,629
Insurance claim receivable .................................... -- 37,229
Inventories (Note 1,2,3,5,14) ................................. 6,584,546 5,308,870
Other (Note 6) ................................................ 729,941 223,748
------------ ------------
Total current assets ........................................ 13,083,883 11,144,176
------------ ------------
Property and equipment, net (Note 2,7,10) ...................... 565,902 256,621
------------ ------------
Other assets
Note receivable-officer/stockholder (Note 4,6,15) ............. -- 1,036,436
Loan receivable-affiliated company (Note 8) ................... 437,429 --
Organization costs, net of accumulated amortization of $-0- and
$814 (Note 2)................................................ -- 623
Security deposits and other ................................... 71,268 82,329
------------ ------------
Total other assets .......................................... 508,697 1,119,388
------------ ------------
$ 14,158,482 $ 12,520,185
============ ============
</TABLE>
See accompanying notes to financial statements
F-44
<PAGE>
LIABILITIES and STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Current liabilities
Current portion of obligations under capital leases (Note 2,7,10,15). $ 124,685 $ --
Accounts payable and accrued expenses (Note 1,2,9,11,13,14,15) .......... 4,143,299 7,517,193
Advances from factor (Note 3,15) ........................................ 7,301,274 3,082,608
Due to affiliated company ............................................... -- 118,043
State income taxes payable (Note 2) ..................................... 25,341 32,090
Accounts payable -- subordinated (Note 9,15) ............................ 1,379,568 --
------------ ------------
Total current liabilities ............................................. 12,974,167 10,749,934
Obligations under capital leases (Note 2,7,10,15) ........................ 227,628 --
Deferred rent expense (Note 2,10) ........................................ 8,225 13,901
Accounts payable-subordinated (Note 9,15) ................................ -- 1,379,568
------------ ------------
Total liabilities ..................................................... 13,210,020 12,143,403
------------ ------------
Commitments and contingencies (Note 1,3,10,11,12,13,14,16)
Stockholders' equity
Common stock-no par value --
- Class A (voting) -- 1,000 shares authorized, 200 shares issued and
outstanding ........................................................... 200 200
- Class B (non-voting) -- 1,000 shares authorized, 800 shares issued
and outstanding ....................................................... 800 800
Additional paid-in capital ............................................... 6,000 6,000
Retained earnings ........................................................ 941,462 369,782
------------ ------------
Total stockholders' equity ............................................ 948,462 376,782
------------ ------------
$ 14,158,482 $ 12,520,185
============ ============
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
WINDSONG, INC.
Statements of Income and Retained Earnings (Accumulated Deficit)
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Net sales ............................................ $ 63,630,094 $ 30,330,207 $ 6,202,405
Cost of goods sold ................................... 49,884,050 23,861,570 5,444,006
------------ ------------ -----------
Gross profit ......................................... 13,746,044 6,468,637 758,399
Selling and distribution expenses .................... 4,527,731 1,858,492 400,253
General and administrative expenses .................. 6,546,268 3,883,081 340,978
------------ ------------ -----------
Income from operations ............................... 2,672,045 727,064 17,168
Interest expense, net ................................ 1,661,405 317,214 13,937
------------ ------------ -----------
Income before provision for income taxes ............. 1,010,640 409,850 3,231
Provision for income taxes ........................... 46,000 35,000 2,500
------------ ------------ -----------
Net income ........................................... 964,640 374,850 731
Retained earning (accumulated deficit) -- beginning of
year ................................................ 369,782 (5,068) (5,799)
Distributions to stockholders ........................ (392,960) -- --
------------ ------------ -----------
Retained earnings -- end of year ..................... $ 941,462 $ 369,782 $ (5,068)
============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
WINDSONG, INC.
Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
Increase (decrease) in cash
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income ........................................... $ 964,640 $ 374,850 $ 731
------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities ...................
Depreciation and amortization ...................... 156,882 45,629 24,895
Effect of straight-lining minimum lease
payments .......................................... (5,676) 13,901 --
Loss on disposal of property and equipment ......... -- 15,294 --
Net basis adjustment of property and equipment (3,831) -- --
Provision for doubtful accounts .................... 20,000 -- --
Computer training expense incurred in connec-
tion with property and equipment acquired
under capital lease ............................... 67,840 -- --
Note receivable-officer/stockholder converted
into salary ....................................... 1,036,436 -- --
Changes in operating assets and liabilities
Accounts receivable .................................. (89,588) (4,220,872) (1,352,757)
Insurance claim receivable ........................... 37,229 10,667 (47,796)
Inventories .......................................... (1,275,676) (3,122,119) (1,202,185)
Other current assets ................................. (506,193) (138,274) (84,674)
Security deposits and other .......................... 11,061 (70,244) (10,067)
Accounts payable and accrued expenses ................ (3,373,894) 5,011,137 2,905,955
Advances from factor ................................. 4,218,666 2,640,551 442,057
State income taxes payable ........................... (6,749) 32,090 --
------------ ------------ ------------
Total adjustments .................................. 286,507 217,760 675,428
------------ ------------ ------------
Net cash provided by operating activities, carried
forward ............................................ $ 1,251,147 $ 592,610 $ 676,159
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
WINDSONG, INC.
Statements of Cash Flows -- continued
For the Years Ended December 31, 1998, 1997 and 1996
Increase (decrease) in cash
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Net cash provided by operating activities, brought forward .......... $ 1,251,147 $ 592,610 $ 676,159
----------- ---------- ----------
Cash flows from investing activities
Increase in note receivable officer/stockholder, net ............... -- (74,321) --
Payments to affiliated company ..................................... (555,472) (284,904) (686,127)
Payments for property and equipment ................................ (101,416) (232,785) (54,293)
Payments for organization costs .................................... -- -- (1,000)
----------- ---------- ----------
Net cash used in investing activities ........................... (656,888) (592,010) (741,420)
----------- ---------- ----------
Cash flows from financing activities
Distributions to shareholders ...................................... (392,960) -- --
Payments on obligations under capital lease, net of certain
adjustments by lessor ............................................ (75,820) -- --
----------- ---------- ----------
Net cash used in financing activities ........................... (468,780) -- --
----------- ---------- ----------
Net increase (decrease) in cash ..................................... 125,479 600 (65,261)
Cash -- beginning of year ........................................... 700 100 65,361
----------- ---------- ----------
Cash -- end of year ................................................. $ 126,179 $ 700 $ 100
=========== ========== ==========
Supplemental disclosure of cash flow information:
Cash was paid for
Income taxes ..................................................... $ 64,745 $ 4,901 $ 750
=========== ========== ==========
Interest, net of interest received from factor ................... $ 1,638,830 $ 381,530 $ 15,810
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
WINDSONG, INC.
Statement of Cash Flows -- continued
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ -------------- ------------
<S> <C> <C> <C>
Supplemental schedules of non-cash operating,
investing and financing activities:
Acquisition of property and equipment and
$67,840 in training under capital leases, net of
certain adjustments by lessor ....................... $ 428,133 $ -- $ --
========= =========== =========
Reclassification of amount from property and
equipment, net, to organization costs, net .......... $ 120 $ -- $ --
========= =========== =========
Reclassification of accounts payable to accounts
payable-subordinated ................................ $ -- $ 399,899 $ --
========= =========== =========
Issuance of 800 shares of newly-authorized Class
B (non-voting) common stock and a correspond-
ing increase in other current assets. (The Com-
pany's voting common stock has been desig-
nated as Class A.) .................................. $ -- $ 800 $ --
========= =========== =========
Acquisition of the following net assets of an affili-
ated company, at their book value in exchange
for (a) satisfaction of the Company's receivable
from the affiliated company, in the amount of
$897,860, and (b) a payable to the affiliated
company, in the amount of $118,043:
Note receivable -- officer/stockholder ................ $ -- $ 962,115 $ --
Property and equipment, net ........................... -- 51,770 $ --
Security deposits and other ........................... -- 2,018 $ --
--------- ----------- ---------
$ -- $ 1,015,903 $ --
========= =========== =========
Inventories acquired for accounts payable -- sub-
ordinated ........................................... $ -- $ -- $ 979,669
========= =========== =========
Property and equipment acquired for decrease in
due from affiliated company ......................... $ -- $ -- $ 2,777
========= =========== =========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
WINDSONG, INC.
Notes to Financial Statements
Note 1 -- Description of business
Windsong, Inc. (the Company) was incorporated on August 3, 1995 and
commenced substantive operations as of January 1, 1996 and approximately $3.3
million of the Company's sales occurred in the fourth quarter of 1996.
Windsong, Inc. is engaged in developing, designing and sourcing
private-label knit and woven shirts for distribution to a relatively small
number of retail customers located throughout the United States. Additionally,
the Company has entered into a long-term licensing agreement with a certain
designer to source and distribute knit and woven shirts and sweaters throughout
the United States (Note 13).
During 1996, the Company's stockholder and another individual who
controlled the Company's major supplier had an agreement to provide financing
to the Company (Note 9). During 1996, in connection with that agreement, a
substantial portion of the Company's inventory was acquired from the major
supplier. Also, in connection with that agreement, an affiliated company
(hereinafter referred to as affiliated company) controlled by the Company's
stockholder paid certain expenses during the year and was reimbursed for
payment of those expenses by the end of the year (Note 10). All expenses paid
by the affiliated company for the Company have been included in the results of
operations.
Also during 1996, (a) the Company reimbursed the affiliated company for
amounts incurred on its behalf (Note 10) and (b) the aforementioned individual
had subscribed to shares of the Company's common stock and, accordingly, was
previously identified as a Company stockholder; however, that subscription
expired prior to December 31, 1996, whereupon those subscribed shares were
issued, instead, to the Company's sole stockholder.
During the last quarter of 1996 the affiliated company, a contract
manufacturer for predominantly one customer, substantially terminated its
operations. The Company assumed none of its affiliate's customers and did not
import/distribute the same products as the affiliate. Neither the affiliated
company nor the Company have any manufacturing facilities.
During 1997, the Company:
a. assumed (1) sponsorship of a defined benefit pension plan that was
previously sponsored by the affiliated company (Note 11); (2) the
affiliated company's remaining obligation under non-cancellable leases for
office and warehouse space (Note 10); and (3) a small number of affiliated
company employees;
b. became totally responsible for certain expenses that had been previously
allocated between the Company and the affiliated company; and
c. exchanged its intercompany receivable for assets of the affiliate, at
their net book value including property and equipment consisting of
approximately $50,000 and $2,000 for automobiles and furniture and
equipment, respectively.
Based on the above facts the transaction between the Company and the
affiliated company in 1997 does not meet the criteria for an acquisition of a
business as discussed in Article 11 of Regulation S-X or Accounting Principle
Board Opinion Number 16.
During 1998 and 1997, a substantial portion of the Company's inventories
were acquired from a relatively small number of suppliers.
F-50
<PAGE>
WINDSONG, INC.
Notes to Financial Statements -- (Continued)
Note 2 -- Summary of significant accounting policies
a) Use of estimates
The preparation of financial statements requires the Company's management
to estimate the current effects of transactions and events whose ultimate
outcomes may not be determinable until future years. Consequently, the
estimated current effects could differ from the effects of the ultimate
outcomes.
b) Cash
Cash includes cash on hand and demand deposits with a financial
institution located in Connecticut. As of December 31, 1998, deposits with that
financial institution in the amount of approximately $194,000 are not covered
by federal deposit insurance.
c) Inventories
Inventories are valued at the lower of cost (principally the specific
identification method) or market.
d) Property and equipment and depreciation
Property and equipment is stated at cost. Depreciation is provided over
the estimated useful lives of the assets, utilizing principally the
straight-line method. Expenditures for maintenance, repairs and renewals, which
neither materially add to the value of the property nor appreciably extend its
useful life, are charged to operations as incurred. When depreciable assets are
sold or otherwise retired from service, their cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in the results of operations.
The Company entered into non-cancellable capital leases for computer
software and equipment, as well as office and warehouse equipment. Under the
terms of the leases, (a) the lessors retain a security interest in the leased
assets and (b) the Company is obligated for the payment of taxes, insurance and
maintenance costs, which are included in the results of operations.
The asset values related to capital leases are included in property and
equipment at the present value of the minimum lease payments at inception plus
any additional costs incurred or fair value, if lower. The capital lease
obligations are reflected as part of current and non-current liabilities, and
the associated interest is charged to expense over the related lease terms.
e) Organization costs and amortization
Organization costs were originally stated at cost and amortized over five
years, utilizing the straight-line method. At December 31, 1998, these costs
have been fully amortized. Amortization, included in the results of operations,
amounted to $743, $407 and $407 for 1998, 1997 and 1996, respectively.
f) Deferred rent expense
Deferred rent expense represents the cumulative effect of straight-lining
minimum lease payments which, for financial statement purposes, are required to
be recognized as rent expense on a straight-line basis over the lease term.
g) Advertising costs
The costs of cooperative advertising are charged to expense when related
sales are recognized. All other costs of advertising are charged to expense as
incurred. Total advertising costs amounted to approximately $372,000, $126,000
and $37,500 for 1998, 1997 and 1996, respectively, of which approximately
$238,000, $62,000 and $0 respectively, related to cooperative advertising.
F-51
<PAGE>
WINDSONG, INC.
Notes to Financial Statements -- (Continued)
Note 2 -- Summary of significant accounting policies -- (Continued)
h) Income taxes
The Company is treated as an S Corporation for federal income tax
purposes. As an S Corporation, the taxable income or loss and tax credits of
the Company are allocated to its stockholder. State income taxes are provided
to the extent that S Corporation status is not recognized for such purposes.
i) Reclassifications
Certain items included in the 1997 and 1996 financial statements, as
originally issued, have been reclassified to conform to the 1998 presentation.
Note 3 -- Accounts receivable
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Accounts assigned to factor (a) ........... $ 5,654,907 $ 5,443,921
Accounts not assigned to factor ........... 8,310 129,708
----------- -----------
5,663,217 5,573,629
Less: allowance for doubtful accounts .......... 20,000 --
----------- -----------
Total accounts receivable ...................... $ 5,643,217 $ 5,573,629
=========== ===========
</TABLE>
(a) The Company has an arrangement with a commercial factor that includes
the terms and conditions discussed below.
o The Company receives advances from the factor in accordance with a
formula that is based upon --
(1) the "net face amount", as defined, of assigned receivables (less a
factoring commission) plus
(2) eligible inventories, as defined, less
(3) certain amounts held by the factor for letters of credit opened and
liabilities owed to the factor.
o The aforementioned advances are repaid as the assigned receivables are
collected.
o Interest is charged or credited on outstanding balances due to or from
the factor at a specified percentage (the percentage) above the prime
rate of a certain bank, as quoted from time to time. The percentage was
2% through September 30, 1997. Effective October 1, 1997, the
percentage was 1.5% (decreased to .5% as of October 1, 1998), except
for "overadvances", in which case the percentage was 4.5% (decreased to
1% as of October 1, 1998). The "overadvances" percentage was 5% above
the prime rate of a certain bank through September 30, 1997.
o Factor commissions are charged in an amount equal to a specified
percentage of assigned receivables. That percentage was 1% through
September 30, 1997. Effective October 1, 1997, that percentage was .75%
(decreased to .5% for the period from October 1, 1998 until September
30, 1999, then .6% thereafter).
o Customary charges are made by the factor in connection with (a) letters
of credit that are issued for the Company's account to its suppliers
and (b) the servicing of assigned receivables.
o Amounts due to the factor, as well as any outstanding letters of
credit, are secured by the Company's trade receivables and inventories.
o Amounts due to the factor are also guaranteed by a Company
officer/stockholder.
F-52
<PAGE>
WINDSONG, INC.
Notes to Financial Statements -- (Continued)
Note 3 -- Accounts receivable -- (Continued)
Amounts were due (to)/from the factor as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -----------
<S> <C> <C>
Accounts receivable assigned to factor .......... $ 5,654,907 $ 5,443,921
Less: advances from the factor .................. 7,301,274 3,082,608
------------- -----------
$ (1,646,367) $ 2,361,313
============= ===========
</TABLE>
Factor commissions and interest expense, net, included in the results of
operations, amounted to $484,757 and $1,298,176, respectively, for 1998,
$322,155 and $367,884, respectively, for 1997 and $35,670 and $14,908,
respectively, for 1996.
Note 4 -- Note receivable-officer/stockholder
A note receivable-officer/stockholder, which bore interest at the
short-term federal rate, as published by the Internal Revenue Service from time
to time, was converted into salary during 1998. Interest income, included in
the results of operations, amounted to $62,573 and $64,316, for 1998 and 1997,
respectively.
Note 5 -- Inventories
Inventories consist of the following:
1998 1997
----------- -----------
Raw materials ............ $ 85,904 $ 367,122
Work-in-process .......... -- 278,336
Finished goods ........... 6,498,642 4,663,412
----------- -----------
$ 6,584,546 $ 5,308,870
=========== ===========
<PAGE>
Note 6 -- Other current assets
Other current assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Prepaid/unearned sales allowances (1)................................ $ 445,598 $ --
Interest receivable on note receivable-officer/stockholder .......... 126,889 64,316
Advances to officers/stockholders ................................... 105,273 --
Deposit on inventory purchase ....................................... -- 100,000
Prepaid expenses and other .......................................... 52,181 59,432
--------- ---------
$ 729,941 $ 223,748
========= =========
</TABLE>
(1) The Company permits customers, based on their sales volume, to deduct from
such customer's remittances to the Company a specified amount. To the extent
that the customer's deduction exceeds the amount allowable, such excess is
adjusted by reducing the sales allowance in the subsequent period. The
excess amount is reflected as prepaid/unearned sales allowance.
Note 7 -- Property and equipment, net
Property and equipment, net, consists of the following:
<TABLE>
<CAPTION>
Estimated
Useful Lives
in Years 1998 1997
------------ --------- ---------
<S> <C> <C> <C>
Furniture and equipment ....................................... 5 -- 7 $ 254,724 $ 232,522
Automobiles ................................................... 5 146,881 202,195
Computer software ............................................. 3 70,981 51,036
Property and equipment under capital leases (Note 10) ......... 3 -- 5 360,293 --
--------- ---------
832,879 485,753
Less accumulated depreciation and amortization ................ 266,977 229,132
--------- ---------
$ 565,902 $ 256,621
========= =========
</TABLE>
F-53
<PAGE>
WINDSONG, INC.
Notes to Financial Statements -- (Continued)
Note 7 -- Property and equipment, net -- (Continued)
Included in property and equipment are assets acquired from an affiliated
company during 1997. As of January 1, 1998, the cost basis and related
accumulated depreciation of certain of those assets were adjusted to better
reflect net book value at the time of acquisition. The foregoing resulted in
the recognition of a net basis adjustment credit of $3,831, which is included
in other income.
Property and equipment under capital leases consist of the following:
1998
---------
Computer software ...................... $ 128,790
Computer and office equipment .......... 180,210
Warehouse equipment .................... 51,293
---------
$ 360,293
=========
Depreciation and amortization on property and equipment, included in the
results of operations, amounted to $156,139, $45,222, and $24,488 for 1998,
1997 and 1996, respectively.
Included in accumulated depreciation and amortization is accumulated
depreciation related to capital leases in the amount of $68,060 as of December
31, 1998.
Note 8 -- Loan receivable-affiliated company
The loan receivable-affiliated company is due on demand and bears interest
at the short-term federal rate, as published by the Internal Revenue Service
from time to time, commencing January 1, 1999 (extended from October 1, 1998).
The Company has expressed its intent not to demand payment on this loan prior
to January 1, 2000 (extended from October 1, 1999).
Note 9 -- Accounts payable
One of the Company's largest suppliers has agreed that approximately $1.4
million of its accounts payable shall be subordinated to all other liabilities
of the Company.
During 1998, the Company and the supplier agreed that, effective January
1, 1998, accounts payable to that supplier will bear interest as follows:
o for the subordinated portion, 8-1/2% per annum, retroactive to May 15,
1996.
o for the remaining portion, a rate equal to the prime rate of the
supplier's bank, as quoted from time to time.
Total interest expense, included in the results of operations, related to
this supplier amounted to $405,595 for 1998. Interest on the subordinated
debt amounted to $275,934 ($114,679 and $161,255 for 1998 and prior years,
respectively). Interest on accounts payable amounted to $129,661 for 1998.
<PAGE>
On April 14, 1999, $690,000 of principal of the subordinated debt was
paid. The balance along with all unpaid interest is expected to be paid during
June, 1999.
Note 10 -- Leases
a) Capital leases
As of December 31, 1998, the future minimum payments under capital leases
are as follows:
Total Net
Payments Interest Portion (1) Payments
--------- -------------------- ---------
1999 ............ $ 159,332 $ 34,647 $ 124,685
2000 ............ 155,082 19,774 135,308
2001 ............ 96,584 4,264 92,320
--------- -------- ---------
$ 410,998 $ 58,685 $ 352,313
========= ======== =========
----------
(1) Interest rates range from approximately 9% to approximately 17% per
annum. Interest expense, included in the results of operations,
amounted to $19,907.
F-54
<PAGE>
WINDSONG, INC.
Notes to Financial Statements -- (Continued)
Note 10 -- Leases -- (Continued)
b) Operating leases
The Company is obligated under non-cancellable operating leases for
office, showroom and warehouse space. The leases, which expire on various dates
through November, 2002 provide for minimum annual payments. Additional
information about the leases is as follows:
o The lease for office space was assumed from an affiliated company as of
January 1, 1997 (Note 1). Payments under the lease for office space were
guaranteed by an officer/ stockholder of the Company. The lease contained
a two-year renewal option which was not exercised. The Company's lease
obligation was terminated effective April 19, 1999 (Note 16).
o The lease for showroom space provides for contingent rental payments,
consisting of a proportionate share of any increases in real estate taxes
and operating expenses.
o One of the Company's two leases for warehouse space expired during August
1998. The remaining lease contains a five-year renewal option and provides
for contingent rentals consisting of a proportionate share of real estate
taxes, insurance and operating expenses.
b) Operating leases-continued Future minimum lease payments are as
follows:
Office and
Showroom Warehouse
Total Space Space
----------- ---------- -----------
1999 ............ $ 327,713 $ 80,616 $ 247,097
2000 ............ 288,897 41,800 247,097
2001 ............ 247,097 -- 247,097
2002 ............ 226,503 -- 226,503
----------- --------- ---------
$ 1,090,210 $ 122,416 $ 967,794
=========== ========= =========
<PAGE>
Rent expense, included in the results of operations, amounted to $419,036
and $134,283 for 1998 and 1997, respectively, of which $38,794 and $7,209,
respectively consisted of contingent rentals.
During 1996, the Company rented office space from an affiliated company
(Note 1) on a month-to-month basis and reimbursed the affiliated company for
other expenses necessary for the Company's operations.
A summary of the reimbursed expenses follows:
<TABLE>
<CAPTION>
Rent Other Total
-------- ---------- -----------
<S> <C> <C> <C>
For the eight months ended August 31, 1996, as
previously reported ............................... $ 9,059 $ 146,214 $ 155,273
For the period from September 1 through
December 31, 1996 (a) ............................. 4,055 (134,792) (130,737)
-------- ---------- ----------
Total for the year ended December 31, 1996 ......... $ 13,114 $ 11,422 $ 24,536
======== ========== ==========
</TABLE>
----------
(a) After giving effect to a credit resulting from a refinement in the way
in which expenses are allocated between the Company and the affiliated
company.
Additionally, the Company makes payments under various short-term leases
for equipment. Such payments are not significant to the Company's operations.
F-55
<PAGE>
WINDSONG, INC.
Notes to Financial Statements -- (Continued)
Note 11 -- Employee benefit plan
Effective January 1, 1997, the Company assumed the sponsorship, from the
affiliated company, of a defined benefit pension plan for all eligible
employees. The plan provides for retirement benefits based on employees' length
of service and earnings. Pension cost is actuarially determined and annual
contributions to the plan are made in amounts that meet the minimum funding
standards of the Employee Retirement Income Security Act (ERISA) and the
Internal Revenue Code.
<TABLE>
<CAPTION>
Pension Benefits
--------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year ................ $ 2,290,708 $ 967,290
Service cost ........................................... 429,801 402,653
Interest cost .......................................... 160,350 118,447
Amendments ............................................. -- 1,006,833
Actuarial gain/(loss) .................................. 73,718 (127,377)
Benefits paid .......................................... -- (77,138)
----------- ------------
Benefit obligation at end of year ...................... 2,954,577 2,290,708
----------- ------------
Changes in plan assets:
Fair value of plan assets at beginning of year ......... 1,229,381 1,227,394
Actual return on plan assets ........................... 13,614 79,125
Employer contributions ................................. 871,000 --
Benefits paid .......................................... -- (77,138)
----------- ------------
Fair value of plan assets at end of year ............... 2,113,995 1,229,381
----------- ------------
Funded status .......................................... (840,582) (1,061,327)
Unrecognized actuarial gain ............................ (185,877) (356,793)
Unrecognized prior service cost ........................ 469,335 488,891
Unrecognized net obligation ............................ 71,761 75,178
Unrecognized intangible asset .......................... (15,908) (17,066)
----------- ------------
Net amount recognized .................................. $ (501,271) $ (871,117)
=========== ============
</TABLE>
The decrease in the pension liability and net periodic cost result from
(1) 1997 plan amendments to the benefit formula and (2) a change in plan
actuarial assumptions for recognizing the effect of the amendments in 1997.
F-56
<PAGE>
WINDSONG, INC.
Notes to Financial Statements -- (Continued)
Note 11 -- Employee benefit plan -- (Continued)
Amount recognized in the statement of financial position consist of:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Accrued benefit liability ..................... $ (501,271) $ (871,117)
=========== ===========
Weighted-average assumptions as of December 31:
Discount rate ................................ 7.00% 7.00%
Expected return on plan assets ............... 7.00 7.00
Rate of compensation increase ................ 4.00 4.00
Components of net periodic cost consist of:
Service cost ................................. $ 429,801 $ 402,653
Interest cost ................................ 160,350 118,447
Expected return on plan assets ............... (105,006) (83,481)
Amortization of prior service cost ........... 19,556 517,942
Amortization of net obligation ............... 3,417 3,417
Amortization of actuarial gain ............... (5,806) (4,828)
Underaccrual of prior service cost ........... (1,041) (83,033)
----------- -----------
Net periodic cost ............................ $ 501,271 $ 871,117
=========== ===========
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets were $2,955,000, $ 2,615,000, and $2,114,000 respectively,
as of December 31, 1998 and $2,291,000, $2,100,000 and $1,229,000 respectively,
as of December 31, 1997.
As of December 31, 1998, plan assets consisted primarily of investments in
money market and mutual funds and common stocks under discretionary management
in accordance with ERISA.
Note 12 -- Purchase orders
As of December 31, 1998, the Company is contingently liable on outstanding
letters of credit of approximately $4.5 million, against open purchase orders
of approximately $13.7 million.
Note 13 -- Licensing agreement
The Company's licensing agreement with a certain designer (a) expires on
December 31, 2001, or sooner if the Company is unable to achieve certain sales
volumes before that date, (b) contains an option that allows the Company to
renew the licensing agreement for an additional five years under substantially
the same terms, except for varying minimum annual payments as set forth in the
licensing agreement, and (c) provides for the payment of the following:
a) Specified percentages of annual net sales (as defined in the agreement, as
amended) of the designer's products, with minimum annual payments
totalling 75% of the prior year's percentage payments, for each of the
calendar years from January 1, 1998 through December 31, 2001. Percentage
payments, included in the results of operations, amounted to approximately
$1,747,000, $778,000 and $37,500 for 1998, 1997 and 1996, respectively,
and exceed the minimum annual payments for 1998, 1997 and 1996,
respectively. The foregoing includes amounts accrued, but unpaid as of
December 31, 1998, 1997, and 1996.
b) A specified percentage of annual net sales of the designer's products or
an agreed upon amount, to be used for advertising, commencing January 1,
1998. (The amount of such advertising expense, included in the results of
operations, amounted to approximately $132,000, $50,000 and $37,500 for
1998, 1997 and 1996, respectively.)
c) Reimbursements for certain travel and other expenses incurred by the
designer.
F-57
<PAGE>
WINDSONG, INC.
Notes to Financial Statements -- (Continued)
Note 14 -- Other Agreements
The Company has agreements with (a) an independent sales representative
for the payment of commissions on licensed products sold to certain significant
customers and (b) a purchasing agent for the payment of commissions on certain
products acquired by the Company for resale.
Additionally, the Company provides members of management with bonuses that
are payable if certain Company goals are attained. The total of such bonuses,
included in the results of operations, amounted to approximately $1,578,000,
$612,000 and $0 for 1998, 1997 and 1996, respectively.
Note 15 -- Interest expense, net
Interest expense, net, consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- --------
<S> <C> <C> <C>
Interest on --
Advances from factor, net (Note 3) ..................... $ 1,298,176 $ 367,884 $ 14,908
Accounts payable (Note 9) .............................. 405,595 12,814 --
Obligations under capital lease (Note 10) .............. 19,907 -- --
Other, net ............................................. 300 832 --
----------- --------- --------
1,723,978 381,530 14,908
Interest income from note receivable officer/stockholder
(Note 4) ............................................. (62,573) (64,316) --
Other .................................................. -- -- (971)
----------- --------- --------
$ 1,661,405 $ 317,214 $ 13,937
=========== ========= ========
</TABLE>
Note 16 -- Subsequent event
On April 1, 1999, the Company entered into a non-cancellable lease for
office space from a new affiliated company. The lease which expires on April 1,
2009, provides for initial fixed annual gross rental payments of approximately
$195,000 per annum, and increases at the rate of 6% per annum during the lease
term. The lease payments include the Company's proportionate share of operating
expenses and real estate taxes.
F-58
<PAGE>
WINDSONG, INC.
Balance Sheets
March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
--------------- ---------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 20,717 $ 126,179
Accounts receivable, net .................................... 8,527,200 5,643,217
Due from affiliates ......................................... 720,136 --
Due from officers ........................................... 166,139 232,162
Inventory ................................................... 9,472,703 6,584,546
Prepaid expenses and other current assets ................... 422,279 497,779
------------ ------------
Total current assets ..................................... 19,329,174 13,083,883
Due from affiliates ............................................ -- 437,429
Property and equipment, net .................................... 597,791 565,902
Other assets ................................................... 71,268 71,268
------------ ------------
Total assets ............................................. $ 19,998,233 $ 14,158,482
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases ......... $ 125,000 $ 124,685
Advances from factor ........................................ 10,707,226 7,301,274
Accounts payable ............................................ 4,985,354 1,873,078
Accounts payable -- subordinated ............................ 1,379,568 1,379,568
Accrued expenses ............................................ 854,032 2,270,221
State income taxes payable .................................. 4,551 25,341
------------ ------------
Total current liabilities ................................ 18,055,731 12,974,161
Obligations under capital leases ............................... 186,621 227,628
Deferred rent expense .......................................... -- 8,225
------------ ------------
Total liabilities ........................................ 18,242,352 13,210,020
------------ ------------
Shareholders' equity:
Common stock -- no par value
--Class A (voting)
1,000 shares authorized
200 shares issued and outstanding ......................... 200 200
--Class B (non-voting)
1,000 shares authorized
800 shares issued and outstanding ......................... 800 800
Contributed capital ........................................... 6,000 6,000
Retained earnings ............................................. 1,748,881 941,462
------------ ------------
Total shareholders' equity ............................... 1,755,881 948,462
------------ ------------
Total liabilities and shareholders' equity ............... $ 19,998,233 $ 14,158,482
============ ============
</TABLE>
See accompanying notes.
F-59
<PAGE>
WINDSONG, INC.
Statements of Income and Retained Earnings
Three Months Ended March 31, 1999 and March 31, 1998
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1999 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
Net sales ........................................ $ 14,552,336 $ 17,311,703
Cost of sales .................................... 11,169,978 13,683,331
------------ ------------
Gross profit ..................................... 3,382,358 3,628,372
Selling and distribution expenses ................ 864,247 1,010,437
General and administrative expenses .............. 1,205,933 1,120,800
------------ ------------
Income from operations ........................... 1,312,178 1,497,135
Interest expense ................................. (334,132) (447,939)
Interest income .................................. 263 110
------------ ------------
Income before provision for income taxes ......... 978,309 1,049,306
Provision for income taxes ....................... 44,000 47,000
------------ ------------
Net income ....................................... $ 934,309 $ 1,002,306
============ ============
</TABLE>
See accompanying notes
F-60
<PAGE>
WINDSONG, INC.
Statements Of Cash Flows
Three Months Ended March 31, 1999 and March 31, 1998
(Decrease) Increase in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income .......................................................... $ 934,309 $ 1,002,306
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ...................................... 40,000 41,152
Changes in operating assets and liabilities:
Accounts receivable ............................................. (2,883,983) (7,701,394)
Due from affiliates and officers ................................ (343,573) (126,575)
Inventory ....................................................... (2,888,157) (439,109)
Prepaid expenses ................................................ 202,389 (319,892)
Accounts payable ................................................ 2,011,409 (805,644)
Accrued expenses ................................................ (344,337) (398,718)
Advances from factor ............................................ 3,405,952 8,846,243
Other assets .................................................... -- (9,146)
------------ ------------
Net cash provided by operating activities ........................ 134,009 89,223
------------ ------------
INVESTING ACTIVITIES
Purchase of fixed assets ............................................ (71,889) (88,425)
Distributions to shareholders ....................................... (126,890) --
------------ ------------
Net cash used in investing activities ............................ (198,779) (88,425)
------------ ------------
FINANCING ACTIVITIES
Payments on obligations under capital lease ......................... (40,692)
------------
Net cash used in financing activities ............................ (40,692) --
------------ ------------
(Decrease) increase in cash and cash equivalents .................... (105,462) 798
Cash and cash equivalents at beginning of period .................... 126,179 700
------------ ------------
Cash and cash equivalents at end of period .......................... $ 20,717 $ 1,498
============ ============
</TABLE>
See accompanying notes.
F-61
<PAGE>
WINDSONG, INC.
Notes to Quarterly Financial Statements
Three Months Ended March 31, 1999
1. ORGANIZATION
Windsong, Inc. ("Windsong") is engaged in developing, designing and
sourcing private-label knit and woven shirts for distribution to a relatively
small number of retail customers located throughout the United States.
Additionally, Windsong has entered into a long-term licensing agreement with a
certain designer to source and distribute knit and woven shirts and sweaters
throughout the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of Windsong's management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of operations for the periods presented have been
included.
The financial data at December 31, 1998 is derived from audited financial
statements and should be read in conjunction with the audited financial
statements and notes thereto. Interim results are not necessarily indicative of
results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires Windsong's management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------------- ---------------
(Unaudited) (Audited)
<S> <C> <C>
U.S. trade accounts receivable .............. $ 8,617,200 $ 5,663,217
Allowance for returns and discounts ......... (90,000) (20,000)
----------- -----------
$ 8,527,200 $ 5,643,217
=========== ===========
</TABLE>
Windsong has entered into a factoring arrangement on its accounts
receivable. Amounts due (owed) to the factor are $8.5 million and $5.6 million
of unmatured accounts receivable assigned to the factor, less $10.7 million and
$7.3 million of advances received from the factor, at March 31, 1999 and
December 31, 1998 respectively.
4. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
Raw materials ............................... $ 41,343 $ 85,904
Finished goods shipments-in-transit ......... 2,079,973 1,550,292
Finished goods .............................. 7,351,387 4,948,350
----------- -----------
$ 9,472,703 $ 6,584,546
=========== ===========
</TABLE>
F-62
<PAGE>
4,000,000 Shares
[GRAPHIC OMITTED]
Class A Common Stock
JANNEY MONTGOMERY SCOTT INC.
FIRST SECURITY VAN KASPER
MORGAN SCHIFF & CO., INC.
Until , 1999, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
, 1999
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 6, 1999
58,333 Shares
Class A Common Stock
[GRAPHIC OMITTED]
This prospectus relates to the offer and sale, from time to time, of up to
58,333 shares of The Pietrafesa Corporation's Class A Common Stock by a
stockholder of The Pietrafesa Corporation. We will not receive any portion of
the proceeds from the sale of shares of Class A Common Stock by the selling
stockholder. Prior to this offering, there has been no public market for our
Class A Common Stock. Our Class A Common Stock has been approved for quotation
on the Nasdaq National Market under the symbol "BRND."
The Class A Common Stock is one of two classes of Common Stock of The
Pietrafesa Corporation. Holders of shares of Class A Common Stock will elect
25% of the directors. Holders of shares of Class B Common Stock will elect 75%
of the directors and will have the power to decide substantially all other
matters submitted to stockholders. The Class B Common Stock is not being
offered to the public and is currently held by a private limited partnership.
Holders of shares of Class A Common Stock will have limited voting rights until
all shares of Class B Common Stock are converted into Class A Common Stock.
Investing in the Class A Common Stock involves risks. See "Risk Factors"
beginning on page 14.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Prospectus dated , 1999
ALT-COVER
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary ................................................................... 5
Risk Factors ......................................................................... 14
Forward Looking Statements ........................................................... 21
Capitalization ....................................................................... 23
Dividend Policy ...................................................................... 24
Selected Historical Consolidated Financial Data ...................................... 26
Pro Forma Combined Financial Data .................................................... 29
Management's Discussion and Analysis of Financial Condition and Results of Operations 39
Business ............................................................................. 54
Management ........................................................................... 65
Certain Relationships and Related Transactions ....................................... 69
Principal Stockholders ............................................................... 71
Selling Stockholder .................................................................. 72
Description of Capital Stock ......................................................... 73
Shares Eligible for Future Sale ...................................................... 76
Plan of Distribution by Selling Stockholder .......................................... 77
Legal Matters ........................................................................ 78
Experts .............................................................................. 78
Additional Information ............................................................... 79
Index to Financial Statements ........................................................ F-1
</TABLE>
---------------------
You should rely only on the information contained in this prospectus. No
dealer, salesperson or other person is authorized to give information that is
not contained in this prospectus. This prospectus is not an offer to sell nor
is it seeking an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of these securities.
Our logo and name are trademarks of The Pietrafesa Corporation. Other
trademarks, trade names or service marks appearing in this prospectus are the
property of their respective owners.
ALT-T/C
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common Stock which may be
offered for resale from time to
time by Windsong, Inc. .............. 58,333 shares of Class A Common Stock
Common Stock offered by The
Pietrafesa Corporation under a
separate prospectus ................. 4,000,000 shares of Class A Common Stock
Common Stock to be outstanding
after our offering .................. 4,333,333 shares of Class A Common Stock(1)
3,775,667 shares of Class B Common Stock, all of which are owned
by MS Pietrafesa, L.P., our sole stockholder prior to the offering.
Holders of Class B Common Stock may convert their shares at any
time on a one-for-one basis into shares of Class A Common Stock.
Holders of Class A Common Stock, voting as a class, are entitled to
Voting rights .........................
elect 25% of the members of our Board of Directors. Other than such
right to elect directors, holders of Class A Common Stock will have
very limited voting rights until all of the shares of Class B Common
Stock are converted into shares of Class A Common Stock or
otherwise cease to be issued and outstanding. See "Description of
Capital Stock."
Nasdaq National Market symbol ......... BRND
</TABLE>
- --------------------
(1) Excludes:
o shares of Class A Common Stock equal to 10% of our outstanding shares
after the offering which may be issued in the future under our Stock
Option Plan;
o shares of Class A Common Stock which may be issued as deferred purchase
price to the sellers of Diversified Apparel, Global Sourcing Network,
Components and Windsong; and
o up to 600,000 shares of Class A Common Stock which will be issued to the
underwriters if they exercise their over-allotment option.
See "Management" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Significant Acquisitions."
ALT-8
<PAGE>
the right to elect 25% of our directors, until all shares of Class B Common
Stock are converted into shares of Class A Common Stock or otherwise cease to
be outstanding. As a result, Mr. Cohen will control the outcome of
substantially all matters submitted to a vote of our stockholders. See
"Description of Capital Stock."
The Interests of our Controlling Stockholder may Conflict with the
Interests of the Holders of our Class A Common Stock
The interests of Mr. Cohen may conflict with the interests of holders of
Class A Common Stock. The concentration of voting power described above may
make us an unattractive takeover target and may discourage acquisition
proposals, even if such proposals are supported by holders of Class A Common
Stock. In addition, Mr. Cohen's voting power permits him to implement policies
not favored by, or in the best interests of, the holders of the Class A Common
Stock. In addition, as long as any Class B Common Stock is outstanding, Mr.
Cohen will be able to transfer voting control to a third party at a premium
that will not be enjoyed by holders of the Class A Common Stock. Voting power
will, in all likelihood, continue to be concentrated following conversion of
all of the outstanding shares of Class B Common Stock, since MS Pietrafesa,
L.P. would own approximately 46.6% of the outstanding shares of Class A Common
Stock following the full conversion.
Failure to Comply with Significant Covenant Restrictions in our Agreements
with our Lenders could Result in Acceleration of our Repayment Obligations
We may incur substantial additional indebtedness to fund our growth
strategy. Incurring substantial additional indebtedness would reduce our
financial flexibility and expose us to additional risks, including greater
vulnerability to economic downturns and competitive pressures.
Our agreements with our lenders contain significant operating and
financial restrictions. Our current credit agreements and other loan documents
contain restrictive covenants, including restrictions on incurrence of debt,
dividend payments, sales of assets, acquisitions and other business
combinations, transactions with affiliates, liens and investments. If we fail
to comply with existing or future debt covenants, we could default under these
agreements. If a default were to occur, the lender under such agreement could
accelerate our repayment of the indebtedness evidenced by that agreement.
Acceleration of our repayment obligations may also be required under any other
agreements then in effect containing cross-acceleration or cross-default
provisions. Any acceleration of our outstanding indebtedness could result in
foreclosure against our operating and working capital assets, the termination
of our license or other agreements and our bankruptcy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
The Market Price of our Class A Common Stock could be Adversely Affected
by Future Sales of Substantial Amounts of Shares in the Public Market
There will be an aggregate of 4,333,333 shares of Class A Common Stock
outstanding immediately after the offering, which amount could increase by up
to 600,000 shares if our underwriters exercise their over-allotment option. Of
these shares, the shares of Class A Common Stock sold in our initial public
offering and the 58,333 shares of Class A Common Stock sold in this offering
will be freely tradable under the Securities Act of 1933.
The balance of the shares of Class A Common Stock issued to Windsong, Inc.
in connection with the Windsong acquisition and the up to 3,775,667 shares of
Class A Common Stock to be issued upon conversion of the 3,775,667 outstanding
shares of Class B Common Stock will be "restricted securities" and may, in the
future, be sold in compliance with Rule 144 under the Securities Act, subject,
in the case of the shares issued to Windsong, Inc., to the resale restrictions
in the Windsong acquisition agreement. See "Shares Eligible for Future Sale."
The sale or availability for sale of a large number of shares in the
market after the offering could cause a decline in the market price of the
Class A Common Stock. This could make it more difficult for us to raise funds
through future offerings of our stock.
ALT-20
<PAGE>
Absence of Current Public Market, Determination of Public Offering Price
and Market Uncertainty may Cause the Market Price of the Class A Common Stock
to Fluctuate
There has not been a public market for the Class A Common Stock. We have
applied for listing of the Class A Common Stock on the Nasdaq National Market.
We do not know the extent to which investor interest in our stock will cause an
active trading market to develop or be sustained, or how liquid that market
might be. The market price for the Class A Common Stock could also fluctuate in
response to various factors and events, including liquidity of the market for
our shares, quarter-to-quarter variations in our results of operations and our
significant developments and of other industry participants, pricing and
competition in our industry, broad market fluctuations and economic and
political conditions not directly related to our business. The initial public
offering price of the Class A Common Stock will be determined by negotiation
between us and representatives of the underwriters. Investors may not be able
to resell their shares at or above the price that they pay in the initial
public offering.
Purchasers will be Subject to Potential Future Dilution
Issuances of Class A Common Stock pursuant to the exercise of stock
options or warrants that we may issue from time to time, or as payment of the
deferred purchase price in connection with the Diversified Apparel, Global
Sourcing Network, Components and Windsong acquisitions, could cause further
dilution in the net tangible book value per share of the Class A Common Stock.
FORWARD-LOOKING STATEMENTS
An investment in the Class A Common Stock offered hereby is speculative in
nature and involves a high degree of risk. Some statements made in this
prospectus under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements. Forward-looking statements are identified by use of terms such as
"may," "will," "expect," "anticipate," "believe," "estimate," "intend," "plan"
and similar expressions, although some forward-looking statements are expressed
differently. Although we believe these statements are reasonable, there are
important risks and uncertainties, including those discussed in the "Risk
Factors" section above, that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements, including
changes in general economic and business conditions, actions of competitors,
changes in our business strategies and the factors set forth under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
ALT-21
<PAGE>
[This page intentionally left blank]
ALT-22
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1999:
(1) our actual capitalization, giving retroactive effect to the issuances
of Class B Common Stock to our sole stockholder which have occurred or
will occur prior to the completion of the offering;
(2) our pro forma combined capitalization after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions, including the issuance of 333,333 shares of Class A Common
Stock to Windsong, based on an assumed initial offering price of $12.00
per share, as part of our acquisition of Windsong; and
(3) our pro forma combined capitalization, as adjusted to give effect to
the Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions, our sale of 4,000,000 shares of Class A Common
Stock pursuant to our initial public offering, assuming an initial
public offering price of $12.00 per share, and the application of the
net proceeds of such offering. Our pro forma combined capitalization, as
adjusted, set forth below, excludes shares of Class A Common Stock which
may be issued as deferred purchase price under the terms of the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Pro Forma Combined
Financial Data" and the audited financial statements and the notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 1999
------------------------------------------------
Pro Forma
Combined,
Actual Pro Forma Combined As Adjusted
---------- -------------------- ------------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Long term debt, net of current maturities .............. $13,054 $47,914 $ 5,914
Stockholders' equity:
Class A Common Stock, par value $.001 per share;
12,000,000 shares authorized, no shares issued and
outstanding, 333,333 shares issued and outstanding
pro forma combined and 4,333,333 shares issued and
outstanding pro forma combined, as adjusted ......... -- -- 4
Class B Common Stock, par value $.0002 per share;
10,000,000 shares authorized, 3,775,667 shares
issued and outstanding actual, pro forma combined
and pro forma combined, as adjusted ................. -- -- --
Additional paid-in capital ............................. 3,191 7,191 50,387
Retained earnings ...................................... 282 282 282
------- ------- -------
Total stockholders' equity ........................... 3,473 7,473 50,673
------- ------- -------
Total capitalization ................................... $16,527 $55,387 $56,587
======= ======= =======
</TABLE>
ALT-23
<PAGE>
DIVIDEND POLICY
We have not declared or paid any cash or other dividends on our capital
stock and we do not expect to pay dividends for the foreseeable future. We
anticipate that all of our earnings in the foreseeable future will be used for
the operation of our business, to support our growth strategy and to reduce our
indebtedness. Any future determination to pay dividends will be at the
discretion of our Board of Directors and will depend upon, among other factors,
our results of operations, financial condition and capital requirements. In
addition, our existing credit facility with PNC Bank, National Association, and
other loan agreements contain, and any successor facility will likely contain,
prohibitions on our ability to pay dividends. Please refer to the "Certain
Relationships and Related Transactions" section of this prospectus, however,
for a description of tax-related distributions required to be made by MS
Pietrafesa, L.P. to its partners under its partnership agreement. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ALT-24
<PAGE>
[This page intentionally left blank]
ALT-25
<PAGE>
PRO FORMA COMBINED FINANCIAL DATA
Our pro forma combined financial data includes our statement of operations
data which reflects our historical results after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions as if they occurred on January 1, 1998, and also includes our
balance sheet data, which reflects our balance sheet and the balance sheets of
Diversified Apparel, Global Sourcing Network, Components and Windsong as if the
acquisitions of such businesses had occurred on March 31, 1999. The
acquisitions of Diversified Apparel and Global Sourcing Network were
consummated on April 15, 1999. We have entered into definitive agreements to
purchase the Components and Windsong businesses. Our acquisition of Components
and Windsong occurred simultaneously with our initial public offering. The pro
forma combined, as adjusted financial data includes our pro forma combined
information as adjusted for our initial public offering and the application of
the proceeds of that offering. The pro forma combined financial data are based
upon preliminary estimates, available information and assumptions that
management deems appropriate, but are not necessarily indicative of the results
that would have been obtained had such events occurred at the times assumed or
our future results. The pro forma combined financial statements should be read
in conjunction with the other financial statements and notes thereto included
elsewhere in this prospectus.
The acquisitions have been recorded in the pro forma financial statements
as a purchase in accordance with Accounting Principle Board Opinion No. 16.
Accordingly, the purchase price of each acquisition has been allocated to the
fair value of the assets acquired and the amount of the liabilities assumed,
with the remainder allocated to goodwill. No other intangible assets were
acquired as part of the acquisitions. The initial, non-deferred purchase price
of Components will be paid entirely in cash. The initial, non-deferred purchase
prices of Global Sourcing Network and Diversified Apparel were paid in cash and
by the issuance of notes. The initial, non-deferred purchase price of Windsong
will be paid in cash and $4.0 million worth of Class A Common Stock valued at
the initial public offering price, assumed to be $12.00 per share, or 333,333
shares. A summary of the initial, non-deferred purchase price of the
acquisitions and allocation of each such price to the fair value of assets
acquired and liabilities assumed is shown below:
Schedule of Allocation of Purchase Price of Acquisitions
<TABLE>
<CAPTION>
Global
Diversified Sourcing Total
Apparel Network Components Windsong Combined
------------- ------------ ------------ ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Purchase Price:
Cash portion ............................... $ 800 $ 1,400 $ 4,695 $ 22,000 $ 28,895
Equity portion ............................. -- -- -- 4,000 4,000
Sellers' notes ............................. 400 800 -- -- 1,200
Costs directly associated with the
acquisition ............................... 350 350 350 400 1,450
--------- -------- -------- --------- ---------
Total purchase price ....................... $ 1,550 $ 2,550 $ 5,045 $ 26,400 $ 35,545
Allocation of Purchase Price:
Fair value of assets acquired .............. $ (2,457) $ (1,171) $ (8,660) $ (19,998) $ (32,286)
Assumption of liabilities .................. $ 1,955 $ 1,121 $ 6,021 $ 16,862 $ 25,959
--------- -------- -------- --------- ---------
Goodwill acquired .......................... $ 1,048 $ 2,500 $ 2,406 $ 23,264 $ 29,218
========= ======== ======== ========= =========
Pro forma amortization expense ............. $ 105 $ 167 $ 160 $ 1,163 $ 1,595
========= ======== ======== ========= =========
Pro forma amortization for quarter ......... $ 26 $ 42 $ 40 $ 291 $ 399
========= ======== ======== ========= =========
</TABLE>
ALT-29
<PAGE>
(5) For purposes of the acquisition pro forma adjustments, we have assumed an
acquisitions payable amount which represents the initial purchase price owed
for the Components and Windsong acquisitions and the Windsong escrow amount.
We intend to fund the Components and Windsong acquisitions using the
proceeds of the offering.
(6) Reflects additional debt assumed to be necessary to finance the
acquisitions.
(7) Reflects the elimination of common stock and retained earnings of the
acquisitions.
(8) Reflects the elimination of the additional paid-in capital of the
acquisitions and the issuance of $4.0 million worth of Class A Common Stock
associated with the acquisition of Windsong at an assumed price of $12,00
per share.
(9) Reflects assumed net proceeds of approximately $43.2 million from our
initial public offering.
(10) Reflects our use of net proceeds of our initial public offering.
ALT-35
<PAGE>
We lease a retail store facility in Syracuse, New York from Robert D.
Pietrafesa and Richard C. Pietrafesa, uncle and father, respectively, of our
President and Chief Executive Officer, under a 10-year lease expiring in 2007
requiring rental payments totaling $145,000 per year. A portion of this retail
store facility is subleased to a third party. The sublease will expire in 2000
and provides minimum rental income of $30,000 per year.
We source customer orders, including a substantial volume of the aggregate
orders for Jos.A.Bank, with an affiliate, SourceOne. SourceOne is owned by the
General Partner. SourceOne operates two manufacturing facilities in Baltimore,
Maryland of 54,000 and 125,000 square feet. SourceOne leases, directly and
through a sublease, these facilities from Jos.A.Bank. All production performed
for us by SourceOne is performed on a "cost" basis, without mark-up. None of
our employees receive compensation from SourceOne.
Morgan Schiff, an affiliate of the General Partner, provides financial
advisory and strategic consulting services to us under an agreement requiring
monthly retainer payments of $25,000. The agreement also requires us to pay
specified fees to Morgan Schiff when we consummate various acquisitions,
capital raising and financing transactions. The agreement may be terminated
annually by either party upon 30 days notice. Morgan Schiff has waived all
retainer payments otherwise payable to it for financial advisory services for
1996, 1997, 1998 and 1999, as well as all fees associated with the Diversified
Apparel, Global Sourcing Network, Components and Windsong acquisitions, the PNC
Bank credit facility and this offering. No such services were provided to us by
Morgan Schiff during those periods and in respect of those transactions, other
than investment banking and financial analyst services for which Morgan Schiff
was paid, and we received no benefit under the agreement during those periods.
Our agreement with Morgan Schiff does not compel Morgan Schiff to provide
any actual services in return for the $25,000 monthly retainer payment.
However, it was in our interest to enter into the agreement at the time of our
acquisition by MS Pietrafesa, L.P., an affiliate of Morgan Schiff, because it
was anticipated that we would be financially successful and that Morgan Schiff
would provide meaningful services in the form of merger and acquisition advice
and assistance in private capital raising activities and that the cost of those
services would be less than or equal to the cost of procuring those services
from an unaffiliated third party. However, after we were acquired in the early
1990s, our revenues increased rapidly, but our profitability declined. As a
result, during the period from 1995 through 1997, we divested our non-core
manufacturing assets, refinanced our secured lending arrangements and
negotiated the forgiveness of our subordinated indebtedness. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview." Financial analysis related to these transactions was provided by our
financial management and consultants and not by Morgan Schiff.
In April 1998, MS Pietrafesa, L.P. made a distribution of $207,000 to its
partners in accordance with its Amended and Restated Agreement of Limited
Partnership dated January 1, 1996, for the payment of income taxes incurred by
such partners on the portion of partnership income attributable to their
respective interests during 1997. In May 1999, we paid $1.5 million to MS
Pietrafesa, L.P. from amounts borrowed under the PNC Bank credit facility to
cover the tax distribution to be made by MS Pietrafesa, L.P. to its partners in
accordance with its Partnership Agreement for the payment of income taxes
incurred by such partners on the portion of partnership income attributable to
their respective interests during the period from January 1, 1998 through
September 30, 1998. A portion of the net proceeds of the offering will be
applied toward the repayment of the PNC Bank credit facility.
We reimburse, on a per-flight basis, operating expenses of an aircraft
owned by Twins Aviation, Inc., a corporation owned by our President and Chief
Executive Officer. We use this aircraft on a regularly scheduled, weekly basis
to fly staff to production meetings in New York City, as well as for customer
and contractor visits. Such reimbursements amounted to $225,000 for the year
ended December 31, 1996, $223,000 for the year ended December 31, 1997 and
$454,000 for the year ended December 31, 1998.
We believe that each of the affiliate transactions described above are on
terms no less favorable than would be generally available to us from
unaffiliated third parties. After the closing of the offering, all related
party transactions will be approved by our independent, disinterested
directors. See also "Management" and "Principal Stockholders."
ALT-68
<PAGE>
PRINCIPAL STOCKHOLDERS
The table below sets forth information as of June 30, 1999 regarding the
beneficial ownership of Class A Common Stock and Class B Common Stock, as well
as the percentage ownership of our Class A Common Stock and Class B Common
Stock. Shares of Class B Common Stock are convertible into Class A Common Stock
on a one-for-one basis, as described under "Description of Capital Stock."
Percentage ownership numbers are based on shares of Class A Common Stock and
shares of Class B Common Stock outstanding immediately following our initial
public offering and, in the case of Class B Common Stock, immediately prior to
that offering. Although shares of Class B Common Stock may be converted into
shares of Class A Common Stock at any time, the table below does not reflect
the shares of Class A Common Stock issuable to holders of Class B Common Stock
upon conversion as being beneficially owned by those holders.
Information is provided as to each of our directors, the executive
officers named in the Summary Compensation Table under "Management --
Compensation of Executive Officers," each person we know to own beneficially
more than 5% of the outstanding shares of Class A Common Stock or Class B
Common Stock and all of our directors and executive officers as a group. Except
as described below, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
MS Pietrafesa Acquisition Corporation is the general partner of MS
Pietrafesa, L.P. and has the sole right to vote the shares of Class B Common
Stock owned by MS Pietrafesa, L.P. and to direct the disposition of such
shares. Philip Ean Cohen is the sole stockholder of MS Pietrafesa Acquisition
Corporation. See "Risk Factors -- The Interests of our Controlling Stockholder
may Conflict with the Interests of the Holders of our Class A Common Stock."
MSJP, L.P. and RJP Investments Assoc., L.P. indirectly own shares of Class
B Common Stock through their respective ownership of limited partnership
interests in MS Pietrafesa, L.P. Neither MSJP nor RJP has any right to vote or
to direct the disposition of their respective shares. Shares of Class B Common
Stock indicated below as beneficially owned by MSJP and RJP exclude additional
shares of Class B Common Stock that MSJP and RJP are entitled to receive
pursuant to MS Pietrafesa, L.P.'s Partnership Agreement. See "Certain
Relationship and Related Transactions."
Shares of Class B Common Stock indicated below as beneficially owned by
Sterling B. Brinkley, Jr. and Thomas A. Minkstein are owned indirectly through
their ownership of limited partnership interests in MSJP, L.P. Such individuals
have no right to vote or to direct the disposition of these shares. Shares of
Class B Common Stock indicated below as beneficially owned by Richard C.
Pietrafesa, Jr. and Joseph J. Pietrafesa II are owned indirectly through their
ownership of limited partnership interests in MSJP, L.P. and RJP Investments
Assoc., L.P. Such individuals have no right to vote or to direct the
disposition of these shares.
<TABLE>
<CAPTION>
Shares of Class A Shares of Class B Percentage of
Common Stock Common Stock Class A and
----------------------- -------------------------- Class B
Beneficial Owner Number Percentage Number Percentage Common Stock
- ---------------- -------- ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
MS Pietrafesa, L.P. ........................... -- -- 3,775,667 100.0% 46.6%
MSJP, L.P. .................................... -- -- 3,151,549 83.5% 38.9%
MS Pietrafesa Acquisition Corporation ......... -- -- 3,775,667 100.0% 46.6%
Phillip Ean Cohen ............................. -- -- 3,775,667 100.0% 46.6%
350 Park Avenue, 8th Floor
New York, NY 10022
Richard C. Pietrafesa, Jr. .................... -- -- 504,683 13.4% 6.2%
Thomas A. Minkstein ........................... -- -- 94,231 2.5% 1.2%
David McDonough ............................... -- -- -- -- --
</TABLE>
ALT-69
<PAGE>
<TABLE>
<CAPTION>
Shares of Class A Shares of Class B Percentage of
Common Stock Common Stock Class A and
------------------------- ------------------------ Class B
Beneficial Owner Number Percentage Number Percentage Common Stock
- ---------------- ---------- ------------ --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
RJP Investments Assoc., L.P. ............ -- -- 586,361 15.5% 7.2%
7400 Morgan Road
Liverpool, NY 13090
Sterling B. Brinkley, Jr. ............... -- -- 245,077 6.5% 3.0%
350 Park Avenue, 8th Floor
New York, NY 10022
Mark C. Pickup .......................... -- -- -- -- --
6734 Corte Segunda
Martinez, CA 94553
Robert J. Bennett ....................... -- -- -- -- --
M&T Bank Corp.
101 South Salina Street
Syracuse, NY 13202
Paul M. McNicol ......................... -- -- 47,131 1.3% *
305 Oakley Court
Mill Neck, NY 11765
Ross W. Stefano ......................... -- -- -- -- --
30 The Orchard
Fayetteville, NY 13066
Windsong, Inc. .......................... 333,333 7.7% -- -- 4.1%
1599 Post Road East
Westport, CT 06880
All executive officers and directors as a
group (eight persons) .................. -- -- 891,122 23.6% 11.0%
</TABLE>
- ------------
* Represents less than 1.0%.
SELLING STOCKHOLDER
The following table contains information concerning Windsong, Inc., on
behalf of which shares of Class A Common Stock are being registered for sale on
a continuous basis.
<TABLE>
<CAPTION>
Percentage of Class A
and Class B
Shares Owned Amount to Shares Owned Percentage of Class A Owned after
Prior to Offering be Offered after Offering Owned after Offering Offering
- ------------------- ------------ ---------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
333,333 58,333 275,000 6.3% 3.4%
</TABLE>
ALT-70
<PAGE>
o approving conflict of interest transactions involving our affiliates
which are approved by our disinterested directors.
The holders of the outstanding shares of Class A Common Stock will be
entitled, however, to vote as a class upon any proposed amendment to our
Certificate of Incorporation which would increase or decrease the par value of
the shares of Class A Common Stock, or alter or change the powers, preferences
or special rights of the shares of the Class A Common Stock so as to affect
them adversely. See "Risk Factors -- The Interests of our Controlling
Stockholder may Conflict with the Interests of the Holders of our Class A
Common Stock."
All of the shares of the Class B Common Stock are owned by MS Pietrafesa,
L.P. and can be voted by the General Partner, which is wholly-owned by Mr.
Cohen. See "Principal Stockholders."
Conversion Rights. At the option of any holder of shares of Class B Common
Stock, such holder may, at any time and from time to time, convert all or part
of such holder's shares of Class B Common Stock into an equal number of shares
of Class A Common Stock. The shares of Class B Common Stock are also subject to
mandatory conversion into an equal number of shares of Class A Common Stock, in
whole or in part, at any time and from time to time, at the option of the
holder or holders of a majority of the outstanding shares of Class B Common
Stock. If, and only if, all the outstanding shares of Class B Common Stock
converted into Class A Common Stock or are otherwise no longer outstanding, the
holders of the Class A Common Stock will have general voting power in the
election of all members of the Board and in all other matters upon which our
stockholders are entitled to vote. Holders of shares of Class A Common Stock
have no right to convert Class A Common Stock into any of our other securities.
Preferred Stock
Our Certificate of Incorporation authorizes 5,000,000 shares of Preferred
Stock. Upon the affirmative vote or the written consent of the holders of a
majority of the outstanding shares of Class B Common Stock, shares of Preferred
Stock may be issued in one or more series. Each such series will have such
distinctive designation as stated in resolutions adopted by the Board.
Authority is expressly vested in the Board to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series of the designation
of such series, without further vote or action by the stockholders. The
Preferred Stock may be granted voting powers provided, however that (1) so long
as any Class B Common Stock is outstanding, the holders of the Class B Common
Stock will always have the absolute right to elect a majority of the Board and
(2) if voting powers are granted, the holders of shares of Preferred Stock will
be entitled to vote together with the holders of the Class A Common Stock as a
class on all matters on which holders of Class A Common Stock are entitled to
vote. At present, we have no plans to issue any shares of the Preferred Stock.
Indemnification and Limitation of Liability
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law as currently or hereafter in effect.
Delaware law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duty as a director,
except for liability
(1) for breach of their duty of loyalty to the corporation or its
stockholders;
(2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the General Corporation Law
of the State of Delaware (the "DGCL"); or
(4) for any transaction from which the director derives an improper
personal benefit.
Our Certificate of Incorporation provides for the mandatory
indemnification of, and advancement of expenses to our directors and officers.
ALT-72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of our initial public offering, we will have a total of
4,333,333 shares of Class A Common Stock, 4,933,333 if the Underwriters'
over-allotment option is exercised in full, and 3,775,667 shares of Class B
Common Stock outstanding. All shares of Class A Common Stock sold in the
offering and, after the expiration of the 180 day lock-up period, described
below, the 58,333 shares of Class A Common Stock sold in this offering will be
freely tradable under the Securities Act unless they are purchased or held by
"affiliates" of ours as defined in Rule 144. The balance of the shares of Class
A Common Stock issued to Windsong, Inc. in connection with the Windsong
acquisition will be "restricted securities" within the meaning of Rule 144
under the Securities Act and may, after the expiration of the 180 day lock-up
period, be sold in compliance with Rule 144 under the Securities Act, subject
to additional resale restrictions under the Windsong acquisition agreement. In
addition, all shares of Class B Common Stock and the 3,775,667 shares of Class
A Common Stock issuable upon conversion thereof, all of which are subject to
the 180 day lock-up period, will be "restricted" securities within the meaning
of Rule 144 under the Securities Act and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemption provided by Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned "restricted" shares for at least one year, including
a person who may be deemed our affiliate, is entitled to sell within any
three-month period a number of shares of Class A Common Stock that does not
exceed the greater of 1% of the then-outstanding shares of our Class A Common
Stock or the average weekly trading volume of the Class A Common Stock on the
Nasdaq National Market during the four calendar weeks preceding such sale.
Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice and the availability of current public information about us. A person
who is not our affiliate and has not been such at any time during the 90 days
preceding a sale, and who has beneficially owned "restricted" shares for at
least two years, would be entitled to sell such shares immediately following
the offering without regard to the volume limitations, manner of sale
provisions or notice or other requirements of Rule 144 of the Securities Act.
However, the transfer agent, American Stock Transfer & Trust Company, may
require an opinion of counsel that a proposed sale of "restricted" shares comes
within the terms of Rule 144 of the Securities Act prior to effecting a
transfer of such shares. Such opinion would be provided by and at the cost of
the transferor.
Our officers and directors and certain other stockholders, including the
principal officers of Diversified Apparel, Global Sourcing Network, Components
and Windsong, have agreed, pursuant to the underwriting agreement and lock-up
agreement, that they will not sell any shares of our capital stock owned by
them, either publicly or privately, without the prior consent of Janney
Montgomery Scott Inc., as representative of the underwriters, for a period of
180 days from the date of this prospectus.
MS Pietrafesa, L.P. has offered its limited partners the right to withdraw
from the partnership under its Partnership Agreement and receive a distribution
of Class A Common Stock. Such right to withdraw may be exercised by a limited
partner at any time between the consummation of the offering and 14 days before
the expiration of the lock-up period. The withdrawal will be effective at the
end of the month in which the lock-up period expires. The shares acquired
through a limited partner's withdrawal will be subject to the resale
limitations under Rule 144.
Limited partners electing to withdraw from MS Pietrafesa, L.P. will
generally be deemed to have held the shares of Class A Common Stock distributed
to them from the date they acquired their partnership interest. Accordingly,
original investors in MS Pietrafesa, L.P. will be entitled to sell such shares
pursuant to Rule 144 immediately upon distribution of such shares from MS
Pietrafesa, L.P., subject to volume, manner of sale and other limitations.
Prior to the offering, there has been no public market for either class of
our Common Stock and no predictions can be made of the effect, if any, that the
sale or availability for sale of additional shares of our Common Stock or our
other securities, or the development of a public trading market for the Class B
Common Stock, will have on the market price of the Class A Common Stock.
Nevertheless, sales of substantial amounts of shares of Class A Common Stock in
the public market, the perception that such sales
ALT-74
<PAGE>
could occur, the development of a public trading market for the Class B Common
Stock or the issuance of other securities, could adversely affect the market
price of the Class A Common Stock and could impair our future ability to raise
capital through an offering of our equity securities.
PLAN OF DISTRIBUTION OF SELLING STOCKHOLDER
The selling stockholder may, but is not required to, sell, directly or
through brokers, its shares of Class A Common Stock in negotiated transactions
or in one or more transactions in the market at the price prevailing at the
time of sale, subject to lock-up provisions contained in the Windsong
acquisition agreement and subject to a lock-up agreement with the underwriters.
Under the Windsong acquisition agreement the selling stockholder is subject to
a staggered lock-up for a period of 30 months following the closing of the
Windsong acquisition. The selling stockholder and any broker-dealers that
participate in the sale of the Class A Common Stock may be deemed to be
"underwriters" of the selling stockholder's shares of Class A Common Stock
within the meaning of the Securities Act. It is anticipated that usual and
customary brokerage fees will be paid by the selling stockholder in all open
market transactions. We will not receive any of the proceeds from the sale of
any Class A Common Stock sold by the selling stockholder. We will bear all
costs and expenses of the registration under the Securities Act of the Class A
Common Stock exclusive of any discounts or commissions payable with respect to
sales of such securities. The selling stockholder may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving
sales of the selling stockholder's Class A Common Stock against certain
liabilities, including liabilities arising under the Securities Act.
At the time an offer for Class A Common Stock owned by the selling
stockholder is made by or on behalf of the selling stockholder, to the extent
required, a prospectus will be distributed by the selling stockholder which
will set forth the number of shares of Class A Common Stock being offered by
the selling stockholder and the terms on which shares of Class A Common Stock
are offered by the selling stockholder.
Except for its entry into the Windsong acquisition agreement, the selling
stockholder has not had any material relationship with us or any of our
affiliates within the past three years.
We will inform the selling stockholder that the anti-manipulation
provisions of Regulation M under the Exchange Act may apply to the sales of the
shares of Class A Common Stock being registered by the selling stockholder. We
will advise the selling stockholder of the requirement for delivery of this
prospectus in connection with any sale of the Class A Common Stock offered by
the selling stockholder.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed
upon by Roberts, Sheridan & Kotel, a Professional Corporation, which firm
provides legal services from time to time for Morgan Schiff and its affiliates.
EXPERTS
The Consolidated Financial Statements and schedule of The Pietrafesa
Corporation at December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998, appearing in this prospectus and the
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The Financial Statements of Components at December 31, 1997 and 1998, and
for each of the two years in the period ended December 31, 1998 included
elsewhere in this prospectus and the related financial statement schedules
included elsewhere in the registration statement have been audited by Lawrence
B. Goodman & Co., P.A., independent auditors, as stated in their reports
appearing herein and elsewhere in the Registration Statement, and are included
in reliance upon such report given upon their authority of such firm as experts
in accounting and auditing.
ALT-75
<PAGE>
The Financial Statements of Global Sourcing Network at December 31, 1997
and 1998, and for each of the two years in the period ended December 31, 1998
included elsewhere in this prospectus and the related financial statement
schedules included elsewhere in the registration statement have been audited by
Pasquale & Bowers, LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the Registration Statement, and are included
in reliance upon the reports of such firm, given upon their authority as
experts in accounting and auditing.
The Financial Statements of Windsong at December 31, 1997 and 1998, and
for each of the three years in the period ended December 31, 1998 included
elsewhere in this prospectus and the related financial statement schedules
included elsewhere in the registration statement have been audited by
Weissbarth, Altman & Michaelson LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the Registration Statement, and are
included in reliance upon the reports of such firm, given upon their authority
as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Commission a Registration Statement on Form S-1,
including all amendments, exhibits, annexes and schedules thereto, pursuant to
the Securities Act, and the rules and regulations promulgated thereunder, with
respect to the Class A Common Stock being offered in the offering. This
Prospectus does not contain all the information set forth in the Registration
Statement. For further information with respect to The Pietrafesa Corporation
and the securities offered hereby, reference is made to the Registration
Statement. Statements made in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the document or matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement, may be inspected, without charge, and copies may be
obtained, at prescribed rates, at the public reference facilities of the
Commission maintained at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Copies of the Registration Statement may also be
inspected, without charge, at the Commission's regional office at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Chicago, Illinois 60661. In addition, copies of the
Registration Statement may be obtained by mail at prescribed rates, from the
Commission's Public Reference Section at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Commission
maintains a Web site at www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
Upon completion of the offering, we will become subject to the
informational requirements of the Exchange Act, and in accordance therewith
will be required to file periodic reports and other information with the
Commission. Such periodic reports, proxy statements and other information will
be available for inspection and copying at the public reference facilities,
regional offices and Web site referred to above.
We intend to furnish our stockholders with annual reports containing
consolidated financial statements audited by independent certified public
accountants.
ALT-76
<PAGE>
58,333 Shares
[GRAPHIC OMITTED]
Class A Common Stock
, 1999
ALT-B/C
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all estimated expenses incurred or
expected to be incurred by the Registrant in connection with the issuance and
distribution of the securities being registered hereby, other than underwriting
discounts and commissions. All amounts are estimated except for the SEC
registration fee and the NASD filing fee.
Item Amount
- ---- ----------
SEC registration fee ........................ $ 16,847
NASD filing fee. ............................ 5,500
Nasdaq National Market listing fee .......... 55,000
Blue sky fees and expenses .................. 10,000
Printing and engraving costs ................ 140,000
Transfer agent fees. ........................ 3,500
Legal fees and expenses. .................... 395,000
Accounting fees and expenses ................ 340,000
Miscellaneous. .............................. 474,153
----------
Total. ...................................... $1,440,000
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
We are incorporated under the laws of the State of Delaware. Section 145
of the General Corporation Law of the State of Delaware provides that a
Delaware corporation may indemnify any person who is, or is threatened to be
made, a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation), by reason of the fact
that such person was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was illegal. A
Delaware corporation may indemnify any person who is, or is threatened to be
made, a party to any threatened, pending or completed action or suit by or in
the right of the corporation by reason of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses,
including attorneys' fees, actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests except that no indemnification
is permitted without judicial approval if the officer or director is adjudged
to be liable to the corporation. Where an officer or director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.
Our Certificate of Incorporation provides for the indemnification of our
directors and officers to the fullest extent permitted by Section 145. In that
regard, our Certificate of Incorporation provides that we shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director or
officer of such corporation, or is or was serving at the request of such
corporation as a director, officer or member of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with
II-1
<PAGE>
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of such
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Indemnification in
connection with an action or suit by or in the right of such corporation to
procure a judgment in its favor is limited to payment of settlement of such an
action or suit except that no such indemnification may be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable for negligence or misconduct in the performance of his duty to the
indemnifying corporation unless and only to the extent that the Court of
Chancery of Delaware or the court in which such action or suit was brought
shall determine that, despite the adjudication of liability but in
consideration of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
In addition, our By-laws provide that we shall indemnify to the full
extent authorized by law any person made or threatened to be made a party to an
action, suit or proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he, his testator or intestate is or
was our director, officer, employee or agent or is or was serving, at our
request, as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise.
We have purchased an insurance policy effective upon consummation of the
offering covering indemnification of directors and officers of the Registrant
against liabilities arising under the Securities Act that might be incurred by
them in such capacities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
We have issued the following securities:
<TABLE>
<CAPTION>
Number of
Purchaser Shares/Units Date Class/Type Par Value
- --------- ---------------- ------------------- -------------------- ----------------
<S> <C> <C> <C> <C>
MS Pietrafesa, L.P. ......... 100 shares October 1, 1998 Class B Common Stock $.0002 per share
3,775,567 shares Issued prior to the Class B Common Stock $.0002 per share
offering through
additional
issuance for
nominal
consideration
Thomas M. Minkstein ......... 2.5 Units January 27, 1999 Partnership Units of Not applicable
MSJP, L.P. valued at
$100,000 per Unit,
representing an indirect
2.9% beneficial interest
in the shares of Class B
Common Stock owned
by MS Pietrafesa, L.P.
Windsong, Inc. .............. 333,333 shares(1) , 1999 Class A Common Stock $.001 per share
</TABLE>
- ------------
(1) Shares of Class A Common Stock issued to Windsong, Inc. as part of our
acquisition of Windsong, based on an assumed offering price of $12.00 per
share.
Each of the issuances cited above was exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act because the
issuances did not involve a public offering. In addition, each recipient
represented its intention to acquire the securities for investment only and not
with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the certificates issued in such
transactions. Such recipients had adequate access to information about The
Pietrafesa Corporation and were sophisticated and expert in financial matters.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
**1 Form of Underwriting Agreement
**3.1 Certificate of Incorporation of Registrant, as amended
**3.2 By-Laws of Registrant
**4 Form of Common Stock Certificate
**5 Opinion of Roberts, Sheridan & Kotel, a Professional Corporation
**10.1 Asset Purchase Agreement dated March 11, 1999, among Registrant, Components
Acquisition Corp., John McCoy and Components by John McCoy, Inc.
**10.2 Asset Purchase Agreement dated March 11, 1999, among Registrant, DAG Acquisition
Corp., Jarrod Nadel and Diversified Apparel Group, Ltd.
**10.3 Stock Purchase Agreement dated March 11, 1999, among Registrant, Peter Lister and
Global Sourcing Network, Ltd.
**10.4 Credit Agreement dated June 19, 1998, between National Bank of Canada and MS
Pietrafesa, L.P.
**10.5 Lease Agreement dated October 1, 1994, between MS Pietrafesa, L.P. and Onondaga
County Industrial Development Agency
**10.6 Payment in Lieu of Tax Agreement dated as of October, 1, 1994 between Onondaga
County Industrial Development Agency and MS Pietrafesa, L.P.
**10.7 Loan Agreement dated November 22, 1995, with New York State Urban Development
Corporation and MS Pietrafesa, L.P.
**10.8 Transfer of Assets and Assignment and Assumption of Contracts and Leases dated as of
October 1, 1998, between MS Pietrafesa, L.P. and The Pietrafesa Corporation.
**10.9 Revolving Credit, Term Loan and Security Agreement dated April 15, 1999, between
Registrant and PNC Bank, National Association.
+10.10 License Agreement, as amended, dated as of January 1, 1996, between Alexander Julian,
Inc. and Windsong, Inc.
**10.11 Factoring Agreement dated November 4, 1996, between Windsong, Inc. and FINOVA
Capital Corporation, as amended.
**10.12 Asset Purchase Agreement dated as of July 12, 1999, between Windsong Acquisition
Corp. and Windsong, Inc.
**21 List of Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Lawrence B. Goodman & Co., P.A.
23.3 Consent of Pasquale & Bowers, LLP
23.4 Consent of Weissbarth, Altman & Michaelson LLP
23.5 Consent of Roberts, Sheridan & Kotel, a Professional Corporation (included in its opinion
filed as Exhibit 5 hereto)
**24 Power of Attorney (reference is made to the signature pages to the Registration Statement)
**27 Financial Data Schedule
</TABLE>
- ------------
** Previously filed.
+ Confidential treatment requested. Omitted portions have been filed separately
with the Commission.
(b) Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted as they are inapplicable, or the
other information is included in the financial statements.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide the
underwriters at the closing of the offering specified in the Underwriting
Agreement certificates in such denominations and registered in such names as
required by the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission, such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel that matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(d) The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which offers or sales of securities are
being made, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or together,
represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in the volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(iii) Include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-4
<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 Syracuse, New York on
this 6th day of August, 1999.
THE PIETRAFESA CORPORATION
By: /s/ RICHARD C. PIETRAFESA, JR.
---------------------------------
Name: Richard C. Pietrafesa, Jr.
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ---------------
<S> <C> <C>
/s/ Richard C. Pietrafesa, Jr. * President, Chief Executive Officer and August 6, 1999
- ----------------------------------
Director (Principal Executive Officer)
/s/ Thomas A. Minkstein * Chief Operating Officer and Director August 6, 1999
- ----------------------------------
/s/ Eugene R. Sunderhaft * Vice President -- Finance, Chief Financial August 6, 1999
- ----------------------------------
Officer, Secretary and Treasurer (Principal
Financial and Accounting Officer)
/s/ Sterling B. Brinkley, Jr. * Chairman of the Board August 6, 1999
- ----------------------------------
/s/ Mark C. Pickup * Director August 6, 1999
- ----------------------------------
/s/ Robert J. Bennett * Director August 6, 1999
- ----------------------------------
/s/ Paul M. McNicol * Director August 6, 1999
- ----------------------------------
</TABLE>
- ----------------
*By: /s/ RICHARD C. PIETRAFESA, JR.
-----------------------------
Richard C. Pietrafesa, Jr.
Attorney-in-Fact
II-5
<PAGE>
We have audited the Consolidated Financial Statements of The Pietrafesa
Corporation as of December 31, 1997 and 1998, and for each of the three years
in the period ended December 31, 1998, and have issued our report thereon dated
February 12, 1999 (except for Note 12 as to which the date is July 15, 1999);
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedule pertaining to Pietrafesa listed in Item 16(b)
of this Registration Statement. This schedule is the responsibility of
Pietrafesa's management. Our responsibility is to express an opinion based on
our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Syracuse, New York
February 12, 1999
S-1
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
THE PIETRAFESA CORPORATION
Years Ended December 31, 1996, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged Balance at
Description Beginning of Year to Expense Deductions End of Year
- ------------------------------- ------------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996:
Reserve for bad debts ......... $187 $(179)(1) (27)(2) $ 35
Inventory reserve ............. 435 -- 100(3) 335
Year Ended December 31, 1997:
Reserve for bad debts ......... 35 -- -- 35
Inventory reserve ............. 335 -- -- 335
Year Ended December 31, 1998:
Reserve for bad debts ......... 35 10(1) 10(3) 35
Inventory reserve ............. 335 459(1) 39(3) 755
</TABLE>
- ------------
(1) Reduction/Addition of reserve based on analysis of related assets.
(2) Write-off of accounts receivable, net of recoveries. Writes-offs totaled
$27 in 1996 and recoveries totaled $54 in 1996.
(3) Write-off of accounts receivable or inventory.
S-2
<PAGE>
We have audited the Financial Statements of Components by John McCoy, Inc.
("Components") as of December 31, 1997 and 1998, and for the years then ended,
and have issued our report thereon dated March 4, 1999 (included elsewhere in
this Registration Statement). Our audits also included the financial statement
schedule pertaining to Components listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of Components management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Lawrence B. Goodman & Co., P.A.
Certified Public Accountants
Fair Lawn, New Jersey
March 7, 1999
S-3
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
COMPONENTS BY JOHN McCOY, INC.
Years Ended December 31, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged Balance at
Description Beginning of Year to Expense Deductions (1) End of Year
- ------------------------------- ------------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Reserve for bad debts ......... $11 $ 51 $ -- $62
Year Ended December 31, 1998:
Reserve for bad debts ......... $62 $114 $115 $61
</TABLE>
- ------------
(1) Represents write-offs of account receivables.
S-4
<PAGE>
We have audited the Financial Statements of Global Sourcing Network, Ltd.
(GSN) as of December 31, 1997 and 1998 and for the years then ended, and have
issued our reports thereon dated February 2, 1999 (included elsewhere in this
Registration Statement). Our audits also included the financial statement
schedule pertaining to GSN listed in Item 16(b) of this Registration Statement.
This schedule is the responsibility of GSN's management. Our responsibility is
to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Pasquale & Bowers, LLP
Certified Public Accountants
Syracuse, New York
May 28, 1999
S-5
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
GLOBAL SOURCING NETWORK, LTD.
December 31, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged Balance at
Description Beginning of Year to Expense Deductions End of Year
- ------------------------------- ------------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Reserve for bad debts ......... $0 $ 102 $(102)(1) $ 0
Year Ended December 31, 1998:
Reserve for bad debts ......... $0 $ 149 $ (59)(1) $90
</TABLE>
- ------------
(1) Represents write-off of accounts receivable.
S-6
<PAGE>
We have audited the Financial Statements of Windsong, Inc. as of December
31, 1998 and 1997 and the related statements of income and retained earnings
(accumulated deficit) and cash flows for each of the three years in the period
ended December 31, 1998, and have issued our report thereon dated May 7, 1999
(included elsewhere in this Registration Statement).
Our audits also included the financial statement schedule pertaining to
Windsong, Inc. listed in item 16(b) of this Registration Statement. This
schedule is the responsibility of Windsong's management. Our responsibility is
to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
/s/ Weissbarth, Altman & Michaelson LLP
New York, New York
May 7, 1999
S-7
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
WINDSONG, INC.
Year Ended December 31, 1996, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged Balance at
Description Beginning of Year to Expense Description End of Year
- ------------------------------- ------------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996:
Reserve for bad debts ......... $ -- $-- $ -- $--
Inventory reserve ............. 35 -- -- 35
Year Ended December 31, 1997:
Reserve for bad debts ......... -- -- -- --
Inventory reserve ............. 35 -- 35(1) --
Year Ended December 31, 1998:
Reserve for bad debts ......... -- 20 -- 20
Inventory reserve ............. -- -- -- --
</TABLE>
- ------------
(1) Reduction/Addition of reserve based on analysis of related assets.
S-8
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
THE PIETRAFESA CORPORATION
================================================================================
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
**1 Form of Underwriting Agreement
**3.1 Certificate of Incorporation of Registrant, as amended
**3.2 By-Laws of Registrant
**4 Form of Common Stock Certificate
**5 Opinion of Roberts, Sheridan & Kotel, a Professional Corporation
**10.1 Asset Purchase Agreement dated March 11, 1999, among Registrant, Components
Acquisition Corp., John McCoy and Components by John McCoy, Inc.
**10.2 Asset Purchase Agreement dated March 11, 1999, among Registrant, DAG Acquisition
Corp., Jarrod Nadel and Diversified Apparel Group, Ltd.
**10.3 Stock Purchase Agreement dated March 11, 1999, among Registrant, Peter Lister and
Global Sourcing Network, Ltd.
**10.4 Credit Agreement dated June 19, 1998, between National Bank of Canada and MS
Pietrafesa, L.P.
**10.5 Lease Agreement dated October 1, 1994, between MS Pietrafesa, L.P. and Onondaga
County Industrial Development Agency
**10.6 Payment in Lieu of Tax Agreement dated as of October, 1, 1994 between Onondaga
County Industrial Development Agency and MS Pietrafesa, L.P.
**10.7 Loan Agreement dated November 22, 1995, with New York State Urban Development
Corporation and MS Pietrafesa, L.P.
**10.8 Transfer of Assets and Assignment and Assumption of Contracts and Leases dated as of
October 1, 1998, between MS Pietrafesa, L.P. and The Pietrafesa Corporation.
**10.9 Revolving Credit, Term Loan and Security Agreement dated April 15, 1999, between
Registrant and PNC Bank, National Association.
+10.10 License Agreement, as amended, dated as of January 1, 1996, between Alexander Julian,
Inc. and Windsong, Inc.
**10.11 Factoring Agreement dated November 4, 1996, between Windsong, Inc. and FINOVA
Capital Corporation, as amended.
**10.12 Asset Purchase Agreement dated as of July 12, 1999, between Windsong Acquisition
Corp. and Windsong, Inc.
**21 List of Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Lawrence B. Goodman & Co., P.A.
23.3 Consent of Pasquale & Bowers, LLP
23.4 Consent of Weissbarth, Altman & Michaelson LLP
23.5 Consent of Roberts, Sheridan & Kotel, a Professional Corporation (included in its opinion
filed as Exhibit 5 hereto)
**24 Power of Attorney (reference is made to the signature pages to the Registration Statement)
**27 Financial Data Schedule
</TABLE>
- ------------
** Previously filed.
+ Confidential treatment requested. Omitted portions have been filed separately
with the Commission.
(b) Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted as they are inapplicable, or the
other information is included in the financial statements.
<PAGE>
EXHIBIT 10.10
ALEXANDER JULIAN, INC.
63 Copps Hill Road
Ridgefield, CT 06877
as of January 1, 1996
Windsong, Inc.
224 Riverside Avenue
Westport, CT 06880
Attention: Joseph Sweedler
Gentlemen:
You have requested that Alexander Julian, Inc., a North Carolina
corporation (hereinafter referred to as the "Company"), grant to Windsong, Inc.,
a Connecticut corporation, ("Windsong"), the exclusive right to use the
trademark COLOURS BY ALEXANDER JULIAN, whether registered or not, (the
"Trademark"), in connection with the manufacture, importation, distribution,
advertising and sale of the products listed in Exhibit A (the "Products"). This
letter sets forth the terms on which the Company agrees to grant such rights.
1. Grant.
1.1 Subject to the terms and conditions hereof the Company hereby
grants to Windsong and Windsong hereby accepts, an exclusive license to use the
Trademark, including all of the rights and privileges that the Company has or
shall acquire during the term hereof in utilizing the Trademark, solely in
connection with the manufacture, importation, distribution, advertising and sale
of the Products in the countries set forth in Exhibit B which is attached hereto
(the "Territory").
1.2 Windsong shall not manufacture, distribute or sell any
merchandise utilizing the Trademark, except as specifically provided for herein,
in the Territory or otherwise. All articles other than the Products are
expressly excluded from this Agreement.
2. Design and Manufacture of the Products.
2.1 In accordance with industry practice and timetables the Company
shall develop and present design information and product specifications and
Windsong shall prepare finished designs and prototype samples of the Products,
and shall submit such items to the Company for its written approval prior to
use. The Company will consider suggestions of Windsong, but the Company will
have ultimate design control.
<PAGE>
Windsong shall make no changes in the design of the Products unless such changes
are consented to by the Company by prior written approval. In the event that the
Company does not respond within fifteen days, then its approval shall be deemed
to have been given. The finished design Products produced by Windsong shall be
submitted to the Company for approval in a timely, formal, unified and cohesive
presentation.
2.2 Windsong agrees to produce, and manufacture and diligently
promote the Products for each selling season during the term of this Agreement.
2.3 All designs and product information, including without
limitation, sketches and swatches, whether final or rough, for the Products are
and shall be the sole and exclusive property of the Company, shall be returned
to the Company, shall not be disclosed or furnished by Windsong to any other
person, firm or corporation (except in accordance with this Agreement). Windsong
shall not manufacture or sell any Product bearing designs copied from the
Products of the Company or using trademark, copyrights or designs which are
confusingly similar to the Trademark used in conjunction with the Products, or
any other property proprietary to the Company, without the prior written consent
of the Company.
2.4 The Products shall at all times be manufactured, packaged, sold,
marketed, distributed, advertised or otherwise promoted in a manner appropriate
for and consistent with the "Approved Quality" products. For purposes hereof, a
Product shall be deemed to be of "Approved Quality" if the quality of such
Product is equal or superior to the quality of a sample of such Product
previously approved by the Company.
2.5 All of the Products shall be manufactured, labeled, packaged,
sold, marketed, distributed, advertised or otherwise promoted in accordance with
all applicable federal, state and local laws and regulations.
2.6 The styles, designs, packaging, labels, contents, fabric, color,
workmanship and quality of all of the Products shall require the approval of the
Company pursuant to the terms of this Agreement to insure that the Products
manufactured, sold or distributed hereunder are of Approved Quality.
2.7 Windsong acknowledges that the Trademark has established
prestige and goodwill and is well-recognized in the mind of the trade and the
public, that it is of great importance and value to the Company, and that in the
sale of the various lines of the Company's products, including the Products, the
high standards and reputation that the Company and the Trademark have
established be maintained. Accordingly, all Products produced by Windsong
hereunder shall be of first quality and uniform workmanship, with strict
adherence to all details, colors and other characteristics which have been
approved by the Company. Windsong shall make no changes in any of the Company's
2
<PAGE>
designs, its Products or samples approved by the Company without the prior
written approval of the Company as to the changes. From time to time during
production, Windsong shall, at reasonable times and upon reasonable notice
during the term hereof, upon the Company's request, make its facilities
available to the Company for inspection by its representative during usual
working hours. Off-quality, irregular or damaged Products, or otherwise
defective merchandise shall be clearly marked as such, and shall not bear the
Trademark or trade name unless consented to in writing by the Company or unless
the removal of such mark or name would destroy the Product. Windsong shall
provide, and be financially responsible for, samples and related materials.
2.8 All the Products shall be manufactured in the Territory or in
countries outside the Territory which have received prior written approval by
the Company. Windsong will submit to the Company a list of countries and
factories in which it intends to manufacture Products.
3. Marketing of the Products.
3.1 Windsong shall use its best efforts to exploit the rights herein
granted, maximize sales and obtain as broad a distribution of the Products in
the Territory as is reasonably possible consistent with the Company's high
prestige and the maintenance of the Company's good will; provided, however, that
none of the Products sold hereunder shall be sold to accounts which are not
approved by the Company. Windsong shall provide the Company with a complete
account list on an annual basis. Windsong acknowledges that the Products sold
hereunder shall be sold in a manner so not to injure or in any manner diminish
the substantial good will and prestige associated with items sold under the
Trademark or that would otherwise injure the prestige and good will of the
Company or the Trademark.
3.2 Windsong shall be responsible for the sale of the Products
through its sales force and, unless otherwise specifically provided for herein,
for all matters relating to such sales, including without limitation, credit
determination, billing and shipping.
3.3 Windsong shall establish, maintain and operate a full time
showroom for the display of the Products in New York, NY. In addition, Windsong
shall display Products semi-annually at the Magic Trade Show in Las Vegas,
Nevada. All matters involving the display shall have the prior written approval
of the Company.
3.4 Windsong shall cause appropriate copyright, trademark, service
mark or other notice desired by the Company relative to the Trademark to appear
on or with all labels, cartons, containers, packing or wrapping material,
advertising, art work, designs, promotional or display material bearing the
Trademark. Copies of each and every tag, label, imprint, or other device
containing any such notice, trademark or otherwise relating to the Products and
3
<PAGE>
all advertising, art work, designs, packaging, promotional, display or publicity
material bearing the Trademark including press releases, annual reports and
promotional brochures (with respect to material pertaining to the Company or
Trademark only) and promotional brochures shall be submitted by Windsong to the
Company for its written approval prior to use by Windsong, which approval or
rejection shall be given within five (5) working days of receipt thereof.
Failure to respond within such time shall be deemed approval. None of such
material shall bear the name of any other firm or person, except that certain
advertising may bear the name of retail establishments with which Windsong is
doing cooperative advertising. All such material shall be of a taste level
consistent with the Company's reputation and image and shall be delivered to the
Company in a timely manner so as to allow for due consideration and modification
by the Company. Approval by the Company shall not constitute waiver of the
Company's rights or Windsong's duties under any provision hereof. Windsong shall
not vary the Trademark.
3.5 Windsong and the Company shall jointly prepare prior to year end
a written annual marketing plan detailing their strategies for the ensuing
period, with respect to sales, marketing, advertising and sales support.
4. Use of Trademark.
4.1 Windsong acknowledges that the Company has the sole and
exclusive ownership of the Trademark in connection with the Products in the
Territory. The Company agrees to maintain the Trademark for the term of this
Agreement and in connection with the protection and defense thereof will
consider all information from Windsong with regard to the potential infringement
of the Trademark with respect to the Products, it being understood that all
action or inaction with regard to protection of the Trademark shall be in the
sole discretion of the Company.
4.2 Windsong shall cause to appear on everything which uses, bears
or displays the Trademark, including without limitation, all labels, packaging,
tags, advertising, annual reports, art work, designs, and promotional or display
material therefor, a notice proclaiming and identifying the Trademark appearing
therein as proprietary to the Company, as the Company may deem appropriate or as
may be required by law or governmental regulation. No name and no product other
than the Products shall be used in connection with the Trademark in any
advertising, publicity, labeling, wrapping or packaging under the control of
Windsong in connection with the Products, except as to which the Company may
consent in writing or as otherwise provided herein with respect to trade or coop
advertising or as may be required by law.
4
<PAGE>
4.3 Windsong agrees that it will not have or obtain, by exercising
its rights under this Agreement or otherwise, any right or interest in the
Trademark, beyond the rights specifically granted in this Agreement. Windsong
further agrees that the Trademark used by Windsong in connection with the
Products which might suggest that they are indicia of source, shall, with all of
the goodwill relating thereto, inure to the benefit of and be the sole property
of the Company. If, contrary to the provisions of this Agreement, Windsong
during or after the Term of this Agreement, obtains any right or interest in the
Trademark by any cause, then Windsong will immediately assign it, along with any
accompanying goodwill, to the Company, at Windsong's expense, in accordance with
the Company's written instructions. If any such right or interest is not
assigned or assignable for any reason, Windsong agrees never to exercise such
right or interest by exploiting it directly or indirectly, or by preventing the
Company or any other person authorized by the Company from exploiting it.
4.4 Windsong shall use the Trademark in each jurisdiction in the
Territory in compliance with the legal requirements obtaining therein and shall
use such markings in connection therewith as may be required by such
jurisdiction's applicable legal provisions.
4.5 Windsong represents, warrants and covenants to the Company that
Windsong (directly or through any affiliated or unaffiliated person) has not
made and will not during and after the Term make, and does not and will not in
any manner during and after the Term wholly or partially hold or control, or
represent directly or indirectly that it holds or controls, any applications,
registrations, or other indicia of ownership of the Trademark, or of any other
property proprietary to the Company, or of any word, name, symbol or design
which might suggest an association with the Company within or outside the
Territory. Windsong agrees that it shall not, directly or indirectly, during the
Term of this Agreement or thereafter, (i) challenge, contest or attack the
Company's ownership of or the validity of the Trademark, or any application for
registration thereof, or (ii) seek to register or claim ownership of any of the
Trademark, or any other trademark confusingly similar to the Trademark.
4.6 Windsong shall not at any time use, promote, advertise, display
or otherwise commercialize the Trademark, or any variation thereof, or any
material utilizing or reproducing the Trademark, unless Windsong does so in such
manner as will not adversely affect any right of ownership of the Company
therein.
4.7 Windsong shall not use the Trademark in any manner likely to
cause confusion or doubt in the mind of the public as to the ownership and
control thereof or in any manner that does not make clear that the Trademark are
owned and controlled exclusively by the Company.
5
<PAGE>
4.8 Windsong shall, in connection with its duty to use the so as to
promote the continuing goodwill thereof, give immediate attention and take
necessary action to satisfy all material and legitimate customer complaints
brought to the attention of Windsong in connection with the Products or other
materials using the Trademark. Windsong shall give the Company immediate notice
of all complaints that might affect the good standing of the Trademark or the
reputation of the Company and also of all complaints that might result in legal
action between the Company and any third party, and shall cooperate with the
Company upon request to achieve as good a reputation and press for the Trademark
as possible.
5. Infringement.
5.1 Windsong agrees to assist the Company, to the extent reasonably
necessary, in the procurement of any protection or to protect any of the
Company's rights in and to the Trademark in the Territory, both during and after
the Term of this Agreement, including without limitation the procuring of
trademark registrations. The Company, if it so desires, may commence or
prosecute any claim or suit in its own name or join Windsong as a party thereto
with the consent of Windsong. Windsong will immediately notify the Company in
writing of any infringement or imitation of, or any other event or claim adverse
to or in violation of the Company's rights or interests in, the Trademark,
occurring within or outside the Territory, which comes to Windsong's attention.
The Company shall have the absolute right to determine whether or not any action
shall be taken on account of any such infringements or imitations and Windsong
shall not institute any suit or take any action on account of any such
infringements or imitations without first obtaining the written consent of the
Company; however, should Windsong desire to take any action in respect of an
infringement of the Trademark, the Company agrees to cooperate reasonably with
Windsong in arriving at a mutually acceptable basis upon which to proceed with
such action.
5.2 The Company does hereby indemnify and agree to hold Windsong
harmless during and after the Term from and against any and all liabilities,
claims, causes of action, suits, damages, loss, expenses, or other injury
(including reasonable attorneys' fees and expenses), in connection with any
legal or other formal proceeding by a third person against Windsong in which
Windsong's proper reproduction or use of the Trademark in accordance with this
Agreement is attacked for infringement of such third-person's proprietary
rights. This obligation is conditional on Windsong notifying the Company
promptly in writing of such proceeding or potential proceeding, on the Company
having sole right to control all aspects of the defense of such proceeding
(including choice of attorney and settlement), and on Windsong assisting and
fully cooperating with the Company in connection with such proceeding.
6
<PAGE>
5.3 Windsong does hereby indemnify and hold the Company harmless
during and after the Term from and against any and all claims, liabilities,
damages, causes of action, suits, losses, expenses or other injury (including
reasonable attorney's fees and expenses) arising in any way out of Windsong's
activities hereunder, including without limitation any actual or alleged: (i)
Windsong violation of this Agreement; (ii) violation by any subcontractor of the
terms of this Agreement; (iii) claim by any employee or subcontractor permitted
by Windsong to produce or participate in the production of the Products; or (iv)
other act or omission of such employee or subcontractor in connection with this
Agreement. Windsong's indemnity obligation includes without limitation claims
for alleged improper reproduction or use of the Trademark, or except as may be
limited by paragraph 5.3 of actual or alleged violation of any copyright,
trademark, service mark, certification mark, patent, confidential information,
privacy, publicity or other rights, and claims for injury or damage related to
any alleged defect in any Product, or the failure of any product to conform to
applicable law. In the case of a legal or other proceeding by a third person
against Windsong, relating to this provision, the Company shall assist and fully
cooperate with Windsong in connection with such proceeding. Windsong shall
provide Company with copies of all court pleadings, correspondence and any other
relevant documentation relating to any such action.
6. Compensation and Certain Definitions.
6.1 "Net Sales" shall mean the invoice price charged by Windsong,
for the sale or other exploitation of the Products in the Territory, as well as
the fair market value of any other compensation received by Windsong with regard
thereto. No set-offs or deductions of any kind may be taken in the determination
of Net Sales or the royalties due the Company hereunder, except that Windsong
may deduct standard trade, advertising and promotional discounts actually given,
actual returns, bad debts, tariffs, import/export duties, freight and sales
taxes.
6.2 "Annual Period" shall mean the twelve (12) month period
commencing on January 1, and ending on December 31, for the term of this
Agreement, except that the first Annual Period shall commence on [***] and end
on [***].
6.3 Annual Minimum Payments. During the initial term of this
Agreement Windsong shall pay the Company a Minimum Annual Payment. Annual
Minimum shall be paid in quarterly payments on January 1, April 1, July 1, and
October 1 of each Annual Period. The Annual Minimum for the First Annual Period
shall be [***] and thereafter shall be [***]. Thereafter the Annual Minimum
payment shall be [***].
[***] Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
7
<PAGE>
6.4 Percentage Payments. During the term of this Agreement, Windsong
shall pay the Company a percentage payment of [***] Net Sales (the "Percentage
Payment"). Any Percentage Payment due the Company for any calendar quarter
during the Annual Period shall be paid by Windsong within thirty (30) days
following the end of such calendar quarter. Additionally, if certain products
designed by the Company (which shall be approved by the Company) but which do
not bear the Trademark are sold by Windsong or off-price or irregular sales then
the Company shall receive a percentage payment of [***].
6.5 Payments of Annual Minimums for each Annual Period shall at all
times be credited against the Percentage Payment due for the same Annual Period.
6.6 In no event shall the Percentage Payment for any Annual Period
in excess of the Minimum Payment for the same Annual Period be credited against
any payment due for any other Annual Period.
6.7 All amounts payable hereunder shall be paid in United States
Dollars.
6.8 All payments hereunder which are overdue fifteen (l5) business
days or more shall bear interest at [***]% above the prime rate from the due
date.
6.9 Windsong shall promptly reimburse the Company upon presentation
of an appropriate invoice for any travel or related expenses incurred by the
Company and its employees in connection with this Agreement, including without
limitation, sourcing travel, personal appearances, headquarters or sales visits
which shall be discussed with Windsong. It is understood that travel for its
principal designer shall be first class and for others business class whether
domestic or foreign.
7. Advertising and Marketing Assistance.
7.1 During the term hereof in each Annual Period commencing January
1, 1996, Windsong shall set aside and pay over to the Company for advertising of
the Trademark and the Products, [***]. All matters pertaining to such
advertising shall be determined by the Company, including without limitation
conception, development, content and placement. The Company shall consult
periodically with Windsong regarding such program through the annual plan.
Windsong and the Company shall account in writing to each other for all
expenditures made hereunder. For purposes hereof, expenditures on advertising
shall consist of the out-of-pocket cost of space and time in any media as well
as direct production costs related thereto, direct out-of-pocket expenditures
relating to public relations or in store
[***] Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
8
<PAGE>
seminars, promotions, displays, exhibits or joint showrooms may also constitute
expenditures on advertising as well as fashion shows, press kits and videos.
Windsong shall have annual audit rights with regard to advertising expenditures.
7.2 Any and all advertising undertaken by Windsong shall have the
prior written approval of the Company.
7.3 All advertising (except cooperative advertising), art work,
involving the Trademark, or any reproduction thereof, shall, notwithstanding
their creation, invention or use by Windsong, be and remain the property of the
Company and the Company shall be entitled to use the same. Upon the termination
of this Agreement, all art work shall be delivered to the Company.
8. Accounting.
8.1 Windsong shall deliver to the Company, at the time each
Percentage Payment is due, a full and complete statement (a form of which has
been submitted to and approved by the Company and which is attached as Exhibit
C) indicating the amount of the Net Sales for the period covered by the
Percentage Payment. Each statement shall show the category, style number,
description, invoice price and gross sales of all of the Products by categories
and styles during the period covered by the Percentage Payment, as well as the
amount of authorized deductions therefrom as permitted under this Agreement,
including actual trade discounts and returns, and computation of the amount of
Percentage Payment due hereunder in respect of such Net Sales for such period.
Such statement shall in each instance be certified by the Chief Financial
Officer of Windsong. Such statement shall be furnished irrespective of the
quantity of the Products sold during the period for which such statement is due;
provided, however, no statement shall be delivered until actual sales of the
Products have occurred. The Company shall have the right to inspect return
reports.
8.2 Windsong shall prepare and maintain, in accordance with
generally accepted accounting principles as consistently applied by Windsong,
complete and accurate books of account and records covering all transactions
relating to the rights hereby granted. The Company and its duly authorized
representatives shall have the right upon reasonable advance notice to examine
said books of account and records and other documents and material in the
possession or under the control of Windsong to the extent reasonably required to
verify the amount of Net Sales of the Products, deductions, and compensation
payable with respect to such sales, and to make extracts therefrom. All such
books of account, records and documents shall be kept available by Windsong for
the Company's inspection during the term of this Agreement. In the event that
Windsong shall not deliver or make available in a timely manner the reports
referred to herein, then the Company or its representative shall have the right
to audit the books and records of
9
<PAGE>
Windsong to determine the information contained in such reports and the expense
of any such audit shall be borne by Windsong. This remedy shall be in addition
to and without limitation to any other which the Company may have under this
Agreement or otherwise.
8.3 The Company may, in its sole discretion and at its sole expense,
cause an independent public accountant of its choice, upon reasonable advance
notice to Windsong, to examine Windsong's books and records to verify the
accuracy of the statements submitted by Windsong and to determine the amounts
due the Company hereunder. Such examination and audit shall be at the Company's
own expanse and shall be limited to no more than one such audit during any
Annual Period; provided, however, that if such examination or audit discloses an
underpayment of the total compensation due to the Company of [***] for the
Annual Periods covered by such audit, then reasonable expenses incurred by the
Company in connection with the examination and audit shall be borne by Windsong.
9. Term.
9.1 The initial term of this Agreement shall be from [***] and
continuing through December 31, 2001; provided, however, that unless sooner
terminated in accordance with its terms. Windsong shall have the right to renew
this agreement for one additional period of five years, which renewal period
shall end on December 31, 2006, if at least [***] prior to the conclusion of
such term, written notice of such renewal is delivered to the Company by
Windsong. The foregoing rights of extension shall only be exercisable for
Windsong if Windsong shall have achieved Net Sales for the Products of [***] for
the twelve months ending December 31, 2000.
9.2 It is understood that in the event that this Agreement is not
renewed or extended on [***] or [***], as the case may be, then, the Company
shall thereafter be free to negotiate with any other party in respect of the
rights contained in this Agreement and to manufacture, distribute and sell the
Products under the Trademark (either alone or in concert with a third party),
provided that none of the Products is delivered for sale prior to the
termination date of this Agreement.
9.3 In the event that the following sales volume is not achieved,
the Company shall have the right to terminate the contract:
Year ending Volume
December 31, [***] [***]
December 31, [***] [***]
December 31, [***] [***]
10. Default.
[***] Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
10
<PAGE>
10.1 The following shall constitute events of default on the part of
Windsong: (a) If any Advance Payment or Percentage Payment or other payment
shall not be paid when due and such default continues for more than five (5)
days after written notice thereof, or (b) if Windsong attacks the title or any
rights of the Company in and to the Trademark or otherwise attacks the validity
of this Agreement, or (c) if Windsong, except for reasons of force majuer, (i)
ceases to manufacture, sell or distribute the Products unless otherwise provided
for herein for a period of fifteen (15) days, or (ii) defaults in performing any
of the other material terms of this Agreement, including but not limited to its
obligations to use the Trademark and to not misuse the Trademark, and in each
instance continues in default for a period of thirty (30) days after written
notice thereof, or (d) if a receiver is appointed for it, or (e) if Windsong is
adjudicated bankrupt or insolvent or makes application for relief as a debtor
under any federal or state bankruptcy law, or (f) if Windsong defaults on any
obligation which is secured by a security interest in any of the Products
covered by this Agreement, then, in any such event, the Company shall have the
right, exercisable in its sole discretion, to terminate this Agreement upon ten
(10) days' written notice to Windsong of its intention to do so, and upon the
expiration of such 10 day period, this Agreement shall automatically terminate
and be of no further force and effect without prejudice to any remedy of the
Company for the recovery of monies then due it under this Agreement or in
respect of antecedent breach of this Agreement, and without prejudice to any
other rights of the Company, including without limitation, damages for breach to
the extent that the same may be recoverable. No assignee for the benefit of
creditors, receiver, trustee in bankruptcy, sheriff, or any other officer of the
court or official charged with taking over custody of Windsong's assets or
business shall have the right to continue the performance of this Agreement.
10.2 Windsong shall have the right to terminate this Agreement (a)
if the Company defaults in performing any of the material terms of this
Agreement and continues in default for a period of thirty (30) days after notice
thereof, or (b) if the Company is adjudicated bankrupt or insolvent, or makes
application for relief as a debtor under any federal or state bankruptcy act, or
(c) if a receiver is appointed for it. Windsong's right of termination shall
take effect upon ten (10) days written notice thereof to the Company.
11. Disposal of Stock Upon Termination or Expiration.
11.1 Upon termination or expiration of this Agreement, Windsong
shall provide the Company with an accurate inventory of Windsong's Products as
of the termination date. Additionally, the Company or its agent shall have the
right within ten (10) days of submission of the inventory to make an audit of
Windsong's inventory of the Products. After termination of this Agreement,
provided that Windsong is not in default hereunder, Windsong may
11
<PAGE>
dispose of the Products which are on hand or in process at the time notice of
termination is received for a period of one hundred eighty (180) days, on a
non-exclusive basis, after date of termination, provided Windsong fully complies
with all provisions of this Agreement hereof in connection with such disposal
(including, but not limited to, payment of Percentage Payments pursuant to
Paragraph 6 hereof).
12. Effect of Termination.
12.1 It is understood and agreed that except for the right to use
the Trademark as specifically provided for in this Agreement, Windsong shall
have no right, title or interest in or to the Trademark. Upon and after the
termination of this Agreement and except as granted in Paragraph 11 hereof, all
rights granted to Windsong hereunder, together with any interest in and to the
Trademark and corresponding goodwill that Windsong may acquire, shall forthwith
and without further act or instrument be assigned to and revert back to the
Company. In addition, Windsong will execute any instruments reasonably requested
by the Company to accomplish or confirm the foregoing. Any such assignment,
transfer or conveyance shall be without further consideration other than the
mutual agreements contained herein. The Company shall thereafter be free to
assign or license to others the use of the Trademark in connection with the
manufacture and sale of the Products covered hereby, and Windsong will refrain
from further use of the Trademark or any further reference to it, direct or
indirect, or anything deemed by the Company, in its sole opinion, to be similar
to the Trademark in connection with the manufacture, sale or distribution of
Windsong's products, except as specifically set forth in Paragraph 11 hereof.
13. Insurance.
13.1 Windsong shall procure and maintain at its own expense in full
force and effect at all times during which the Products are being sold, a
comprehensive liability insurance policy (including contractual and product
liability) from a reputable insurance company with respect to all of the
Products with a limit of liability of not less than $5,000,000 per occurrence
and $2,000,000 per person. Such insurance may be obtained by Windsong in
conjunction with a policy of products liability insurance which covers products
other than the Products. Windsong shall deliver a certificate evidencing said
insurance policy, and such policy shall name the Company as an additional
insured to the extent of its interests, and shall provide that it may not be
canceled or changed without thirty (30) days prior written notice to the
Company.
14. Certain Representations and Warranties.
12
<PAGE>
14.1 Windsong represents and warrants that it has full right, power
and authority to enter into this Agreement and to perform all of its obligations
hereunder and that it has sufficient financial capability to fulfill all of its
obligations hereunder.
14.2 The Company hereby represents and warrants that it is the owner
of the Trademark, and has the full right, power and authority to enter into this
Agreement and to perform all of its obligations hereunder. The Company shall
have the right to change the Trademark to resolve any actual or potential
conflict with the rights of third parties.
14.3 Windsong represents and warrants that it will assign any and
all design patents, copyrights, invention or other items of intellectual
property that may have been developed or produced relating to the Products
produced under this Agreement to the Company notwithstanding the invention or
use by Windsong.
15. Samples.
15.1 Windsong shall provide the Company with samples from time to
time as needed for marketing purposes, as may be reasonably requested by the
Company.
16. Arbitration.
16.1 Except as specifically set forth in this Agreement, any and all
disputes, controversies and claims arising out of or relating to this Agreement,
or with respect to the construction of this Agreement, or concerning the
respective rights or obligations hereunder of the parties hereto and their
respective permitted successors and assigns (except disputes, controversies and
claims relating to or affecting in any way the Company's ownership of, or rights
to, or the validity of the Trademark or any registration thereof or infringement
thereof, as set forth in Paragraph 6) shall be determined by arbitration of a
panel of three (3) arbitrators in New York, New York, in accordance with and
pursuant to the then existing rules of the American Arbitration Association.
Windsong acknowledges that any unauthorized reproduction or use of the
Trademark, during or after the Term, which violates this Agreement or is
otherwise improper, will be an infringement of, and will immediately and
irreparably damage the Company, and the Company's rights and interests in and
to, and the value to the Company of, the Trademark, within and outside the
Territory. Windsong agrees that the Company, provided it is not in breach of any
of the terms in this Agreement, is entitled to preliminary and permanent
injunctive relief and any and all other remedies for enforcement of rights to
stop such reproduction or use. This Paragraph will in no way limit the Company
from obtaining any and all other relief to which it may be entitled. Any
arbitration award shall be final and binding upon the parties and judgment
thereon may be entered in any court
13
<PAGE>
having jurisdiction thereof. Jurisdiction in the state and federal courts of New
York is hereby consented to by the parties for such purposes. The service of any
notice, process, motion or other document in connection with an arbitration
award hereunder may be effectuated either by personal service upon a party or by
certified or registered mail to the respective addresses herein provided. The
arbitrators shall have no right to amend or supplement this Agreement.
17. Notices, etc.
17.1 All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been properly given or
sent on the date when such notice, request, consent or communication is (a)
personally delivered and acknowledged, or (b) if mailed, when received by
certified or registered mail, at the address of the parties set forth below, or
at such other address or addresses as any of the parties hereto shall have
heretofore designated by notice hereunder.
If to the Company:
Alexander Julian Inc.
63 Copps Hill Road
Ridgefield, Connecticut 06877
Attention: Alexander Julian
If to Windsong:
Windsong
224 Riverside Avenue
Westport, CT 06880
Attention: Joseph Sweedler
18. Relationship Between the Parties.
18.1 Nothing herein contained shall be construed to place the
parties in the relationship of partners or joint venturers. Neither party shall
represent itself as the agent or legal representative of the other party for any
purpose whatsoever and shall have no power to obligate or bind the other party
in any manner whatsoever.
19. Waiver.
19.1 None of the terms hereof can be waived or modified except by an
express agreement in writing signed both parties hereto. The failure of either
party hereto to enforce, or the delay by either party in enforcing, any of its
rights hereunder shall not be deemed a continuing waiver or a modification
thereof and either party may, within the time provided by applicable law,
commence appropriate legal proceedings to enforce any and all such rights. All
rights and remedies provided for herein shall be cumulative and in addition to
any other rights or remedies such
14
<PAGE>
parties may have at law or in equity. No person, firm or corporation, other than
the parties hereto, shall be deemed to have acquired any rights by reason of
anything contained in this Agreement.
20. Assignment.
20.1 This Agreement may not be assigned by Windsong without prior
written consent of the Company. Windsong may not grant sublicenses. Subject to
the foregoing, this Agreement shall bind and inure to the benefit of the
parties, their successors and assigns.
21. Brokerage.
21.1 The parties in their negotiations relative to this Agreement
have not utilized the services of any finder, broker or agent. Each party agrees
to indemnify the other party against and hold it harmless from any and all
liabilities (including without limitation, reasonable attorney's fees) to any
person, firm or corporation claiming commissions or fees in connection with this
Agreement or the transactions contemplated hereby as a result of an agreement
with or services rendered to such party.
22. Paragraph Headings.
22.1 The captions of paragraphs have been inserted for convenience
only and shall not be given any legal effect.
23. Applicable Law.
23.1 This Agreement shall be construed and interpreted in accordance
with the internal laws of the State of New York applicable to contracts made and
performed therein (without applying New York conflict of laws rules). If any
applicable mandatory law prevents application of New York law to a provision of
this Agreement, all other provisions will remain subject to New York law.
24. Severability.
24.1 In the event that any one or more provisions of this Agreement
shall at any time be found to be invalid or otherwise rendered unenforceable,
including with respect to all or part of the Territory, then such provision or
provisions shall be severable from this Agreement (but only with respect to that
part of the Territory) and the validity or enforceability of the remaining
provisions of this Agreement shall not be affected thereby.
25. Entire Agreement.
15
<PAGE>
25.1 This Agreement expresses fully the understanding between the
parties and all prior understandings are hereby canceled and no changes in the
terms of this Agreement shall be valid except when and if reduced to writing and
signed by both parties.
16
<PAGE>
If the foregoing correctly sets forth our complete agreement and understanding,
please so indicate by signing in the space provided below and on the duplicate
copy of this letter, and thereafter returning it to the Company, whereupon this
letter shall constitute a binding agreement between the Company and Windsong.
Very truly yours,
ALEXANDER JULIAN, INC.
By: /s/
----------------------------
AGREED TO:
As of this 1st day of January, 1996.
WINDSONG, INC.
By: /s/ Joseph Sweedler
--------------------------------
17
<PAGE>
Alexander Julian, Inc.
63 Copps Hill Road
Ridgefield, Connecticut 06877
As of July 9, 1999
Windsong, Inc.
1599 Post Road East
Westport, Connecticut 06880
Re: License Agreement (the "License Agreement"), dated as of January 1,
1996, Between Alexander Julian, Inc. (the "Licensor") and Windsong,
Inc. (the "Licensee")
Gentlemen:
In connection with the proposed sale of substantially all of the
assets of the Licensee (including, without limitation, all of the Licensee's
right, title and interest in, to and under the License Agreement) to Windsong
Acquisition Corp. (the "Purchaser" pursuant to an Asset Purchase Agreement (the
"Asset Purchase Agreement") to be entered into between the Licensee and the
Purchaser, you have requested that the Licensor consent to the assignment of the
License Agreement from the Licensee to the Purchaser.
Effective upon [***] delivery of an executed guaranty by Pietrafesa
Corporation as set forth in the last paragraph of this Letter Agreement, (i) the
Licensor hereby consents to the assignment of the License Agreement from the
Licensee to the Purchaser [***] (ii) the Licensor and the Licensee hereby amend
and restate the last sentence in Article 6.3 of the License Agreement by
deleting such sentence in its entirety and inserting in lieu thereof the
following: "Thereafter the Annual Minimum payment shall be the greater of 75% of
the prior year's Percentage Payments or $1,000,000," and (iii) the Licensor and
Licensee reaffirm all other terms and conditions of the License Agreement except
to the extent modified by this Letter Agreement and the Coloursport Alexander
Julian Agreement entered into simultaneously herewith.
The Licensor and the Licensee both represent to the best of their
knowledge that (i) the License Agreement is in full force and effect, and (ii)
there is no dispute or disagreement between the Licensor and the Licensee with
respect to the License Agreement and to the best of their knowledge there is no
basis for terminating the License Agreement or asserting any indemnity claim
thereunder.
The Licensor agrees and acknowledges that in connection with the
assignment of the License Agreement, Licensee may continue to sell the Products
(as defined by the License Agreement, Exhibit A) to Licensee's existing
customers to the extent identified on Schedule A annexed hereto and made a part
hereof.
The Licensee agrees and acknowledges that notwithstanding the
Licensor's approval of the customers identified on Schedule A, Licensee will not
sell the Products (without Licensor's prior written approval), to any customer
who: (i) applies for, or consents to the appointment of a receiver, trustee, or
liquidator for all, or a substantial part of its assets; (ii) admits in writing
its inability to pay its debts as they mature; (iii) makes a general assignment
or trust mortgage for the benefit of its creditors; (iv) is adjudged bankrupt or
insolvent; (v) files a petition initiating any proceeding under any insolvency
or other similar law; (vi) files an answer admitting the material allegations of
a petition filed in any proceeding under any provision of the Bankruptcy Act or
under any insolvency or other similar law, or permits any such petition to
remain undismissed for a period of thirty (30) days; or (vii) permits an order,
judgment or decree to be entered with or without its application, approval or
consent, by any court
[***] Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
<PAGE>
of competent jurisdiction approving a petition seeking its reorganization, or
the appointment of a receiver, trustee, liquidator, or any similar officer of
all, or a substantial part, of its assets and, if such order, judgment or decree
is entered without its application, approval or consent, such order, judgment or
decree shall continue unstayed and in effect for a period of thirty (30) days;
or (viii) takes any corporate action for the purpose of effecting any of the
foregoing.
The Licensor's prior written approval will be required relative to
any publicity utilizing Licensor's corporate name, the name Alexander Julian.
Licensor's trademarks, the License Agreement, and/or any modification of
Pietrafesa Corporation's S-1 to the extent such modification concerns or relates
to any of the above.
Licensee agrees and acknowledges that there will not be any further
assignment of the License Agreement without Licensor's prior written approval
and that (i) any merger or acquisition of Purchaser or its parent, the result of
which is that Purchaser or its parent is not the surviving entity, or (ii) any
other corporate transaction whereby Philip E. Cohen is no longer in direct or
indirect control of Pietrafesa Corporation, other than by death or total and
permanent disability shall be considered an assignment requiring Licensor's
prior written approval for the purposes of License Agreement Article 20.
The Licensor will be timely provided with all further drafts and
execution copies of (i) the "more definitive agreements" referenced in the
Letter of Intent, (ii) the assignment of the License Agreement to Purchaser, and
(iii) Pietrafesa Corporation's guaranty of Purchaser's assumption of the
obligations of the License Agreement.
In the event that the License Agreement has not been assigned to the
Purchaser on or before the earlier of October 31, 1999 or the date on which the
Asset Purchase Agreement terminates (or, if the Asset Purchase Agreement is not
entered into by the Licensee and the Purchaser, the date on which the Letter of
Intent, between the Licensee and The Pietrafesa Corporation is terminated), this
Letter Agreement shall automatically terminate and be of no further force or
effect, after which, the parties hereto shall not have any rights or obligations
under this Letter Agreement.
This Letter Agreement represents the entire agreement of the parties
hereto with respect to the subject matter expressed in this Letter Agreement,
and any previous agreement or understanding between the parties hereto with
respect to the subject matter of this Letter Agreement is superseded by this
Letter Agreement. This Letter Agreement is governed by the laws of the State of
New York.
This Letter Agreement and the assignment of the License Agreement to
Purchaser shall not become effective unless and until the obligations of the
Licensee are assumed by the Purchaser and unconditionally guaranteed by the
Pietrafesa Corporation in form and substance acceptable to each of the
undersigned.
Very truly yours,
ALEXANDER JULIAN, INC., Licensor
By: /s/ Alexander Julian
----------------------------
Alexander Julian
President
Acknowledged and Agreed:
WINDSONG, INC., Licensee
By: /s/ Joseph Sweedler
------------------------------
Joseph Sweedler
President
2
<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 February 12, 1999 (except for Note 12, as to which the
date is July 15, 1999), in the Pre-Effective Amendment No. 3 to Registration
Statement (Form S-1 No. 333-74439) and related prospectus of The Pietrafesa
Corporation for the registration of 4,658,333 shares of its common stock.
/s/ Ernst & Young LLP
Syracuse, New York
August 5, 1999
<PAGE>
Exhibit 23.2
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 4, 1999, with respect to the financial statements
and schedules of Components by John McCoy, Inc. included in the Registration
Statement (Form S-1) and related prospectus of The Pietrafesa Corporation for
the registration of 4,658,333 shares of its common stock.
/s/ Lawrence B. Goodman & Co. P.A.
Certified Public Accountants
Fair Lawn, New Jersey
August 5, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 2, 1999, with respect to the financial
statements and schedules of Global Sourcing Network, Ltd. included in the
Registration Statement (Form S-1--No. 333-74439) and related prospectus of The
Pietrafesa Corporation for the registration of 4,658,333 shares of its common
stock.
/s/ Pasquale & Bowers, LLP
Syracuse, New York
August 5, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated May 7, 1999 for the Financial Statements of Windsong,
Inc. in the Registration Statement (Form S-1--No. 333-74439) and related
prospectus of The Pietrafesa Corporation for the registration of 4,658,333
shares of its common stock.
/s/ Weissbarth, Altman & Michaelson LLP
New York, New York
August 5, 1999
