<PAGE>
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1999
REGISTRATION NO. 333-74439
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
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 1401 WALNUT 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. |_|
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Amount Proposed Maximum Proposed Maximum
Title of each Class of to be Offering Price Aggregate Amount of
Securities to be Registered Registered (1) Per Share Offering Price(2) Registration Fee
- --------------------------------- ----------------- -------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Class A Common Stock $50,700,000 $14,095(3)
</TABLE>
- -----------------------
(1) Includes up to ____ shares that may be purchased from The Pietrafesa
Corporation at the option of the underwriters solely to cover
over-allotments, if any, and _____ shares being registered for sale 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) $13,900 of this amount has been previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<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 MAY 28, 1999
Shares
Class A Common Stock
[LOGO]
$ per share
Of the shares of The Pietrafesa Corporation's Class A Common Stock
being offered in this prospectus, shares are being offered by The Pietrafesa
Corporation. This prospectus also relates to the offer and sale, from time to
time, of up to shares of Class A Common Stock by a stockholder of The
Pietrafesa Corporation. Prior to this offering, there has been no public market
for our Class A Common Stock. We expect that the initial public offering price
to the public will be between $ and $ per share. The market price of
the shares after the offering may be higher or lower than the offering price.
We have applied for listing of the Class A Common Stock on the Nasdaq National
Market under the symbol "BRND."
The Class A Common Stock is one of two classes of Common Stock of The Pietrafesa
Corporation. Holders of shares of Class A Common Stock will elect 25% of the
directors. Holders of shares of Class B Common Stock will elect 75% of the
directors and will have the power to decide substantially all other matters
submitted to stockholders. The Class B Common Stock is not being offered to the
public and is currently held by a private limited partnership. Holders of shares
of Class A Common Stock will have limited voting rights until all shares of
Class B Common Stock are converted into Class A Common Stock.
Investing in the Class A Common Stock involves risks. See "Risk Factors"
beginning on page 14.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Price to the public.......................... $ $
Underwriting discounts and commissions.......
Proceeds to The Pietrafesa Corporation.......
</TABLE>
The Pietrafesa Corporation has granted the underwriters an option to purchase up
to an additional shares to cover over-allotments within 30 days following
the date of this prospectus. The underwriters expect to deliver the shares to
purchasers on , 1999.
We will not receive any portion of the proceeds from sales of Class A Common
Stock by the selling stockholder.
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.
EVEREN SECURITIES, INC.
FIRST SECURITY VAN KASPER
MORGAN SCHIFF & CO., INC.
, 1999
<PAGE>
[Artwork]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary..................................................................................... 5
Forward Looking Statements............................................................................. 13
Risk Factors........................................................................................... 19
Use of Proceeds........................................................................................ 20
Capitalization......................................................................................... 21
Dividend Policy........................................................................................ 22
Dilution............................................................................................... 22
Selected Historical Consolidated Financial Data........................................................ 24
Pro Forma Combined Financial Data...................................................................... 26
Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 38
Business............................................................................................... 51
Management............................................................................................. 62
Certain Relationships and Related Transactions......................................................... 66
Principal Stockholders................................................................................. 68
Selling Stockholder.................................................................................... 69
Description of Capital Stock........................................................................... 70
Shares Eligible for Future Sale........................................................................ 73
Underwriting........................................................................................... 74
Plan of Distribution of Selling Stockholder............................................................ 75
Legal Matters.......................................................................................... 75
Experts................................................................................................ 76
Additional Information................................................................................. 76
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
million worth of Class A Common Stock valued at the 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 to the issuance to MS Pietrafesa, L.P. of a total of 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
Brooks Brothers Saks Fifth Avenue
Dillards Sam's Club
Filene's Basement Sulka
Jos.A.Bank The Men's Wearhouse
Bloomingdale's Today's Man
In 1998, six customers accounted for 67% of our net revenues. None of those
customers individually accounted for more than 20% of our net revenues in 1998.
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
5
<PAGE>
specialize in specific products, price points or distribution channels. We
believe that two important trends in the apparel industry benefit us:
o Private label apparel represents an increasing percentage of total men's
apparel sales; and
o Retailers are concentrating more business with fewer suppliers to achieve
greater efficiency in merchandising, purchasing and inventory management.
The apparel industry is intensely competitive and includes competitors 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; services such as design,
merchandising, statistical quality control and inventory management;
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 are:
o to achieve greater penetration among our existing customers and to
develop new customer relationships;
o to acquire, develop and license brands in order to leverage our
merchandising and sourcing capabilities;
o to expand internationally by offering our merchandising/sourcing services
to foreign retailers; and
o to grow 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 are:
o to make, 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;
o to operate each newly-acquired business as an independent unit and to
hold it accountable for its utilization of capital and overhead; and
o to improve and standardize financial controls, quality control practices
and back-office functions of each acquired business and eliminate
duplicative operational facilities.
In addition, we are licensees for Alexander Julian, FUBU, the Greg Norman
Collection and DKNY.
o Alexander Julian is a recognized brand of fashion apparel. We develop and
market a collection of sportswear under this label.
o FUBU is a brand of urban sportswear. We will develop and market a
collection of tailored clothing, neckwear and outerwear.
o The Greg Norman collection is a brand of active sportswear. We will
develop and market a collection of tailored clothing, dress shirts,
neckwear, outerwear and sportswear.
o DKNY is a recognized brand of fashion apparel. We develop and market a
collection of outerwear and topcoats under this label.
6
<PAGE>
Upon the completion of this offering, we will have consummated four
acquisitions:
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.
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, our reliance on third party manufacturers, the unpredictability
of our operating results 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>
<CAPTION>
<S> <C>
Common Stock offered by The Pietrafesa Corporation............ shares of Class A Common Stock
Common Stock to be outstanding after our offering............. shares of Class A Common Stock (1)
shares of Class B Common Stock, all of which were
issued to MS Pietrafesa, L.P. prior to the consummation
of 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 complete the Components and Windsong acquisitions, to repay
indebtedness in connection with the Diversified Apparel and
Global Sourcing Network Acquisitions and other purposes.
Common Stock which may be offered from time to time by
Windsong, Inc............................................... shares of Class A Common Stock
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 (a) shares of Class A Common Stock reserved for issuance upon the
exercise of options which may be issued from time to time under our Stock Option
Plan, pursuant to which, as anticipated to be adopted prior to the closing of
the offering, options to purchase a number of shares equal to 10% of our
outstanding capital stock immediately following the offering may be granted, (b)
shares of Class A Common Stock that may be issued as deferred purchase price in
lieu of cash pursuant to the Diversified Apparel, Global Sourcing Network,
Components and Windsong acquisition agreements and (c) up to shares available
for purchase by the underwriters under their over-allotment option. See
"Management," "Principal Stockholders," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Significant Acquisitions" and
"Underwriting."
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 was 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 financial
statements and the notes thereto, included elsewhere in this prospectus.
Our pro forma combined financial data includes (1) 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 (2) 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.
9
<PAGE>
<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, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues.......................... $ 42,073 $ 40,009 $ 44,000 $ 37,582 $ 56,763 $161,081 $ 161,081
Cost of sales......................... 34,087 31,631 34,769 29,218 47,062 130,311 130,311
---------- --------- --------- --------- ---------- ----------- ------------
Gross profit.......................... 7,986 8,378 9,231 8,364 9,701 30,770 30,770
Operating expenses:
Selling, general and administrative
expenses............................ 6,066 9,869 7,518 6,118 5,536 18,175 18,175
Depreciation and amortization
expenses............................ 99 102 165 151 222 1,982 1,982
---------- --------- --------- --------- ---------- ----------- ------------
6,165 9,971 7,683 6,269 5,758 20,157 20,157
---------- --------- --------- --------- ---------- ----------- ------------
Operating income (loss)............... 1,821 (1,593) 1,548 2,095 3,943 10,613 10,613
Interest expense...................... 1,044 1,693 1,720 1,446 1,209 2,885 1,929
Public offering costs(1).............. -- -- -- -- 823 823 823
---------- --------- --------- --------- ---------- ----------- ------------
Income (loss) from continuing
operations
before income taxes................. 777 (3,286) (172) 649 1,911 6,905 7,861
Provision for income taxes(2)......... -- -- -- -- 514 2,762 3,144
---------- --------- --------- --------- ---------- ----------- ------------
Income (loss) from continuing
operations.......................... 777 (3,286) (172) 649 1,397 4,143 4,717
Loss from discontinued operations(3).. (718) (6,236) (321) (93) -- -- --
---------- --------- --------- --------- ---------- ----------- ------------
Income (loss) before extraordinary item. 59 (9,522) (493) 556 1,397 4,143 4,717
---------- --------- --------- --------- ---------- ----------- ------------
Extraordinary item(4)................. -- -- 3,350 -- -- -- --
---------- --------- --------- --------- ---------- ----------- ------------
Net income (loss)..................... $ 59 $(9,522)$ 2,857 $ 556 $ 1,397 $ 4,143 $ 4,717
========== ========= ========= ========= ========== =========== ============
Pro forma net income data:
Income before income taxes,
as reported above................... $1,911 $6,905 $7,861
Pro forma provision for income taxes(7) 764 2,762 3,144
---------- ----------- ------------
Pro forma net income.................. $1,147 $4,143 $4,717
========== =========== ============
Pro forma basic and diluted net income
per common share.................... $ $ $
Pro forma weighted average number of
common shares outstanding (basic and
diluted)(6).........................
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1998
----------------------------------------------------------------
Pro Forma Combined
Pro Forma Combined As Adjusted
Actual
------------------- ---------------------- ---------------------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital............................... $ 9,239 $ 12,134 $ 12,022
Total assets.................................. 29,375 86,913 86,913
Total long-term debt, net of current
maturities.................................... 12,561 45,802 690
Total stockholders' equity.................... 2,383 6,383 51,383
</TABLE>
<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)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data:
EBITDA(5)............................. $ 2,833 $ (396) $ 2,494 $ 2,897 $ 4,731 $13,161 $13,161
Capital expenditures.................. 1,103 368 105 59 592 895 895
Operating cash flows.................. (3,022) 3,779 2,445 3,056 (1,395) (2,217) (1,643)
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>
11
<PAGE>
<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, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues............................. $ 9,503 $ 17,803 $ 37,774 $ 46,012 $ 37,774 $ 46,012
Cost of sales............................ 7,028 14,833 29,698 37,445 29,698 37,445
------------------------------------------------------------------------------
Gross profit............................. 2,475 2,970 8,076 8,567 8,076 8,567
Operating expenses:
Selling, general and administrative
expenses............................ 1,305 1,201 4,033 4,226 4,033 4,226
Depreciation and amortization expenses 64 68 504 507 504 507
------------------------------------------------------------------------------
1,369 1,269 4,537 4,733 4,537 4,733
------------------------------------------------------------------------------
Operating income (loss).................. 1,106 1,701 3,539 3,834 3,539 3,834
Interest expense......................... 253 296 577 682 350 498
------------------------------------------------------------------------------
Income (loss) before income taxes........ 853 1,405 2,962 3,152 3,189 3,336
Provision for income taxes(2)............ - 565 1,185 1,264 1,276 1,334
------------------------------------------------------------------------------
Net income............................... $ 853 $ 840 $ 1,777 $ 1,888 $ 1,913 $ 2,002
==============================================================================
Pro forma net income data:
Income before taxes, as
reported above......................... $ 853 $ 1,405 $ 2,962 $ 3,152 $ 3,189 $ 3,336
Pro forma income tax
expense(7)............................. 341 565 1,185 1,264 1,276 1,334
------------------------------------------------------------------------------
Pro forma net income.................... $ 512 $ 840 $ 1,777 $ 1,888 $ 1,913 $ 2,002
==============================================================================
Pro forma basic and diluted net income
per common share ...................... $ $ $ $ $ $
==============================================================================
Pro forma weighted
average number of common
shares outstanding (basic
and diluted) (6) ......................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As of 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>
Balance Sheet Data:
Working capital.......................... $ 5,707 $ 10,520 $ 8,354 $ 14,392 $ 12,392 $ 12,089
Total assets............................. 21,838 29,944 82,908 95,698 85,436 95,698
Total long-term debt, net of current
maturities 8,754 13,054 41,537 47,914 575 611
Total partners' capital and stockholders'
equity 3,562 3,473 7,355 7,473 52,355 52,473
For the Three Months Ended March 31,
------------------------------------------------------------------------------
Pro Forma Pro Forma
Pro Forma Pro Forma Combined, Combined,
Combined Combined As Adjusted As Adjusted
1998 1999 1998 1999 1998 1999
------------------------------------------------------------------------------
(in thousands)
Other Data:
EBITDA(5)................................ $ 1,308 $ 1,886 $ 4,182 $ 4,460 $ 4,182 $ 4,460
Capital expenditures.....................
90 109 186 313 186 313
Operating cash flows.....................
28 (613) (9,039) (4,354) (11,471) (6,868)
Cash (used in) provided by investing
activities.............................
(90) (109) (35,731) (35,858) (35,731) (35,858)
Cash (used in) provided by financing
activities.............................
62 721 42,805 39,905 45,333 39,905
- ---------------------
</TABLE>
12
<PAGE>
(1) Relates to a public offering that was delayed due to adverse market
conditions.
(2) MS Pietrafesa, L.P., our predecessor, was not subject to state or federal
income taxes. We are a C-corporation. We became subject to federal and
state income tax as of October 1, 1998 when we acquired all of the assets
and liabilities of MS Pietrafesa, L.P.
(3) During 1995, MS Pietrafesa, L.P. discontinued manufacturing of a low priced
tailored clothing line. The loss from disposal and from operations of this
segment is shown as discontinued operations.
(4) In 1996, MS Pietrafesa, L.P. recorded an extraordinary gain related to the
forgiveness of all of its outstanding subordinated debt and related
interest.
(5) EBITDA represents income (loss) from continuing operations before provision
(benefit) for income taxes plus depreciation and amortization plus interest
expense plus public offering costs. EBITDA 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, it has been
disclosed in this prospectus to permit a more complete comparative analysis
of our performance relative to other companies in the apparel industry. Our
definition of EBITDA may not be identical to similarly titled measures of
other companies and, therefore, may not necessarily be an accurate basis of
comparison.
(6) Consists of shares of Class A Common Stock to be issued in the offering and
the Windsong acquisition and the shares of Class B Common Stock currently
issued and outstanding. The number of shares of Class B Common Stock
outstanding gives effect to the issuance to MS Pietrafesa, L.P. of a total
of shares of Class B Common Stock prior to the consummation of the
offering for the nominal consideration of the stock's par value per share.
(7) Assumes that the Company was subject to federal and state income taxes for
the entire year, assuming an effective tax rate of 40.0%.
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
We Generate A Significant Percentage Of Our Revenue From A Limited Number
Of Customers
Sam's Club, S&K Famous Brands, Brooks Brothers, Dillards, Jos. A. Bank and Polo
Retail, our six most significant customers in 1998 accounted for 67% of our net
revenues in 1998. Sam's Club, S&K Famous Brands, Brooks Brothers and Dillards
each accounted for in excess of 10% of our net revenues in 1998. Sales to our
six largest customers in 1997 accounted for 60% of our net revenues in 1997.
In June 1999, our licensing agreement with Polo Corporation will expire and
sales to Polo Retail under this agreement will terminate after 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.
A Substantial Portion Of Our Revenues And Net Income Is Dependent Upon A
Single Licensing Relationship
Approximately 27.0% of our pro forma combined revenues and approximately 24.0%
of our pro forma combined net income during 1998 was 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. If we fail to perform our obligations, Alexander
Julian could terminate the license 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 And
Increased Costs
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 and customer
orders and goodwill.
Bilateral textile agreements between the United States and a number of other
countries contain provisions that impose quotas on the amount and type of goods
that can be imported into the United States from those countries. These
agreements allow the United States to impose restraints at any time on the
importation of specified categories of merchandise. Substantially all of the
countries from which we import products are subject to these agreements. In
addition, the United States imposes customs duties on our imported products. The
United States may impose additional tariffs on products that are found to have
been manufactured by convict, forced or indentured labor. In addition, the
United States may withdraw the "most favored nation" status of countries in
which our products are manufactured, which could result in the imposition of
reduced quotas and/or higher tariffs on products imported from these countries.
New or less favorable quotas, duties, tariffs or import restrictions could
result in an increase in our cost of products.
See "Business--Imports and Import Regulations."
14
<PAGE>
Our International Sourcing Of Products And Raw Materials May Subject Us To
Increased Costs And Unprofitable Transactions
We currently source production and raw materials from providers located outside
the United States. As a result, we are exposed to various risks, including:
o currency exchange rate fluctuations to the extent that 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.
These items could result in particular transactions being unprofitable to us,
increased costs of doing business in the affected countries or the inability to
do business in the affected countries.
The Adoption Of The Euro May Adversely Affect Our European Suppliers
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.
We purchased approximately 46% of our raw materials from European suppliers
based in countries which are participating in the Euro in 1999. The adoption of
the Euro may be disruptive to the 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 "--Reliance on Third
Parties to Perform Manufacturing Function."
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, it could cause us to lose
market share or require us to reduce our prices or increase our expenditures.
A Recession Or Consolidation In The Apparel Industry May Adversely Affect
Our Sales
The apparel industry has historically been highly cyclical and dependent on
general economic conditions and other factors, including consumer spending and
preferences. An economic recession or a deterioration in consumer confidence
could result in reduced sales volume or lower margins for our retailers, which
in turn could lower our margins or sales volume. In addition, apparel retailers
have experienced significant changes and difficulties over the past several
years, including consolidation of ownership, increased centralization of buying
decisions, 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 or require us to assume more credit risk
relating to its receivables. In addition, consolidations, restructurings and
reorganizations involving our customers could decrease the number of stores that
carry our products. Any increase in the ownership concentration within the
retail industry could make us more dependent on a limited number of customers
and could worsen the impact of losing a customer. See "Business -- Industry
Overview."
15
<PAGE>
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 revenue and net
income have fluctuated and may continue to fluctuate on a seasonal basis. A
disproportionate amount of our net revenue and a majority of our net income are
typically realized during the third quarter of our year. 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 this seasonality of net revenues, if our net revenues decrease
substantially in the third quarter of the year, it could have a material adverse
effect on our liquidity and on our profitability for the entire year.
Unsold Inventory Could Result In Decreased Profitability
Although we presently commence production of products only upon receipt of firm
purchase orders, we may at times have excess inventory due to the inventory
requirements that may arise for some of our apparel programs. In the future, we
may offer products that are not produced against firm purchase orders to attract
new customers or capture market share in particular products, which will expose
us to more risk of having excess or unsaleable inventory. In addition, our
customers may become entitled to cancel or modify a purchase order after we have
made purchasing commitments related to that order. This could occur due to
various factors, including our failure to fulfill an order on a timely basis for
reasons beyond our control. Holding inventory which could not be resold at
customary prices would decrease our profitability.
We Will Need Additional Financing And A Strong Infrastructure To Support
Our Expansion Plans
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 successfully develop 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. For a further
discussion of our growth strategy, see "Business--Growth Strategy."
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 net
revenues fluctuated between $40.0 million and $56.8 million, income (loss) from
continuing operations fluctuated between $(3.3) million and $1.4 million, EBITDA
fluctuated between $(0.4) million and $4.7 million and net income (loss)
fluctuated between $(9.5) million and $1.4 million. See "Summary Historical and
Pro Forma Combined Financial Data." Our future financial performance depends on
various factors, including successfully implementing our business plan,
expanding our existing and acquired businesses and developing new sources of
revenues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
We Depend On Our Key Management Personnel
Our ability to successfully implement our business 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. Our
management team has only recently been assembled and management controls are
still in their formative stages. We cannot assure you that this new 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 and qualified replacements are not found, our integration of
Diversified Apparel, Components and Windsong could be materially and adversely
affected.
16
<PAGE>
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 Mr. 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 Margins Could Be Affected By Fluctuations In Price And Availability Of
Raw Materials
We principally source wool, camel hair, cashmere, silk, linens, cotton and
blended fabrics for our products. The prices and availability of these fabrics,
as well as related trim and linings, are largely dependent on the market prices
for the raw materials used to produce them. The price and availability of the
fabrics used in our apparel may fluctuate significantly in relation to worldwide
demand and other reasons. While we attempt to fix the cost of our raw materials
at the time that we establish product pricing, we are not always able to do so.
If we fail to fix our raw material costs in this manner, our margins will be
affected by subsequent changes in raw material costs.
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 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. See "Business--Product
Sourcing, Raw Materials Sourcing and Manufacturing."
We Rely On Performance By Third Party Manufacturers
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 perform 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. See
"Business--Product Sourcing, Raw Materials Sourcing and Manufacturing."
We Face Risks Relating To The Year 2000 Issue
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, our business could be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Impact
of the Year 2000 Issue."
Risks Relating To Our Acquisition Strategy And Future Acquisitions
Our Combined Operating History May Not Be Indicative Of Future Operating
Results
We recently acquired Diversified Apparel and Global Sourcing Network and will
acquire Components and Windsong simultaneously with the consummation of the
offering. Accordingly, we have just begun to integrate 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 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.
17
<PAGE>
Our Focus On Growth May Divert Management's Attention From Other Business
Concerns
Our growth strategy depends heavily on the identification, acquisition and
successful management of new businesses. Pursuit of this growth strategy will
divert our management's attention from other business concerns. It is also
possible that neither our management nor management of Diversified Apparel,
Global Sourcing Network, Components and Windsong will have the skills necessary
to manage an aggressive acquisition program. Although we may recruit additional
managers to supplement the existing management of any acquired business, 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 have a
material adverse effect on our business, results of operations and financial
condition.
We May Be Adversely Affected By Unforeseen, Unknown Liabilities In
Connection With The Operation Of Acquired Businesses
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.
Future Performance Of The Acquired Businesses May Not Be Commensurate With
The 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 between 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. We cannot assure you that
independent valuations of Diversified Apparel, Global Sourcing Network,
Components and Windsong would not have been less than the consideration paid or
to be paid by us for the acquisition of any of these businesses. The future
performance of Diversified Apparel, Global Sourcing Network, Components and
Windsong may not be commensurate with the consideration paid to acquire these
businesses.
Reductions In Our Future Net Income Caused By The Amortization Of Goodwill
May Adversely Affect The Market Price Of Our Common Stock
Approximately $29 million, or 34%, of our pro forma combined, as adjusted total
assets as of December 31, 1998 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. 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. In addition, we will 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. 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. We plan
to evaluate continually whether events or circumstances have occurred that could
result in an acceleration of the amount to be amortized.
18
<PAGE>
We May Be Unable To Successfully Implement Or Realize Cost Savings
Opportunities Created By Our Acquisitions
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 have a material adverse effect on
our business, results of operations and financial condition.
Some of Our Acquisition Agreements Contain Terms That Could Prevent A
Change In Control of A Change in Management.
If Philip Ean Cohen ceases to control The Pietrafesa Corporation, we will
be required to pay Windsong the present value of the deferred portion of
the purchase price for Windsong. If Richard Pietrafesa is no longer our chief
executive officer, our deferred purchase price obligations under the Components
acquisition agreement will be accelerated. These and other provisions included
the Components and Windsong acquisition arrangements may entrench management or
discourage transactions in which we are assigned an attractive valuation because
a change in control is involved.
Risks Associated With Our Capital Structure
The Interests Of Our Controlling Stockholder May Conflict With The
Interests Of The Holders Of Our Class A Common Stock
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 the 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 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 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
favored by holders of Class A Common Stock. In addition, as long as any Class B
Common Stock is outstanding, MS Pietrafesa, L.P. 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 % of the
outstanding shares of Class A Common Stock following the full conversion.
We Are Subject To Risks Relating To Potential Significant Covenant
Restrictions
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 would also be permitted under any other instruments then
in effect containing cross-acceleration or cross-default provisions, which could
have a material adverse effect on our business, results of operations and
financial condition.
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 shares of Class A Common Stock outstanding
immediately after the offering. Of these shares, the shares of Class A Common
Stock sold in this offering will be freely tradable under the Securities Act of
1933. The up to shares of Class A Common Stock to be issued upon conversion of
the 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. In addition, commencing days after the closing of the offering, or sooner
with the consent of the underwriters, such shares of Class A Common Stock may be
sold without registration under the Securities Act to the extent permitted by
Rule 144. See "Shares Eligible for Future Sale."
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<PAGE>
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 And 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. See
"Underwriting."
Holders 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 December 31, 1998,
purchasers of Class A Common Stock in the offering will experience an immediate
dilution of $ in the pro forma net tangible book value per share of Class A
Common Stock from the initial public offering price of $ 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 above and under the
captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."
20
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of ________ shares of Class A Common Stock in
this offering, after payment of expenses of this offering, are estimated to be
approximately $____ million, or $ ___ million if the underwriters'
over-allotment option is exercised in full, assuming an initial public offering
price of $_____ 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 4,700
General corporate purposes 12,850
-------
$45,000
=======
- -----------------------
(1) This escrow will be funded to secure a performance-based portion of the
purchase price in the Windsong acqusition.
(2) These notes bear interest at a rate of 10% per annum and mature in May
2002.
The portion of the net proceeds of the offering that has been allocated to
general corporate purposes may be applied to future acquisitions, to repay
indebtedness or for working capital or other purposes. The Company currently has
not entered into any agreements for the acquisition of any company except as set
forth in this prospectus.
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<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1999:
(1) our actual capitalization;
(2) our pro forma combined capitalization after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions; and
(3) our pro forma combined capitalization, as adjusted to give effect to
the Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions, issuance to MS Pietrafesa, L.P. of a total of
shares of Class B Common Stock prior to the consummation of the
offering, our sale of shares of Class A Common Stock pursuant to the
offering, assuming an initial public offering price of $ 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
Pro Forma Combined,
Actual 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 $ 611
Stockholders' equity:
Class A Common Stock, par value $.001 per share;
5,000,000 shares authorized, shares issued and
outstanding and shares issued and outstanding pro
forma combined and pro forma combined, as
adjusted..........................................
Class B Common Stock, par value $.001 per share;
10,000,000 shares authorized, shares issued and
outstanding and shares issued and outstanding pro
forma combined and pro forma combined, as
adjusted.....
Additional paid-in capital.............................. 3,191
Retained earnings (deficit)............................. 282
-------- -------- --------
Total stockholders' equity.......................... 3,473 7,473 52,473
======== ======== ========
Total capitalization.................................... $ 16,527 $ 55,387 $ 53,084
======== ======== ========
</TABLE>
22
<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
The net tangible book value of our Common Stock as of March 31, 1999, was $
million, or $ per share. 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, our net tangible book value as of March 31, 1999
would have been $ million or $ per share. After giving effect to the sale of
shares of Class A Common Stock offered hereby at an assumed initial public
offering price of $ 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 $ million, or $ per share of Common Stock. This represents an
immediate increase in net tangible book value of $ per share to the holder of
our Class B Common Stock and an immediate dilution in net tangible book value of
$ per share to purchasers of Class A Common Stock in the offering. The following
table illustrates this per share dilution.
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share......................................... $
---------
Net tangible book value per share of Common Stock as of March 31,1999............... $
Decrease in net tangible book value per share of Common Stock
attributable to the Diversified Apparel, Global Sourcing Network,
Components and Windsong acquisitions...........................................
--------
Pro forma net tangible book value per share of Common Stock after the acquisitions..
Increase in pro forma net tangible book value per share of Common Stock attributable
to new investors...............................................................
--------
Decrease in pro forma net tangible book value attributable to the issuance of shares
of Class B Common Stock to MS Pietrafesa, L.P..................................
--------
Pro forma net tangible book value per share of Common Stock after the acquisitions,
the issuance of the Class B Common Stock and the offering......................
---------
Dilution per share of Class A Common Stock to new investors............................. $
=========
</TABLE>
23
<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
stockholders 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 $____ 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
Purchased Consideration
---------------- ---------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).. $ % $
New investors.............
Total..................... 100% $ 100%
====== ===== ====== =====
-----------------------
</TABLE>
(1) Excludes shares of Class A Common Stock to be reserved for issuance
upon the exercise of options which may be issued from time to time under
our Stock Option Plan, pursuant to which, as anticipated to be adopted
prior to the closing of the offering, 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."
24
<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 is 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.
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.
<TABLE>
<CAPTION>
For the Year Ended December 31, Three Months Ended March 31,
---------------------------------------------------------- ----------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ---------- ------------ ------------
(in thousands, except share and per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues......................... $ 42,073 $ 40,009 $ 44,000 $ 37,582 $ 56,763 $9,503 $ 17,803
Cost of sales........................ 34,087 31,631 34,769 29,218 47,062 7,028 14,833
----------- ----------- ----------- ----------- ---------- ------------ ------------
Gross profit......................... 7,986 8,378 9,231 8,364 9,701 2,475 2,970
Operating expenses:
Selling, general and administrative
expenses........................... 6,066 9,869 7,518 6,118 5,536 1,305 1,201
Depreciation and amortization expenses 99 102 165 151 222 64 68
----------- ----------- ----------- ----------- ---------- ------------ ------------
6,165 9,971 7,683 6,269 5,758 1,369 1,269
----------- ----------- ----------- ----------- ---------- ------------ ------------
Operating income (loss).............. 1,821 (1,593) 1,548 2,095 3,943 1,106 1,701
Interest expense..................... 1,044 1,693 1,720 1,446 1,209 253 296
Public offering costs(1)............. -- -- -- -- 823 -- --
----------- ----------- ----------- ----------- ---------- ------------ ------------
Income (loss) from continuing
operations before income taxes..... 777 (3,286) (172) 649 1,911 853 1,405
Provision for income taxes(2)........ -- -- -- -- 514 -- 565
----------- ----------- ----------- ----------- ---------- ------------ ------------
Income (loss) from continuing
operations......................... 777 (3,286) (172) 649 1,397 853 840
Loss from discontinued operations(3). (718) (6,236) (321) (93) -- -- --
----------- ----------- ----------- ----------- ---------- ------------ ------------
Income (loss) before extraordinary item 59 (9,522) (493) 556 1,397 853 840
Extraordinary item(4)................ -- -- 3,350 -- -- -- --
----------- ----------- ----------- ----------- ---------- ------------ ------------
Net income (loss).................... $ 59 $ (9,522) $ 2,857 $ 556 $ 1,397 $ 853 $ 840
=========== =========== =========== =========== ========== ============ ============
Pro forma net income data:
Income before income taxes,
as reported above ............... $1,911 $ 853 $ 1,405
Pro forma provision for
income taxes(8) ................. 764 341 562
-------- ------------ ------------
Pro forma net income $1,147 $ 512 $ 843
======== ============ ============
Pro forma basic and diluted net
income (loss) per common share..... $ $ $
Pro forma weighted average number
of common shares outstanding
(basic and diluted)(5).............
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of March 31,
--------------------------------------------------------- --------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ---------- ----------- ---------- ----------- ------------- ------------
(in thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C> <C>
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(6) 3,562 3,473
<CAPTION>
For the Year Ended December 31, Three Months Ended March 31,
--------------------------------------------------------- ----------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ---------- ----------- ---------- ----------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data:
EBITDA(7)........................... $ 2,833 $ (396) $ 2,494 $ 2,897 $ 4,731 $1,308 $1,886
Capital expenditures................ 1,103 368 105 59 592 90 109
Operating cash flows................ (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>
(1) Relates to a public offering that was delayed due to adverse market
conditions.
(2) MS Pietrafesa, L.P., our predecessor, was not subject to state or federal
income taxes. The Pietrafesa Corporation is a C-corporation. We became
subject to federal and state income tax as of October 1, 1998 when we
acquired all of the assets and liabilities of MS Pietrafesa, L.P.
(3) During 1995, MS Pietrafesa, L.P. discontinued manufacturing of a low price
point tailored clothing line. The loss from disposal and from operations
of this segment is shown as discontinued operations.
(4) In 1996, MS Pietrafesa, L.P. recorded an extraordinary gain related to the
forgiveness of all of its outstanding subordinated debt and related
interest.
(5) Consists of shares of Class A Common Stock to be issued in the offering
and the Windsong acquisition and the shares of Class B Common Stock
currently issued and outstanding. The number of shares of Class B Common
Stock outstanding gives effect to the issuance to MS Pietrafesa, L.P. of a
total of shares of Class B Common Stock prior to the consummation of the
offering for the nominal consideration of the stock's par value per share.
(6) Gives effect to MS Pietrafesa, L.P.'s transfer to us of all of its assets
and liabilities as of October 1, 1998, including a $1.5 million obligation
relating to tax-related distributions to its partners, and to the impact
of the recording of $0.5 million of tax expense as a C-corporation
reflected in our 1998 statement of operations. See "Certain Relationships
and Related Transactions."
(7) EBITDA represents income (loss) from continuing operations before
provision (benefit) for income taxes plus depreciation and amortization
plus interest expense plus public offering costs. EBITDA 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, it has
been disclosed in this prospectus to permit a more complete comparative
analysis of our performance relative to other companies in the apparel
industry. Our definition of EBITDA may not be identical to similarly
titled measures of other companies and, therefore, may not necessarily be
an accurate basis of comparison.
(8) Assumes the Company was subject to federal and state income taxes for the
entire year, assuming an effective tax rate of 40.0%.
26
<PAGE>
PRO FORMA COMBINED FINANCIAL DATA
Our 1998 pro forma combined financial data includes (1) 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 (2) 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. 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 No. 16. Accordingly, the
purchase price of each acquisition has been allocated to the fair value of the
assets acquired, with the remainder allocated to goodwill. There are no other
intangible assets that have been acquired as part of the acquisitions. A summary
of the purchase price of the acquisition and allocation of that price to the
fair value of assets is shown below:
<TABLE>
<CAPTION>
Schedule of Allocation of Purchase Price of Acquisitions
(in thousands)
Global
Sourcing Diversified Total
Components Network Apparel Windsong Combined
-------------- --------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Purchase Price:
Cash portion........................ $ 4,695 $ 1,400 $ 800 $ 22,000 $ 28,895
Equity portion...................... -- -- - 4,000 4,000
Sellers' notes...................... -- 800 400 -- 1,200
Assumption of liabilities........... 6,021 1,121 1,955 16,862 25,959
Costs directly associated with the
acquisition......................... 350 350 350 400 1,450
Purchase price adjustment........... -- -- -- -- --
-------------- --------------- -------------- ---------------- ---------------
Total purchase price................ 11,066 3,671 3,505 43,262 61,504
Allocation of Purchase Price:
Fair value of assets acquired....... (8,660) (1,171) (2,457) (19,998) (32,286)
-------------- --------------- -------------- ---------------- ---------------
Goodwill acquired................... $ 2,406 $ 2,500 $ 1,048 $ 23,264 $ 29,218
============== =============== ============== ================ ===============
Pro Forma amortization expense...... $ 160 $ 167 $ 105 $ 1,163 $ 1,595
============== =============== ============== ================ ===============
Pro Forma amortization for qtr...... $ 40 $ 42 $ 26 $ 291 $ 399
============== =============== ============== ================ ===============
</TABLE>
Goodwill will be amortized over a period ranging from 10-20 years. The principal
assets acquired or to be acquired for each of the acquisitions are accounts
receivable, inventory and goodwill. The principal liabilities assumed for each
of the acquisitions are accounts payable, accrued expenses and debt facilities.
The amount of goodwill recorded in the pro forma financial statements is based
on asset 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.
27
<PAGE>
Pro Forma Combined Statement of Operations Data
Year Ended December 31, 1998
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
The Global
Pietrafesa Sourcing Diversified Total
Corporation Components Network Apparel Windsong Combined
-------------- -------------- -------------- ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenues................................ $ 56,763 $ 19,993 $ 18,062 $ 2,633 $ 63,630 $ 161,081
Cost of sales............................... 47,062 15,007 16,768 1,590 49,884 130,311
-------------- -------------- -------------- ------------ ------------ ------------
Gross profit................................ 9,701 4,986 1,294 1,043 13,746 30,770
Operating expenses:
Selling, general and administrative expenses 5,536 3,107 1,390 765 10,917 21,715
Depreciation and amortization expenses.... 222 1 4 3 157 387
-------------- -------------- -------------- ------------ ------------ ------------
5,758 3,108 1,394 768 11,074 22,102
-------------- -------------- -------------- ------------ ------------ ------------
Operating income (loss)..................... 3,943 1,878 (100) 275 2,672 8,668
Interest expense............................ 1,209 293 -- 1 1,661 3,164
Public offering costs....................... 823 -- -- -- -- 823
-------------- -------------- -------------- ------------ ------------ ------------
Income (loss) before income taxes .......... 1,911 1,585 (100) 274 1,011 4,681
Provision for income taxes.................. 514 158 (46) 24 46 696
-------------- -------------- -------------- ------------ ------------ ------------
Net income (loss)........................... $ 1,397 $ 1,427 $ (54) $ 250 $ 965 $ 3,985
============== ============== ============== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Company Pro Acquisition Pro Forma
Forma Pro Forma Pro Forma Offering Combined,
Adjustments Adjustments Combined Adjustments As Adjusted
-------------- -------------- ------------- -------------- --------------
(in thousands)
<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 -- (3,540)(2) 18,175 -- 18,175
Depreciation and amortization expenses.... -- 1,595 (3) 1,982 -- 1,982
-------------- -------------- -------------- ------------- --------------
-- (1,945) 20,157 -- 20,157
-------------- -------------- -------------- ------------- --------------
Operating income (loss)..................... -- 1,945 10,613 -- 10,613
Interest expense............................ -- (279)(4) 2,885 (956)(5) 1,929
Public offering costs....................... -- -- 823 -- 823
-------------- ----- -------- -------------- ------------- --------------
Income (loss) before income taxes .......... -- 2,224 6,905 956 7,861
Provision for income taxes.................. 250(1) 1,816(1) 2,762 382(6) 3,144
-------------- ----- -------- ---- --------- ------------- ---- ---------
Net income (loss)........................... $ (250) $ 408 $ 4,143 $ 574 4,717
============== ============== ============== ============= ==============
Basic and diluted net income (loss) per common
share.....................................
Weighted average number of common shares
outstanding (basic and diluted)(7)........
</TABLE>
28
<PAGE>
Pro Forma Combined Statement of Operations Data
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
The Global
Pietrafesa Sourcing Diversified Total
Corporation Components Network Apparel Windsong Combined
---------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenues................................. $ 17,803 $ 5,384 $ 6,040 $ 2,233 $ 14,552 $46,012
Cost of sales................................ 14,833 4,123 5,622 1,697 11,170 37,445
---------------------------------------------------------------------------
Gross profit................................. 2,970 1,261 418 536 3,382 8,567
Operating expenses:
Selling, general and administrative
expenses................................. 1,201 604 261 336 2,030 4,432
Depreciation and amortization expenses.... 68 -- -- -- 40 108
---------------------------------------------------------------------------
Total operating expenses.................. 1,269 604 261 336 2,070 4,540
---------------------------------------------------------------------------
Operating income (loss) ..................... 1,701 657 157 200 1,312 4,027
Interest expense............................. 296 76 -- 4 334 710
Public offering costs........................ -- -- -- -- -- --
---------------------------------------------------------------------------
Income (loss) before income taxes............ 1,405 581 157 196 978 3,317
Provision for income taxes................... 565 -- -- (1) 44 608
===========================================================================
Net income (loss)............................ $ 840 $ 581 $ 157 $ 197 $ 934 $ 2,709
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Company Acquisition Pro Forma
Pro Forma Pro Forma Pro Forma Offering Combined As
Adjustments Adjustments Combined Adjustments Adjusted
----------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA (in thousands)
<S> <C> <C> <C> <C> <C>
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 (206)(2) 4,226 -- 4,226
expenses.....................................
Depreciation and amortization expenses.... 399 (3) 507 -- 507
----------------------------------------------------------------------------
Total operating expenses.................. -- 193 4,733 -- 4,733
----------------------------------------------------------------------------
Operating income (loss) ..................... -- (193) 3,834 -- 3,834
Interest expense............................. -- (28)(4) 682 (184)(5) 498
Public offering costs........................ -- -- -- --
----------------------------------------------------------------------------
Income (loss) before income taxes............ -- (165) 3,152 184 3,336
Provision for income taxes................... -- 656(1) 1,264 70(6) 1,334
----------------------------------------------------------------------------
Net income (loss)............................ -- $ (821) $ 1,888 $ 114 $ 2,002
============================================================================
Basic and diluted net income (loss) per common
share.....................................
Weighted average number of common shares
outstanding (basic and diluted)(7)........
</TABLE>
29
<PAGE>
Pro Forma Combined Statement of Operations Data
For the Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
The Global
Pietrafesa Sourcing Diversified Total
Corporation Components Network Apparel Windsong Combined
---------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenues................................. $ 9,503 $ 4,868 $ 5,831 $ 260 $ 17,312 $37,774
Cost of sales................................ 7,028 3,596 5,372 18 13,684 29,698
---------------------------------------------------------------------------
Gross profit................................. 2,475 1,272 459 242 3,628 8,076
Operating expenses:
Selling, general and administrative
expenses..................................... 1,305 509 324 176 2,090 4,404
Depreciation and amortization expenses.... 64 -- -- -- 41 105
---------------------------------------------------------------------------
Total operating expenses.................. 1,369 509 324 176 2,131 4,509
---------------------------------------------------------------------------
Operating income (loss) ..................... 1,106 763 135 66 1,497 3,567
Interest expense............................. 253 67 -- -- 448 768
Public offering costs........................ -- -- -- -- -- --
---------------------------------------------------------------------------
Income (loss) before income taxes............ 853 696 135 66 1,049 2,799
Provision for income taxes................... -- 16 2 13 47 78
---------------------------------------------------------------------------
Net income (loss)............................ $ 853 $ 680 $ 133 $ 53 $ 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
----------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA (in thousands)
<S> <C> <C> <C> <C> <C>
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..................................... -- (371)(2) 4,033 -- 4,033
Depreciation and amortization expenses.... -- 399 (3) 504 -- 504
----------------------------------------------------------------------------
Operating income (loss) ..................... -- (28) 3,539 -- 3,539
Interest expense............................. -- (191)(4) 577 (227)(5) 350
Public offering costs........................ -- -- -- --
----------------------------------------------------------------------------
Income (loss) before income taxes............ -- 163 2,962 227 3,189
Provision for income taxes................... 341(1) 766(1) 1,185 91(6) 1,276
----------------------------------------------------------------------------
Net income (loss)............................ $ (341) $ (603) $ 1,777 $ 136 $ 1,913
============================================================================
Basic and diluted net income (loss) per common
share.....................................
Weighted average number of common shares
outstanding (basic and diluted)(7)........
- -----------------------
</TABLE>
(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.
30
<PAGE>
(2) Reflects (1) the elimination of $1.1 million for 1998, $0.2 million for the
first quarter of 1999, or $0.3 million for the first quarter of 1998 of
royalty and commissions expenses of Global Sourcing Network, which expenses
will not continue under the terms of the Global Sourcing Network
acquisition agreement, (2) the reduction of $2.6 million of compensation
and benefits incurred in 1998 or $0.1 million of benefits incurred in the
first quarter of 1999 over the amount of compensation and benefits
specified for the former owners of Diversified Apparel, Components and
Windsong under their respective acquisition agreements.
(3) Gives effect to the amortization of goodwill that results from the
acquisition of Diversified Apparel, Global Sourcing Network, Components and
Windsong as if the acquisitions occurred on January 1, 1998.
(4) Reflects the reduction of interest expense incurred during 1998, the first
quarter of 1999 or the first quarter of 1998 on indebtedness of Windsong
that we will not assume as part of the Windsong acquisition.
(5) Reflects the reduction of interest expense resulting from repayment of debt
with the proceeds from the offering. Also, includes a fee for unused
availability under the PNC credit facility that will result from the
repayment of the PNC credit facility with the proceeds from this offering.
(6) Reflects the income tax effect of the pro forma adjustments assuming an
effective tax rate of 40%.
(7) Consists of shares of Class A Common Stock to be issued in the offering
and the Windsong acquisition and the shares of Class B Common Stock
currently issued and outstanding. The number of shares of Class B Common
Stock outstanding gives effect to the issuance to MS Pietrafesa, L.P. of a
total of _____ shares of Class B Common Stock prior to the consummation of
the offering.
31
<PAGE>
Pro Forma Combined Balance Sheet Data
As of December 31, 1998
<TABLE>
<CAPTION>
The Global
Pietrafesa Sourcing Diversified Total
Corporation Components Network Apparel Windsong Combined
--------------- -------------- ------------- -------------- ------------ ------------
Balance Sheet Data: (in thousands)
Assets
Current assets
<S> <C> <C> <C> <C> <C> <C>
Cash ............................... $ 14 $ 45 $ 154 $ 211 $ 126 $ 550
Accounts receivable ................ 7,967 4,463 19 252 5,643 18,344
Inventories ........................ 13,117 2,311 908 1,047 6,585 23,968
Prepaid expenses and other assets .. 1,131 -- 57 204 1,167 2,559
-------- -------- -------- -------- -------- --------
Total current assets ................. 22,229 6,819 1,138 1,714 13,521 45,421
Property, plant and equipment, net ........ 6,586 181 10 13 566 7,356
Goodwill .................................. -- -- -- -- -- --
Other assets .............................. 560 28 -- 9 71 668
-------- -------- -------- -------- -------- --------
Total assets .............................. $ 29,375 $ 7,028 $ 1,148 $ 1,736 $ 14,158 $ 53,445
======== ======== ======== ======== ======== ========
Liabilities and stockholders' equity
Current liabilities
Credit facility .................... $ -- $ 2,462 $ -- $ 150 $ 7,301 $ 9,913
Account payable .................... 7,893 2,459 1,026 1,049 3,261 15,688
Other current liabilities .......... 3,054 49 229 71 2,295 5,698
Tax distribution payable to partner 1,516 -- -- -- -- 1,516
Current maturities of long-term debt 527 -- -- -- 125 652
-------- -------- -------- -------- -------- --------
Total current liabilities ............ 12,990 4,970 1,255 1,270 12,982 33,467
Deferred tax liability .................... 1,441 -- -- -- -- 1,441
Long-term debt, net of current maturities . 12,561 -- -- -- 228 12,789
Stockholders' equity
Common stock ......................... -- 300 1 -- 1 302
Additional paid in capital ........... 2,941 -- -- -- 6 2,947
Retained earnings .................... (558) 1,758 (108) 466 941 2,499
-------- -------- -------- -------- -------- --------
Total stockholders' equity ................ 2,383 2,058 (107) 466 948 5,748
-------- -------- -------- -------- -------- --------
Total liabilities and stockholders equity . $ 29,375 $ 7,028 $ 1,148 $ 1,736 $ 14,158 $ 53,445
======== ======== ======== ======== ======== ========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1998
--------------------------------------------------------------------------------
Company Pro Acquisition Pro Forma
Forma Pro Forma Pro Forma Offering Combined,
Adjustments Adjustments Combined Adjustments As Adjusted
---------------- --------------- -------------- --------------- ----------------
Balance Sheet Data (Cont.): (in thousands)
Assets
Current assets
<S> <C> <C> <C> <C> <C>
Cash.............................. $-- $ -- $ 550 $ -- $ 550
Accounts receivable............... -- -- 18,344 -- 18,344
Inventories....................... -- -- 23,968 -- 23,968
Prepaid expenses and other assets. -- -- 2,559 -- 2,559
---- -------- ------- ---- -------
Total current assets................ -- -- 45,421 -- 45,421
Property, plant and equipment, net....... -- -- 7,356 -- 7,356
Goodwill................................. -- 29,218 (1) 29,218 -- 29,218
Other assets............................. -- 4,250 (2) 4,918 -- 4,918
---- -------- ------- ---- -------
Total assets............................. $ -- $ 33,468 $86,913 $ -- $86,913
==== ======== ======= ==== =======
Liabilities and stockholders' equity
Current liabilities.................
Credit facility................... $-- $ -- $ 9,913 $1,688 (7) $11,601
Account payable................... -- (1,380) (3) 14,308 -- 14,308
Other current liabilities......... -- 1,200 (4) 6,898 (1,200) (8) 5,698
Tax distribution payable to partner -- -- 1,516 -- 1,516
Current maturities of long-term debt -- -- 652 (376) (8) 276
---- -------- ------- ---- -------
Total current liabilities........... -- (180) 33,287 112 33,399
Deferred tax liability................... -- -- 1,441 -- 1,441
Long-term debt, net of current maturities -- 33,013 (4) 45,802 (45,112) (8) 690
Stockholders' equity
Common stock........................ -- (302) (5) -- -- --
Additional paid in capital.......... -- 3,994 (6) 6,941 45,000 (9) 51,941
Retained earnings................... -- (3,057) (5) (558) -- (558)
Total stockholders' equity............... -- 635 6,383 45,000 51,383
---- -------- ------- ---- -------
Total liabilities and stockholders equity $-- $ 33,468 $86,913 $ -- $86,913
==== ======== ======= ==== =======
</TABLE>
33
<PAGE>
Pro Forma Combined Balance Sheet Data
As of March 31, 1999
<TABLE>
<CAPTION>
The Global
Pietrafesa Sourcing Diversified Total
Corporation Components Network Apparel Windsong Combined
----------------------------------------------------------------------------------
BALANCE SHEET DATA: (in thousands)
Assets
<S> <C> <C> <C> <C> <C> <C>
Current assets
Cash.................................... $ 13 $ 187 $ -- $ 116 $ 21 $ 337
Accounts receivable..................... 8,488 5,199 589 1,471 8,527 24,274
Inventories............................. 12,682 2,454 434 792 9,473 25,835
Prepaid expenses and other assets....... 1,313 - 139 56 1,308 2,816
----------------------------------------------------------------------------------
Total current assets....................... 22,496 7,840 1,162 2,435 19,329 53,262
Property, plant and equipment, net............ 6,523 312 9 13 598 7,455
Goodwill...................................... -- -- -- -- -- --
Other assets.................................. 925 508 -- 9 71 1,513
----------------------------------------------------------------------------------
Total assets.................................. $ 29,944 $ 8,660 $ 1,171 $ 2,457 $ 19,998 $ 62,230
==================================================================================
Liabilities, partners' capital and stockholders' equity
Current liabilities........................
Credit facility......................... $ -- $ 3,369 $ -- $ 150 $ 10,707 $ 14,226
Accounts payable........................ 7,166 2,494 898 1,300 6,365 18,223
Other current liabilities............... 2,767 158 223 357 859 4,364
Tax distribution payable to partner..... 1,516 -- -- 70 -- 1,586
Current maturities of long-term debt.... 527 -- -- -- 124 651
----------------------------------------------------------------------------------
Total current liabilities.................. 11,976 6,021 1,121 1,877 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............................... -- 300 1 1 1 303
Additional paid in capital................. 3,191 -- -- -- 6 3,197
Retained earnings.......................... 282 2,339 49 579 1,749 4,998
----------------------------------------------------------------------------------
Total stockholders' equity.................... 3,473 2,639 50 580 1,756 8,498
----------------------------------------------------------------------------------
Total liabilities and stockholders' equity.... $ 29,944 $ 8,660 $ 1,171 $ 2,457 $ 19,998 $ 62,230
==================================================================================
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 1999
--------------------------------------------------------------------------
Company Pro Acquisition Pro Forma
Forma Pro Forma Pro Forma Combined
Adjustments Adjustments Combined Offering As Adjusted
--------------------------------------------------------------------------
BALANCE SHEET DATA (Cont.): (in thousands)
Assets
<S> <C> <C> <C> <C> <C>
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 (1) 29,218 -- 29,218
Other assets.................................... -- 4,250 (2) 5,763 -- 5,763
--------------------------------------------------------------------------
Total assets.................................... $ -- $ 33,468 $ 95,698 $ -- $ 95,698
==========================================================================
Liabilities, partners' capital and stockholders' equity
Current liabilities
Credit facility............................ $ -- $ -- $ 14,226 $ 3,879 (7) $ 18,105
Accounts payable........................... -- (1,380)(3) 16,843 -- 16,843
Other current liabilities.................. -- 1,200 (4) 5,564 (1,200)(8) 4,364
Tax distribution payable to partner........ -- -- 1,586 -- 1,586
Current maturities of long-term debt....... -- -- 651 (376)(8) 275
--------------------------------------------------------------------------
Total current liabilities.................... -- (180) 38,870 2,303 41,173
Deferred tax liability........................... -- -- 1,441 -- 1,441
Long-term debt, net of current maturities........ -- 34,673 (4) 47,914 (47,303)(8) 611
Stockholders' equity
Common stock.................................. -- (303) 5) -- -- --
Additional paid in capital.................... -- 3,994 (6) 7,191 45,000 (9) 52,191
Retained earnings............................. -- (4,716)(5) 282 -- 282
--------------------------------------------------------------------------
Total stockholders' equity....................... -- (1,025) 7,473 45,000 52,473
--------------------------------------------------------------------------
Total liabilities and stockholders' equity....... $ -- $33,468 $ 95,698 $ -- $ 95,698
==========================================================================
</TABLE>
35
<PAGE>
Pro Forma Combined Balance Sheet Data
As of March 31, 1998
<TABLE>
<CAPTION>
The Global
Pietrafesa Sourcing Diversified Total
Corporation Components Network Apparel Windsong Combined
----------------------------------------------------------------------------------
BALANCE SHEET DATA: (in thousands)
Assets
<S> <C> <C> <C> <C> <C> <C>
Current assets
Cash.................................... $ 3 $ 39 $ 13 $ 193 $ 1 $ 249
Accounts receivable..................... 4,335 3,940 338 122 13,275 22,010
Inventories............................. 10,536 1,409 -- 15 5,748 17,708
Prepaid expenses and other assets....... 355 2 244 58 1,744 2,403
----------------------------------------------------------------------------------
Total current assets....................... 15,229 5,390 595 388 20,768 42,370
Property, plant and equipment, net............ 6,446 3 12 7 305 6,773
Goodwill...................................... -- -- -- -- -- --
Other assets.................................. 163 28 15 -- 91 297
----------------------------------------------------------------------------------
Total assets.................................. $ 21,838 $ 5,421 $ 622 $ 395 $ 21,164 $ 49,440
==================================================================================
Liabilities, partners' capital and stockholders' equity
Current liabilities
Credit facility......................... $ -- $ -- $ -- $ -- $ 11,929 $ 11,929
Accounts payable........................ 7,455 1,726 68 35 6,088 15,372
Other current liabilities............... 1,607 2,290 473 9 1,768 6,147
Tax distribution payable to partner..... -- -- -- 81 -- 81
Current maturities of long-term debt.... 460 -- -- -- -- 460
----------------------------------------------------------------------------------
Total current liabilities.................. 9,522 4,016 541 125 19,785 33,989
Deferred tax liability........................ -- -- -- -- -- --
Long-term debt, net of current maturities..... 8,754 -- -- -- -- 8,754
Partners' capital and stockholders' equity
General partner............................ 31 -- -- -- -- 31
Limited partner............................ 3,531 -- -- -- -- 3,531
Common stock............................... -- 300 1 1 1 303
Additional paid in capital................. -- -- -- -- 6 6
Retained earnings.......................... -- 1,105 80 269 1,372 2,826
----------------------------------------------------------------------------------
Total partners' capital and stockholders'
equity..................................... 3,562 1,405 81 270 1,379 6,697
----------------------------------------------------------------------------------
Total liabilities, partners' capital
and stockholders' equity................... $ 21,838 $ 5,421 $ 622 $ 395 $ 21,164 $ 49,440
==================================================================================
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
March 31, 1998
Company Pro Acquisition Pro Forma
Forma Pro Forma Pro Forma Combined
Adjustments Adjustments Combined Offering As Adjusted
--------------------------------------------------------------------------
BALANCE SHEET DATA (Cont.): (in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Current assets
Cash....................................... $ -- $ -- $ 249 $ 2,528 $ 2,777
Accounts receivable........................ -- -- 22,010 -- 22,010
Inventories................................ -- -- 17,708 -- 17,708
Prepaid expenses and other assets.......... -- -- 2,403 -- 2,403
--------------------------------------------------------------------------
Total current assets......................... -- -- 42,370 2,528 44,898
Property, plant and equipment, net -- -- 6,773 -- 6,773
Goodwill........................................ -- $29,218 (1) 29,218 -- 29,218
Other assets.................................... -- 4,250 (2) 4,547 -- 4,547
--------------------------------------------------------------------------
Total assets.................................... $ -- $33,468 $ 82,908 $ 2,528 $ 85,436
==========================================================================
Liabilities, partners' capital and stockholders' equity
Current liabilities
Credit facility............................ $ -- $ -- $ 11,929 $ -- $ 11,929
Accounts payable........................... -- (1,380)(3) 13,992 -- 13,992
Other current liabilities.................. -- 1,200 (4) 7,347 (1,200)(8) 6,147
Tax distribution payable to partner........ 207 (10) -- 288 -- 288
Current maturities of long-term debt....... -- -- 460 (310)(8) 150
--------------------------------------------------------------------------
Total current liabilities..................... 207 (180) 34,016 (1,510) 32,506
Deferred tax liability.......................... -- -- -- -- --
Long-term debt, net of current maturities....... -- 32,783 (4) 41,537 (40,962)(8) 575
Stockholders' equity
General Partner.............................. (31)(11) -- -- -- --
Limited Partner.............................. (3,531)(11) -- -- -- --
Common stock................................. -- (303)(5) -- -- --
Additional paid in capital................... 3,355 (11) 3,994 (6) 7,355 45,000 (9) 52,355
Retained earnings............................ -- (2,826)(5) -- -- --
--------------------------------------------------------------------------
Total partners' capital and stockholders'
equity....................................... (207) (865) 7,355 45,000 52,355
--------------------------------------------------------------------------
Total liabilities and stockholders' equity...... $ -- $33,468 $ 82,908 $ 2,528 $ 85,436
==========================================================================
</TABLE>
- -----------------------
(1) Reflects the additional goodwill as a result of the Diversified Apparel,
Global Sourcing Network, Components and Windsong acquisitions.
(2) Reflects the deposit of $4.25 million 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 the assumption of debt in order to finance the acquisitions. The
majority of this debt will be repaid through use of the proceeds of the
offering. See note (8) below.
(5) Reflects the elimination of common stock and retained earnings of the
acquisitions.
(6) Reflects the elimination of the additional paid-in capital of the
acquisitions and $4 million of additional equity associated with the
acquisition of Windsong.
(7) Reflects the additional advances required under the PNC credit facility
necessary to finance a portion of the acquisitions.
(8) Reflects the use of our net proceeds of the offering. See "Use of
Proceeds."
(9) Reflects the assumed net proceeds of approximately $45 million from this
offering.
(10) An adjustment to reflect the tax distributions payable to partners for
taxable income earned in 1997, but paid after March 31, 1998.
(11) Reflects the transfer of partners' captial to additional paid in capital
assuming the Company became a C-Corporation as of January 1, 1998.
37
<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 1970's 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, profitability suffered, with
operating income increasing only $0.84 million during this period. 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. See "Risk Factors--A Recession Or
Consolidation In The Apparel Industry May Adversely Affect Our Sales."
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. As part of this new
strategy, in 1998 we commenced acquisition discussions with various independent
merchandising and sourcing companies. See "Risk Factors--We Rely On Performance
Of Third Party Manufacturers," "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 $0.8 million
in cash and issued a promissory note in the principal amount of $0.4 million. In
addition, we assumed some existing liabilities of Diversified Apparel,
consisting of approximately $1.3 million of trade payables, as well as third
party indebtedness that will be repaid from the proceeds of this offering. See
"Use of Proceeds." 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
$0.8 million 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.
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 consists 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 $0.8 million. 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.
38
<PAGE>
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, consisting of
approximately $5.0 million of trade payables and factor advances, as well as
third party indebtedness that will be repaid from the proceeds of this offering.
See "Use of Proceeds." 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 at our option, 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.
In addition, concurrently with the closing of this offering, we will acquire
substantially all of the assets of Windsong. The purchase price will consist of
$22.0 million in cash, $4.0 million in shares of Class A Common Stock valued at
the offering price, and our assumption of approximately $16.9 million of
Windsong liabilities. See "Use of Proceeds." The liabilities to be assumed
include all operating liabilities with the exception of subordinated accounts
payable of $1.4 million at March 31, 1999 and liabilities associated with
Windsong's defined benefit pension plan. Windsong merchandises and sources men's
sportswear worldwide. The purchase price also includes a potential six-year
earn-out of $22.0 million, based on Windsong's achievement of specified annual
pre-tax earnings targets. These targets require Windsong to achieve $6.275
million in pre-tax earnings during 1999 and to increase pre-tax earnings by
approximately 33% by 2004. These targets are measured annually and, if an annual
target is missed, the earn-out payment for such year will be deferred or
forfeited, depending on the extent to which actual performance falls short of
the target. If at any time Philip Ean Cohen ceases to control The Pietrafesa
Corporation, other than because of his death or disability, the then present
value of the remaining earn-out payments will become immediately due to
Windsong. Following the acquisition, the operations of the Windsong unit will be
under the day-to-day control of an advisory board consisting principally of
executives of Windsong, Inc.
Possible Impact of Acquisitions on Results of Operations. The consummation of
the Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions is expected to affect our results of operations in significant
respects. Our depreciation and amortization 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. See "Risk Factors-- Reduction
In Net Income Caused By The Amortization Of Goodwill May Adversely Affect The
Market Price Of Our Common Stock."
RESULTS OF OPERATIONS
As an aid to understanding The Pietrafesa Corporation's, Global Sourcing
Network's, Components' and Windsong's results of operations on a comparative
basis, we have prepared the following discussion setting forth items within The
Pietrafesa Corporation's, Components', Global Sourcing Network's and Windsong's
statements of income as a percentage of net revenues for the periods indicated.
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 such other companies.
The following discussion of the results of operations and financial position
should be read in conjunction with the financial statements, including the notes
thereto, appearing elsewhere in this prospectus.
THE PIETRAFESA CORPORATION
The following table sets forth financial data as a percentage of net revenues
for The Pietrafesa Corporation. This information may not be indicative of our
future results. For more information, see the financial statements of The
Pietrafesa Corporation, including the notes thereto, appearing elsewhere in this
prospectus.
39
<PAGE>
<TABLE>
<CAPTION>
For the
For the Year Ended Three Months Ended
December 31, March 31,
---------------------------------- -----------------------
1996 1997 1998 1998 (1) 1999 (1)
----------- ---------- ----------- ----------- -----------
<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.. 16.7 16.3 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..................... 3.5 5.6 6.9 11.6 9.6
Interest expense..................... 3.9 3.8 2.1 2.7 1.7
Public offering costs................ -- -- 1.4 -- --
----- ----- ----- ----- -----
Income (loss) from continuing
operations before income taxes..... (0.4) 1.7 3.4 8.9 7.9
Provision for income taxes........... -- -- 0.9 -- 3.2
----- ----- ----- ----- -----
Income (loss) from continuing
operations......................... (0.4) 1.7 2.5 8.9 4.7
Discontinued operations.............. (0.7) (0.2) -- -- --
----- ----- ----- ----- -----
Net income (loss) before
extraordinary item................. (1.1) 1.5 2.5 8.9 4.7
Extraordinary item................... 7.6 -- -- -- --
----- ----- ----- ----- -----
Net income........................... 6.5% 1.5% 2.5% 8.9% 4.7%
===== ===== ===== ===== =====
</TABLE>
- -------------------
(1) Derived from unaudited financial information
40
<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 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.
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 consistent with our increased net revenues. Cost of sales as a
percentage of net revenue increased for the three months ended March 31, 1999 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 expense. Selling, general and administrative
expense 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 revenue and the reduction of selling, general and administrative
expenses.
Interest expense. Interest expense for the three months ended March 31, 1999
increased by 20.0% to $0.3 million from $0.25 million 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 $0.6 million 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. As a result of the above factors, net income of $0.8 million for the
three months ended March 31, 1999 was the same as net income 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.
41
<PAGE>
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 revenue increased in 1998 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, 0.8% of the increase in cost of sales as a percent
of net revenues resulted from an increase in inventory reserves.
Selling, general and administrative expense. Selling, general and administrative
expense 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 expires 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 14.3% to $1.2 million
from $1.4 million for 1997, due primarily to lower outstanding principal
balances, a result of improved operating cash flow.
Public offering costs. In 1998, MS Pietrafesa, L.P. incurred $0.8 million of
public offering costs. Such costs related to a public offering that was delayed
due to adverse market conditions. The public offering costs include cost for
legal ($0.2 million), accounting ($0.3 million) and investment banking services
($0.06 million) and travel-related expenses ($0.2 million).
Provision for income taxes. Provision for income taxes for 1998 was $0.5 million
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 $0.6 million for 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net revenues. Net revenues for 1997 decreased by 14.8% to $37.5 million from
$44.0 million for 1996, due principally to the discontinuance of Polo
Corporation's "Ralph Lauren" labeled products and a decline in sales to Brooks
Brothers. In 1996, our net revenues from sales to Brooks Brothers were unusually
high because of the launch of, and initial product deliveries for, the new
"Brooksease" product program. In 1997, our net revenues from sales to Brooks
Brothers for such program, although lower, were consistent with our past
experiences involving the production of replenishment inventory for existing
programs.
Cost of sales. Cost of sales for 1997 decreased by 16.1% to $29.2 million from
$34.8 million for 1996, primarily due to overall lower sales. As a percentage of
net revenues, cost of sales declined to 77.7% in 1997 from 79.0% in 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 expense. Selling, general and administrative
expense for 1997 decreased by 16.7% to $6.1 million from $7.3 million for 1996,
due primarily to the impact of reductions in management personnel implemented in
late 1996. This reduction was partially offset by a reduction of bad debt
expenses in 1996 of $0.18 million due to lower bad debt exposures in 1996.
There was no similar reduction in 1997. Selling, general and administrative
expense as a percentage of net revenues decreased to 16.3% in 1997 from 17.1% in
1996.
Impairment loss on fixed assets. At the end of 1996, we determined that assets
held for sale would be disposed of at a loss of $170,000 which we recorded in
1996. Such loss was actually realized in 1997.
42
<PAGE>
Interest expense. Interest expense for 1997 decreased by 17.6% to $1.4 million
from $1.7 million for 1996, due primarily to lower outstanding principal
balances resulting from improved operating cash flow.
Income (loss) from continuing operations. Income (loss) from continuing
operations for 1997 increased to $0.7 million from $(0.2) million for 1996, due
to lower cost of sales and decreases in selling, general and administrative
expenses.
Discontinued operations. The loss on discontinued operations for 1997 decreased
by 66.6% to $0.1 million from $0.3 million for 1996, due primarily to reduced
interest expense under indebtedness relating to such discontinued operations. In
1995, MS Pietrafesa, L.P. decided to discontinue the domestic manufacture of low
price point tailored clothing and closed a manufacturing facility in Georgia. MS
Pietrafesa, L.P. continued to realize a loss on disposal of such discontinued
operations through 1997.
Extraordinary item. There was no extraordinary item for 1997 as compared to an
extraordinary item of $3.4 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
79.3% to $0.6 million from $2.9 million for 1996.
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. See Financial Statements, including the Notes thereto,
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
For the
For the Year Ended Three Months Ended
December 31, March 31, (1)
-------------------------- -----------------------
1997 1998 1998 1999
---- ---- ---- ----
<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 .3 0
----- ----- ----- -----
Net income........................... 4.9% 7.1% 13.9% 10.8%
===== ===== ===== =====
</TABLE>
- -------------------
(1) Derived from unaudited financial information
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 revenue increased for the three months ended March 31, 1999 to 76.6% from
73.9% for the three months ended March 31, 1998, due primarily to an increase in
sales allowances and discounts.
Selling, general and administrative expense. Selling, general and administrative
expense for the three months ended March 31, 1999 increased by 20.0% to $0.6
million from $0.5 million for the three months ended March 31, 1998, due to
increased commission and travel expenses.
43
<PAGE>
Operating income. Operating income for the three months ended March 31, 1999
decreased by 12.5% to $0.7 million from $0.8 million 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 $0.02 million.
Net income. As a result of the above factors, net income for the three months
ended March 31, 1999 decreased by 14.3% to $0.6 million from $0.7 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 34.2% to $20.0 million from
$14.9 million for 1997, due principally to increased sales to Brooks Brothers
and Tommy Hilfiger.
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
for 1998 as a percentage of net revenue decreased to 75.1% as compared to 78.8%
for 1997, due primarily to cost efficiencies in sourcing larger quantities of
products.
Selling, general and administrative expense. Selling, general and administrative
expense for 1998 increased 47.6% to $3.1 million from $2.1 million for 1997, due
primarily to a $0.4 million 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 expense
as a percentage of net revenues increased to 15.5% in 1998 from 14.1% in 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 revenue and
gross profit.
Net income. As a result of the above factors, net income for 1998 increased by
100% to $1.4 million from $0.7 million for 1997.
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. See Financial Statements,
including the Notes thereto, appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
For the
For the Year Ended Three Months Ended
December 31, March 31, (1)
-------------------------- ------------------------
1997 1998 1998 1999
---- ---- ---- ----
<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 .9 .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........... 0.0 (0.3) 0 --
----- ----- ----- -----
Net loss............................. (0.1)% (0.3)% 2.3% 2.6%
===== ===== ===== =====
</TABLE>
- -------------------
(1) Derived from unaudited financial information
44
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 the timing of S&K
Famous Brands' acceptance of seasonal product.
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 revenue increased for the three months ended March 31, 1999 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 first quarter of 1998.
Selling, general and administrative expense. Selling, general and administrative
expense for the three months ended March 31, 1999 increased by 17.4% to $0.054
million from $0.046 million for the three months ended March 31, 1998, due to
increased legal and accounting expenses associated with the sale of the company.
Royalties and commissions. Royalties and commissions decreased by 33.3% to $0.2
million from $0.3 million for the three months ended March 31, 1998. Royalties
and commissions decreased due to the termination of the remaining commission
relationship early in the first quarter of 1999. Historically, Global Sourcing
Network has paid significant royalties and commissions on its total net sales.
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 $0.002 million.
Net income. As a result of the above factors, net income for the three months
ended March 31, 1999 increased by 23.1% to $0.16 million from $0.13 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 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 revenue decreased
to 92.8% for 1998 from 93.4% as compared to 1997. The reduction in cost of sales
was due to reduced revenue.
Selling, general and administrative expense. Selling, general and administrative
expense for 1998 remained constant at $0.3 million.
Royalties and commissions. Royalties and commissions increased by 11.0% to $1.1
million for 1998. 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 sales. 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, net loss for 1998 increased to
$(0.05) million from a loss of $(0.01) million for 1997.
45
<PAGE>
-- 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, (1)
---------------------------------- -----------------------
1996 1997 1998 1998 1999
----------- ---------- ----------- ----------- -----------
<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........................... --% 1.2% 1.5% 5.8% 6.4%
=========== ========== =========== =========== ===========
</TABLE>
(1) Derived from unaudited financial information
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1998
Net Revenues. Net revenues decreased by $2.7 million, or 15.6%, from $17.3
million in the first quarter of 1998 to $14.6 million in the first quarter of
1999. 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 their increased markdowns and allowances. Overall, sales to the most
significant customer in the first quarter of 1999 amounted to 57.8% of total net
sales, as compared to 33.8% in the comparable prior year period.
Cost of Sales. Cost of sales for the three months ended March 31, 1999 decreased
by 18.4% 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 revenue decreased for the three months ended March 31, 1999 to
76.8% from 79.0% for the three months ended March 31, 1998, due primarily to the
reduction in low margin private label sales and a decrease in markdowns and
allowances in the first quarter of 1999 compared to the first quarter of 1998.
Selling and Distribution Expenses. Selling and distribution expenses decreased
$0.1 million in the first quarter of 1999 as compared to the first quarter of
1998. As a percentage of net sales, these expenses increased from 5.8% in the
first quarter of 1998 to 5.9% in the first quarter of 1999 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
increased from $1.1 million in the first quarter of 1998 to $1.2 million in the
first quarter of 1999. As a percentage of net sales, these expenses increased
from 6.5% in the first quarter of 1998 to 8.3% in the first quarter of 1999.
This percentage increase was primarily due to a general increase in the payroll
and payroll related expenses and lower sales.
Operating Income. Operating income in the first quarter of 1999 was $1.3
million, or 9.0% of net sales, compared to $1.5 million, or 8.7% of net sales,
in the comparable prior year period, an increase in operating income percentage
of 0.3% due to the factors described above. The 0.3% improvement in operating
income as a percentage of net sales is attributable to a 2.2% increase in gross
profit margin and a 1.9% increase in operating expenses.
46
<PAGE>
Interest Expense. Interest expense for the three months ended March 31, 1999
decreased 25.4% to $0.3 million from $0.4 million for the three months ended
March 31, 1998, due primarily to interest expense on accounts
payable-subordinated debt.
Net Income before Income Taxes. As a result of the above factors, net income
before income taxes of $1.0 million for the three months ended March 31, 1999
was the same net income before income taxes for 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 to $0.9 million 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 increased by $33.3 million, or 109.8%, from $30.3
million in 1997 to $63.6 million in 1998. 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 109.1% 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 revenue decreased to 78.4% from 78.7% 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 increased
from $1.9 million in 1997 to $4.5 million in 1998. As a percentage of net sales,
these expenses increased from 6.1% in 1997 to 7.1% in 1998. 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
increased from $3.9 million in 1997 to $6.5 million in 1998. As a percentage of
net sales, these expenses were 10.3% and 12.8% in 1998 and 1997, respectively.
Overall, 1998 expenses 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 were $1.6 million, including payroll taxes, in
1998 as compared to $0 in 1997.
Operating income. Operating income was $0.7 million in 1997, or 2.4% of net
sales, compared to $2.7 million in 1998, or 4.2% of net sales, due to increased
sales to significant customers and management decision to reduce low margin
private label sales and increase licensed product sales that carry higher
margins. This increase in operating income as a percentage of net sales 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 351.9% to $1.7 million
from $0.4 million for 1997, due primarily to increased borrowings and factor
costs consistent with sales growth.
Income before income taxes. Income before income taxes was $0.4 million in 1997
and $1.0 million in 1998, representing 1.3% and 1.6% of net sales, respectively.
This increase in income before taxes, as a percentage of net sales, was due to
the factors described above.
Net Income. As a result of the above factors, net income for 1998 increased to
$1.0 million from $0.4 million for 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net revenues. Net revenues increased by $24.1 million, or 388.6%, from $6.2
million in 1996 to $30.3 million in 1997. The increase in net sales included an
aggregate increase in sales of $19 million to the primary customers.
47
<PAGE>
Cost of Sales. Cost of sales for 1997 increased by 338.3% 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 revenue decreased to 78.7% from 87.8% due to better
margins with significant customers.
Selling and distribution expenses. Selling and distribution expenses increased
from $0.4 million in 1996 to $1.9 million in 1997. As a percentage of net sales,
these expenses decreased from 6.4% in 1996 to 6.1% in 1997. 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 sales, respectively.
General and administrative expenses. General and administrative expenses
increased from $0.3 million in 1996 to $3.9 million in 1997. As a percentage of
net sales, these expenses increased from 5.5% in 1996 to 12.8% in 1997. This
increase was primarily due to the significant increase in sales growth in 1997.
Operating income. Operating income was $0.017 million in 1996, or 0.3% of net
sales, compared to $0.7 million in 1997, or 2.4% of net sales, due to the
factors described above.
Interest expense. Interest expense increased from $0.015 million in 1996 to $0.4
million, or 0.2% of net sales in 1996 to 1.3% of sales in 1997. This increase is
primarily the result of increased borrowings in working capital due to growth in
1997.
Income before taxes. Income before taxes was $0.003 million in 1996 and $0.4
million in 1997, representing 0.1% and 1.3% of net sales, respectively. This
increase in income before taxes as a percentage of net sales was due to factors
discussed previously.
Net Income. As a result of the above factors, net income increased to $0.4
million for 1997 from $0 for 1996.
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 $0.6 million for operating
activities. This was primarily the result of net income of $0.8 million offset
by a $1.0 million decrease in current liabilities and a $0.5 million 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.
48
<PAGE>
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 (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 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. As of
April 30, 1999, $7.4 million was outstanding under the revolving credit line and
$7.0 million was outstanding under the term note. 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.
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 December 31, 1998, $0.6 million 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 $0.6 million for 1998. We expect capital
expenditures to be approximately $0.7 million during 1999. 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 $0.5 million increase in accounts
receivable offset by a $0.4 million 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.
49
<PAGE>
Management believes that the combination of existing working capital, funds
anticipated to be generated from operating activities, the borrowing
availability under the PNC credit facility 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 averaged 10% more in 1998, interest expense for The Pietrafesa
Corporation, excluding any of the acquired businesses, would increase, and
income before taxes would decrease by $103,803. This analysis does not consider
the effects of the reduced level of borrowings that could exist in such an
environment if management took actions to mitigate our exposure to the change.
However, due to the uncertainty of the specific actions that would be taken and
their possible effects, this sensitivity analysis assumes no change in our debt
structure.
BACKLOG
Our backlog of orders is affected by a number of factors, including revisions in
the scheduling of manufacturing and shipment of product which, in some
instances, depends on the demands of the retail consumer. Accordingly, a
comparison of unfilled orders from period to period is not necessarily
meaningful, and the level of unfilled orders at any given time may not be
indicative of actual shipments.
SEASONALITY
Some of our principal products are organized into seasonal lines in response to
the seasonal marketing of such products by our customers. As a result, our net
revenue and net income may fluctuate on a seasonal basis. A disproportionate
amount of our net revenue 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 revenue 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 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 And Increased Costs" 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.
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Our computerized production and sourcing systems are not reliant on
date-sensitive information. We are working to resolve the potential impact of
the Year 2000 on the ability of our computerized financial information systems
to accurately process date-sensitive information. We engaged Arthur Andersen &
Co. 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 will have to upgrade, modify or replace portions of our
financial systems to make them Year 2000 compliant. All related software has
been installed and testing and training are expected to commence shortly. We
plan to complete the modifications and replacements necessary to correct those
systems prior to September 30, 1999. In the event that we fail to correct our
computerized financial information systems prior to December 31, 1999, we will
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. 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 March 31, 1999. We believe, however, that
such Year 2000 compliance costs, including the possible costs relating to
outsourcing appropriate aspects of our financial systems, will not have a
material adverse impact on our financial condition. Year 2000 compliance costs
are expected to be funded from our working capital.
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 event that any of our customers or
suppliers are not Year 2000 compliant, we will implement manual processes to
minimize the impact on our business. 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 have a
material adverse effect on our business, results of operations and financial
condition.
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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 apparel industry trends.
o Private label apparel represents an increasing percentage of total
men's apparel sales; and
o Retailers are concentrating more business with fewer suppliers to
achieve greater efficiency in merchandising, purchasing and inventory
management.
By capitalizing on these trends, we believe that we are positioned to best
address the men's dress apparel needs of national retailers and to increase our
market share across all price points and distribution channels.
One of our key strengths is 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.
INDUSTRY OVERVIEW
Retail sales of men's apparel in the United States in 1998 were approximately
$54 billion in sales, 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 apparel represents an increasing percentage of total men's apparel
sales. 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 increasingly strict demands of larger retailers.
Specialty Chains are Achieving Strong Sales Growth. Over the last five years,
sales of clothing by chain retailers and high-end specialty chains, many of
which sell private label brands primarily or exclusively, have grown
significantly due to both new store openings and comparable store sales
increases. In 1998, specialty chains reported dollar increases in sales of men's
clothing of 6.5% and captured 10.5% of all dollars spent on men's clothing. This
growth is evidenced by the growth of men's apparel retailers such as The Men's
Wearhouse and Today's Man and the publicly announced national store opening
plans of Brooks Brothers and Jos.A.Bank.
BUSINESS STRATEGY
Our business strategy is to become the global leader in developing and managing
branded men's apparel products for major retailers and for companies that
license independent brands by offering:
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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 Saville 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 are to:
o achieve 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 develop new customer relationships by aggressively marketing our
capabilities. We believe that our development of such new
relationships will be enhanced by the Diversified Apparel, Global
Sourcing Network, Components and Windsong acquisitions, each of which
have unique customer relationships;
o acquire, develop and license brands in order to leverage our existing
merchandising and sourcing capabilities. We believe that licensed
brands such as Alexander Julian, FUBU, the Greg Norman Collection and
DKNY and acquired brands such as Pivot Rules have significant growth
potential and will complement our private label business;
o expand 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 grow 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 financial controls, quality control
practices and back-office functions of each acquired business. We will
eliminate 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 revenue.
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 and Customers. 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.
We supply product to national chains, high-end specialty chains, value-priced
retailers and department stores. Our six largest customers in 1998 were Sam's
Club, S&K Famous Brands, Brooks Brothers, Jos.A.Bank, Polo Retail and Dillards.
Combined sales to these six customers represented approximately 67% of net
revenue during 1998. Sales to our six largest customers in 1997 represented
approximately 60% of our net revenues in 1997. See "Risk Factors--We Generate A
Significant Percentage Of Our Revenue From A Limited Number Of Customers."
We derived our net revenues from the following distribution channels:
For the Year Ended
December 31,
1997 1998
----------- -------------
Mass Merchandise Chain 37.2% 37.7%
National chain 16.7 22.9
Department store 14.5 16.2
High-end specialty chain (1) 19.0 13.3
Other 12.6 9.9
------ -------
100.0% 100.0%
====== =======
- ----------------------------
(1) Includes net revenues from single location high-end specialty stores of
1.8% for 1997 and 1.9% for 1998.
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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 system for ordering, invoicing and
payment 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.
PRODUCT SOURCING, RAW MATERIALS SOURCING AND MANUFACTURING
Product Sourcing. During 1998, approximately 72% (by sales dollar volume) of our
products were outsourced worldwide to over 50 independent manufacturers.
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 And Increased Costs."
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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. See "Risk
Factors--Our Margins Could be Affected By Fluctuations In Price And Availability
Of Raw Materials."
Manufacturing. We have over 75 years of experience as a leading domestic
manufacturer of premium tailored clothing. As a result, unlike many of our
small, entrepreneurial 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 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 And Increased
Costs."
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 March 1, 1999 we had eight quality control personnel in
three foreign centers, as well as four additional inspectors for U.S. 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.
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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 Pietrafesa Unit, the Windsong 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.
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
Business Unit 1998
-------------
Windsong 39.5%
Pietrafesa 35.2
Components 12.4
Global Sourcing Network 11.2
Diversified Apparel 1.7
-------
Total 100.0%
=======
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.
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The Windsong Unit is a large supplier of designer label and private label
sportswear to departments store, specialty store 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. See
"Management." 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 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 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 in 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.
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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 "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 at a 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 our resources. 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 In The Highly Competitive Apparel Industry."
INTELLECTUAL PROPERTY
In connection with the Windsong acquisition, Windsong's exclusive license to the
"Colours by Alexander Julian" trademark will be assigned to us. The Alexander
Julian license covers sales of sport shirts, knit shirts and sweaters in the
United States. The initial term of the Alexander Julian license agreement will
terminate 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
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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 this license to make annual minimum
payments to Alexander Julian, Inc., as well as royalty payments based on net
sales of Colours by Alexander Julian apparel. The Alexander Julian license
represents 27% of our pro forma combined revenues and 24% of our pro forma
combined net income 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.
In connection with the Components acquisition, Components' nonexclusive
sublicense to the DKNY trademark covering the sale of overcoats in the United
States, Canada, Mexico and the Caribbean will be assigned to us. The initial
term of the DKNY sublicense agreement will terminate on December 31, 2000, but
if our net sales of specified items of DKNY apparel as of June 30, 2000 exceed a
specified target in connection with the Fall/Winter 1999 and Spring/Summer 2000
seasonal collections, we will have the option to extend the term of the DKNY
license agreement until December 31, 2002. We will be obligated under this
sublicense to make annual minimum payments, as well as royalty payments based on
net sales of DKNY apparel.
Our exclusive license of the Greg Norman collection trademark covers the sale of
men's tailored clothing in the United States and Canada. The Greg Norman
collection license will terminate on December 31, 2004, but we will have the
right to elect two three-year extensions so long as we obtain minimum sales
targets and make minimum royalty payments. We will be obligated under the Greg
Norman collection license to make royalty payments based on net sales of Greg
Norman collection apparel.
Although we have applied for a number of registered U.S. trademarks, including
the Pietrafesa name and the Pivot Rules brand name, such trademarks do not
represent a material asset of ours. In addition, we own the software used in our
point-of-sale made-to-measure programs. We have the exclusive right to use the
Polo trademark on tailored clothing subject to a license agreement. We are not
required to pay any royalties under this license agreement, which will expire in
June 1999.
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 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 1994
and expires in August 2000.
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
foreseeable needs. We also believe our existing facilities are well maintained
and in good operating condition.
EMPLOYEES
As of March 1, 1999, we had 542 employees. Of the total, approximately 50 hold
executive and administrative positions, approximately eight are engaged in
design and merchandising, approximately 412 are engaged in production activities
such as marking, cutting and labeling, approximately 33 are engaged in sales,
approximately 18 are engaged in distribution and approximately 21 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.
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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 December 31, 1998 with respect
to the members of our Board of Directors and our executive officers:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Richard C. Pietrafesa, Jr. (1)... 42 President & Chief Executive Officer, Director
Sterling B. Brinkley, Jr. (1).... 46 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)......... 57 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 as Chairman of our Executive Committee. Mr. Brinkley was a Managing Director
of Morgan Schiff & Co., Inc., one of the underwriters of this offering, for the
years 1986 to 1990. Since 1990, Mr. Brinkley has been a consultant to Morgan
Schiff. Prior to 1986, Mr. Brinkley was a Managing Director in the Corporate
Finance Department of Shearson Lehman Brothers, Inc. Mr. Brinkley is also
Chairman of the Board of Directors of EZCORP, Inc., a publicly-traded pawnshop
chain, and Friedman's Inc., a publicly-traded retail jewelry chain, and Chairman
of the Executive Committee of the Board of Directors of The Farm Journal
Corporation, a publisher of agricultural information. All three companies are
affiliates of The Pietrafesa Corporation and Morgan Schiff. Mr. Brinkley also
serves on the boards of directors of various privately held companies that are
affiliates of The Pietrafesa Corporation and Morgan Schiff. Mr. Brinkley
received a B.A. from Yale University and an M.B.A. from the Stanford Graduate
School of Business.
THOMAS A. MINKSTEIN -- joined us in August 1998 as Chief Operating Officer and
Director. Mr. Minkstein is also a member of our Executive Committee. Prior to
joining us, Mr. Minkstein served for 10 years as Chief Operating Officer of
Empire Vision, a division of Highmark, Inc., and the thirteenth largest optical
retailer in the United States. In this position, Mr. Minkstein was responsible
for the operation of over 4,000 distribution points and six manufacturing
facilities throughout the United States, and managed that division's rapid
growth and earnings expansion through acquisitions and the operations of large
managed care programs. For the years 1973 through 1988, Mr. Minkstein held
various management positions with Frank's Nursery & Craft, a division of General
Host, a publicly-traded company.
EUGENE R. SUNDERHAFT -- joined us in August 1998 as Vice President - Finance,
Chief Financial Officer, Secretary, Treasurer. Prior to joining us, Mr.
Sunderhaft served for four years as Senior Vice President-Finance, Chief
Financial Officer and Secretary of The Penn Traffic Company, a publicly-traded
$3.2 billion retail, wholesale and manufacturing company, where he was
responsible for all accounting 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
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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 as a 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) an Audit Committee;
(2) an Executive Committee; and (3) a Compensation Committee.
The Audit Committee is comprised of Messrs. Pickup, Bennett and McNicol, with
Mr. Pickup as Chairman. The Audit Committee recommends the independent
accountants appointed by the Board to audit our financial statements which
includes an inspection of our books and accounts. The Audit Committee reviews
with such accountants the scope of their audit and their report thereon,
including any questions and recommendations that may arise relating to such
audit and report or our internal accounting and auditing procedures.
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.
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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.
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 Position 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
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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").
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.
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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 shares of Class
B Common Stock to 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 The 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 out-of-pocket
expenses, principally legal and accounting fees, in connection with our
formation and will continue to reimburse Morgan Schiff for ongoing
administrative expenses, principally legal and accounting services rendered to
us. We reimbursed Morgan Schiff $192,300 in 1998 for out-of-pocket expenses. 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 __% 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.
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 credit facility
and this offering.
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 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 credit facility.
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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 May 1, 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.
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 The 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.
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<TABLE>
<CAPTION>
Shares of Class A Shares of Class B Percentage of Class
Common Stock Common Stock A and
Name and Address ------------------------------------------------------------ Class B
of Beneficial Owner Number Percentage Number Percentage Common Stock
- --------------------------------------- ------------------------------ ----------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
MS Pietrafesa, L.P................. 100%
MSJP, L.P..........................
MS Pietrafesa Acquisition 100%
Corporation.....................
Phillip Ean Cohen.................. 100%
350 Park Avenue, 8th Floor
New York, NY 10022
Richard C. Pietrafesa, Jr..........
Thomas A. Minkstein................
Joseph J. Pietrafesa II............
RJP Investments Assoc., L.P........
7400 Morgan Road
Liverpool, NY 13090
Sterling B. Brinkley, Jr. .........
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....................
305 Oakley Court
Mill Neck, NY 11765
Ross W. Stefano....................
30 The Orchard
Fayetteville, NY 13066
Windsong, Inc. ....................
1599 Post Road East
Westport, CT 06880
All executive officers and
directors as a group (eight
persons)........................
</TABLE>
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.
Percentage
Shares Owned Amount to Shares Owned Owned after
Prior to Offering be Offered after Offering Offering
----------------- ---------- -------------- ---------------
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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 5,000,000 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, shares of Class A Common Stock, shares
of Class B Common Stock and no shares of Preferred Stock will be issued and
outstanding. The discussion herein describes our capital stock, Certificate of
Incorporation and By-laws in effect upon effectiveness of the Registration
Statement of which this prospectus is a part.
CLASS A AND CLASS B COMMON STOCK
The holders of shares of Class A Common Stock and Class B Common Stock have
identical rights and privileges on a per share basis, except as set forth below.
The holders of shares of Common Stock have no preemptive rights to maintain
their respective percentage ownership interest in or other subscription rights
for our other securities. Shares of Common Stock are not redeemable or subject
to further calls or assessments. The shares of Common Stock to be outstanding
after the offering, including the shares of Class A Common Stock to be issued
hereby, when paid for and issued, will be fully paid and non-assessable. Holders
of shares of Common Stock are entitled to share pro rata in dividends, if any,
as may be declared by our Board of Directors out of funds legally available
therefor; provided, however, that any dividend upon the Common Stock that is
payable in Common Stock shall be paid only in Class A Common Stock to the
holders of Class A Common Stock, but is payable in Class A or Class B Common
Stock to the holders of Class B Common Stock. Upon our liquidation, dissolution
and winding up, holders of shares of Common Stock are entitled to share ratably
in the net assets available for distribution to such holders. The consent of the
holder or holders of a majority of the Class B Common Stock is required to
authorize the issuance of additional Class B Common Stock.
Limited Voting Rights. The holders of Class A Common Stock have the right as a
class to elect that minimum number of directors constituting 25% of the members
of the Board, which presently represents two of the six directors. The minimum
number of directors shall be rounded to the next highest whole number if such
percentage is not equal to a whole number of directors. Directors elected by the
holders of Class A Common Stock will first be elected at the annual meeting of
stockholders to be held in 1999.
Other than the right to elect directors and as otherwise required by Delaware
law, the holders of Class A Common Stock will have very limited voting rights
until all of the shares of Class B Common Stock are converted into shares of
Class A Common Stock or otherwise cease to be issued and outstanding. At such
time, the holders of Class A Common Stock will be entitled to vote on all
matters submitted to a vote of the stockholders and will be entitled to one vote
per share held. Generally, the vote of the majority of the shares represented at
a meeting of the stockholders and entitled to vote is sufficient for actions
that require a vote of the stockholders. Our Certificate of Incorporation does
not provide for cumulative voting. Because sole voting power has been granted to
the holders of Class B Common Stock, except as stated above and as otherwise
required by Delaware law, substantially all corporate actions can be taken
without any vote by the holders of the Class A Common Stock including, without
limitation:
o amending our Certificate of Incorporation or By-laws, including
authorizing the issuance of additional shares of Class A Common Stock;
o authorizing stock options, restricted stock and other compensation plans for
employees, executives and directors;
o authorizing a merger or disposition or change in control;
o approving indemnification of our directors, officers and eligible
employees; and
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 The Class A Common Stock."
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<PAGE>
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.
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<PAGE>
Our Certificate of Incorporation provides for the mandatory indemnification of,
and advancement of expenses to our directors and officers.
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 The Class A Common Stock."
TRANSFER AGENT
The transfer agent and registrar for the Class A Common Stock is American Stock
Transfer & Trust Company.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have a total of _____ shares of Class A
Common Stock and _____ shares of Class B Common Stock outstanding. All shares of
Class A Common Stock sold in the offering and the _____ shares of Class A Common
Stock being registered for sale, from time to time, by the selling stockholder
will be freely tradable by persons other than our "affiliates" without
restriction under the Securities Act. All other shares of Class A Common Stock
and all shares of Class B Common Stock, and any shares of Class A Common Stock
issued upon conversion of shares of Class B Common Stock, 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., a representative of the underwriters, for a period of
days from the date of this prospectus. See "Underwriting."
MS Pietrafesa, L.P. has offered its limited partners the right to withdraw from
the partnership under its Partnership Agreement and receive a distribution of
Class A Common Stock. Such right to withdraw may be exercised by a limited
partner at any time between the consummation of the offering and 14 days before
the expiration of the Lock-Up Period. The withdrawal will be effective at the
end of the month in which the Lock-Up Period expires. The shares acquired
through a limited partner's withdrawal will be subject to the resale limitations
under Rule 144.
Limited partners electing to withdraw from MS Pietrafesa, L.P. will generally be
deemed to have held the shares of Class A Common Stock distributed to them from
the date they acquired their partnership interest. Accordingly, original
investors in MS Pietrafesa, L.P. will be entitled to sell such shares pursuant
to Rule 144 immediately upon distribution of such shares from MS Pietrafesa,
L.P., subject to volume, manner of sale and other limitations.
Prior to the offering, there has been no public market for either class of our
Common Stock and no predictions can be made of the effect, if any, that the sale
or availability for sale of additional shares of our Common Stock or our other
securities, or the development of a public trading market for the Class B Common
Stock, will have on the market price of the Class A Common Stock. Nevertheless,
sales of substantial amounts of shares of Class A Common Stock in the public
market, the perception that such sales could occur, the 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.
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<PAGE>
UNDERWRITING
Subject to the terms of an underwriting agreement among Janney Montgomery Scott
Inc., EVEREN Securities, 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. ..............................
EVEREN Securities, Inc. ...................................
First Security Van Kasper .................................
Morgan Schiff & Co., Inc. .................................
----------------
Total.............................................
================
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 (1) the preparation of a
preliminary Blue Sky memorandum and the qualification of the securities for sale
in any state and (2) 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 additional shares of Class A Common Stock, at the
same price per share as the public offering price, less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise the option only to cover over-allotments in the sale
of the shares of Class A Common Stock offered by this prospectus. To the extent
the underwriters exercise this option, each of the underwriters has a firm
commitment, subject to certain conditions, to purchase a number of the
additional shares of Class A Common Stock proportionate to such underwriter's
initial commitment as indicated in the preceding table.
In connection with this offering and in compliance with applicable securities
laws, the underwriters may over-allot, or sell more shares of Class A Common
Stock than is shown on the cover page of this prospectus, and may effect
transactions on the Nasdaq National Market which stabilize, maintain or
otherwise affect the market price of the Class A Common Stock at prices above
those which might otherwise prevail in the open market. Such transactions may
include placing bids for the Class A Common Stock or effecting purchases of the
Class A Common Stock for the purpose of pegging, fixing or maintaining the price
of the Class A Commons Stock or for the purpose of reducing a short position
created in connection with the offering. A short position may be covered by
exercise of the over-allotment option described above in place of or in addition
to 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.
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<PAGE>
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, executive officers and certain indirect owners 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 days
after the completion of this offering, without Janney Montgomery Scott Inc.'s
prior written consent. Together, this group indirectly owns, prior to the
offering, approximately % 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 an affiliate of ours. Therefore, 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.
o Our prospects for future earnings.
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.
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<PAGE>
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon by
Roberts, Sheridan & Kotel, a Professional Corporation, which firm provides legal
services from time to time for Morgan Schiff and its affiliates. The validity of
the shares of Class A Common Stock will be passed upon for the underwriters by
Klehr, Harrison, Harvey, Branzburg & Ellers LLP.
EXPERTS
The Consolidated Financial Statements and schedule of The Pietrafesa Corporation
at December 31, 1997 and 1998, and for each of the three years in the period
ended December 31, 1998, appearing in this prospectus and the registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The Financial Statements of Components at December 31, 1997 and 1998, and for
each of the two years in the period ended December 31, 1998 included elsewhere
in this prospectus and the related financial statement schedules included
elsewhere in the registration statement have been audited by Lawrence B. Goodman
& Co., P.A., independent auditors, as stated in their reports appearing herein
and elsewhere in the Registration Statement, and are included in reliance upon
such report given upon their authority of such firm as experts in accounting and
auditing.
The Financial Statements of Global Sourcing Network at December 31, 1997 and
1998, and for each of the two years in the period ended December 31, 1998
included elsewhere in this prospectus and the related financial statement
schedules included elsewhere in the registration statement have been audited by
Pasquale & Bowers, LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the Registration Statement, and are included
in reliance upon the reports of such firm, given upon their authority as experts
in accounting and auditing.
The Financial Statements of Windsong at December 31, 1997 and 1998, and for each
of the three years in the period ended December 31, 1998 included elsewhere in
this prospectus and the related financial statement schedules included elsewhere
in the registration statement have been audited by Weissbarth, Altman &
Michaelson LLP, independent auditors, as stated in their reports appearing
herein and elsewhere in the Registration Statement, and are included in reliance
upon the reports of such firm, given upon their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Commission a Registration Statement on Form S-1,
including all amendments, exhibits, annexes and schedules thereto, pursuant to
the Securities Act, and the rules and regulations promulgated thereunder, with
respect to the Class A Common Stock being offered in the offering. This
Prospectus does not contain all the information set forth in the Registration
Statement. For further information with respect to The Pietrafesa Corporation
and the securities offered hereby, reference is made to the Registration
Statement. Statements made in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the document or matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement, may be inspected, without charge, and copies may be
obtained, at prescribed rates, at the public reference facilities of the
Commission maintained at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Copies of the Registration Statement may also be
inspected, without charge, at the Commission's regional office at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661. In addition, copies of the Registration
Statement may be obtained by mail at prescribed rates, from the Commission's
Public Reference Section at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The Commission maintains a Web site
at www.sec.gov that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
Upon completion of the offering, we will become subject to the informational
requirements of the Exchange Act, and in accordance therewith will be required
to file periodic reports and other information with the Commission. Such
periodic reports, proxy statements and other information will be available for
inspection and copying at the public reference facilities, regional offices and
Web site referred to above.
We intend to furnish our stockholders with annual reports containing
consolidated financial statements audited by independent certified public
accountants.
77
<PAGE>
<TABLE>
<CAPTION>
THE PIETRAFESA CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
THE PIETRAFESA CORPORATION
<S> <C>
Report of Independent Auditors............................................................................... F-2
Consolidated Balance Sheets at 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 at December 31, 1998 and at March 31, 1999 (unaudited)........................... F-16
Consolidated Statements of Operations for the three-month periods ended March 31, 1998 and 1999
(unaudited).............................................................................................. F-17
Consolidated Statements of Cash Flows for the three-month periods ended March 31, 1998 and 1999 (unaudited).. F-18
Notes to Quarterly Consolidated Financial Statements......................................................... F-19
COMPONENTS BY JOHN McCOY, INC.
Report of Independent Auditors............................................................................... F-21
Balance Sheets at December 31, 1997 and 1998................................................................. F-22
Statements of Income and Retained Earnings 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 at December 31, 1998 and at March 31, 1999 (unaudited)........................................ F-28
Statements of Income and Retained Earnings for the three-month periods ended
March 31, 1998 and 1999 (unaudited)...................................................................... F-29
Statements of Cash Flows for the three-month periods ended March 31, 1998 and 1999 (unaudited)............... F-30
Notes to Quarterly Financial Statements...................................................................... F-31
GLOBAL SOURCING NETWORK, LTD.
Independent Auditors' Report................................................................................. F-32
Balance Sheets as of December 31, 1997 and 1998.............................................................. F-33
Statements of Operations and Accumulated Deficit 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 at March 31, 1999 (unaudited)..................................... F-39
Statements of Operations and Accumulated Deficit for the three-month periods ended
March 31, 1998 and 1999 (unaudited)...................................................................... F-40
Statements of Cash Flows for the three-month periods ended March 31, 1998 and 1999 (unaudited)............... F-41
Notes to Quarterly Financial Statements...................................................................... F-42
</TABLE>
<TABLE>
<CAPTION>
WINDSONG, INC.
<S> <C>
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, 1997 and 1998........................................................... F-46
Statements of Cash Flows for the years ended December 31, 1997 and 1998...................................... F-47
Notes to Financial Statements................................................................................ F-50
Independent Auditors' Report................................................................................. F-60
Balance Sheets as of December 31, 1996....................................................................... F-61
Statements of Income and Retained Earnings (Accumulated Deficit)
for the year ended December 31, 1996..................................................................... F-62
Statements of Cash Flows for the year ended December 31, 1996................................................ F-63
Notes to Financial Statements................................................................................ F-65
Balance Sheets as of December 31, 1998 and at March 31, 1999 (unaudited)..................................... F-71
Statements of Income and Retained Earnings (Accumulated Deficit)
for the three-month periods ended March 31, 1998 and 1999 (unaudited).................................... F-72
Statements of Cash Flows for the three-month periods ended March 31, 1998 and 1999 (unaudited)............... F-73
Notes to Quarterly Financial Statements...................................................................... F-74
</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.
Ernst & Young LLP
Syracuse, New York
February 12, 1999, except as to Note 13
as to which the date is ____________ , 1999
The foregoing report is in the form that will be signed upon the completion of
the acquisitions, offering and restatement of capital accounts described in Note
13 to the financial statements.
/s/ Ernst & Young LLP
----------------------
Syracuse, New York
February 12, 1999
F-2
<PAGE>
THE PIETRAFESA CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
-----------------------------
1997 1998
-----------------------------
(In thousands)
Assets
Current assets:
<S> <C> <C>
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>
December 31
-----------------------------
1997 1998
-----------------------------
(In thousands)
Liabilities, partners' capital and shareholder's equity
<S>
Current liabilities: <C> <C>
Accounts payable ......................................................... $ 6,610 $ 7,893
Other current liabilities ................................................ 1,204 3,054
Tax distribution payable to partners ..................................... -- 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, $.001 par value:
Authorized shares - 5,000,000 Class A
- 10,000,000 Class B
Issued shares - 100 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>
Year ended December 31
-------------------------------------------
1996 1997 1998
-------------------------------------------
(In thousands, except
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 7,348 6,118 5,536
Impairment loss on fixed assets 170 -- --
Depreciation and amortization expense (excludes amounts in
cost of sales) 165 151 222
-------------------------------------------
7,683 6,269 5,758
-------------------------------------------
Operating income 1,548 2,095 3,943
Interest expense 1,720 1,446 1,209
Public offering costs -- -- 823
-------------------------------------------
Income (loss) from continuing operations before income taxes (172) 649 1,911
Provision for income taxes -- -- 514
-------------------------------------------
Income (loss) from continuing operations (172) 649 1,397
Loss on disposal of discontinued operations (321) (93) --
-------------------------------------------
Income (loss) before extraordinary item (493) 556 1,397
Extraordinary item 3,350 -- --
-------------------------------------------
Net income $ 2,857 $ 556 $ 1,397
===========================================
Pro forma net income data (Note 2):
Income from operations 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 13) $
Pro forma weighted average number of common shares outstanding
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
THE PIETRAFESA CORPORATION
Consolidated Statements of Changes in Partners' Capital
and Shareholder's Equity
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 28 2,829 2,857
----------------------- --------------
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 --
------------------------------------------------------------------------
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>
Year ended December 31,
-------------------------------------------
1996 1997 1998
-------------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 2,857 $ 556 $ 1,397
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Extraordinary item (3,350) -- --
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 100 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).
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. The Company, based on current circumstances, has
recorded an impairment loss of $170 as of December 31, 1996 related to machinery
and equipment to be disposed.
F-8
<PAGE>
2. Summary of Significant Accounting Policies (Continued)
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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
F-9
<PAGE>
3. Borrowing Arrangements
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
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
Three years ended December 31, 1998
(In thousands)
3. Borrowing Arrangements (continued)
As further discussed in Note 10, certain subordinated indebtedness were forgiven
in June 1996.
Interest paid for the years ended December 31, 1996, 1997 and 1998 amounted to
$1,343, $1,126 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, .1
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
shares of preferred stock upon the consent of the holders of a majority of the
outstanding shares of Class B common stock. The Board is authorized to fix the
rights, preferences, privileges and restrictions of each series, without further
vote or action by the stockholders. The preferred stock may be granted voting
powers provided that the Class B common stock will always have the right to
elect a majority of the Board and the preferred stock will be entitled to vote
with the Class A common stock as a class on any matters on which holders of
Class A common stock are entitled to vote.
5. Retirement Plans
The Company sponsors contributory defined contribution plans for employees not
covered by multi-employer plans. Employer contributions to the plans range from
no contribution to 50% of each participant's elective deferral for the plan
year, subject to certain restrictions as defined in the Plan documents.
Contributions for the years ended December 31, 1996, 1997 and 1998 were $97,
$125 and $141, respectively. The Company also contributes to two multi-employer
pension funds which cover certain union employees under a collective bargaining
agreement. Contributions for the years ended December 31, 1996, 1997, and 1998
were approximately $323, $173 and $156, respectively. Provisions of the
Multi-Employer Pension Plan Amendments Act of 1980 require participating
employers to assume a proportionate share of a multi-employer plan's unfunded
vested benefit in the event of withdrawal from or termination of the Plan.
6. Related Party Transactions
The Company leases a retail store facility from a related party under a ten-year
lease ending June 30, 2000 requiring rental payments totaling $146 per year. A
portion of this facility is subleased and provides minimum rental income of $30
per year.
Beginning in 1998, the Company sources certain customer orders through
SourceOne, L.L.C, an affiliate of the General Partner of the Partnership.
SourceOne has no significant assets or liabilities and neither the Company nor
its employees receive any compensation from SourceOne. The Company purchased
approximately $10,614 of services from SourceOne during 1998 and has a net
payable to SourceOne of $591 at December 31, 1998.
F-11
<PAGE>
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements
Three years ended December 31, 1998
(In thousands)
6. Related Party Transactions (continued)
An affiliate of the General Partner provides financial advisory and strategic
consulting under an agreement requiring monthly payments of $25. The agreement
may be terminated annually by either party upon 30 days notice. The affiliate
waived all payments due under this agreement for 1996, 1997 and 1998.
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:
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.
The provision for income taxes is as follows:
Year ended December 31,
------------------------------------
1996 1997 1998
------------------------------------
Current
Federal $ -- $ -- $ 8
State -- -- 3
------------------------------------
Total current -- -- 11
F-12
<PAGE>
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements
Three years ended December 31, 1998
(In thousands)
8. Income Taxes (continued)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
------------------------------------
<S> <C> <C> <C>
Balance brought forward $ -- $ -- $ 11
Deferred:
Federal -- -- 428
State -- -- 75
------------------------------------
Total deferred -- -- 503
====================================
Total tax expense $ -- $ -- $ 514
====================================
</TABLE>
The difference between the United States federal statutory income tax rate and
the Company's effective tax rate were as follows:
<TABLE>
<CAPTION>
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:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
-------------------------------
<S> <C> <C> <C>
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
===============================
</TABLE>
F-13
<PAGE>
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements
Three years ended December 31, 1998
(In thousands)
9. Discontinued Operations
In 1995, the Company discontinued its low price point tailored clothing
manufacturing business.
All equipment related to this operation was either sold to third parties or
transferred to the Company's primary factory during 1996. In April 1997, the
Company concluded the sale of the remaining assets at their carrying value.
Interest expense included in the loss on disposal of discontinued operations was
$243, $61 and $0 for 1996, 1997, and 1998, respectively, representing the
interest on building and equipment loans attributable to the discontinued
operations and a portion of the interest on the working capital facility
determined based upon average accounts receivable and average inventory
balances.
10. 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.
11. 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.
12. 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.
13. Acquisitions and Public Offering
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 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.
F-14
<PAGE>
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements
Three years ended December 31, 1998
(In thousands)
13. Acquisitions and Public Offering (cont')
In connection with the offering, the Company's Class B common stock has been
adjusted through issuance of _______ 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.
F-15
<PAGE>
THE PIETRAFESA CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited)
----------------------------------
(In thousands)
<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, partners' capital and shareholder's equity
Current liabilities:
Accounts payable $ 7,166 $ 7,893
Other current liabilities 2,767 3,054
Tax distribution payable to partners 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, $.001 par value:
Authorized shares - 5,000,000 Class A
- 10,000,000 Class B
Issued shares - 100 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>
Three Months ended
March 31,
---------------------------
1999 1998
---------------------------
(In thousands, except
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
========== ========
Pro forma net income data:
Income before income taxes, as reported above $ 1,405 $ 853
Pro forma provision for income taxes 565 341
---------- --------
Pro forma net income $ 840 $ 512
========== =========
Pro forma basic and diluted earnings per share ========== =========
Pro forma weighted average number of common share outstanding ========== =========
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE>
THE PIETRAFESA CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
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) --
Principle 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.
3. Subsequent Events
On April 15, 1999, the Company acquired the assets and assumed certain
liabilities of Diversified Apparel Group, Ltd. for $3.5 million in a transaction
to be accounted for as a purchase. Diversified Apparel merchandises and sources
apparel, including lower to mid-priced suits and dress shirts, to value-priced
apparel retailers. On April 15, 1999, the Company acquired all of the common
stock of Global Sourcing Network, Ltd. for $3.7 million in a transaction to be
accounted for as purchase. Global Sourcing Network designs and imports men's
suits. Concurrent with the public offering, the Company will also acquire the
assets and assume certain liabilities of Components by John McCoy, Inc. for
$11.1 million in a transaction to be accounted for as a purchase. Components
merchandises and sources tailored clothing, as well as sportswear, dress shirts,
neckwear, topcoats and casual slacks in Italy.
On May 12, 1999, the Company entered into an agreement to purchase the assets
and assume certain liabilities of Windsong, Inc. for $43.3 million in a
transaction to be accounted for as a purchase. Windsong is a supplier of
designer and private label sportswear to department store, specialty store and
mass merchandising chains.
The portion of the consideration assigned to goodwill in each transaction will
represent the excess of the cost over the estimated fair value of the net assets
acquired. The Company will amortize goodwill using the straight line method over
a period ranging from 10 to 20 years.
In each of the purchase agreements, there are specific contingent payments based
upon achieving specified earning levels. These payments will be recognized as an
adjustment to the purchase price when made.
F-19
<PAGE>
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 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>
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-21
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
----------- -----------
Current Assets
<S> <C> <C>
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, 300,000 300,000
issued and outstanding 100 shares)
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.
</TABLE>
F-22
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Statements of Income and Retained Earnings
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------------------------
Revenues
<S> <C> <C>
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-23
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Statements of Cash Flows
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------------- ---------------
Cash flows from operating activities:
<S> <C> <C>
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-24
<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-25
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Notes to Financial Statements
December 31, 1998 and 1997
f) Revenue Recognition
Revenue is recognized when products are shipped or services have been
provided and is net of returns and allowances.
Note 2: LOAN PAYABLE
Loan payable represents amounts owed to Heller Financial, Inc. as
advances upon collections of factored accounts receivable. Interest on
these advances is computed daily at a rate of 2% over the current prime
rate and is paid monthly using the current prime rate as a base. 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
======== =======
Note 4: NET SALES
Net sales consists of the following:
1998 1997
-------- -----------
Sales $20,340,045 $16,039,672
Less: Sales, returns and discounts 346,561 1,122,977
----------- -----------
$19,993,484 $14,916,695
=========== ===========
Note 5: INTEREST
Interest expense for 1998 and 1997 was $292,676 and $241,225,
respectively, all of which was charged to operations.
F-26
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Notes to Financial Statements
December 31, 1998 and 1997
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-27
<PAGE>
COMPONENTS BY JOHN McCOY, INC.
Balance Sheets
March 31, 1999 and December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1999 1998
------------------ -----------------
(unaudited)
<S> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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-28
<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-29
<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, 1999 March 31, 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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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.
F-36
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
Notes to Financial Statements
Years ended December 31, 1998 and 1997
3. Property and Equipment
Property and equipment, net of accumulated depreciation as of December 31,
1998 and 1997, consists of the following:
1998 1997
----------- -----------
Office equipment $ 19,347 $ 16,641
Furniture and fixtures 7,496 5,738
----------- -----------
26,843 22,379
Less: Accumulated depreciation (16,639) (12,218)
----------- -----------
$ 10,204 $ 10,161
=========== ===========
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
=========== ===========
F-37
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
5. Provision For Income Taxes (continued)
The reconciliation of the effective income tax rate is as follows:
1998 1997
----------- -----------
Federal income tax rate (34)% (34)%
State taxes, net of federal income
tax benefit (6) (6)
Adjustment to deferred tax rate (6) (0)
----------- -----------
(46)% (40)%
=========== ===========
6. Commitments
The Company leases office space under an agreement accounted for as an
operating lease expiring July 31, 1999. The Company sublet a portion of
its office to a related entity. Rent expense for the years ended December
31, 1998 and 1997, net of sublease income was approximately $22,000 and
$38,000, respectively.
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-38
<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-39
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
Statements Of Operations and 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 BEFORE PROVISION FOR INCOME TAXES 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)
----------- -----------
ACCUMULATED DEFICIT - END OF PERIOD $ 48,691 $ 79,597
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-40
<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 - END 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-41
<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 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-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 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 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 the years then ended, in conformity with generally accepted accounting
principles.
/s/ Weissbarth, Altman & Michaelson LLP
New York, New York
February 15, 1999
F-43
<PAGE>
WINDSONG, INC.
Balance Sheets
December 31, 1998 and 1997
ASSETS
1998 1997
------ ------
Current assets
Cash (Note 2) $ 126,179 $ 700
Accounts receivable (Note 1,2,3) 5,643,217 5,573,629
Insurance claim receivable -- 37,229
Inventories (Note 1,2,3,5,14) 6,584,546 5,308,870
Other (Note 6) 729,941 223,748
----------- -----------
Total current assets 13,083,883 11,144,176
----------- -----------
Property and equipment, net (Note 2,7,10) 565,902 256,621
----------- -----------
Other assets
Note receivable-officer/
stockholder (Note 4,6,15) -- 1,036,436
Loan receivable-affiliated
company (Note 8) 437,429 --
Organization costs, net of
accumulated amortization
of $-0- and $814 (Note 2) -- 623
Security deposits and other 71,268 82,329
----------- -----------
Total other assets 508,697 1,119,388
----------- -----------
$14,158,482 $12,520,185
=========== ===========
See accompanying notes to financial statements
F-44
<PAGE>
LIABILITIES and STOCKHOLDERS' EQUITY
1998 1997
------ ------
Current liabilities
Current portion of obligations
under capital leases (Note 2,7,10,15) $ 124,685 $ --
Accounts payable and accrued
expenses (Note 1,2,9,11,13,14,15) 4,143,299 7,517,193
Advances from factor (Note 3,15) 7,301,274 3,082,608
Due to affiliated company -- 118,043
State income taxes payable (Note 2) 25,341 32,090
---------- ----------
Total current liabilities 11,594,599 10,749,934
Obligations under capital leases (Note 2,7,10,15) 227,628 --
Deferred rent expense (Note 2,10) 8,225 13,901
Accounts payable-subordinated (Note 9,15) 1,379,568 1,379,568
----------- -----------
Total liabilities 13,210,020 12,143,403
----------- -----------
Commitments and contingencies
(Note 1,3,10,11,12,13,14)
Stockholders' equity
Common stock-no par value
- Class A (voting) -
1,000 shares authorized,
200 shares issued and out-
standing 200 200
- Class B (non-voting) -
1,000 shares authorized,
800 shares issued and out-
standing 800 800
Additional paid-in capital 6,000 6,000
Retained earnings 941,462 369,782
----------- -----------
Total stockholders' equity 948,462 376,782
----------- -----------
$14,158,482 $12,520,185
=========== ===========
See accompanying notes to financial statements.
F-45
<PAGE>
WINDSONG, INC.
Statements of Income and Retained Earnings (Accumulated Deficit)
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 63,630,094 $ 30,330,207
Cost of goods sold 49,884,050 23,861,570
------------ ------------
Gross profit 13,746,044 6,468,637
Operating expenses 11,073,999 5,741,573
------------ ------------
Income from operations 2,672,045 727,064
Interest expense, net 1,661,405 317,214
------------ ------------
Income before provision for income taxes 1,010,640 409,850
Provision for income taxes 46,000 35,000
------------ ------------
Net income 964,640 374,850
Retained earning (accumulated deficit)-
beginning of year 369,782 (5,068)
Distributions to stockholders (392,960) --
------------ ------------
Retained earnings-end of year $ 941,462 $ 369,782
============ ============
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
WINDSONG, INC.
Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997
Increase (decrease) in cash
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 964,640 $ 374,850
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 156,882 45,629
Effect of straight-lining minimum lease payments (5,676) 13,901
Loss on disposal of property and equipment -- 15,294
Net basis adjustment of property and equipment (3,831) --
Provision for doubtful accounts 20,000 --
Computer training expense incurred in connection
with property and equipment acquired under
capital lease 67,840 --
Note receivable-officer/stockholder
converted into salary 1,036,436 --
Changes in operating assets and liabilities
Accounts receivable (89,588) (4,220,872)
Insurance claim receivable 37,229 10,667
Inventories (1,275,676) (3,122,119)
Other current assets (506,193) (138,274)
Security deposits and other 11,061 (70,244)
Accounts payable and accrued expenses (3,373,894) 5,011,137
Advances from factor 4,218,666 2,640,551
State income taxes payable (6,749) 32,090
------------ ------------
Total adjustments 286,507 217,760
------------ ------------
Net cash provided by operating
activities, carried forward $ 1,251,147 $ 592,610
------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
WINDSONG, INC.
Statements of Cash Flows-continued
For the Years Ended December 31, 1998 and 1997
Increase (decrease) in cash
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net cash provided by operating
activities, brought forward $ 1,251,147 $ 592,610
------------ ------------
Cash flows from investing activities
Increase in note receivable-
officer/stockholder, net -- (74,321)
Payments to affiliated company (555,472) (284,904)
Payments for property and equipment (101,416) (232,785)
------------ ------------
Net cash used in investing activities (656,888) (592,010)
------------ ------------
Cash flows from financing activities
Distributions to shareholders (392,960) --
Payments on obligations under capital lease,
net of certain adjustments by lessor (75,820) --
------------ ------------
Net cash used in financing activities (468,780) --
------------ ------------
Net increase in cash 125,479 600
Cash-beginning of year 700 100
------------ ------------
Cash-end of year $ 126,179 $ 700
============ ============
Supplemental disclosure of cash flow information:
Cash was paid for
Income taxes $ 64,745 $ 4,901
============ ============
Interest, net of interest received from factor $ 1,638,830 $ 381,530
============ ============
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
WINDSONG, INC.
Statement of Cash Flows-continued
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <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
corresponding increase in other current
assets. (The Company's voting common
stock has been designated as Class A.) $ -- $ 800
============= ============
Acquisition of the following net assets of an affiliated company, at their
book value in exchange for (a) satisfaction of the Company's receivable from
the affiliated company, in the amount of $897,860, and (b) a payable to the
affiliated company, in the amount of $118,043:
Note receivable-officer/stockholder $ -- $ 962,115
Property and equipment, net -- 51,770
Security deposits and other -- 2,018
------------ ------------
$ -- $ 1,015,903
============= ============
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
WINDSONG, INC.
Notes to Financial Statements
December 31, 1998 and 1997
Note 1 - Description of business
Windsong, Inc. (the Company) 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).
A substantial portion of the Company's inventories is acquired from a
relatively small number of suppliers.
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.
During 1998, 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.
F-50
<PAGE>
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 2 - Summary of significant accounting policies-continued
d) Property and equipment and depreciation-continued
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 and $407 for 1998 and 1997, 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 and
$126,000 for 1998 and 1997, respectively, of which approximately $238,000 and
$62,000, respectively, related to cooperative advertising.
h) Income taxes
The Company is treated as an S Corporation for federal income tax purposes.
As an S Corporation, the taxable income or loss and tax credits of the
Company are allocated to its stockholder. State income taxes are provided to
the extent that S Corporation status is not recognized for such purposes.
i) Reclassifications
Certain items included in the 1997 financial statements, as originally
issued, have been reclassified to conform to the 1998 presentation.
F-51
<PAGE>
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
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).
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).
F-52
<PAGE>
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 3 - Accounts receivable-continued
o Customary charges are made by the factor in connection with (a)
letters of credit that are issued for the Company's account to its
suppliers and (b) the servicing of assigned receivables.
o Amounts due to the factor, as well as any outstanding letters of
credit, are secured by the Company's trade receivables and
inventories.
o Amounts due to the factor are also guaranteed by a Company officer/
stockholder.
Amounts were due (to)/from the factor as follows:
1998 1997
---- ----
Accounts receivable assigned to factor $ 5,654,907 $ 5,443,921
Less: advances from the factor 7,301,274 3,082,608
------------ ------------
$ (1,646,367) $ 2,361,313
============ ============
Factor commissions and interest expense, net, included in the results of
operations, amounted to $484,757 and $1,298,176, respectively, for 1998, and
$322,155 and $367,884, respectively, for 1997.
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
============ ============
F-53
<PAGE>
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 6 - Other current assets
Other current assets consist of the following:
1998 1997
------ ------
Prepaid sales allowances $ 445,598 $ -
Interest receivable on note receivable-
officer/stockholder 126,889 64,316
Advances to officers/stockholders 105,273 -
Deposit on inventory purchase - 100,000
Prepaid expenses and other 52,181 59,432
--------- --------
$ 729,941 $223,748
========= ========
Note 7 - Property and equipment, net
Property and equipment, net, consists of the following:
Estimated
Useful Lives
in Years 1998 1997
------------ ------ ------
Furniture and equipment 5 - 7 $ 254,724 $ 232,522
Automobiles 5 146,881 202,195
Computer software 3 70,981 51,036
Property and equipment under
capital leases (Note 10) 3 - 5 360,293 -
--------- ----------
832,879 485,753
Less accumulated depreciation
and amortization 266,977 229,132
--------- ----------
$ 565,902 $ 256,621
========= ==========
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.
F-54
<PAGE>
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 7 - Property and equipment, net-continued
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 and $45,222 for 1998 and 1997,
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.
Additionally, effective January 1, 1998, accounts payable to that supplier
bear interest as follows:
-- for the subordinated portion, 8-1/2% per annum, retroactive to
May 15, 1996.
-- for the remaining portion, a rate equal to the prime rate of the
supplier's bank, as quoted from time to time.
Interest expense, included in the results of operations, amounted to
$405,595 for 1998.
F-55
<PAGE>
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 10 - Leases
a) Capital leases
As of December 31, 1998, the future minimum payments under capital leases
are as follows:
Total Interest Net
Payments 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.
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:
-- Payments under the lease for office space are guaranteed by an
officer/ stockholder of the Company. This lease contains a two-year
renewal option.
-- 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.
-- 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.
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
========== ========= =========
F-56
<PAGE>
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 10 - Leases-continued
b) Operating leases-continued
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.
Additionally, the Company makes payments under various short-term leases for
equipment. Such payments are not significant to the Company's operations.
Note 11 - Employee benefit plan
The Company sponsors 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.
Pension Benefits
1998 1997
---------- -----------
Change in benefit obligation:
Benefit obligation at beginning of year $2,290,708 $ 967,290
Service cost 429,801 402,653
Interest cost 160,350 118,447
Amendments -- 1,006,833
Actuarial gain/(loss) 73,718 (127,377)
Benefits paid -- (77,138)
---------- ------------
Benefit obligation at end of year 2,954,577 2,290,708
---------- ------------
Changes in plan assets:
Fair value of plan assets at beginning
of year 1,229,381 1,227,394
Actual return on plan assets 13,614 79,125
Employer contributions 871,000 --
Benefit 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)
========== ============
F-57
<PAGE>
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 11 - Employee benefit plan-continued
Amount recognized in the statement of financial position consists of:
1998 1997
--------- ---------
Accrued benefit liability $(501,271) $(871,117)
========= =========
Weight 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:
1998 1997
--------- --------
Service cost $ 429,801 $402,653
Interest cost 160,350 118,447
Expected return on plan assets (105,006) (83,481)
Amortization of prior service cost 19,556 517,942
Amortization of net obligation 3,417 3,417
Amortization of actuarial gain (5,806) (4,828)
Underaccrual of prior service cost (1,041) (83,033)
--------- ---------
Net periodic cost $501,271 $871,117
========= =========
The projected benefit obligation, accumulated benefit obligation and fair value
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
totaling 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 and $778,000 for 1998 and 1997, respectively,
and exceed the minimum annual payments for 1998 and 1997, respectively.
The foregoing includes amounts accrued, but unpaid as of December 31,
1998 and 1997.
F-58
<PAGE>
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 13 - Licensing agreement-continued
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 and
$50,000 for 1998 and 1997, respectively.)
c) Reimbursements for certain travel and other expenses incurred by the
designer.
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 and $612,000 for 1998 and 1997, respectively.
Note 15 - Interest expense, net
Interest expense, net, consists of the following:
1998 1997
------ ------
Interest on -
Advances from factor, net (Note 3) $ 1,298,176 $ 367,884
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
Interest income from note receivable-
officer/stockholder (Note 4) (62,573) (64,316)
---------- ---------
$ 1,661,405 $ 317,214
=========== =========
F-59
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Stockholder
Windsong, Inc.
We have audited the accompanying balance sheet of Windsong, Inc. as of
December 31, 1996, and the related statements of income and accumulated deficit
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Windsong, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ Weissbarth, Altman & Michaelson LLP
New York, New York
May 7, 1999
F-60
<PAGE>
WINDSONG, INC.
Balance Sheet
December 31, 1996
ASSETS
Current assets
Cash (Note 2) $ 100
Accounts receivable (Note 1,3) 1,352,757
Due from affiliated company (Note 1,8,11) 612,956
Insurance claim receivable 47,896
Inventories (Note 1,2,3,4) 2,186,751
Prepaid commissions and other 84,674
----------
Total current assets 4,285,134
Property and equipment, net (Note 2,5,11) 32,582
Organization costs, net (Note 2) 1,030
Other assets 10,067
----------
$4,328,813
==========
LIABILITIES and STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable and accrued
expenses (Note 1,11) $2,905,955
Due to factor (Note 3,10) 442,057
----------
Total current liabilities 3,348,012
Accounts payable-subordinated (Note 1,11) 979,669
----------
Total liabilities 4,327,681
----------
Commitments and contingencies (Note 3,6,7,8,9)
Stockholder's equity (Note 1)
Common stock-no par value,
-authorized 1,000 shares
-issued and outstanding,
200 shares 200
Additional paid-in capital 6,000
Accumulated deficit (5,068)
----------
Total stockholder's equity 1,132
----------
$4,328,813
==========
See accompanying notes to financial statements.
F-61
<PAGE>
WINDSONG, INC.
Statement of Income and Accumulated Deficit
For the Year Ended December 31, 1996
Net sales $6,202,405
Cost of goods sold 5,444,006
----------
Gross profit 758,399
Operating expenses 741,231
----------
Income from operations 17,168
Interest expense, net 13,937
----------
Income before provision for income taxes 3,231
Provision for income taxes 2,500
----------
Net income 731
Accumulated deficit-beginning of year (5,799)
----------
Accumulated deficit-end of year $ (5,068)
==========
See accompanying notes to financial statements.
F-62
<PAGE>
WINDSONG, INC.
Statement of Cash Flows
For the Year Ended December 31, 1996
(Decrease) increase in cash
Cash flows from operating activities
Net income $ 731
----------
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 24,895
Changes in operating assets and liabilities
Accounts receivable (1,352,757)
Insurance claim receivable (47,796)
Inventories (1,202,185)
Prepaid commissions and other (84,674)
Other assets (10,067)
Accounts payable and accrued expenses 2,905,955
Due to factor 442,057
----------
Total adjustments 675,428
----------
Net cash provided by operating activities 676,159
----------
Cash flows from investing activities
Payments to affiliated company, net (686,127)
Payments for property and equipment (54,293)
Payment for organization costs (1,000)
----------
Net cash used in investing activities (741,420)
----------
Net decrease in cash (65,261)
Cash-beginning of year 65,361
----------
Cash-end of year $ 100
==========
Supplemental disclosure of cash flow information:
Income taxes paid $ 750
==========
Interest paid $ 15,810
==========
See accompanying notes to financial statements.
F-63
<PAGE>
WINDSONG, INC.
Statement of Cash Flows-Continued
For the Year Ended December 31, 1996
Supplemental schedule of non-cash operating, investing
and financing activities:
Inventories acquired for accounts payable-subordinated $979,669
========
Property and equipment acquired for decrease in due
from affiliated company $ 2,777
========
See accompanying notes to financial statements.
F-64
<PAGE>
WINDSONG, INC.
Notes to Financial Statements
December 31, 1996
Note 1 - Description of business
Windsong, Inc. (the Company) was incorporated on August 3, 1995 and commenced
substantive operations on January 1, 1996.
The Company 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 7).
The Company's stockholder and another individual who controls the Company's
major supplier have an agreement to provide financing to the Company. During
1996, in connection with that agreement, (a) a substantial portion of Company
expenses was paid for by a company controlled by the stockholder (hereafter
referred to as affiliated company) and (b) a substantial portion of the
Company's inventories was acquired from the major supplier.
Also during 1996, (a) the Company reimbursed the affiliated company for
amounts incurred on its behalf and (b) the aforementioned individual had
subscribed to 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.
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.
c) Inventories
Inventories are valued at the lower of cost (principally the specific
identification method) or market.
F-65
<PAGE>
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1996
Note 2 - Summary of significant accounting policies-continued
d) Property and equipment and depreciation
Property and equipment is stated at cost. Depreciation is provided over the
estimated useful lives of the assets, utilizing principally the straight-line
method. Expenditures for maintenance, repairs and renewals, which neither
materially add to the value of the property nor appreciably extend its useful
life, are charged to operations as incurred. When depreciable assets are sold
or otherwise retired from service, their cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in the results of operations.
e) Organization costs and amortization
Organization costs are stated at cost. Amortization is provided over five
years, utilizing the straight-line method. Amortization, included in the
results of operations, amounted to $407.
f) 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.
Note 3 - Accounts receivable
Accounts receivable consist of the following:
Accounts assigned to factor (a) $ 1,311,710
Accounts not assigned to factor 41,047
------------
$ 1,352,757
============
(a) The Company has an arrangement with a commercial factor, in which:
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) and (2) eligible
inventories, as defined and (3) certain amounts held by the factor for
letters of credit opened and liabilities owed to the factor.
F-66
<PAGE>
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1996
Note 3 - Accounts receivable-continued
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 2% above the prime rate of a certain bank, as quoted from
time to time except for "overadvances" in which case the percentage is
5% above the prime rate. Also, 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. Factor commissions are charged in an amount equal to 1% of
assigned receivable.
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 also are guaranteed by the Company's
stockholder, who has pledged certain personal assets in connection
therewith.
Amounts were due from the factor as follows:
Accounts receivable assigned to factor $ 1,311,710
Less: advances from the factor 442,057
------------
$ 869,653
============
Factor commissions and interest expense, net, included in the results of
operations, amounted to $35,670 and $14,908, respectively.
Note 4 - Inventories
Inventories consist of the following:
Raw materials $ 378,891
Work in process 406,134
Finished goods 1,401,726
------------
$ 2,186,751
============
F-67
<PAGE>
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1996
Note 5 - Property and equipment, net
Property and equipment, net, consists of the following:
Estimated
Useful Lives
in Years
Furniture and equipment 5 - 7 $ 37,140
Computer software fee 1 1,494
Automobile 5 19,930
------------
58,564
Less accumulated depreciation 25,982
------------
$ 32,582
============
Depreciation, included in the results of operations, amounted to $24,488.
Note 6 - Commitments
As of December 31, 1996, the Company is contingently liable on outstanding
letters of credit of approximately $2.7 million against open purchase orders
of approximately $7.4 million.
Note 7 - 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, and (b) provides for the payment of the
following:
a) Specified percentages of annual net sales (as defined in the agreement)
of the designer's products, with
(1) a minimum payment of $75,000 for the 24-month period ending
December 31, 1997 (initial period), which will be applied
against the amount of specified percentage payments due during
the initial period. Of this minimum payment, $37,500 was paid
during 1996 and is included in operating expenses.
F-68
<PAGE>
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1996
Note 7 - Licensing agreement-continued
(2) a minimum annual payment thereafter at 75% of the prior
year's or initial period's percentage payments, as
applicable, through December 31, 2001 and
(3) two additional minimum payments for design and marketing costs
totalling $37,500, which are included in operating expenses.
b) A specified percentage of annual net sales of the designer's products or
an agreed upon amount to be used for advertising.
c) Reimbursements for certain travel and other expenses incurred by the
designer.
Furthermore, the agreement 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.
Note 8 - Rent and other allocable expenses
The Company rents office space from an affiliated company on a month-to-month
basis and reimburses the affiliated company for other expenses necessary for
the Company's operations.
A summary of the reimbursed expenses follows:
Total Rent Other
----- ---- -----
For the eight months
ended August 31, 1996,
as previously reported $ 155,273 $ 9,059 $ 146,214
For the period from
September 1 through
December 31, 1996 (a) (130,737) 4,055 (134,792)
---------- --------- ----------
Total for the year
ended December 31,
1996 $ 24,536 $ 13,114 $ 11,422
========== ========= ==========
(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.
F-69
<PAGE>
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1996
Note 9 - Agreement with other
The Company has an agreement with an independent sales representative for the
payment of commissions on licensed products sold to certain signficant
customers.
Note 10 - Interest expense, net
Interest expense, net, consists of the following:
Interest expense, net, on amounts due to and
from factor (Note 3) $ 14,908
Other (971)
----------
$ 13,937
==========
Note 11 - Related party and other transactions
a) Accounts payable to major supplier
Accounts payable to the Company's major supplier as of December 31, 1996
consists of (a) $979,669 of accounts payable-subordinated and (b) $2,265,443,
which is included in accounts payable and accrued expenses.
b) Payments to affiliated company
During 1996, the Company made payments, net, to its affiliated company, in
the amount of $686,127, which consisted of reimbursements for expenses, as
discussed in Note 1, and certain property and equipment and advances for
future expenses.
F-70
<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 720,136 437,429
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 13,521,312
----------- -----------
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 lease $ 125,000 $ 124,685
Advances from factor 10,707,226 7,301,274
Accounts payable 4,985,354 1,881,303
Accounts payable - subordinated 1,379,568 1,379,568
Accrued expenses 854,032 2,270,221
Income taxes 4,551 25,341
----------- -----------
Total current liabilities 18,055,731 12,982,392
----------- -----------
Obligations under capital lease 186,621 227,628
----------- -----------
Shareholders' equity:
Common stock - no par value
- Class A (voting)
1000 shares authorized
200 shares issued and outstanding 200 200
- Class B (non-voting)
1000 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-71
<PAGE>
WINDSONG, INC.
Statements of Income and Retained Earnings
Three Months Ended March 31, 1999 and March 31, 1998
Three Months Ended March 31,
1999 1998
------------ -------------
(Unaudited)
Net sales $14,552,336 $17,311,703
Cost of sales 11,169,978 13,683,331
----------- -----------
Gross profit 3,382,358 3,628,372
Selling and distribution expenses 864,247 1,010,437
General and administrative expenses 1,205,933 1,120,800
----------- -----------
Income from operations 1,312,178 1,497,135
Interest expense (334,132) (447,939)
Interest income 263 110
----------- -----------
Income before provision for income taxes 978,309 1,049,306
Provision for income taxes 44,000 47,000
----------- -----------
Net income $ 934,309 $ 1,002,306
=========== ===========
See accompanying notes
F-72
<PAGE>
WINDSONG, INC.
Statements Of Cash Flows
Three Months Ended March 31, 1999 and March 31, 1998
Increase (Decrease) 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-73
<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.
F-74
<PAGE>
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-75
<PAGE>
Shares
[GRAPHIC OMITTED]
Class A Common Stock
JANNEY MONTGOMERY SCOTT INC.
EVEREN SECURITIES, 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.
<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................................................. $ 14,095
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.............................................. 320,000
Accounting fees and expenses......................................... 265,000
Miscellaneous........................................................ 175,895
-----------
Total................................................................ $988,990
===========
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 such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed
II-1
<PAGE>
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>
PURCHASER NO. DATE CLASS/TYPE PAR VALUE
--------- --- ---- ---------- ---------
<S> <C> <C> <C> <C>
MS Pietrafesa, L.P. 100 Shares October 1, 1998 Class B Common Stock $.001 per share
Thomas M. Minkstein 2.5 Units January 27, 1999 Partnership Units of not applicable
MSJP, L.P., representing
an indirect 2.9% beneficial
interest in the shares of Class
B Common Stock owned by
MS Pietrafesa, L.P.
Windsong, Inc. Shares , 1999 Class A Common Stock $.001 per share
</TABLE>
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
Company 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
*2.1 Asset Purchase Agreement, between Registrant and Windsong, Inc.
**3.1 Certificate of Incorporation of Registrant
**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 dated as of January 1, 1996, between Alexander Julian, Inc. and Windsong, Inc.
*11 Statement regarding computation of per share earnings
**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>
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted as they are inapplicable, or the other
information is included in the financial statements.
II-3
<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.
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 28th day of May, 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 and Chief Executive Officer May 28, 1999
- --------------------------------------------
and Director
(Principal Executive Officer)
/s/ Thomas A. Minkstein * Chief Operating Officer May 28, 1999
- -------------------------------------------- and Director
/s/ Eugene R. Sunderhaft * Vice President - Finance, Chief Financial May 28, 1999
- -------------------------------------------- Officer, Secretary, Treasurer
(Principal Financial and Accounting Officer)
/s/ Sterling B. Brinkley, Jr. * Chairman of the Board May 28, 1999
- --------------------------------------------
/s/ Mark C. Pickup * Director May 28, 1999
- --------------------------------------------
/s/ Robert J. Bennett * Director May 28, 1999
- --------------------------------------------
/s/ Paul M. McNicol Director May 28, 1999
- --------------------------------------------
Paul M. McNicol
</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 13 as to which the date is ________, 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.
Ernst & Young LLP
Syracuse, New York
February 12, 1999
The foregoing report is in the form that will be signed upon the completion of
the acquisitions, public offering and restatement of capital accounts described
in Note 13 to the financial statements.
/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>
Col. A Col. B Col. C Col. D Col. E
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>
Col. B
Col. A Balance at Col. C Col. D Col. E
Beginning of Charged Balance at
Description Year to Expense Deductions End of Year
- --------------------------------------------- ------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Reserve for bad debts.................... $ 0 $ 102,000 $ (102,000) (1) $ 0
Year Ended December 31, 1998:
Reserve for bad debts.................... $ 0 $ 149,017 $ (59,017) (1) $ 90,000
</TABLE>
- -----------------------
(1) Represents write-off of accounts receivable.
S-6
<PAGE>
We have audited the Financial Statements of Windsong, Inc. as of December 31,
1996 and for the year then ended, and have issued our report thereon dated May
7, 1999 (included elsewhere in this Registration Statement). We have also
audited the Financial Statements of Windsong, Inc. as of December 31, 1998 and
1997 and have issued our report thereon dated February 15, 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 Deduction 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. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE PIETRAFESA CORPORATION
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EXHIBIT INDEX
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NUMBER DESCRIPTION
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*1 Form of Underwriting Agreement
*2.1 Asset Purchase Agreement, between Registrant and Windsong, Inc.
**3.1 Certificate of Incorporation of Registrant
**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 dated as of January 1, 1996, between Alexander Julian, Inc. and Windsong, Inc.
*11 Statement regarding computation of per share earnings
**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
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* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted as they are inapplicable, or the other
information is included in the financial statements.
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EXHIBIT 5
[Letterhead of Roberts, Sheridan & Kotel, P.C.]
[Form of Opinion]
May __, 1999
The Pietrafesa Corporation
7400 Morgan Road
Liverpool, NY 13090
The Pietrafesa Corporation
Registration Statement on Form S-1
Dear Sirs:
We have acted as counsel for The Pietrafesa Corporation, a
Delaware corporation (the "Issuer"), in connection with the preparation of the
Registration Statement on Form S-1 (the "Registration Statement") filed with the
Securities and Exchange Commission (the "Commission") on March 15, 1999,
Registration Number 333-74439, under the Securities Act of 1933 (the "Act") for
the registration under the Act of ____________ shares of Class A Common Stock,
par value $.001 per share, of the Issuer.
In that connection, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of certificates of public
officials and corporate records, instruments and documents of or affecting the
Issuer, including, without limitation, (i) the Certificate of Incorporation of
the Issuer; (ii) the Bylaws of the Issuer; (iii) resolutions adopted by the
Board of Directors and Stockholders of the Issuer; and (iv) a form of specimen
stock certificate for the Class A Common Stock. We have also examined originals
or copies, certified or otherwise identified to our satisfaction, of
certificates of officers of the Issuer, and have reviewed such questions of law
and made such other inquiries, as we have deemed necessary or appropriate for
the purpose of rendering this opinion.
In rendering our opinion, we have relied, as to matters of
fact, upon representations and warranties of the Issuer and upon such
certificates and other instruments of officers of the Issuer and public
officials as we have deemed necessary or appropriate for the purpose of
rendering this opinion, in each case without independent investigation or
verification. Additionally, without any independent investigation or
verification, we have assumed (i) the genuineness of all signatures, (ii) the
authenticity of all documents submitted to us as originals and the conformity
with the original documents of all documents submitted to us as certified,
conformed or photostatic copies, (iii) the authority of all persons signing any
document other than the officers of the Issuer, where applicable, signing in
their capacity as such, (iv) the enforceability of all the agreements we have
reviewed in accordance with their respective terms against the parties thereto,
and (v) the truth and accuracy of all matters of fact set forth in all
certificates and other instruments furnished to us.
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Based upon the foregoing, and subject to the limitations,
qualifications and assumptions set forth herein, we are of the opinion that:
1. The Issuer is a corporation duly incorporated and is in
good standing under the laws of the State of Delaware.
2. The ________ shares of Class A Common Stock, when sold in
accordance with the provisions of the Registration Statement, shall have been
legally issued and will be fully paid and nonassessable.
Members of this Firm are admitted to practice law only in the
State of New York and do not purport to be experts on, and are not expressing
any opinion with respect to, any laws other than the laws of the State of New
York, the General Corporation Law of the State of Delaware and the Federal laws
of the United States of America.
We hereby consent to the filing of this opinion as Exhibit 5
to the Registration Statement and the reference to us under the heading "Legal
Counsel" in the prospectus included in Part I of the Registration Statement. In
giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act.
Very truly yours,
Roberts, Sheridan & Kotel, P.C.
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REVOLVING CREDIT, TERM LOAN AND SECURITY AGREEMENT
This REVOLVING CREDIT, TERM LOAN AND SECURITY AGREEMENT dated April 15,
1999, among THE PIETRAFESA CORPORATION, a corporation organized under the laws
of the State of Delaware ("Pietrafesa"); DAG ACQUISITION CORP., a Delaware
corporation and a wholly-owned Subsidiary of Pietrafesa ("DAGA"); COMPONENTS
ACQUISITION CORP., a Delaware corporation and a wholly-owned Subsidiary of
Pietrafesa ("Components"); GLOBAL SOURCING NETWORK, LTD., a New York corporation
and a wholly-owned Subsidiary of Pietrafesa ("GSN"; Pietrafesa, DAGA, Components
and GSN, each a "Borrower" and collectively "Borrowers"); the financial
institutions which are now or which hereafter become a party hereto
(collectively, the "Lenders" and individually a "Lender"); and PNC BANK,
NATIONAL ASSOCIATION, a national banking association ("PNC"), as collateral and
administrative agent for Lenders (PNC, together with its successors and assigns
in such capacity, the "Agent").
IN CONSIDERATION of the mutual covenants and undertakings herein
contained, Borrowers, Lenders and Agent hereby agree as follows:
SECTION 1. DEFINITIONS.
1.1 Accounting Terms. As used in this Agreement, each Note, or any
certificate, report or other document made or delivered pursuant to this
Agreement, accounting terms not defined in Section 1.2 or elsewhere in this
Agreement and accounting terms partly defined in Section 1.2 to the extent not
defined, shall have the respective meanings given to them under GAAP; provided,
however, whenever such accounting terms are used for the purposes of determining
compliance with financial covenants in this Agreement, such accounting terms
shall be defined in accordance with GAAP as applied in preparation of the
audited financial statements of Pietrafesa for Pietrafesa's Fiscal Year ended
December 31, 1998.
1.2 General Terms. For purposes of this Agreement the following terms
shall have the following meanings (terms defined in the singular to have the
same meaning when used in the plural, and vice versa):
"Account Debtor" shall mean any Person who is or may become obligated
under or on account of a Receivable.
"Accountants" shall have the meaning set forth in Section 9.7 hereof.
"Accounts Advance Rate" shall have the meaning set forth in Section
2.1(a)(y)(i) hereof.
"Acquisition" shall mean any transaction (other than the Initial
Acquisitions), or any series of related transactions, by which a Borrower
directly or indirectly (i) acquires all or substantially all of any ongoing
business of any Person, whether through the purchase of assets, merger or
otherwise, (ii) acquires (in one transaction or as the most recent transaction
in a series of transactions) control of at least a majority in
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ordinary voting power of the Equity Interests having ordinary voting power for
the election of directors, or (iii) acquires control of 50% or more of the
Equity Interests in any other Person.
"Acquisition Documents" shall mean all stock purchase agreements,
merger agreements, asset purchase agreements or similar agreements, documents or
instruments entered into by a Borrower in connection with an Acquisition and all
schedules, exhibits and attachments forming a part thereof.
"Acquisition Target" shall mean a Person whose assets or Equity
Interests are to be acquired by a Borrower or a wholly-owned Subsidiary of a
Borrower pursuant to an Acquisition.
"Advance Rates" shall mean, collectively, the Receivables Advance Rate
and the Inventory Advance Rate.
"Advances" shall mean and include the Revolving Advances, Letters of
Credit, the Term Loan and each other advance made by Agent or Lenders pursuant
to the terms of this Agreement or any of the Other Documents to or for the
benefit of any Borrower.
"Affiliate" of any Person shall mean (a) any Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled by,
or is under common control with such Person, or (b) any Person who is a director
or officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of
any Person described in clause (a) above. For purposes of this definition,
control of a Person shall mean the power, direct or indirect, (x) to vote 5% or
more of the Equity Interests having ordinary voting power for the election of
directors of such Person or the individuals performing similar functions for any
such Person, or (y) to direct or cause the direction of the management and
policies of such Person whether by contract or otherwise.
"Agent" shall have the meaning set forth in the preamble to this
Agreement and shall include its successors and assigns.
"Alternate Base Rate" shall mean, for any day, a rate per annum equal
to the higher of (i) the Base Rate in effect on such day and (ii) the Federal
Funds Rate in effect on such day plus 1/2 of 1%.
"Amount Due From Factor" shall mean (a) at the date in question, (i) if
a current Factor Status Statement has been delivered to Lender on such date, an
amount equal to the aggregate credit balances due to Borrower under the
Factoring Agreement on such date as reflected on the Factor Status Statement, or
(ii) if a current Factor Status Statement has not been delivered to Lender on
such date, an amount equal to the aggregate credit balances due to Borrower
under the Factoring Agreement on such date as reflected on the Due From Factor
Report delivered to Lender by Borrower on such date or (iii) in the absence of
delivery of Due From Factor Report, an amount determined by Lender in its sole
discretion, minus (b) at the date in question, the Factor Reserve.
"Applicable Law" shall mean all laws, rules and regulations applicable
to the Person, conduct, transaction, covenant, Loan Document or Material
Contract in question, including all applicable common law and equitable
principles; all provisions of all applicable state, federal and foreign
constitutions, statutes, rules, regulations and orders of governmental bodies;
and all orders, judgments and decrees of all courts and arbitrators.
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"Asset Acquisition Agreement" shall mean the Asset Purchase Agreement
(including all exhibits and schedules thereto) dated as of March 11, 1999 among
DAG, as seller, Nadel, DAGA, as buyer, and Pietrafesa.
"Asset Acquisition Documents" shall mean the Asset Acquisition
Agreement and all documents, instruments and other agreements executed in
connection therewith or pursuant thereto, including the Asset Acquisition Note.
"Asset Acquisition Note" shall mean that certain Promissory Note dated
on or about the Closing Date made by DAGA payable to the order of DAG in the
original principal amount of $400,000.
"Authority" shall have the meaning set forth in Section 4.19(d).
"Bankruptcy Code" shall mean title 11 of the United States Code.
"Base Rate" shall mean the base commercial lending rate of PNC as
publicly announced to be in effect from time to time, such rate to be adjusted
automatically, without notice, on the effective date of any change in such rate.
This rate of interest is determined from time to time by PNC as a means of
pricing some loans to its customers and is neither tied to any external rate of
interest or index nor does it necessarily reflect the lowest rate of interest
actually charged by PNC to any particular class or category of customers of PNC.
"Blocked Account" shall have the meaning ascribed to it in Section
4.15(h) hereof.
"Borrower" or "Borrowers" shall have the meaning set forth in the
preamble to this Agreement, all Persons who become a Borrower by executing and
delivering a Joinder Agreement at Agent's request, and shall extend to all
permitted successors and assigns of such Persons.
"Borrowers on a consolidated basis" shall mean the Borrowers' accounts
or other items as to which such term applies, consolidated in accordance with
GAAP.
"Borrowers' Account" shall have the meaning set forth in Section 2.7.
"Borrowing Agent" shall mean Pietrafesa.
"Borrowing Base Certificate" shall mean a certificate from the
President, Chief Operating Officer or Chief Financial Officer of the Borrowing
Agent to Agent by which such officer shall certify to Agent the Formula Amount
and calculation thereof as of the date of the certificate, such certificate to
be in form and substance satisfactory to Agent.
"Business Day" shall mean with respect to Eurodollar Rate Loans, any
day on which commercial banks are open for domestic and international business,
including dealings in Dollar deposits in London, England and New York, New York
and with respect to all other matters, any day other than a day on which
commercial banks in New York, New York are authorized or required by law to
close.
"Business Interruption Insurance Assignment" shall mean the Collateral
Assignment of Business Interruption Insurance to be executed by each Borrower on
the Closing Date in favor of Agent, for its benefit and for the ratable benefit
of Lenders, as security for the payment of the Obligations.
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"Capital Expenditures" shall mean expenditures made or liabilities
incurred for the acquisition of any fixed assets or improvements, replacements,
substitutions or additions thereto which have a useful life of more than one
year, including the total principal portion of Capitalized Lease Obligations.
"Capitalized Lease Obligation" shall mean any Indebtedness of a
Borrower represented by obligations under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP.
"Cash Taxes" shall mean, for any period, the actual federal, state and
location taxes of a Person based on income or business activity paid in cash
during such period.
"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. ss. 9601 et seq.
"Change of Control" shall mean (a) the occurrence of any event (whether
in one or more transactions) which results in a transfer of Control of
Pietrafesa to a Person who is not the Original Owner or (b) any merger or
consolidation of or with any Borrower in which a Borrower is not the surviving
entity or sale of all or substantially all of the property or assets of any
Borrower to any Person other than another Borrower.
"Charges" shall mean all taxes, charges, fees, imposts, levies or other
assessments, including all net income, gross income, gross receipts, sales, use,
ad valorem, value added, transfer, franchise, profits, inventory, capital stock,
license, withholding, payroll, employment, social security, unemployment,
excise, severance, stamp, occupation and property taxes, custom duties, fees,
assessments, Liens, claims and charges of any kind whatsoever, together with any
interest and any penalties, additions to tax or additional amounts, imposed by
any taxing or other authority, domestic or foreign (including the Pension
Benefit Guaranty Corporation or any environmental agency or superfund), upon the
Collateral, any Borrower or any of its Subsidiaries.
"Client Risk Account" shall mean a Factored Account with respect to
which the risk of the Account Debtor's nonpayment for any reason is borne by
Pietrafesa instead of Factor.
"Closing Date" shall mean April 15, 1999 or such other date as may be
agreed to in writing by the parties hereto.
"Code" shall mean the Internal Revenue Code of 1986.
"Collateral" shall mean and include all of the following types or items
of property or interests in property of each Borrower:
(a) all Receivables;
(b) all Equipment;
(c) all General Intangibles;
(d) all Inventory;
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(e) all Real Property;
(f) all Subsidiary Stock;
(g) all of each Borrower's right, title and interest in and to (i) its
respective goods and other property including all merchandise returned or
rejected by Customers, relating to or securing any of the Receivables; (ii) all
of each Borrower's rights as a consignor, a consignee, an unpaid vendor,
mechanic, artisan, or other lienor, including stoppage in transit, setoff,
detinue, replevin, reclamation and repurchase; (iii) all additional amounts due
to any Borrower from any Customer relating to the Receivables; (iv) other
property, including warranty claims, relating to any goods securing this
Agreement; (v) all of each Borrower's contract rights, rights of payment which
have been earned under a contract right, instruments, documents, chattel paper,
warehouse receipts, deposit accounts, money, securities and investment property;
(vi) if and when obtained by any Borrower, all real and personal property of
third parties in which such Borrower has been granted a Lien or security
interest as security for the payment or enforcement of Receivables; and (vii)
any other goods, personal property or real property now owned or hereafter
acquired in which any Borrower has expressly granted a security interest or may
in the future grant a security interest to Agent hereunder, or in any amendment
or supplement hereto or thereto, or under any other agreement between Agent and
any Borrower;
(h) all of each Borrower's ledger sheets, ledger cards, files,
correspondence, records, books of account, business papers, computers, computer
software (owned by any Borrower or in which it has an interest), computer
programs, tapes, disks and documents relating to (a), (b), (c), (d), (e), (f) or
(g) of this Paragraph; and
(i) all proceeds and products of (a), (b), (c), (d), (e), (f), (g) and
(h) in whatever form, including: cash, deposit accounts (whether or not
comprised solely of proceeds), certificates of deposit, insurance proceeds
(including hazard, flood and credit insurance), negotiable instruments and other
instruments for the payment of money, chattel paper, security agreements,
documents, eminent domain proceeds, condemnation proceeds and tort claim
proceeds.
"Commitment Percentage" of any Lender shall mean the percentage set
forth below such Lender's name on the signature page hereof as same may be
adjusted upon any assignment by a Lender pursuant to Section 16.3(b) hereof.
"Commitment Transfer Supplement" shall mean a document in the form of
Exhibit B hereto, properly completed and otherwise in form and substance
satisfactory to Agent by which the Eligible Assignee purchases and assumes a
portion of the obligation of Lenders to make Advances under this Agreement.
"Compliance Certificate" shall mean a compliance certificate to be
signed by the chief financial officer of the Borrowing Agent, which shall state
that, based on an examination sufficient to permit him to make an informed
statement, no Default or Event of Default exists, or if such is not the case,
specifying such Default or Event of Default, its nature, when it occurred,
whether it is continuing and the steps being taken by Borrowers with respect to
such default and, such certificate shall have appended thereto calculations
which set forth Borrowers' compliance with the requirements or restrictions
imposed by Section 6.9, 7.6 and 7.11 hereof.
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"Consents" shall mean all filings and all licenses, permits, consents,
approvals, authorizations, qualifications and orders of Governmental Bodies and
other third parties, domestic or foreign, necessary to carry on any Borrower's
business, including all consents required by Applicable Law.
"Consigned Inventory" shall mean Inventory of a Borrower that is in the
possession of another Person on a consignment, sale or return, or other basis
that does not constitute a final sale and acceptance of such Inventory.
"Contract Rate" shall mean, as applicable, the Revolving Interest Rate
or the Term Loan Rate.
"Control" or "control" of any Person" shall mean the power, direct or
indirect (x) to vote 50% or more of the securities having ordinary voting power
for the election of directors of such Person or (y) to direct or cause the
direction of the management and policies of such Person by contract or
otherwise.
"Controlled Disbursement Account" shall mean any demand deposit account
established and maintained by Borrowers with PNC or any Affiliate of PNC after
the Closing Date with respect to which Borrowers and Agent agree that the
presentation for payment by PNC or such Affiliate of PNC of any check or other
item of payment drawn on a such account shall be deemed an irrevocable request
for a Revolving Advance pursuant to Section 2.1(d)(iii) of this Agreement.
"Controlled Group" shall mean all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with Borrowers, are treated as a single employer
under Section 414 of the Code.
"Customer" shall mean and include the account debtor with respect to
any Receivable and/or the prospective purchaser of goods, services or both with
respect to any contract or contract right, and/or any party who enters into or
proposes to enter into any contract or other arrangement with any Borrower,
pursuant to which such Borrower is to deliver any personal property or perform
any services.
"DAG" shall mean Diversified Apparel Group, Ltd., a New York
corporation.
"DAG Subordination Agreement" shall mean that certain Debt
Subordination Agreement dated on or about the Closing Date among Agent,
Pietrafesa, DAGA and DAG with respect to the obligations of Pietrafesa and DAGA
to DAG.
"Debt Payments" shall mean and include all cash actually expended by
Borrowers to make (a) interest payments on any Advances hereunder, plus (b)
scheduled principal payments on the Term Loan, plus (c) payments for all fees,
commissions and charges set forth herein and with respect to any Advances, plus
(d) capitalized lease payments, plus (e) schedule payments with respect to any
other Indebtedness for borrowed money.
"Default" shall mean an event which, with the giving of notice or
passage of time or both, would constitute an Event of Default.
"Default Rate" shall have the meaning set forth in Section 3.1 hereof.
"Defaulting Lender" shall have the meaning set forth in Section 2.15(a)
hereof.
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"Depository Accounts" shall have the meaning set forth in Section
4.15(h) hereof.
"Dollar" and the sign "$" shall mean lawful money of the United States
of America.
"Domestic Rate Loan" shall mean any Advance that bears interest based
upon the Alternate Base Rate.
"Due From Factor Report" shall mean a report based on information
provided to Pietrafesa by Factor and prepared by Pietrafesa concurrently with
each request for an Advance under this Agreement (but no less frequently than
weekly) that reflects the status of Factored Accounts on such date.
"Early Termination Date" shall have the meaning set forth in Section
13.1 hereof.
"Earnings Before Interest and Taxes" shall mean for any period the sum
of (i) net income (or loss) of Borrowers on a consolidated basis for such period
(excluding extraordinary gains), plus (ii) all interest expense of Borrowers on
a consolidated basis for such period, plus (iii) all charges against income of
Borrowers on a consolidated basis for such period for federal, state and local
taxes.
"EBITDA" shall mean for any period, the sum, for Borrowers and its
Subsidiaries on a consolidated basis, of (i) Earnings Before Interest and Taxes
for such period, plus (ii) depreciation expenses for such period, plus (iii)
amortization expenses for such period.
"Eligible Assignee" shall mean a Lender or a U.S. based Affiliate of a
Lender; a commercial bank organized under the laws of the United States or any
state and having total assets in excess of $5,000,000,000 or an asset-based
lending Affiliate of any such banks; or any other financial institution that is
acceptable to Agent and Lenders and that in the ordinary course of its business
extends credit of the type evidenced by the Revolving Credit Notes and has total
assets in excess of $1,000,000,000.
"Eligible Inventory" shall mean and include, with respect to each
Borrower, all Inventory of such Borrower, valued at the lower of cost or market
value, determined on a first-in-first-out basis, which is not, in Agent's
opinion, obsolete, slow moving or unmerchantable and which Agent, in its sole
discretion, shall not deem ineligible Inventory, based on such considerations as
Agent may from time to time deem to be appropriate, including whether the
Inventory is subject to a perfected, first priority security interest in favor
of Agent, whether the Inventory is subject to any other Lien that is not a
Permitted Encumbrance, and whether the Inventory conforms to all standards
imposed by any Governmental Body that has regulatory authority over such goods
or the use or sale thereof. Without limiting the generality of the foregoing, no
Inventory shall be Eligible Inventory if it does not meet all standards imposed
by any Governmental Body, is in transit, is located outside the continental
United States, is situated at a location (other than a location owned by a
Borrower) and not subject to a landlord agreement, mortgagee agreement,
warehouse agreement and/or Licensor/Agent Agreement satisfactory to Agent, is
situated at a location that is not otherwise in compliance with this Agreement,
or constitutes Consigned Inventory. Without limiting the generality of the
foregoing, no Inventory located at a Processor or Processors for which the
Processor Conditions have not been satisfied shall be deemed Eligible Inventory.
"Eligible Receivables" shall mean and include with respect to each
Borrower, each Receivable of such Borrower arising from the sale of goods in the
ordinary course of such Borrower's business and which Agent, in its sole credit
judgment, shall deem to be an Eligible Receivable, based on such considerations
as
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Agent may from time to time deem appropriate. A Receivable shall not be deemed
eligible unless such Receivable is subject to Agent's first priority perfected
security interest and no other Lien (other than Permitted Encumbrances), and is
evidenced by an invoice or other documentary evidence satisfactory to Agent. In
addition, no Receivable shall be an Eligible Receivable if:
(a) it arises out of a sale made by a Borrower to an Affiliate of any
Borrower or to a Person controlled by an Affiliate of any Borrower;
(b) it is due or unpaid more than ninety (90) days after the original
invoice date;
(c) fifty percent (50%) or more of the Receivables from such Customer
are not deemed Eligible Receivables hereunder. Such percentage may, in Agent's
sole discretion, be increased or decreased from time to time;
(d) any covenant, representation or warranty contained in this
Agreement with respect to such Receivable has been breached;
(e) the Customer shall (i) apply for, suffer, or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of all or a substantial part of its property or call
a meeting of its creditors, (ii) admit in writing its inability, or be generally
unable, to pay its debts as they become due or cease operations of its present
business, (iii) make a general assignment for the benefit of creditors, (iv)
commence a voluntary case under any state or federal bankruptcy laws (as now or
hereafter in effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a
petition seeking to take advantage of any other law providing for the relief of
debtors, (vii) acquiesce to, or fail to have dismissed, any petition which is
filed against it in any involuntary case under such bankruptcy laws, or (viii)
take any action for the purpose of effecting any of the foregoing;
(f) the sale is to a Customer outside the continental United States of
America, unless the sale is either (i) on letter of credit, guaranty or
acceptance terms, or (ii) covered by credit insurance, in each case acceptable
to Agent in its sole discretion;
(g) the sale to the Customer is on a bill-and-hold, guaranteed sale,
sale-and-return, sale on approval, consignment or any other repurchase or return
basis or is evidenced by chattel paper;
(h) Agent believes, in its sole judgment, that collection of such
Receivable is insecure or that such Receivable may not be paid by reason of the
Customer's financial inability to pay;
(i) the Customer is the United States of America, any state or any
department, agency or instrumentality of any of them, unless the applicable
Borrower assigns its right to payment of such Receivable to Agent pursuant to
the Assignment of Claims Act of 1940, as amended (31 U.S.C. Sub-Section 3727 et
seq. and 41 U.S.C. Sub-Section 15 et seq.) or has otherwise complied with other
applicable statutes or ordinances;
(j) the goods giving rise to such Receivable have not been shipped and
delivered to and accepted by the Customer or the services giving rise to such
Receivable have not been performed by the applicable Borrower and accepted by
the Customer or the Receivable otherwise does not represent a final sale;
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(k) the Receivables of the Customer exceed a credit limit determined by
Agent, in its sole discretion, to the extent such Receivable exceeds such limit;
(l) the Receivable is subject to any offset, deduction, defense,
dispute, or counterclaim, the Customer is also a creditor or supplier of a
Borrower or the Receivable is contingent in any respect or for any reason;
(m) the applicable Borrower has made any agreement with any Customer
for any deduction therefrom, except for discounts or allowances made in the
ordinary course of business for prompt payment, all of which discounts or
allowances are reflected in the calculation of the face value of each respective
invoice related thereto;
(n) shipment of the merchandise or the rendition of services has not
been completed;
(o) any return, rejection or repossession of the merchandise has
occurred;
(p) such Receivable is not payable to a Borrower;
(q) such Receivable is not otherwise satisfactory to Agent as
determined in good faith by Agent in the exercise of its discretion in a
reasonable manner; or
(r) if such Receivable is a Factored Account.
"Environmental Complaint" shall have the meaning set forth in Section
4.19(d) hereof.
"Environmental Indemnity Agreement" shall mean that certain
Environmental Indemnity Agreement dated on or about the Closing Date executed by
Borrowers in favor of Agent and Lenders.
"Environmental Laws" shall mean all federal, state and local
environmental, land use, zoning, health, chemical use, safety and sanitation
laws, statutes, ordinances and codes relating to the protection of the
environment and/or governing the use, storage, treatment, generation,
transportation, processing, handling, production or disposal of Hazardous
Substances and the rules, regulations, policies, guidelines, interpretations,
decisions, orders and directives of federal, state and local governmental
agencies and authorities with respect thereto.
"Equipment" shall mean and include as to each Borrower all of such
Borrower's goods (other than Inventory) whether now owned or hereafter acquired
and wherever located, including all equipment, machinery, apparatus, motor
vehicles, fittings, furniture, furnishings, fixtures, parts, accessories and all
replacements and substitutions therefor or accessions thereto.
"Equity Interest" shall mean the interest of (i) a shareholder in a
corporation, (ii) a partner (whether general or limited) in a partnership
(whether general, limited or limited liability), (iii) a member in a limited
liability company, or (iv) any other Person having any other form of equity
security or ownership interest.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time and the rules and regulations promulgated
thereunder.
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"Eurodollar Rate" shall mean for any Eurodollar Rate Loan for the then
current Interest Period relating thereto the interest rate per annum (the
resulting quotient taken out to the fifth decimal place), determined by Agent to
be the rate of interest in accordance with its usual procedures (which
determination shall be conclusive absent manifest error) by dividing (i) the
average of the London interbank offered rates for U.S. dollars quoted by the
British Bankers' Association as set forth on Dow Jones Markets Service (formerly
known as Telerate) display page 3750 (or appropriate successor or, if the
British Bankers' Association or its successor ceases to provide such quotes, a
comparable replacement determined by Agent) two (2) Business Days prior to the
first day of the Interest Period for an amount comparable to the outstanding
principal balance of the Eurodollar Rate Loan and having a borrowing date and
maturity comparable to such Interest Period, by (ii) a number equal to 1.00
minus the Reserve Percentage.
"Eurodollar Rate Loan" shall mean an Advance at any time that bears
interest based on the Eurodollar Rate.
"Event of Default" shall mean the occurrence of any of the events set
forth in Section 10 hereof.
"Excess Cash Flow" shall mean, with respect to any fiscal period, the
remainder of EBITDA, minus Unfunded Capitalized Expenditures made during such
period, minus Cash Taxes paid during such period, minus Debt Payments made
during such period.
"Factor" shall mean The CIT Group/Commercial Services, Inc., a New York
corporation.
"Factor Assignment Agreement" shall mean the Assignment of Factoring
Proceeds dated on or about the Closing Date between Pietrafesa and Agent, and
consented to by Factor, pursuant to which, among other things, Pietrafesa
assigns to Agent, for its benefit and the benefit of Lenders, and Factor
acknowledges the assignment to Agent, of all sums at any time or times due or to
become due from Factor under the Factoring Agreement.
"Factor Intercreditor Agreement" shall mean the Intercreditor Agreement
dated on or about the Closing Date between Factor and Agent by which, among
other things, such parties establish the relative priorities of their Liens with
respect to Pietrafesa's Accounts.
"Factor Reserve" shall mean the amount which at any time may be charged
to Pietrafesa under the Factoring Agreement or withheld from sums otherwise due
to Pietrafesa under the Factoring Agreement, including, without limitation,
interest, fees, commissions, ledger debt and other charges due Factor under the
Factoring Agreement and the amount of any actual or anticipated disputes or
claims arising with respect to any Factored Account.
"Factor Status Statement" shall means an account current statement or
similar report issued by Factor on a monthly basis under the Factoring Agreement
and setting forth the status of the Factored Accounts.
"Factored Account" shall mean an Account of Pietrafesa for which
Today's Man is the Account Debtor which is factored by Factor under the
Factoring Agreement.
"Factoring Agreement" shall mean that certain Accounts Receivable
Purchase Agreement dated November 30, 1998, between Borrower and Factor, as at
any time amended.
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<PAGE>
"Federal Funds Rate" shall mean, for any day, the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day (or
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or if such rate is not so published for any
day which is a Business Day, the average of quotations for such day on such
transactions received by PNC from three Federal funds brokers of recognized
standing selected by PNC.
"Financial Condition Certificate" shall mean a certificate
substantially in the form of Exhibit D attached hereto.
"Fiscal Quarter" shall mean one (1) of the four (4) fiscal quarters of
Borrowers and their Subsidiaries for accounting and tax purposes, which end on
March 31, June 30, September 30 and December 31 of each Fiscal Year.
"Fiscal Year" shall mean the fiscal year of Borrowers and their
Subsidiaries for accounting and tax purposes, which ends on December 31 of each
year and, when preceded by the designation of a calendar year (e.g., 1999 Fiscal
Year), means the Fiscal Year of Borrowers and their Subsidiaries ended on
December 31 of such designated calendar year.
"Fixed Charge Coverage Ratio" shall mean and include, with respect to
any fiscal period, the ratio of (a) EBITDA, minus Unfunded Capital Expenditures
made during such period, minus Cash Taxes paid during such period to (b) all
Debt Payments made during such period.
"Formula Amount" shall have the meaning set forth in Section 2.1(a).
"GAAP" shall mean generally accepted accounting principles in the
United States of America in effect from time to time.
"General Intangibles" shall mean and include, as to each Borrower, all
of such Borrower's general intangibles, whether now owned or hereafter acquired,
including all choses in action, causes of action, corporate or other business
records, inventions, designs, patents, patent applications, equipment
formulations, manufacturing procedures, quality control procedures, trademarks,
service marks, trade secrets, goodwill, copyrights, design rights,
registrations, licenses, franchises, customer lists, tax refunds, tax refund
claims, computer programs, all claims under guaranties, security interests or
other security held by or granted to Borrowers to secure payment of any of the
Receivables by a Customer all rights of indemnification and all other intangible
property of every kind and nature (other than Receivables).
"Governmental Body" shall mean any nation or government, any state or
other political subdivision thereof or any entity exercising the legislative,
judicial, regulatory or administrative functions of or pertaining to a
government.
"GSN Subordination Agreement" shall mean that certain Debt
Subordination Agreement dated on or about the Closing Date among Agent,
Pietrafesa and Lister with respect to the obligations of Pietrafesa to Lister.
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<PAGE>
"Guarantor" shall mean all Persons listed on Schedule 1.1 attached
hereto and any Person who may hereafter guarantee payment or performance of the
whole or any part of the Obligations and "Guarantors" means collectively all
such Persons.
"Guarantor Security Agreement" shall mean any Security Agreement
executed by any Guarantor in favor of Agent securing the Guaranty of such
Guarantor.
"Guaranty" shall mean any guaranty of the obligations of Borrowers
executed by a Guarantor in favor of Agent for the ratable benefit of Lenders.
"Hazardous Substance" shall mean, without limitation, any flammable
explosives, radon, radioactive materials, asbestos, urea formaldehyde foam
insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane, hazardous materials, Hazardous Wastes, hazardous or Toxic Substances or
related materials as defined in CERCLA, the Hazardous Materials Transportation
Act (49 U.S.C. Sections 1801, et seq.), RCRA, or any other applicable
Environmental Law and in the regulations adopted pursuant thereto.
"Hazardous Wastes" shall mean all waste materials subject to regulation
under CERCLA, RCRA or applicable state law, and any other applicable Federal and
state laws now in force or hereafter enacted relating to hazardous waste
disposal.
"Indebtedness" of a Person at a particular date shall mean all
obligations of such Person which in accordance with GAAP would be classified
upon a balance sheet as liabilities (except capital stock and surplus earned or
otherwise) and in any event, without limitation by reason of enumeration, shall
include all indebtedness, debt and other similar monetary obligations of such
Person whether direct or guaranteed, and all premiums, if any, due at the
required prepayment dates of such indebtedness, and all indebtedness secured by
a Lien on assets owned by such Person, whether or not such indebtedness actually
shall have been created, assumed or incurred by such Person. Any indebtedness of
such Person resulting from the acquisition by such Person of any assets subject
to any Lien shall be deemed, for the purposes hereof, to be the equivalent of
the creation, assumption and incurring of the indebtedness secured thereby,
whether or not actually so created, assumed or incurred.
"Individual Formula Amount" shall mean, at the date of determination
thereof, with respect to each Borrower, an amount equal to the sum of: (i) the
Accounts Advance Rate multiplied by the Net Amount of Eligible Receivables of
such Borrower, plus (ii) the Factoring Advance Rate of the Amount Due From
Factor that is attributable to Factored Accounts that are not Client Risk
Accounts of such Borrower, plus (iii) the Inventory Advance Rate multiplied by
the Value of Eligible Inventory of such Borrower, minus (iv) the aggregate
amount of outstanding Letters of Credit of such Borrower, minus (v) such
reserves as Agent may reasonably deem proper and necessary from time to time.
"Initial Acquisition Documents" shall mean the Asset Acquisition
Documents and the Stock Acquisition Documents.
"Initial Acquisitions" shall mean (a) the acquisition by Pietrafesa of
all the issued and outstanding capital stock of GSN pursuant to the Stock
Acquisition Documents, and (b) the acquisition by DAGA of substantially all of
the assets and the assumption of substantially all of the liabilities of DAG
pursuant to the Asset Acquisition Documents.
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<PAGE>
"Interest Period" shall mean the period provided for any Eurodollar
Rate Loan pursuant to Section 2.16(a).
"Interest Rate Agreement" shall mean any forward contract, future
contract, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate change agreement or other similar agreement
or arrangement designed to protect any Borrower against fluctuations in interest
rates.
"Interest Rate Reduction Conditions" shall mean (i) that Pietrafesa
shall have completed an initial public offering of its common stock resulting in
net proceeds to Pietrafesa (after underwriters' discount) of at least
$20,000,000 or Agent shall have received evidence, satisfactory to Agent in its
sole discretion, that Pietrafesa has received an aggregate amount of at least
$20,000,000 in cash equity contributions by some other means on or after the
Closing Date, and (ii) Agent shall have received (and found satisfactory in its
sole discretion) such evidence, as applicable, prior to the beginning of the
current month.
"Inventory" shall mean and include, as to each Borrower, all of such
Borrower's now owned or hereafter acquired goods, merchandise and other personal
property, wherever located, to be furnished under any contract of service or
held for sale or lease, all raw materials, work in process, finished goods and
materials and supplies of any kind, nature or description which are or might be
used or consumed in such Borrower's business or used in selling or furnishing
such goods, merchandise and other personal property, and all documents of title
or other documents representing them.
"Inventory Advance Rate" shall have the meaning set forth in Section
2.1(a)(y)(iii) hereof.
"Issuer" shall mean any Person who issues a Letter of Credit and/or
accepts a draft pursuant to the terms hereof.
"Joinder Agreement" shall mean a Joinder Agreement and Supplement to
Revolving Credit, Term Loan and Security Agreement in the form of Exhibit E
annexed hereto by which a Person that is a wholly-owned Subsidiary of a Borrower
shall become a "Borrower" under, and shall be bound by all the terms of, this
Agreement, but only if and to the extent requested or permitted to do so by
Agent in the exercise of its sole and absolute discretion.
"Lender" and "Lenders" shall have the meaning ascribed to such term in
the preamble to this Agreement and shall include each Person which becomes a
transferee, successor or assign of any Lender.
"Letter of Credit Fees" shall have the meaning set forth in Section
3.2.
"Letters of Credit" shall have the meaning set forth in Section 2.8.
"License Agreement" shall mean any agreement between a Borrower and a
Licensor pursuant to which such Borrower markets, manufactures or sells
Inventory.
"Licensor" shall mean any Person from whom a Borrower licenses the
right to use any trademark, copyright or other intangible in connection with the
manufacture, marketing or sale of any Inventory.
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<PAGE>
"Licensor/Agent Agreement" shall mean an agreement between Agent and a
Licensor by which Agent is given the unqualified right, vis-a-vis such Licensor,
to enforce Agent's Liens with respect to a Borrower's Inventory irrespective of
such Borrower's default under such Borrower's License Agreement with such
Licensor (subject only to Agent's payment to such Licensor the amount of
royalties that would be payable with respect to a sale of such Inventory if such
sale had been concluded by such Borrower under the License Agreement with such
Licensor) and which is otherwise in form and substance satisfactory to Agent.
"Lien" shall mean any mortgage, deed of trust, pledge, hypothecation,
assignment, security interest, lien (whether statutory or otherwise), Charge,
claim or preference, priority or other security agreement or preferential
arrangement held or asserted in respect of any asset of any kind or nature
whatsoever, including any conditional sale or other title retention agreement,
any lease having substantially the same economic effect as any of the foregoing,
and the filing of, or agreement to give, any financing statement under the UCC
or comparable law of any jurisdiction.
"Lien Perfection Documents" shall mean all instruments, agreements,
filings and recordings necessary or, in Agent's reasonable determination,
necessary or desirable to perfect, maintain or continue the perfection of, or
achieve or maintain the first priority status of any Lien granted to Agent
pursuant to any of the Loan Documents by any Borrower or Guarantor, including
all UCC-1 financing statements, pledges, assignments, hypothecations,
registrations of pledge, notifications, bailment agreements, landlord or
mortgagee waivers, processor waivers, intercreditor agreements, subordination
agreements, chattel mortgage filings or similar instruments, agreements or
documents.
"Lister" shall mean Peter Lister.
"Liverpool Property" shall mean the real property and improvements
thereon owned by Pietrafesa and located at 7400 Morgan Road, Liverpool, New
York.
"Loan Documents" shall mean this Agreement and all of the Other
Documents.
"Material Adverse Effect" shall mean a material adverse effect upon (a)
the condition, operations, assets or business of the Borrowers as a whole or any
Guarantor, (b) all Borrowers' or any Guarantor's ability to pay the Obligations
in accordance with the terms thereof, (c) the value of the Collateral, or
Agent's Liens on the Collateral or the priority of any such Lien or (d) the
practical realization of the benefits of Agent's and each Lender's rights and
remedies under this Agreement and the Other Documents.
"Material Contract" shall mean an agreement to which any Borrower or
Guarantor is a party (other than the Loan Documents) (i) which is deemed to be a
material contract as provided in Regulation S-K promulgated by the SEC under the
Securities Act of 1933 or (ii) for which breach, termination, cancellation,
nonperformance or failure to renew could reasonably be expected to have a
Material Adverse Effect.
"Maximum Revolving Advance Amount" shall mean, at any date of
determination, $18,000,000 minus the amount of any reserve established by Agent
from time to time in respect of obligations of Borrowers under Interest Rate
Agreements.
"Monthly Advances" shall have the meaning set forth in Section 3.1
hereof.
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<PAGE>
"Money Borrowed" shall mean, as applied to any Person, (i) Indebtedness
arising from the lending of money by any other Person to such Person; (ii)
Indebtedness, whether or not in any such case arising from the lending of money
by another Person to such Person, (A) which is represented by notes payable or
drafts accepted that evidence extensions of credit, (B) which constitutes
obligations evidenced by bonds, debentures, notes or similar instruments, or (C)
upon which interest charges are customarily paid (other than accounts payable)
or that was issued or assumed as full or partial payment for property; (iii)
Indebtedness that constitutes a capitalized lease obligation; (iv) reimbursement
obligations with respect to letters of credit or guaranties of letters of
credit; and (v) Indebtedness of such Person under any guaranty of obligations
that would constitute Indebtedness for Money Borrowed under clauses (i) through
(iii) hereof, if owed directly by such Person.
"Mortgage" shall mean the mortgage on the Liverpool Property securing
the Obligations together with all extensions, renewals, amendments, supplements,
modifications, substitutions and replacements thereto and thereof.
"Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Sections 3(37) and 4001(a)(3) of ERISA.
"Nadel" shall mean Jarrod Nadel.
"Net Amount" shall mean, with reference to Eligible Receivables, the
face amount of such Eligible Receivables on any date, less any and all returns,
rebates, discounts (which may, at Agent's option, be calculated on shortest
terms), credits, allowances or taxes (including sales, excise or other taxes) at
any time issued, owing, claimed by Customers, granted, outstanding or payable in
connection with, or any interest accrued on the amount of, such Eligible
Receivables at such date.
"Notes" shall mean, collectively, the Term Notes and the Revolving
Credit Notes.
"Obligations" shall mean and include the following, in each case,
whether now in existence or hereafter arising and howsoever the same may be
evidenced, (i) the principal of, and interest and premium, if any, on the
Advances; (ii) all Indebtedness and other obligations of any Borrower to any
Lender under any Interest Rate Agreement, currency or equity swap, future,
option, or other similar agreement or arrangement; (iii) all other Indebtedness,
covenants and duties now or at any time or times hereafter owing by any or all
Borrowers to Agent or any Lender arising under or pursuant to this Agreement or
any of the other Loan Documents, whether evidenced by any note or other writing,
whether arising from any extension of credit, opening of a letter of credit,
acceptance, loan, guaranty, indemnification or otherwise, whether direct or
indirect, absolute or contingent, due or to become due, primary or secondary, or
joint or several, including all interest, charges, expenses, fees or other sums
chargeable to any or all Borrowers or Guarantors hereunder or under any of the
other Loan Documents; and (iv) in the case of PNC and its Affiliates, any
indebtedness, liabilities, obligations, covenants and duties arising in
connection with any banking or related transactions, services or functions
provided to any Borrower or Guarantor in connection with any conduct of such
Borrower's or Guarantor's business (excluding extensions of credit giving rise
to any Indebtedness for Money Borrowed not related to this Agreement or any
other Loan Documents).
"OCIDA" shall mean the Onondaga County Industrial Development Agency, a
public benefit corporation established and existing under the laws of the State
of New York.
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<PAGE>
"OCIDA Subordination Agreement" shall mean the Subordination Agreement
dated on or about the Closing Date by Pietrafesa and OCIDA in favor of Agent,
pursuant to which Pietrafesa and OCIDA subordinate their leasehold interests in
the Liverpool Property to the interests of Agent in such Liverpool Property
under the Mortgage.
"Organization Documents" shall mean, with respect to any Person, its
charter, certificate or articles of incorporation, bylaws, articles of
organization, operating agreement, members' agreement, partnership agreement,
voting trust or similar agreement or instrument governing the formation or
operation of such Person.
"Original Owner" shall mean MS Pietrafesa, L.P., a Delaware limited
partnership.
"Other Documents" shall mean the Notes, the Questionnaire, the
Mortgage, any Guaranty, any Guarantor Security Agreement, the Subordination
Agreements, the Pledge Agreements, the Trademark Security Agreement, the Factor
Assignment, the Factor Intercreditor Agreement, the Environmental Indemnity
Agreement, and any and all other agreements, instruments and documents,
including guaranties, pledges, powers of attorney, consents, and all other
writings heretofore, now or hereafter executed by any Borrower or Guarantor
and/or delivered to Agent or any Lender in respect of the transactions
contemplated by this Agreement.
"Out-of-Formula Condition" shall have the meaning set forth in Section
2.1(c) of this Agreement.
"Out-of-Formula Loan" shall mean a Revolving Advance made when an
Out-of-Formula Condition exists or the amount of any Revolving Advance which,
when funded, results in an Out-of-Formula Condition.
"Parent" of any Person shall mean a corporation or other entity owning,
directly or indirectly at least 50% of the shares of stock or other Equity
Interests having ordinary voting power to elect a majority of the directors of
the Person, or other individuals performing similar functions for any such
Person.
"Participant" shall mean each Person who shall be granted the right by
any Lender to participate in any of the Advances and who shall have entered into
a participation agreement in form and substance satisfactory to such Lender.
"Payment Office" shall mean initially Two Tower Center Boulevard, East
Brunswick, New Jersey 08816; thereafter, such other office of Agent, if any,
which it may designate by notice to the Borrowing Agent and to each Lender to be
the Payment Office.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Permitted Acquisition" shall mean any Acquisition by any Borrower in
which each of the following conditions is satisfied: (a) the business of the
Acquisition Target to be acquired is related or substantially similar to the
business of Borrowers; (b) immediately before and after giving effect to such
Acquisition, no Default or Event of Default shall have occurred and be
continuing or would result therefrom; (c) Borrowing Agent has given Agent not
less than 30 days prior written notice of the proposed consummation of the
Acquisition and has provided to Agent complete and accurate copies of all term
sheets, letters of intent, commitment letters, proposals and substantially final
drafts and all final drafts of Acquisition Documents,
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<PAGE>
promptly after Borrower's receipt thereof; (d) immediately after giving effect
to the consummation of such Acquisition, Borrowers shall have an Undrawn
Availability of at least $5,000,000; (e) Borrowers' consummation of the
Acquisition will be in compliance with Applicable Law (and Agent and Lenders
shall have received legal opinions to that effect from Borrowers' legal counsel,
if and to the extent so requested by Agent and Lenders), and Borrowers shall
have obtained all required approvals from Governmental Bodies; (f) Agent shall
have completed its field examination of the business to be acquired with respect
to all assets of the Acquisition Target which may constitute Eligible
Receivables or Eligible Inventory and the information obtained may be used by
Agent and Lenders in determining applicable advance rates for the assets of the
Acquisition Target for purposes hereof; (g) if the Acquisition takes the form of
a purchase of Equity Interests of the Acquisition Target or if the Acquisition
involves the formation of a new Subsidiary of a Borrower to purchase the assets
of the Acquisition Target, the Acquisition Target or such newly-formed
Subsidiary becomes or remains a wholly-owned Subsidiary of a Borrower upon the
consummations of the Acquisitions and such Borrower has pledged all of the
Equity Interests of such new Subsidiary to the Agent as security for the
Obligations; (h) concurrently with the consummation of such Acquisition, any
wholly-owned Subsidiary formed or acquired in connection with the Acquisition
shall, at Agent's option, either (1) execute and deliver to Agent a Joinder
Agreement by which such Subsidiary shall become a Borrower hereunder and bound
by all of the terms hereof and each of the Other Documents or (2) execute and
deliver to Agent, for its benefit and for the ratable benefit of Lenders, a
Guaranty and Guarantor Security Agreement; (i) prior to the consummation of such
Acquisition (1) Pietrafesa shall have completed an initial public offering of
its common stock resulting in net proceeds to Pietrafesa (after underwriters'
discount) of at least $20,000,000 or (2) Agent shall have received evidence,
satisfactory to Agent in its sole discretion, that Pietrafesa has received an
aggregate amount of at least $20,000,000 in cash equity contributions by some
other means on or after the Closing Date, and Agent shall have received (and
found satisfactory in its sole discretion) such evidence, as applicable; and (j)
for so long as any Borrower owes any Indebtedness to UDC, such Borrower has
obtained the prior written consent of UDC to such Acquisition and has delivered
evidence of such consent to Agent.
"Permitted Encumbrances" shall mean (a) Liens in favor of Agent for the
benefit of Agent and Lenders; (b) Liens for taxes, assessments or other
governmental charges not delinquent or being contested in good faith and by
appropriate proceedings and with respect to which proper reserves have been
taken by Borrowers, but only if the Lien shall have no effect on the priority of
the Liens in favor of Agent or the value of the assets in which Agent has such a
Lien and a stay of enforcement of any such Lien shall be in effect; (c) Liens
disclosed in the financial statements referred to in Section 5.5, the existence
of which Agent has consented to in writing; (d) deposits or pledges to secure
obligations under worker's compensation, social security or similar laws, or
under unemployment insurance; (e) deposits or pledges to secure bids, tenders,
contracts (other than contracts for the payment of money), leases, statutory
obligations, surety and appeal bonds and other obligations of like nature
arising in the ordinary course of a Borrower's business; (f) judgment Liens that
have been stayed or bonded and mechanics', workers', materialmen's or other like
Liens arising in the ordinary course of a Borrower's business with respect to
obligations which are not due or which are being contested in good faith by the
applicable Borrower; (g) Liens placed upon fixed assets hereafter acquired to
secure a portion of the purchase price thereof, provided that (x) any such Lien
does not encumber any other property of any Borrower and (y) the aggregate
amount of Indebtedness secured by such Liens incurred as a result of such
purchases during any Fiscal Year shall not exceed the amount provided for in
Section 7.6; and (h) Liens disclosed on Schedule 1.2.
"Permitted Purchase Money Indebtedness" shall mean Purchase Money
Indebtedness of Borrowers which is incurred after the date of this Agreement and
which is secured by no Lien or only by a Purchase
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<PAGE>
Money Lien, provided the aggregate amount of Purchase Money Indebtedness
outstanding at any time may not exceed $750,000. For the purposes of this
definition, the principal amount of any Purchase Money Indebtedness consisting
of capitalized leases shall be computed as a Capitalized Lease Obligation.
"Person" shall mean any individual, sole proprietorship, partnership,
corporation, business trust, joint stock company, trust, unincorporated
organization, association, limited liability company, institution, public
benefit corporation, joint venture, entity or government (whether Federal,
state, county, city, municipal or otherwise, including any instrumentality,
division, agency, body or department thereof).
"Plan" shall mean any employee benefit plan within the meaning of
Section 3(3) of ERISA, maintained for employees of Borrowers or any member of
the Controlled Group or any such Plan to which any Borrower or any member of the
Controlled Group is required to contribute on behalf of any of its employees.
"Pledge Agreements" shall mean, collectively, (i) the Stock Pledge
Agreement dated the Closing Date executed by Pietrafesa in favor of Agent
pursuant to which Pietrafesa has pledged to Agent, for the benefit of itself and
Lenders, all of the issued and outstanding capital stock of DAGA, GSN and
Components, and (ii) the Note Pledge Agreement dated the Closing Date executed
by DAGA in favor of Agent pursuant to which DAGA has pledged to Agent, for the
benefit of itself and Lenders, the Nadel Note.
"Pro Forma Balance Sheet" shall have the meaning set forth in Section
5.5(a) hereof.
"Pro Forma Financial Statements" shall have the meaning set forth in
Section 5.5(b) hereof.
"Processor" shall mean any Person that manufactures or processes any of
Borrowers' Inventory.
"Processor Agreement" shall mean an agreement between Agent and a
Processor, in form and substance satisfactory to Agent, by which for locations
at which a Borrower places Inventory with such Processor, such Processor agrees
to waive or subordinate any Lien it may have with respect to such Inventory in
favor of Agent's Lien therein, to not offset any amounts owed by such Processor
to any Borrower against amounts owed to such Processor by such Borrower, and to
permit Agent to enter upon such premises and remove such Property or to use such
premises to store or dispose of such Property.
"Processor Conditions" shall mean, with respect to any Processor, each
of the following conditions: (i) such Processor shall have entered into a
Processor Agreement, (ii) such Processor shall have executed and delivered a UCC
financing statement in favor of the appropriate Borrower or Borrowers with
respect to the Inventory processed by such Processor, and (iii) Agent shall have
received assurances satisfactory to it that such Processor has not granted a
Lien on the Inventory processed by such Processor to any Person other than such
Borrower or Borrowers.
"Projections" shall have the meaning set forth in Section 5.5(b)
hereof.
"Properly Contested" shall mean, in the case of any Indebtedness of any
Borrower (including any Charges) that is not paid as and when due or payable by
reason of such Borrower's bona fide dispute concerning its liability to pay same
or concerning the amount thereof, that (i) such Indebtedness is being properly
contested in good faith by appropriate proceedings promptly instituted and
diligently conducted; (ii) Borrower has established appropriate reserves as
shall be required in conformity with GAAP; (iii) the
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non-payment of such Indebtedness will not have a Material Adverse Effect and
will not result in a forfeiture of any assets of any Borrower; (iv) no Lien is
imposed upon any of any Borrower's assets with respect to such Indebtedness
unless such Lien is at all times junior and subordinate in priority to the Liens
in favor of Agent (except only with respect to property taxes that have priority
as a matter of applicable state law) and enforcement of such Lien is stayed
during the period prior to the final resolution or disposition of such dispute;
(v) if the Indebtedness results from, or is determined by the entry, rendition
or issuance against a Borrower or any of its assets of a judgment, writ, order
or decree, execution on such judgment, writ, order or decree is stayed pending a
timely appeal or other judicial review; and (vi) if such contest is abandoned,
settled or determined upon a final resolution adversely to such Borrower, such
Borrower forthwith pays such Indebtedness and all penalties and interest in
connection therewith.
"Purchase Money Indebtedness" shall mean and include (i) Indebtedness
(other than the Obligations) of any or all Borrowers for the payment of all or
any part of the purchase price of any fixed assets, (ii) any Indebtedness (other
than the Obligations) of any or all Borrowers incurred at the time of or within
ten (10) days prior to or after the acquisition of any fixed assets for the
purpose of financing all or any part of the purchase price thereof (whether by
means of a loan agreement, capitalized lease or otherwise), and (iii) any
renewals, extensions or refinancings (but not any increases in the principal
amounts) thereof outstanding at the time.
"Purchase Money Lien" shall mean a Lien upon fixed assets which secures
Purchase Money Indebtedness, but only if such Lien shall at all times be
confined solely to the fixed assets acquired through the incurrence of the
Purchase Money Indebtedness secured by such Lien and such Lien constitutes a
purchase money security interest under the UCC.
"Purchasing Lender" shall have the meaning set forth in Section 16.3
hereof.
"Questionnaire" shall mean the Documentation Information Questionnaire
and the responses thereto provided by each Borrower and delivered to Agent.
"RCRA" shall mean the Resource Conservation and Recovery Act, 42 U.S.C.
ss. 6901 et seq., as same may be amended from time to time.
"Real Property" shall mean all of each Borrower's right, title and
interest in and to any real property, whether owned or leased by such Borrower,
including the owned and leased premises identified on Schedule 4.19 hereto.
"Receivables" shall mean and include, as to each Borrower, all of such
Borrower's accounts, contract rights, instruments (including those evidencing
Indebtedness owed to such Borrower by any of its Affiliates), documents, chattel
paper, general intangibles relating to accounts, drafts and acceptances, and all
other forms of obligations owing to Borrowers arising out of or in connection
with the sale or lease of Inventory or the rendition of services, all guarantees
and other security therefor, whether secured or unsecured, now existing or
hereafter created, and whether or not specifically sold or assigned to Agent
hereunder.
"Receivables Advance Rate" shall mean, collectively, the Accounts
Advance Rate and the Factoring Advance Rate.
"Releases" shall have the meaning set forth in Section 5.7(c)(i)
hereof.
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"Reportable Event" shall mean a reportable event described in Section
4043(b) of ERISA or the regulations promulgated thereunder.
"Required Lenders" shall mean Lenders holding at least fifty-one
percent (51%) of the Advances and, if no Advances are outstanding, shall mean
Lenders holding fifty-one percent (51%) of the Commitment Percentages; provided,
however, that if any Lender shall be a Defaulting Lender, then, for so long as
such breach continues, the term "Required Lenders" shall mean Lenders (excluding
each Defaulting Lender) holding at least fifty-one percent (51%) of the Advances
(excluding Advances held by each Defaulting Lender), and, if no Advances are
outstanding, at least fifty-one percent (51%) of the Commitment Percentages
(excluding the Commitment Percentages held by each Defaulting Lender).
"Reserve Percentage" shall mean the maximum effective percentage in
effect on any day as prescribed by the Board of Governors of the Federal Reserve
System (or any successor) for determining the reserve requirements (including
supplemental, marginal and emergency reserve requirements) with respect to
euroccurency funding.
"Revolving Advances" shall mean Advances made other than Letters of
Credit and the Term Loan under this Agreement to or for the benefit of any
Borrower.
"Revolving Credit Notes" shall mean, collectively, promissory notes
referred to in Section 2.1(a) hereof.
"Revolving Interest Rate" shall mean (a) prior to the satisfaction of
the Interest Rate Reduction Conditions, an interest rate per annum equal to (i)
the sum of the Alternate Base Rate plus one-half percent (0.50%) with respect to
Domestic Rate Loans, and (ii) the sum of the Eurodollar Rate plus two and
three-quarters percent (2.75%) with respect to Eurodollar Rate Loans, and (b)
subsequent to the satisfaction of the Interest Rate Reduction Conditions, an
interest rate per annum equal to (i) the sum of the Alternate Base Rate plus
one-quarter percent (0.25%) with respect to Domestic Rate Loans, and (ii) the
sum of the Eurodollar Rate plus two and one-half percent (2.50%) with respect to
Eurodollar Rate Loans.
"Scheduled Term Loan Balance" shall mean the remainder of (a)
$7,000,000, minus (b) the sum of (i) repayments of the outstanding principal
amount of the Term Loan pursuant to Sections 2.3 and 2.13(b), to the extent such
payments are actually made by Borrowers, plus (ii) the amount, up to $4,000,000,
of voluntary prepayments of the Term Loan made by Borrowers after Pietrafesa
completes an initial public offering of its common stock resulting in net
proceeds to Pietrafesa (after underwriters' discount) of at least $20,000,000 or
Agent shall have received evidence, satisfactory to Agent in its sole
discretion, that Pietrafesa has received an aggregate amount of at least
$20,000,000 in cash equity contributions by some other means after the Closing
Date.
"Settlement Date" shall mean the Closing Date and thereafter Wednesday
of each week unless such day is not a Business Day in which case it shall be the
next succeeding Business Day.
"Solvent" shall mean, with respect to any Person, such Person (i) owns
Property whose fair saleable value is greater than the amount required to pay
all of such Person's Indebtedness (including contingent), (ii) is able to pay
all of its Indebtedness as such Indebtedness matures, (iii) has capital
sufficient to carry on its business and transactions and all business and
transactions in which it is about to engage, and (iv) is not "insolvent" within
the meaning of Section 101(32) of the Bankruptcy Code.
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"SourceOne" shall mean SourceOne, L.L.C., a New York limited liability
company.
"Stock Acquisition Agreement" shall mean the Stock Purchase Agreement
(including all exhibits and schedules thereto) dated March 11, 1999 among
Pietrafesa, as buyer, GSN, and Lister, as seller.
"Stock Acquisition Documents" shall mean the Stock Acquisition
Agreement and all documents, instruments and other agreements executed in
connection therewith or pursuant thereto, including the Stock Acquisition Note.
"Stock Acquisition Note" shall mean that certain Promissory Note dated
on or about the Closing Date made by Pietrafesa payable to Lister in the
original principal amount of $800,000.
"Subordinated Indebtedness" shall mean, collectively, (a) the
obligations of Pietrafesa and DAGA to DAG under the Asset Acquisition Documents,
and (b) the obligations of Pietrafesa to Lister under the Stock Acquisition
Documents.
"Subordinated Notes" shall mean, collectively, Asset Acquisition Note
and the Stock Acquisition Note.
"Subordination Agreements" shall mean, collectively, the DAG
Subordination Agreement, the GSN Subordination Agreement, the UDC Subordination
Agreement, and the OCIDA Subordination Agreement.
"Subsidiary" shall mean a corporation or other entity of whose shares
of stock or other ownership interests having ordinary voting power (other than
stock or other ownership interests having such power only by reason of the
happening of a contingency) to elect a majority of the directors of such
corporation, or other Persons performing similar functions for such entity, are
owned, directly or indirectly, by such Person.
"Subsidiary Stock" shall mean all of the issued and outstanding shares
of stock of any Subsidiaries of Borrowers, including DAGA, GSN and Components.
"Term" shall have the meaning set forth in Section 13.1 hereof.
"Term Loan" shall mean the Advances made pursuant to Section 2.3
hereof.
"Term Loan Rate" shall mean (a) prior to the satisfaction of the
Interest Rate Reduction Conditions, an interest rate per annum equal to (i) the
sum of the Alternate Base Rate plus one and one-half percent (1.50%) with
respect to Domestic Rate Loans, and (ii) the sum of the Eurodollar Rate plus
three and one-half percent (3.50%) with respect to Eurodollar Rate Loans, and
(b) subsequent to the satisfaction of the Interest Rate Reduction Conditions, an
interest rate per annum equal to (i) the sum of the Alternate Base Rate plus one
and one-quarter percent (1.25%) with respect to Domestic Rate Loans, and (ii)
the sum of the Eurodollar Rate plus three and one-quarter percent (3.25%) with
respect to Eurodollar Rate Loans.
"Term Notes" shall mean, collectively, the promissory notes described
in Section 2.3 hereof.
"Termination Event" shall mean (i) a Reportable Event with respect to
any Plan or Multiemployer Plan; (ii) the withdrawal of any Borrower or any
member of the Controlled Group from a Plan or Multiemployer Plan during a plan
year in which such entity was a "substantial employer" as defined in
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Section 4001(a)(2) of ERISA; (iii) the providing of notice of intent to
terminate a Plan in a distress termination described in Section 4041(c) of
ERISA; (iv) the institution by the PBGC of proceedings to terminate a Plan or
Multiemployer Plan; (v) any event or condition (a) which might constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Plan or Multiemployer Plan, or (b) that may
result in termination of a Multiemployer Plan pursuant to Section 4041A of
ERISA; or (vi) the partial or complete withdrawal within the meaning of Sections
4203 and 4205 of ERISA, of any Borrower or any member of the Controlled Group
from a Multiemployer Plan.
"Today's Man" shall mean Today's Man, Inc. of Moorestown, New Jersey.
"Toxic Substance" shall mean and include any material present on the
Real Property or the Leasehold Interests which has been shown to have
significant adverse effect on human health or which is subject to regulation
under the Toxic Substances Control Act (TSCA), 15 U.S.C. ss. 2601 et seq.,
applicable state law, or any other applicable Federal or state laws now in force
or hereafter enacted relating to toxic substances. "Toxic Substance" includes
asbestos, polychlorinated biphenyls (PCBs) and lead-based paints.
"Trademark Security Agreement" shall mean each Trademark Security
Agreement to be executed by a Borrower in favor of Agent on or before the
Closing Date and by which such Borrower shall collaterally assign and grant a
Lien to Agent, for its benefit and for the ratable benefit of Lenders, as
security for the Obligations, in all of such Borrower's right, title and
interest in and to all of its trademarks.
"Transactions" shall have the meaning set forth in Section 5.5 hereof.
"UCC" shall mean the Uniform Commercial Code (or any successor statute)
as adopted and in force in the State of New York or, when the laws of any other
state govern the method or manner of the perfection or enforcement of any
security interest in any of the Collateral, the Uniform Commercial Code (or any
successor statute) of such state.
"UDC" shall mean the New York State Urban Development Corporation, a
corporate government agency of the State of New York constituting a political
subdivision and public benefit corporation.
"UDC Reserve" shall mean a reserve in the amount of $560,000.
"UDC Reserve Release Conditions" shall mean either of the following
conditions: (a) Agent shall have received a duly executed intercreditor
agreement among Agent, UDC and Pietrafesa on terms and conditions satisfactory
to Agent in its sole discretion, including (i) a subordination of UDC's interest
in the Liverpool Property to Agent's Lien therein securing Obligations in the
minimum principal amount of $2,100,000, (ii) no restrictions on Agent's right to
amend the Loan Documents, including the maximum amount of the Obligations and
the payment terms thereof, (iii) a prohibition on UDC's right to take any action
to enforce its interest in such assets for 180 days after an Event of Default,
and (iv) no right of UDC to cure any Default or Event of Default under this
Agreement and Borrowers shall have executed and delivered an amendment to the
Mortgage in form and substance satisfactory to Agent to increase the
indebtedness secured thereby to $3,000,000, delivered to Agent an endorsement to
the mortgagee title insurance policy insuring the Lien of the Mortgage as so
amended, which endorsement shall be in form and substance satisfactory to Agent
and shall give effect to the Mortgage amendment, and paid all applicable
documentary stamp, intangibles, recording, note, mortgage or other similar taxes
payable with respect to the Mortgage amendment and the premium for such title
insurance endorsement; or (b) Borrowers' payment in
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full of all Indebtedness of Borrowers to UDC, the release of all interests UDC
may have in Borrowers' assets, the termination of all UDC loan and security
documents, all as evidenced by duly executed documentation delivered to Agent
and satisfactory to Agent in its sole discretion, and Borrowers shall have
executed and delivered an amendment to the Mortgage in form and substance
satisfactory to Agent to increase the indebtedness secured thereby to
$3,000,000, delivered to Agent an endorsement to the mortgagee title insurance
policy insuring the Lien of the Mortgage as so amended, which endorsement shall
be in form and substance satisfactory to Agent and shall give effect to the
Mortgage amendment, and paid all applicable documentary stamp, intangibles,
recording, note, mortgage or other similar taxes payable with respect to the
Mortgage amendment and the premium for such title insurance endorsement.
"UDC Subordination Agreement" shall mean that certain Subordination,
Waiver and Consent Agreement among the UDC, Pietrafesa and Agent dated on or
about the Closing Date pursuant to which the UDC subordinates its Lien on the
Liverpool Property and certain Equipment of Pietrafesa to Agent's Lien on such
property.
"Undrawn Availability" at a particular date shall mean an amount equal
to (a) the lesser of (i) the Formula Amount or (ii) the Maximum Revolving
Advance Amount, minus (b) the sum of (i) the outstanding amount of Advances
(other than the Term Loan) plus (ii) all amounts due and owing to Borrowers'
trade creditors which are more than sixty (60) days past due, plus (iii) fees
and expenses for which Borrowers are liable but which have not been paid or
charged to Borrowers' Account.
"Unfunded Capital Expenditures" shall mean, for any period, the Capital
Expenditures of a Person not financed by a means other than an Advance
hereunder.
"Upstream Payment" shall mean a payment or distribution of cash or
other property by a Subsidiary of a Borrower to such Borrower, whether in
repayment of Indebtedness owed by such Subsidiary to such Borrower, to pay
dividends on account of such Borrower's ownership of Equity Interests or
otherwise.
"Value" shall mean, with reference to the value of Inventory, value
determined on the basis of the lower of cost or market of such Inventory, with
the cost thereof calculated on a first-in, first-out basis, determined in
accordance with GAAP.
"Week" shall mean the time period commencing with the opening of
business on a Wednesday and ending on the end of business the following Tuesday.
1.3 UCC Terms. All terms used herein and defined in the UCC as adopted
in the State of New York shall have the meaning given therein unless otherwise
defined herein.
1.4 Certain Matters of Construction. The terms "herein," "hereof," and
"hereunder" and other words of similar import refer to this Agreement as a whole
and not to any particular section, paragraph or subdivision. Any pronoun used
shall be deemed to cover all genders. Wherever appropriate in the context, terms
used herein in the singular also include the plural and vice versa. All
references to statutes and related regulations shall include any amendments of
same and any successor statutes and regulations. All references herein to the
time of day shall mean the time in East Brunswick, New Jersey. Unless otherwise
provided, all references to any instruments or agreements to which Agent is a
party, including references to any of the Other Documents, shall include any and
all modifications or amendments thereto and any and all extensions or renewals
thereof. Whenever the words "including" or "include" shall be used, such words
shall be
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understood to mean "including, without limitation" or "include, without
limitation." A Default or Event of Default shall be deemed to exist at all times
during the period commencing on the date that such Default or Event of Default
occurs to the date on which such Default or Event of Default is waived in
writing pursuant to this Agreement or, in the case of a Default, is cured with
any period of cure expressly provided for in this Agreement; and an Event of
Default shall "continue" or be "continuing" until such Event of Default has been
waived in writing by Agent. Any Lien referred to in this Agreement or any of the
Other Documents as having been created in favor of Agent, any agreement entered
into by Agent pursuant to this Agreement or any of the Other Documents, any
payment made by or to or funds received by Agent pursuant to or as contemplated
by this Agreement or any of the Other Documents, or any act taken or admitted to
be taken by Agent, shall, unless otherwise expressly provided, be created,
entered into, made or received, or taken or omitted, for the benefit or account
of Agent and Lenders.
SECTION 2. ADVANCES, PAYMENTS
2.1 Revolving Advances.
(a) Subject to the terms and conditions set forth in this
Agreement, each Lender, severally and not jointly, will make Revolving Advances
to Borrowers in aggregate amounts outstanding at any time not to exceed such
Lender's Commitment Percentage of the lesser of (x) the Maximum Revolving
Advance Amount less the aggregate amount of outstanding Letters of Credit or (y)
an amount equal to the sum of:
(i) up to 85%, subject to the provisions of Section 2.1(b) hereof
("Accounts Advance Rate"), of the Net Amount of Eligible Receivables,
plus
(ii) up to 85%, subject to the provisions of Section 2.1(b) hereof
("Factoring Advance Rate"), of the Amount Due From Factor on such date
that is attributable to Factored Accounts that are not Client Risk
Accounts, plus
(iii) up to the lesser of (A) the sum of (1) 55%, subject to the
provisions of Section 2.1(b) hereof (the "Raw Materials Advance Rate"),
of the Value of Eligible Inventory consisting of raw materials, plus (2)
the lesser of (a) 25%, subject to the provisions of Section 2.1(b)
hereof (the "WIP Advance Rate"), of the Value of Eligible Inventory
consisting of work in process and (b) $1,000,000, plus (3) 65%, subject
to the provisions of Section 2.1(b) hereof (the "Finished Goods Advance
Rate"; together with the Raw Materials Advance Rate and the WIP Advance
Rate, collectively the "Inventory Advance Rate"), of the Value of the
Eligible Inventory consisting of finished goods or (B) $8,000,000, minus
(iv) the aggregate amount of outstanding Letters of Credit, other
than any Letters of Credit for which Agent holds cash collateral as
provided in Section 2.10(e), minus
(v) prior to satisfaction of the UDC Reserve Release Conditions,
the UDC Reserve, minus
(vi) such other reserves as Agent may reasonably deem proper and
necessary from time to time.
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The amount derived from the remainder of (A) the sum of Sections
2.1(a)(y)(i), (ii) and (iii) minus (B) Section 2.1(a)(y)(iv), (v) and (vi) at
any time and from time to time shall be referred to as the "Formula Amount." If
any event occurs or any condition exists that Agent determines is likely to have
a Material Adverse Effect, or if a Default or Event of Default exists, Agent
shall have the right (exercisable at such time or times as Agent deems
appropriate) to require that separate calculations of the Individual Formula
Amount be made for each Borrower, as well as the right to limit the use of
proceeds of Advances to or for the benefit of each Borrower to an amount that
does not exceed such Borrower's Individual Formula Amount. The Revolving
Advances shall be evidenced by secured promissory notes ("Revolving Credit
Notes") in favor of each Lender in substantially in the form attached hereto as
Exhibit A.
(b) Discretionary Rights. Agent may, in its discretion, from
time to time, upon not less than fifteen (15) days prior notice to Borrower, (i)
reduce the Receivables Advance Rate with respect to Eligible Receivables and
Amounts Due from Factor to the extent that Agent determines in good faith that:
the dilution with respect to the Receivables for any period (based on the ratio
of the aggregate amount of reductions in Receivables other than as a result of
payments in cash to the aggregate amount of total sales) has increased in any
material respect or may be reasonably anticipated to increase in any material
respect above historical levels, or the general creditworthiness of account
debtors has declined or (ii) reduce the Applicable Inventory Advance Rate with
respect to Eligible Inventory to the extent that Lender determines that: (A) the
number of days of the turnover of the Inventory for any period has changed in
any material respect, or (B) the liquidation value of the Eligible Inventory, or
any category thereof, has decreased in any material respect, or (C) the nature
and quality of the Inventory has deteriorated in any material respect. In
determining whether to reduce the Advance Rates, Agent may consider events,
conditions, contingencies or risks which are also considered in determining
Eligible Receivables, Eligible Inventory or in establishing availability
reserves. Borrower consents to any such decreases and acknowledges that
decreasing the Advance Rates or increasing the reserves may limit or restrict
Revolving Advances requested by Borrower.
(c) Out-of-Formula Loans. If the unpaid balance of Revolving
Advances outstanding at any time should exceed the Formula Amount at such time
(an "Out-of-Formula Condition"), such Revolving Advances shall nevertheless
constitute Obligations that are secured by the Collateral and entitled to all of
the benefits of the Loan Documents. If Agent or Lenders are willing in their
sole and absolute discretion to make Out-of-Formula Loans, such Out-of-Formula
Loans shall be payable on demand and shall bear interest at the Default Rate;
provided that, if Lenders do make Out-of-Formula Loans, neither Agent nor
Lenders shall be deemed thereby to have changed the limits of Section 2.1(a) or
be obligated to honor requests for Revolving Advances when an Out-of-Formula
Condition exists or would result therefrom.
(d) Procedure for Revolving Advances Borrowing. A request for
a Revolving Advance shall be made, or shall be deemed to be made, in the
following manner: (i) Borrowing Agent on behalf of any Borrower may notify Agent
prior to 1:00 p.m. (East Brunswick, New Jersey time) on a Business Day of a
Borrower's request to incur, on that day, a Revolving Advance hereunder; (ii)
unless payment is otherwise timely made by Borrowers, the coming due of any
amount required to be paid as interest hereunder, or as fees or other charges
under this Agreement or any other agreement with Agent or Lenders, or with
respect to any other Obligation, become due, shall be deemed a request for a
Revolving Advance as of the date such payment is due, in the amount required to
pay in full such interest, fee, charge or Obligation under this Agreement or any
other agreement with Agent or Lenders, and such request shall be irrevocable;
and (iii) unless payment is otherwise timely made by Borrowers, the presentation
for payment by PNC of any check or other item of payment drawn on a Controlled
Disbursement Account shall be deemed an irrevocable request (without any
requirement for the submission of a notice by any Borrower) for a Revolving
Advance
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on the date of such presentation and in an amount equal to the aggregate amount
of the items presented for payment, and the proceeds of such Revolving Advance
may be disbursed by way of direct payment to the Controlled Disbursement Account
that such items were drawn upon. Agent shall have no obligation to Borrowers to
honor any deemed request for a Revolving Advance, but may do so in its
discretion and without regard to the existence of, and without being deemed to
have waived, any Default or Event of Default and without regard to the existence
or creation of an Out-of-Formula Condition.
2.2 Disbursement of Advance Proceeds. All Advances shall be disbursed
from whichever office or other place Agent may designate from time to time and,
together with any and all other Obligations of Borrowers to Agent or Lenders,
shall be charged to Borrowers' Account on Agent's books. During the Term,
Borrowers may use the Revolving Advances by borrowing, prepaying and
reborrowing, all in accordance with the terms and conditions hereof. The
proceeds of each Revolving Advance requested by Borrowers or deemed to have been
requested by Borrowers under Section 2.1(d) hereof shall, with respect to
requested Revolving Advances to the extent Lenders make such Revolving Advances,
be made available to the Borrowers on the day so requested by way of credit to
such operating account at PNC, or such other bank as the Borrowing Agent may
designate following notification to Agent, in immediately available federal
funds or other immediately available funds or, with respect to Revolving
Advances deemed to have been requested by any Borrower, be disbursed to Agent to
be applied to the outstanding Obligations giving rise to such deemed request.
2.3 Term Loan. Subject to the terms and conditions of this Agreement,
each Lender, severally and not jointly, will fund its portion of the Term Loan
by making Advances to Borrowers in the sum equal to such Lender's Commitment
Percentage of $7,000,000. The Advances comprising the Term Loan shall be
advanced on the Closing Date and shall be, with respect to principal, payable as
follows: thirty-three (33) monthly installments of $116,667 each, with such
payments due on the first day of each month after the Closing Date, and a final
payment of all unpaid principal thereof on April 15, 2002, subject to
acceleration upon the occurrence of an Event of Default under this Agreement or
termination of this Agreement. The Term Loan shall be evidenced by secured
promissory notes (collectively, "Term Notes") in substantially the form attached
hereto as Exhibit A-1. Borrowers shall not be permitted to reborrow any amount
repaid with respect to the Term Loan.
2.4 Maximum Advances. The aggregate balance of Revolving Advances
outstanding at any time shall not exceed the lesser of (a) Maximum Revolving
Advance Amount or (b) the Formula Amount.
2.5 Repayment of Obligations.
(a) The Advances and other Obligations shall be due and payable in
full on the last day of the Term subject to earlier prepayment as herein
provided. The Term Loan shall be due and payable as provided in Section 2.3
hereof and in the Term Notes.
(b) Each Borrower recognizes that the amounts evidenced by checks,
notes, drafts or any other items of payment relating to and/or proceeds of
Collateral may not be collectible by Agent on the date received. In
consideration of Agent's agreement to conditionally credit Borrowers' Account as
of the Business Day on which Agent receives those items of payment, each
Borrower agrees that, in computing the charges under this Agreement, all items
of payment shall be deemed applied by Agent on account of the Obligations one
(1) Business Day after the Business Day Agent receives such payments via wire
transfer or electronic depository check. Agent is not, however, required to
credit Borrowers' Account for the amount
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of any item of payment that is unsatisfactory to Agent, and Agent may charge
Borrowers' Account for the amount of any item of payment which is returned to
Agent unpaid.
(c) All payments of principal, interest and other amounts payable
hereunder, or under any of the related agreements shall be made to Agent at the
Payment Office not later than 1:00 p.m. (East Brunswick, New Jersey time) on the
due date therefor in lawful money of the United States of America in federal
funds or other funds immediately available to Agent. Agent and Lenders shall
have the right to effectuate payment on any and all Obligations due and owing
hereunder by charging Borrowers' Account or by making Advances as provided in
Sections 2.1 and 2.16 hereof.
(d) Borrowers shall pay principal, interest, and all other amounts
payable hereunder, or under any related agreement, without any deduction
whatsoever, including any deduction for any setoff or counterclaim.
2.6 Repayment of Excess Advances. The aggregate balance of Advances
outstanding at any time in excess of the maximum amount of Advances permitted
hereunder shall be immediately due and payable without the necessity of any
demand, at the Payment Office, whether or not a Default or Event of Default has
occurred.
2.7 Statement of Account. Agent shall maintain, in accordance with its
customary procedures, a loan account ("Borrowers' Account") in the name of
Borrowers in which shall be recorded the date and amount of each Advance made by
Agent and the date and amount of each payment in respect thereof; provided,
however, the failure by Agent or Lenders to record the date and amount of any
Advance shall not adversely affect Agent or any Lender. Each month, Agent shall
send to the Borrowing Agent a statement showing the accounting for the Advances
made, payments made or credited in respect thereof, and other transactions among
Agent, Lenders and Borrowers during such month. The monthly statements shall be
deemed correct and binding upon Borrowers in the absence of manifest error and
shall constitute an account stated between Lenders and Borrowers unless Agent
receives a written statement of Borrowers' specific exceptions thereto within
thirty (30) days after such statement is received by the Borrowing Agent. The
records of Agent with respect to the Borrowers' Account shall be conclusive
evidence absent manifest error of the amounts of Advances and other charges
thereto and of payments applicable thereto.
2.8 Letters of Credit. Subject to the terms and conditions hereof,
Agent shall issue or cause the issuance of Letters of Credit ("Letters of
Credit") on behalf of any Borrower; provided, however, that Agent will not be
required to issue or cause to be issued any Letters of Credit to the extent that
the face amount of such Letters of Credit would then cause the sum of (i) the
outstanding Revolving Advances plus (ii) outstanding Letters of Credit to exceed
the lesser of (x) the Maximum Revolving Advance Amount or (y) the Formula
Amount. The maximum amount of outstanding Letters of Credit shall not exceed
$1,000,000 in the aggregate at any time. All disbursements or payments related
to Letters of Credit shall be deemed to be Domestic Rate Loans consisting of
Revolving Advances and shall bear interest at the Revolving Interest Rate for
Domestic Rate Loans; Letters of Credit that have not been drawn upon shall not
bear interest.
2.9 Issuance of Letters of Credit.
(a) The Borrowing Agent, on behalf of Borrowers, may request Agent
to issue or cause the issuance of a Letter of Credit by delivering to Agent at
the Payment Office, Agent's form of Letter of Credit Application (the "Letter of
Credit Application") completed to the satisfaction of Agent; and, such
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other certificates, documents and other papers and information as Agent may
reasonably request. The Borrowing Agent, on behalf of Borrowers, also has the
right to give instructions and make agreements with respect to any application,
any applicable letter of credit and security agreement, any applicable letter of
credit reimbursement agreement and/or any other applicable agreement, any letter
of credit and the disposition of documents, disposition of any unutilized funds,
and to agree with Agent upon any amendment, extension or renewal of any Letter
of Credit.
(b) Each Letter of Credit shall, among other things, (i) provide
for the payment of sight drafts or acceptances of usance drafts when presented
for honor thereunder in accordance with the terms thereof and when accompanied
by the documents described therein and (ii) have an expiry date not later than
six (6) months after such Letter of Credit's date of issuance and in no event
later than the last day of the Term. Each Letter of Credit shall be subject to
the Uniform Customs and Practice for Documentary Credits (1993 Revision),
International Chamber of Commerce Publication No. 500, and any amendments or
revision thereof adhered to by the Issuer and, to the extent not inconsistent
therewith, the laws of the State of New Jersey.
(c) Agent shall use its reasonable efforts to notify Lenders of
the request by Borrowers for a Letter of Credit hereunder.
2.10 Requirements For Issuance of Letters of Credit.
(a) In connection with the issuance of any Letter of Credit,
Borrowers, jointly and severally, shall indemnify, save and hold Agent, each
Lender and each Issuer harmless from any loss, cost, expense or liability,
including payments made by Agent, any Lender or any Issuer and expenses and
reasonable attorneys' fees incurred by Agent, any Lender or Issuer arising out
of, or in connection with, any Letter of Credit to be issued or created for any
Borrower. Borrowers shall be bound by Agent's or any Issuer's regulations and
good faith interpretations of any Letter of Credit issued or created for
Borrowers' Account, although this interpretation may be different from its own;
and, neither Agent, nor any Lender, nor any Issuer nor any of their
correspondents shall be liable for any error, negligence, or mistakes, whether
of omission or commission, in following the Borrowing Agent's or any Borrower's
instructions or those contained in any Letter of Credit or of any modifications,
amendments or supplements thereto or in issuing or paying any Letter of Credit,
except for Agent's, any Lender's, any Issuer's or such correspondents' willful
misconduct or gross negligence.
(b) The Borrowing Agent shall authorize and direct any Issuer to
name the applicable Borrower as the "Applicant" or "Account Party" of each
Letter of Credit. If Agent is not the Issuer of any Letter of Credit, the
Borrowing Agent shall authorize and direct the Issuer to deliver to Agent all
instruments, documents, and other writings and property received by the Issuer
pursuant to the Letter of Credit and to accept and rely upon Agent's
instructions and agreements with respect to all matters arising in connection
with the Letter of Credit, the application therefor or any acceptance therefor.
(c) In connection with all Letters of Credit issued or caused to
be issued by Agent under this Agreement, each Borrower hereby appoints Agent, or
its designee, as its attorney, with full power and authority (i) to sign and/or
endorse such Borrower's name upon any warehouse or other receipts, letter of
credit applications and acceptances; (ii) to sign such Borrower's name on bills
of lading; (iii) to clear Inventory through the United States of America Customs
Department ("Customs") in the name of such Borrower or Agent or Agent's
designee, and to sign and deliver to Customs officials powers of attorney in
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the name of such Borrower for such purpose; and (iv) to complete in such
Borrower's name or Agent's, or in the name of Agent's designee, any order, sale
or transaction, obtain the necessary documents in connection therewith, and
collect the proceeds thereof. Neither Agent nor its attorneys will be liable for
any acts or omissions nor for any error of judgment or mistakes of fact or law,
except for Agent's or its attorney's willful misconduct or gross negligence.
This power, being coupled with an interest, is irrevocable as long as any
Letters of Credit remain outstanding.
(d) Each Lender shall to the extent of the percentage amount equal
to the product of such Lender's Commitment Percentage times the aggregate amount
of all unreimbursed reimbursement obligations arising from disbursements made or
obligations incurred with respect to the Letters of Credit be deemed to have
irrevocably purchased an undivided participation in each such unreimbursed
reimbursement obligation. In the event that at the time a disbursement is made
the unpaid balance of Revolving Advances exceeds or would exceed, with the
making of such disbursement, the lesser of the Maximum Revolving Advance Amount
or the Formula Amount, and such disbursement is not reimbursed by Borrowers
within two (2) Business Days, Agent shall promptly notify each Lender and upon
Agent's demand each Lender shall pay to Agent such Lender's proportionate share
of such unreimbursed disbursement together with such Lender's proportionate
share of Agent's unreimbursed costs and expenses relating to such unreimbursed
disbursement. Upon receipt by Agent of a repayment from any Borrower of any
amount disbursed by Agent for which Agent had already been reimbursed by
Lenders, Agent shall deliver to each Lender that Lender's pro rata share of such
repayment. Each Lender's participation commitment shall continue until the last
to occur of any of the following events: (A) Agent ceases to be obligated to
issue or cause to be issued Letters of Credit hereunder; (B) no Letter of Credit
issued hereunder remains outstanding and uncanceled or (C) all Persons (other
than the applicable Borrower) have been fully reimbursed for all payments made
under or relating to Letters of Credit.
(e) On demand, Borrowers will cause cash to be deposited and
maintained in an account with Agent, as cash collateral, in an amount equal to
one hundred and five percent (105%) of the outstanding Letters of Credit, and
each Borrower hereby irrevocably authorizes Agent, in its discretion, on such
Borrower's behalf and in such Borrower's name, to open such an account and to
make and maintain deposits therein, or in an account opened by such Borrower, in
the amounts required to be made by such Borrower, out of the proceeds of
Receivables or other Collateral or out of any other funds of such Borrower
coming into any Lender's possession at any time. Agent will invest such cash
collateral (less applicable reserves) in such short-term money-market items as
to which Agent and the Borrowing Agent mutually agree and the net return on such
investments shall be credited to such account and constitute additional cash
collateral. No Borrower may withdraw amounts credited to any such account except
upon payment and performance in full of all Obligations and termination of this
Agreement.
2.11 Additional Payments. Any sums expended by Agent or any Lender due
to any Borrower's failure to perform or comply with its obligations under this
Agreement or any Other Document, including any Borrower's obligations under
Sections 4.2, 4.4, 4.12, 4.13, 4.14 and 6.1 hereof, may be charged to Borrowers'
Account as a Revolving Advance and added to the Obligations.
2.12 Manner of Borrowing and Payment.
(a) Each borrowing of Revolving Advances shall be advanced
according to the Commitment Percentages of Lenders. The Term Loan shall be
advanced according to the Commitment Percentages of Lenders.
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(b) Each payment (including each prepayment) by Borrowers on
account of the principal of and interest on the Revolving Advances, shall be
applied to the Revolving Advances pro rata according to the applicable
Commitment Percentages of Lenders. Each payment (including each prepayment) by
any Borrower on account of the principal of and interest on the Term Note, shall
be made from or to, or applied to that portion of the Term Loan evidenced by the
Term Note pro rata according to the Commitment Percentages of Lenders. Except as
expressly provided herein, all payments (including prepayments) to be made by
Borrowers on account of principal, interest and fees shall be made without set
off or counterclaim and shall be made to Agent on behalf of the Lenders to the
Payment Office, in each case on or prior to 1:00 p.m. (East Brunswick, New
Jersey time), in Dollars and in immediately available funds.
(c) (i) Notwithstanding anything to the contrary contained in
Sections 2.12(a) and (b) hereof, commencing with the first Business Day
following the Closing Date, each borrowing of Revolving Advances shall be
advanced by Agent and each payment by any Borrower on account of Revolving
Advances shall be applied first to those Revolving Advances advanced by Agent.
On or before 1:00 p.m. (East Brunswick, New Jersey time), on each Settlement
Date commencing with the first Settlement Date following the Closing Date, Agent
and Lenders shall make certain payments as follows: (i) if the aggregate amount
of new Revolving Advances made by Agent during the preceding Week (if any)
exceeds the aggregate amount of repayments applied to outstanding Revolving
Advances during such preceding Week, then each Lender shall provide Agent with
funds in an amount equal to its applicable Commitment Percentage of the
difference between (w) such Revolving Advances and (x) such repayments and (ii)
if the aggregate amount of repayments applied to outstanding Revolving Advances
during such Week exceeds the aggregate amount of new Revolving Advances made
during such Week, then Agent shall provide each Lender with funds in an amount
equal to such Lender's applicable Commitment Percentage of the difference
between (y) such repayments and (z) such Revolving Advances.
(ii) Agent and each Lender shall be entitled to earn interest
at the applicable Contract Rate on outstanding Advances which it has funded.
(iii) Promptly following each Settlement Date, Agent shall
submit to each Lender a certificate with respect to payments received and
Advances made during the Week immediately preceding such Settlement Date. Such
certificate of Agent shall be conclusive in the absence of manifest error.
(d) If any Lender or Participant (a "benefitted Lender") shall at
any time receive any payment of all or part of its Advances, or interest
thereon, or receive any Collateral in respect thereof (whether voluntarily or
involuntarily or by set-off) in a greater proportion than any such payment to
and Collateral received by any other Lender, if any, in respect of such other
Lender's Advances, or interest thereon, and such greater proportionate payment
or receipt of Collateral is not expressly permitted hereunder, such benefitted
Lender shall purchase for cash from the other Lenders a participation in such
portion of each such other Lender's Advances, or shall provide such other Lender
with the benefits of any such Collateral, or the proceeds thereof, as shall be
necessary to cause such benefitted Lender to share the excess payment or
benefits of such Collateral or proceeds ratably with each of Lenders; provided,
however, that if all or any portion of such excess payment or benefits is
thereafter recovered from such benefitted Lender, such purchase shall be
rescinded, and the purchase price and benefits returned, to the extent of such
recovery, but without interest. Each Lender so purchasing a portion of another
Lender's Advances may exercise all rights of payment (including rights of
set-off) with respect to such portion as fully as if such Lender were the direct
holder of such portion.
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(e) Unless Agent shall have been notified by telephone, confirmed
in writing, by any Lender that such Lender will not make the amount which would
constitute its applicable Commitment Percentage of the Advances available to
Agent, Agent may (but shall not be obligated to) assume that such Lender shall
make such amount available to Agent on the next Settlement Date and, in reliance
upon such assumption, make available to Borrowers a corresponding amount. Agent
will promptly notify the Borrowing Agent of its receipt of any such notice from
a Lender. If such amount is made available to Agent on a date after such next
Settlement Date, such Lender shall pay to Agent on demand an amount equal to the
product of (i) the daily average Federal Funds Rate (computed on the basis of a
year of 360 days) during such period as quoted by Agent, times (ii) such amount,
times (iii) the number of days from and including such Settlement Date to the
date on which such amount becomes immediately available to Agent. A certificate
of Agent submitted to any Lender with respect to any amounts owing under this
paragraph (e) shall be conclusive, in the absence of manifest error. If such
amount is not in fact made available to Agent by such Lender within three (3)
Business Days after such Settlement Date, Agent shall be entitled to recover
such an amount, with interest thereon at the rate per annum then applicable to
such Revolving Advances hereunder, on demand from Borrowers; provided, however,
that Agent's right to such recovery shall not prejudice or otherwise adversely
affect Borrowers' rights (if any) against such Lender.
2.13 Mandatory Prepayments.
(a) When any Borrower sells or otherwise disposes of any
Collateral other than Inventory in the ordinary course of business (including
close-out sales of finished goods Inventory in the ordinary course of business)
and Equipment to the extent permitted by Section 4.3 hereof, Borrowers shall
repay the Advances in an amount equal to the net proceeds of such sale (i.e.,
gross proceeds less the reasonable costs of such sales or other dispositions),
such repayments to be made promptly but in no event more than one (1) Business
Day following receipt of such net proceeds, and until the date of payment, such
proceeds shall be held in trust for Agent. The foregoing shall not be deemed to
be implied consent to any such sale otherwise prohibited by the terms and
conditions hereof. Such repayments shall be applied first, to the Obligations in
such order as Agent may determine, subject to Borrowers' ability to reborrow
Revolving Advances in accordance with the terms hereof.
(b) Borrowers shall prepay the outstanding amount of the Advances
in an amount equal to fifty percent (50%) of Borrowers' Excess Cash Flow for
each Fiscal Year commencing on or after January 1, 1999, payable upon delivery
of the financial statements to Agent referred to in and required by Section 9.7
for such Fiscal Year but in any event not later than ninety (90) days after the
end of each such Fiscal Year, which amount shall be applied first, to the
outstanding principal installments of the Term Loan in the inverse order of the
maturities thereof and, second, to the remaining Advances in such order as Agent
may determine subject to Borrowers' ability to reborrow Revolving Advances in
accordance with the terms hereof. In the event that the financial statement is
not so delivered, then a calculation based upon estimated amounts shall be made
by Agent upon which calculation Borrowers shall make the prepayment required by
this Section 2.13(b), subject to adjustment when the financial statement is
delivered to Agent as required hereby. The calculation made by Agent shall not
be deemed a waiver of any rights Agent or Lenders may have as a result of the
failure by Borrowers to deliver such financial statement.
2.14 Use of Proceeds. Borrowers shall apply the proceeds of Advances to
(i) repay existing indebtedness owed to National Bank of Canada and to Fleet
Bank, (ii) pay fees and expenses relating to this
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transaction and the Acquisitions, (iii) provide for Borrowers' working capital
needs, (iv) finance the transactions contemplated by the Initial Acquisition
Documents, and (v) finance Permitted Acquisitions.
2.15 Defaulting Lender.
(a) Notwithstanding anything to the contrary contained herein, in
the event any Lender (x) has refused (which refusal constitutes a breach by such
Lender of its obligations under this Agreement) to make available its portion of
any Advance or (y) notifies either Agent or the Borrowing Agent that it does not
intend to make available its portion of any Advance (if the actual refusal would
constitute a breach by such Lender of its obligations under this Agreement)
(each, a "Lender Default"), all rights and obligations hereunder of such Lender
(a "Defaulting Lender") as to which a Lender Default is in effect and of the
other parties hereto shall be modified to the extent of the express provisions
of this Section 2.15 while such Lender Default remains in effect.
(b) Advances shall be incurred pro rata from Lenders (the
"Non-Defaulting Lenders") which are not Defaulting Lenders based on their
respective Commitment Percentages, and no Commitment Percentage of any Lender or
any pro rata share of any Advances required to be advanced by any Lender shall
be increased as a result of such Lender Default. Amounts received in respect of
principal of any type of Advances shall be applied to reduce the applicable
Advances of each Lender pro rata based on the aggregate of the outstanding
Advances of that type of all Lenders at the time of such application; provided,
that, such amount shall not be applied to any Advances of a Defaulting Lender at
any time when, and to the extent that, the aggregate amount of Advances of any
Non-Defaulting Lender exceeds such Non-Defaulting Lender's Commitment Percentage
of all Advances then outstanding.
(c) A Defaulting Lender shall not be entitled to give instructions
to Agent or to approve, disapprove, consent to or vote on any matters relating
to this Agreement and the Other Documents. All amendments, waivers and other
modifications of this Agreement and the Other Documents may be made without
regard to a Defaulting Lender and, for purposes of the definition of "Required
Lenders," a Defaulting Lender shall be deemed not to be a Lender and not to have
Advances outstanding.
(d) Other than as expressly set forth in this Section 2.15, the
rights and obligations of a Defaulting Lender (including the obligation to
indemnify Agent) and the other parties hereto shall remain unchanged. Nothing in
this Section 2.15 shall be deemed to release any Defaulting Lender from its
obligations under this Agreement and the Other Documents, shall alter such
obligations, shall operate as a waiver of any default by such Defaulting Lender
hereunder, or shall prejudice any rights which Borrowers, Agent or any Lender
may have against any Defaulting Lender as a result of any default by such
Defaulting Lender hereunder.
(e) In the event a Defaulting Lender retroactively cures to the
satisfaction of Agent the breach which caused a Lender to become a Defaulting
Lender, such Defaulting Lender shall no longer be a Defaulting Lender and shall
be treated as a Lender under this Agreement.
2.16 Provisions Applicable to Eurodollar Rate Loans.
(a) Notwithstanding the provisions of Section 2.1 above, in the
event a Borrower desires to obtain a Eurodollar Rate Loan, the Borrowing Agent
shall give Agent at least two (2) Business Days prior written notice, specifying
(i) the date of the proposed borrowing (which shall be a Business Day), (ii) the
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type of borrowing and the amount on the date of such Advance to be borrowed,
which amount shall be an integral multiple of $1,000,000, and (iii) the duration
of the first Interest Period therefor. Interest Periods for Eurodollar Rate
Loans shall be for one, two or three months; provided, if an Interest Period
would end on a day that is not a Business Day, it shall end on the next
succeeding Business Day unless such day falls in the next succeeding calendar
month in which case the Interest Period shall end on the next preceding Business
Day. No Eurodollar Rate Loan shall be made available to Borrowers during the
continuance of a Default or an Event of Default.
(b) Each Interest Period of a Eurodollar Rate Loan shall commence
on the date such Eurodollar Rate Loan is made and shall end on such date as the
Borrowing Agent may elect as set forth in (a)(iii) above provided that the exact
length of each Interest Period shall be determined in accordance with the
practice of the interbank market for offshore Dollar deposits and no Interest
Period shall end after the last day of the Term.
The Borrowing Agent shall elect the initial Interest Period applicable
to a Eurodollar Rate Loan by its notice of borrowing given to Agent pursuant to
Section 2.16(a) or by its notice of conversion given to Agent pursuant to
Section 2.16(c), as the case may be. The Borrowing Agent shall elect the
duration of each succeeding Interest Period by giving irrevocable written notice
to Agent of such duration not less than three (3) Business Days prior to the
last day of the then current Interest Period applicable to such Eurodollar Rate
Loan. If Agent does not receive timely notice of the Interest Period elected by
the Borrowing Agent, Borrowers shall be deemed to have elected to convert to a
Domestic Rate Loan subject to Section 2.16(c) herein below.
(c) Provided that no Event of Default shall have occurred and be
continuing, the Borrowing Agent may, on the last Business Day of the then
current Interest Period applicable to any outstanding Eurodollar Rate Loan, or
on any Business Day with respect to Domestic Rate Loans, convert any such loan
into a loan of another type in the same aggregate principal amount provided that
any conversion of a Eurodollar Rate Loan shall be made only on the last Business
Day of the then current Interest Period applicable to such Eurodollar Rate Loan.
If the Borrowing Agent desires to convert a loan, the Borrowing Agent shall give
Agent not less than three (3) Business Days' prior written notice to convert
from a Domestic Rate Loan to a Eurodollar Rate Loan or one (1) Business Day's
prior written notice to convert from a Eurodollar Rate Loan to a Domestic Rate
Loan, specifying the date of such conversion, the loans to be converted and if
the conversion is from a Domestic Rate Loan to any other type of loan, the
duration of the first Interest Period therefor. After giving effect to each such
conversion, there shall not be outstanding more than five (5) Eurodollar Rate
Loans, in the aggregate.
(d) Borrowers shall jointly and severally indemnify Agent and
Lenders and hold Agent and Lenders harmless from and against any and all losses
or expenses that Agent and Lenders may sustain or incur as a consequence of any
prepayment, conversion of or any default by Borrowers in the payment of the
principal of or interest on any Eurodollar Rate Loan or failure by Borrowers to
complete a borrowing of, a prepayment of or conversion of or to a Eurodollar
Rate Loan after notice thereof has been given, including any interest payable by
Agent or Lenders to lenders of funds obtained by it in order to make or maintain
its Eurodollar Rate Loans hereunder. A certificate setting forth any additional
amounts payable pursuant to the foregoing sentence submitted by Agent or any
Lender to the Borrowing Agent shall be conclusive absent manifest error.
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(e) Notwithstanding any other provision hereof, if any applicable
law, treaty, regulation or directive, or any change therein or in the
interpretation or application thereof, shall make it unlawful for any Lender
(for purposes of this subsection (e), the term "Lender" shall include any Lender
and the office or branch where any Lender or any corporation or bank controlling
such Lender makes or maintains any Eurodollar Rate Loans to make or maintain its
Eurodollar Rate Loans, the obligation of Lenders to make Eurodollar Rate Loans
hereunder shall forthwith be canceled and Borrowers shall, if any affected
Eurodollar Rate Loans are then outstanding, promptly upon request from Agent,
either pay all such affected Eurodollar Rate Loans or convert such affected
Eurodollar Rate Loans into loans of another type. If any such payment or
conversion of any Eurodollar Rate Loan is made on a day that is not the last day
of the Interest Period applicable to such Eurodollar Rate Loan, Borrowers shall
pay Agent, upon Agent's request, such amount or amounts as may be necessary to
compensate Lenders for any loss or expense sustained or incurred by Lenders in
respect of such Eurodollar Rate Loan as a result of such payment or conversion,
including any interest or other amounts payable by Lenders to lenders of funds
obtained by Lenders in order to make or maintain such Eurodollar Rate Loan. A
certificate setting forth any additional amounts payable pursuant to the
foregoing sentence submitted by Lenders to Borrowing Agent shall be conclusive
absent manifest error.
SECTION 3. INTEREST AND FEES.
3.1 Interest. Interest on Advances shall accrue be payable in arrears
on the last day of each month with respect to Domestic Rate Loans and, with
respect to Eurodollar Rate Loans, at the end of each Interest Period or, for
Eurodollar Rate Loans with an Interest Period in excess of three months, at the
earlier of (a) each three months on the anniversary date of the commencement of
such Eurodollar Rate Loan or (b) the end of the Interest Period. Interest
charges shall be computed on the actual principal amount of Advances outstanding
during the month (the "Monthly Advances") at a rate per annum equal to with
respect to Revolving Advances, the applicable Revolving Interest Rate and (ii)
with respect to the Term Loan, the applicable Term Loan Rate (as applicable, the
"Contract Rate"). Whenever, subsequent to the date of this Agreement, the
Alternate Base Rate is increased or decreased, the applicable Contract Rate
shall be similarly changed without notice or demand of any kind by an amount
equal to the amount of such change in the Alternate Base Rate during the time
such change or changes remain in effect. The Eurodollar Rate shall be adjusted
with respect to Eurodollar Rate Loans without notice or demand of any kind on
the effective date of any change in the Reserve Percentage as of such effective
date. Upon and after the occurrence of an Event of Default, and during the
continuation thereof, (i) the Obligations other than Eurodollar Rate Loans shall
bear interest at the applicable Contract Rate plus two (2%) percent per annum,
and (ii) Eurodollar Rate Loans shall bear interest at the applicable Contract
Rate plus two (2%) percent per annum (as applicable, the "Default Rate").
3.2 Letter of Credit Fees. Borrowers shall pay (x) to Agent, for the
benefit of Lenders, fees for each Letter of Credit for the period from and
excluding the date of issuance of same to and including the date of expiration
or termination, equal to the average daily face amount of each outstanding
Letter of Credit multiplied by one and one-half percent (1.50%) per annum, such
fees to be calculated on the basis of a 360-day year for the actual number of
days elapsed and to be payable monthly in arrears on the first day of each month
and on the last day of the Term and (y) to the Issuer, any and all fees and
expenses as agreed upon by the Issuer and the Borrowing Agent in connection with
any Letter of Credit, including in connection with the opening, amendment or
renewal of any such Letter of Credit and any acceptances created thereunder and
shall reimburse Agent for any and all fees and expenses, if any, paid by Agent
to the Issuer (all of the foregoing fees, the "Letter of Credit Fees"). All such
charges shall be deemed earned in full on the date when the same are due and
payable hereunder and shall not be subject to rebate or proration upon the
termination
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of this Agreement for any reason. Any such charge in effect at the time of a
particular transaction shall be the charge for that transaction, notwithstanding
any subsequent change in the Issuer's prevailing charges for that type of
transaction. All Letter of Credit Fees payable hereunder shall be deemed earned
in full on the date when the same are due and payable hereunder and shall not be
subject to rebate or proration upon the termination of this Agreement for any
reason.
3.3 Closing and Facility Fees.
(a) Upon the execution of this Agreement, Borrowers shall pay to
Agent for the ratable benefit of Lenders a closing fee of $250,000 less that
portion of the deposit fee of $50,000 and the commitment fee of $50,000
heretofore paid by Borrowers to Agent remaining after application of such fee to
out-of-pocket expenses. An additional closing fee equal of $62,500 shall be
deemed fully earned at the time on the Closing Date and shall be payable six
months after the Closing Date; provided, however, if Agent receives evidence,
satisfactory to Agent in its sole discretion, that Pietrafesa has received at
least $20,000,000 of cash equity contributions no later than six months after
the Closing Date, Borrowers shall not be obligated to make pay such additional
closing fee.
(b) If, for any month during the Term, the average daily unpaid
balance of the Revolving Advances for each day of such month does not equal the
Maximum Revolving Advance Amount, then Borrowers shall pay to Agent for the
ratable benefit of Lenders a fee at a rate equal to one-half of one percent
(0.50%) per annum on the amount by which the Maximum Revolving Advance Amount
exceeds such average daily unpaid balance. Such fee shall be payable to Agent in
arrears on the last day of each Fiscal Quarter.
3.4 Collateral Evaluation and Monitoring Fee.
(a) Borrowers shall pay Agent a collateral evaluation fee equal
to $2,000 per month, commencing on the first day of the month following the
Closing Date and on the first day of each month thereafter during the Term. The
collateral evaluation fee shall be deemed earned in full on the date when same
is due and payable hereunder and shall not be subject to rebate or proration
upon termination of this Agreement for any reason.
(b) Borrowers shall pay to Agent on the first day of each month
following any month in which Agent performs any collateral monitoring - namely
any field examination, collateral analysis or other business analysis, the need
for which is to be determined by Agent and which monitoring is undertaken by
Agent or for Agent's benefit - a collateral monitoring fee in an amount equal to
$675 per day for each person (other than Agent's management personnel) employed
to perform such monitoring and in an amount equal to $675 per day for each
manager of Agent performing such monitoring, plus all costs and disbursements
incurred by Agent in the performance of such examination or analysis.
3.5 Computation of Interest and Fees. Interest and fees hereunder
shall be computed on the basis of a year of 360 days and for the actual number
of days elapsed. If any payment to be made hereunder becomes due and payable on
a day other than a Business Day, the due date thereof shall be extended to the
next succeeding Business Day and interest thereon shall be payable at the
applicable Contract Rate during such extension.
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3.6 Maximum Charges. In no event whatsoever shall interest and other
charges charged hereunder exceed the highest rate permissible under Applicable
Law. In the event interest and other charges as computed hereunder would
otherwise exceed the highest rate permitted under Applicable Law, such excess
amount shall be first applied to any unpaid principal balance owed by Borrowers,
and if the then remaining excess amount is greater than the previously unpaid
principal balance, Lenders shall promptly refund such excess amount to Borrowers
and the provisions hereof shall be deemed amended to provide for such
permissible rate.
3.7 Increased Costs. In the event that any Applicable Law, treaty or
governmental regulation, or any change therein or in the interpretation or
application thereof, or compliance by any Lender (for purposes of this Section
3.7, the term "Lender" shall include Agent or any Lender and any corporation or
bank controlling Agent or any Lender) and the office or branch where Agent or
any Lender (as so defined) makes or maintains any Eurodollar Rate Loans with any
request or directive (whether or not having the force of law) from any central
bank or other financial, monetary or other authority, shall:
(a) subject Agent or any Lender to any tax of any kind whatsoever
with respect to this Agreement or any Other Document or change the basis of
taxation of payments to Agent or any Lender of principal, fees, interest or any
other amount payable hereunder or under any Other Documents (except for changes
in the rate of tax on the overall net income of Agent or any Lender by the
jurisdiction in which it maintains its principal office);
(b) impose, modify or hold applicable any reserve, special
deposit, assessment or similar requirement against assets held by, or deposits
in or for the account of, advances or loans by, or other credit extended by, any
office of Agent or any Lender, including pursuant to Regulation D of the Board
of Governors of the Federal Reserve System; or
(c) impose on Agent or any Lender or the London interbank
Eurodollar market any other condition with respect to this Agreement or any
Other Document;
and the result of any of the foregoing is to increase the cost to Agent or any
Lender of making, renewing or maintaining its Advances hereunder by an amount
that Agent or such Lender deems to be material or to reduce the amount of any
payment (whether of principal, interest or otherwise) in respect of any of the
Advances by an amount that Agent or such Lender deems to be material, then, in
any case Borrowers shall promptly pay Agent or such Lender, upon its demand,
such additional amount as will compensate Agent or such Lender for such
additional cost or such reduction, as the case may be, provided that the
foregoing shall not apply to increased costs which are reflected in the
Eurodollar Rate. Agent or such Lender shall certify the amount of such
additional cost or reduced amount to Borrowers, and such certification shall be
conclusive absent manifest error.
3.8 Basis For Determining Interest Rate Inadequate or Unfair. In the
event that Agent or any Lender shall have determined that:
(a) reasonable means do not exist for ascertaining the Eurodollar
Rate applicable pursuant to Section 2.16 hereof for any Interest Period; or
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(b) Dollar deposits in the relevant amount and for the relevant
maturity are not available in the London interbank Eurodollar market, with
respect to an outstanding Eurodollar Rate Loan, a proposed Eurodollar Rate Loan,
or a proposed conversion of a Domestic Rate Loan into a Eurodollar Rate Loan,
then Agent shall give the Borrowing Agent prompt written, telephonic or
telegraphic notice of such determination. If such notice is given, (i) any such
requested Eurodollar Rate Loan shall be made as a Domestic Rate Loan, unless the
Borrowing Agent shall notify Agent no later than 10:00 a.m. (East Brunswick, New
Jersey time) two (2) Business Days prior to the date of such proposed borrowing,
that its request for such borrowing shall be cancelled or made as an unaffected
type of Eurodollar Rate Loan, (ii) any Domestic Rate Loan or Eurodollar Rate
Loan that was to have been converted to an affected type of Eurodollar Rate Loan
shall be continued as or converted into a Domestic Rate Loan, or, if the
Borrowing Agent shall notify Agent, no later than 10:00 a.m. (East Brunswick,
New Jersey time) two (2) Business Days prior to the proposed conversion, shall
be maintained as an unaffected type of Eurodollar Rate Loan, and (iii) any
outstanding affected Eurodollar Rate Loans shall be converted into a Domestic
Rate Loan, or, if the Borrowing Agent shall notify Agent, no later than 10:00
a.m. (East Brunswick, New Jersey time) two (2) Business Days prior to the last
Business Day of the then current Interest Period applicable to such affected
Eurodollar Rate Loan, shall be converted into an unaffected type of Eurodollar
Rate Loan, on the last Business Day of the then current Interest Period for such
affected Eurodollar Rate Loans. Until such notice has been withdrawn, Lenders
shall have no obligation to make an affected type of Eurodollar Rate Loan or
maintain outstanding affected Eurodollar Rate Loans and no Borrower shall have
the right to convert a Domestic Rate Loan or an unaffected type of Eurodollar
Rate Loan into an affected type of Eurodollar Rate Loan.
3.9 Capital Adequacy.
(a) In the event that Agent or any Lender shall have determined
that any Applicable Law, rule, regulation or guideline regarding capital
adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by Agent or any Lender (for purposes of this Section 3.9, the term "Lender"
shall include Agent or any Lender and any corporation or bank controlling Agent
or any Lender) and the office or branch where Agent or any Lender (as so
defined) makes or maintains any Eurodollar Rate Loans with any request or
directive regarding capital adequacy (whether or not having the force of law) of
any such authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on Agent or any Lender's capital as a
consequence of its obligations hereunder to a level below that which Agent or
such Lender could have achieved but for such adoption, change or compliance
(taking into consideration Agent's and each Lender's policies with respect to
capital adequacy) by an amount deemed by Agent or any Lender to be material,
then, from time to time, Borrowers shall pay upon demand to Agent or such Lender
such additional amount or amounts as will compensate Agent or such Lender for
such reduction. In determining such amount or amounts, Agent or such Lender may
use any reasonable averaging or attribution methods. The protection of this
Section 3.9 shall be available to Agent and each Lender regardless of any
possible contention of invalidity or inapplicability with respect to any
Applicable Law or condition.
(b) A certificate of Agent or such Lender setting forth such
amount or amounts as shall be necessary to compensate Agent or such Lender with
respect to Section 3.9(a) hereof when delivered to Borrowers shall be conclusive
absent manifest error.
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SECTION 4. COLLATERAL: GENERAL TERMS
4.1 Security Interest in the Collateral. To secure the prompt payment
and performance to Agent and each Lender of the Obligations, each Borrower
hereby assigns, pledges and grants to Agent, for its benefit and the ratable
benefit of Lenders, a continuing security interest in and to all of its
Collateral, whether now owned or existing or hereafter acquired or arising and
wheresoever located. Each Borrower shall mark its books and records as may be
necessary or appropriate to evidence, protect and perfect Agent's security
interest and shall cause its financial statements to reflect such security
interest.
4.2 Perfection of Security Interest. Borrower shall take all action
that may be necessary or desirable, or that Agent may request, so as at all
times to maintain the validity, perfection, enforceability and priority of
Agent's security interest in the Collateral and to enable Agent to protect,
exercise or enforce its rights hereunder and in the Collateral, including (i)
immediately discharging all Liens other than Permitted Encumbrances, (ii)
obtaining landlords' or mortgagees' Lien waivers, (iii) delivering to Agent,
endorsed or accompanied by such instruments of assignment as Agent may specify,
and stamping or marking, in such manner as Agent may specify, any and all
chattel paper, instruments, letters of credits and advices thereof and documents
evidencing or forming a part of the Collateral, (iv) entering into warehousing,
lockbox and other custodial arrangements satisfactory to Agent, and (v)
executing and delivering, or causing to be executed or delivered, Lien
Perfection Documents requested by Agent, in each case in form and substance
satisfactory to Agent, relating to the creation, validity, perfection,
maintenance or continuation of Agent's security interest under the UCC or other
Applicable Law. Agent is hereby authorized to file financing statements signed
by Agent instead of Borrower in accordance with Section 9-402(2) of the UCC as
adopted in the State of New York. All charges, expenses and fees Agent may incur
in doing any of the foregoing, and any local taxes relating thereto, shall be
charged to Borrowers' Account as a Revolving Advance of a Domestic Rate Loan and
added to the Obligations, or, at Agent's option, shall be paid to Agent for the
ratable benefit of Lenders immediately upon demand.
4.3 Disposition of Collateral. Each Borrower will safeguard and
protect all Collateral for Agent's general account and make no disposition
thereof whether by sale, lease or otherwise except (a) the sale of Inventory in
the ordinary course of business (including close-out sales of finished goods
Inventory in the ordinary course of such Borrower's business) and (b) the
disposition or transfer of obsolete and worn-out Equipment in the ordinary
course of business during any Fiscal Year having an aggregate fair market value
of not more than $100,000 and only to the extent that (i) the proceeds of any
such disposition are used to acquire replacement Equipment which is subject to
Agent's first priority security interest or (ii) the proceeds of which are
remitted to Agent for application to the Obligations in accordance with this
Agreement.
4.4 Preservation of Collateral. Following the occurrence of a Default
or Event of Default, in addition to the rights and remedies set forth in Section
11.1 hereof, Agent: (a) may at any time take such steps as Agent deems necessary
to protect Agent's interest in and to preserve the Collateral, including the
hiring of such security guards or the placing of other security protection
measures as Agent may deem appropriate; (b) may employ and maintain at any of
any Borrower's premises a custodian who shall have full authority to do all acts
necessary to protect Agent's interests in the Collateral; (c) may lease
warehouse facilities to which Agent may move all or part of the Collateral; (d)
may use any Borrower's owned or leased lifts, hoists, trucks and other
facilities or equipment for handling or removing the Collateral; and (e) shall
have, and is hereby granted, a right of ingress and egress to the places where
the Collateral is located, and may proceed over and through any Borrower's owned
or leased property. Each Borrower shall cooperate
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fully with all of Agent's efforts to preserve the Collateral and will take such
actions to preserve the Collateral as Agent may direct. All of Agent's expenses
of preserving the Collateral, including any expenses relating to the bonding of
a custodian, shall be charged to Borrowers' Account as a Revolving Advance of a
Domestic Rate Loan and added to the Obligations.
4.5 Ownership of Collateral. With respect to the Collateral, at the
time the Collateral becomes subject to Agent's security interest: (a) each
Borrower shall be the sole owner of and fully authorized and able to sell,
transfer, pledge and/or grant a first priority security interest in each and
every item of its respective Collateral to Agent; and, except for Permitted
Encumbrances, the Collateral shall be free and clear of all Liens and
encumbrances whatsoever; (b) each document and agreement executed by each
Borrower or delivered to Agent or any Lender in connection with this Agreement
shall be true and correct in all respects; (c) all signatures and endorsements
of each Borrower that appear on such documents and agreements shall be genuine
and each Borrower shall have full capacity to execute same; and (d) each
Borrower's Equipment and Inventory shall be located as set forth on Schedule 4.5
and shall not be removed from such locations without the prior written consent
of Agent except with respect to the sale of Inventory in the ordinary course of
business and Equipment to the extent permitted in Section 4.3 hereof. In no
event shall (i) the aggregate Value of Borrowers' Consigned Inventory on any
date exceed five percent (5.0%) of the aggregate Value of all Borrowers'
Inventory, (ii) the aggregate Value of Borrowers' Inventory at all locations in
the United State and not subject to a landlord agreement, mortgagee agreement,
warehouseman agreement, Processor Agreement and/or Licensor/Agent Agreement
satisfactory to Agent exceed ten percent (10.0%) of the aggregate Value of all
Borrowers' Inventory, and (iii) the aggregate Value of Borrowers' Inventory at
any single location in the United States and not subject to a landlord
agreement, mortgagee agreement, warehouseman agreement, Processor Agreement
and/or Licensor/Agent Agreement satisfactory to Agent exceed ten percent (10.0%)
of the aggregate Value of all Borrowers' Inventory.
4.6 Defense of Agent's and Lenders' Interests. Until (a) payment and
performance in full of all of the Obligations and (b) termination of this
Agreement, Agent's interests in the Collateral shall continue in full force and
effect. During such period no Borrower shall, without Agent's prior written
consent, pledge, sell (except Inventory in the ordinary course of business
(including close-out sales of finished goods Inventory in the ordinary course of
such Borrower's business and sales of Equipment to the extent permitted in
Section 4.3 hereof), assign, transfer, create or suffer to exist a Lien upon or
encumber or allow or suffer to be encumbered in any way except for Permitted
Encumbrances, any part of the Collateral. Each Borrower shall defend Agent's
interests in the Collateral against any and all Persons whatsoever. At any time
following demand by Agent for payment of all Obligations, Agent shall have the
right to take possession of the indicia of the Collateral and the Collateral in
whatever physical form contained, including labels, stationery, documents,
instruments and advertising materials. If Agent exercises this right to take
possession of the Collateral, each Borrower shall, upon demand, assemble it in
the best manner possible and make it available to Agent at a place reasonably
convenient to Agent. In addition, with respect to all Collateral, Agent and
Lenders shall be entitled to all of the rights and remedies set forth herein and
further provided by the UCC or other Applicable Law. Each Borrower shall, and
Agent may, at its option, instruct all suppliers, carriers, forwarders,
warehouses or others receiving or holding cash, checks, Inventory, documents or
instruments in which Agent holds a security interest to deliver same to Agent
and/or subject to Agent's order and if they shall come into such Borrower's
possession, they, and each of them, shall be held by Borrowers in trust as
Agent's trustee, and such Borrower will immediately deliver them to Agent in
their original form together with any necessary endorsement.
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4.7 Books and Records. Each Borrower shall (a) keep proper books of
record and account in which full, true and correct entries will be made of all
dealings or transactions of or in relation to its business and affairs; (b) set
up on its books accruals with respect to all Charges and claims; and (c) on a
reasonably current basis set up on its books, from its earnings, allowances
against doubtful Receivables, advances and investments and all other proper
accruals (including by reason of enumeration, accruals for premiums, if any, due
on required payments and accruals for depreciation, obsolescence, or
amortization of properties), which should be set aside from such earnings in
connection with its business. All determinations pursuant to this subsection
shall be made in accordance with, or as required by, GAAP consistently applied
in the opinion of such independent public accountant as shall then be regularly
engaged by Borrowers.
4.8 Financial Disclosure. Each Borrower hereby irrevocably authorizes
and directs all accountants and auditors employed by such Borrower at any time
during the Term to exhibit and deliver to Agent and each Lender copies of any of
such Borrower's financial statements, trial balances or other accounting records
of any sort in the accountant's or auditor's possession, and to disclose to
Agent and each Lender any information such accountants may have concerning such
Borrower's financial status and business operations. Each Borrower hereby
authorizes all federal, state and municipal authorities to furnish to Agent and
each Lender copies of reports or examinations relating to Such Borrower, whether
made by such Borrower or otherwise; however, Agent and each Lender will attempt
to obtain such information or materials directly from such Borrower prior to
obtaining such information or materials from such accountants or such
authorities.
4.9 Compliance with Laws. Each Borrower shall comply with all
Applicable Law with respect to its respective Collateral or any part thereof or
to the operation of such Borrower's business the non-compliance with which could
reasonably be expected to have a Material Adverse Effect on such Borrower. Each
Borrower may, however, contest or dispute any acts, rules, regulations, orders
and directions of those bodies or officials in any reasonable manner, provided
that such contest or dispute is pursued diligently, in good faith and by
appropriate proceedings, any related Lien is inchoate or stayed and sufficient
reserves are established to the reasonable satisfaction of Agent to protect
Agent's Lien on or security interest in the Collateral. The Collateral and other
assets of such Borrower at all times shall be maintained in accordance with the
requirements of all insurance carriers which provide insurance with respect to
the Collateral and such other assets of such Borrower so that such insurance
shall remain in full force and effect.
4.10 Inspection of Premises. At all reasonable times upon not less
than twenty-four hours prior oral or written notice to Borrowing Agent, Agent
and its agents, and each Lender in the company of Agent or its agents, shall
have full access to and the right to audit, check, inspect and make abstracts
and copies from each Borrower's books, records, audits, correspondence and all
other papers relating to the Collateral and the operation of such Borrower's
business. Agent and its agents, and any Lender or Lenders and their agents in
the company of Agent or its agents, may enter upon any of any Borrower's
premises at any time during business hours and at any other reasonable time, and
from time to time upon not less than twenty-four hours prior oral or written
notice to Borrowing Agent, for the purpose of inspecting the Collateral and any
and all records pertaining thereto and the operation of such Borrower's
business.
4.11 Insurance. Each Borrower shall bear the full risk of any loss of
any nature whatsoever with respect to the Collateral. At each Borrower's own
cost and expense in amounts and with carriers acceptable to Agent, Borrowers
shall (a) keep all its properties in which it has an interest insured against
the hazards of fire, flood, sprinkler leakage, those hazards covered by extended
coverage insurance and such other hazards, and for such amounts, as is customary
in the case of companies engaged in businesses similar to
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such Borrower's including business interruption insurance; (b) maintain a bond
in such amounts as is customary in the case of companies engaged in businesses
similar to such Borrower insuring against larceny, embezzlement or other
criminal misappropriation of insured's officers and employees who may either
singly or jointly with others at any time have access to the assets or funds of
such Borrower either directly or through authority to draw upon such funds or to
direct generally the disposition of such assets; (c) maintain public and product
liability insurance against claims for personal injury, death or property damage
suffered by others; (d) maintain all such worker's compensation or similar
insurance as may be required under the laws of any state or jurisdiction in
which such Borrower is engaged in business; (e) furnish Agent with (i) copies of
all policies and evidence of the maintenance of such policies by the renewal
thereof at least thirty (30) days before any expiration date, and (ii)
appropriate loss payable endorsements in form and substance satisfactory to
Agent, naming Agent as a co-insured and loss payee as its interests may appear
with respect to all insurance coverage referred to in clauses (a), and (c)
above, and providing (A) that all proceeds thereunder shall be payable to Agent,
(B) no such insurance shall be affected by any act or neglect of the insured or
owner of the property described in such policy, and (C) that such policy and
loss payable clauses may not be cancelled, amended or terminated unless at least
thirty (30) days prior written notice is given to Agent. In the event of any
loss thereunder, the carriers named therein are hereby directed by Agent and the
applicable Borrower to make payment for such loss to Agent and not to such
Borrower and Agent jointly. If any insurance losses are paid by check, draft or
other instrument payable to any Borrower and Agent jointly, Agent may endorse
such Borrower's name thereon and do such other things as Agent may deem
advisable to reduce the same to cash. When any Event of Default exists, Agent is
hereby authorized to adjust and compromise claims under insurance coverage
referred to in clauses (a) and (b) above. All loss recoveries received by Agent
upon any such insurance may be applied to the Obligations, in such order as
Agent in its sole discretion shall determine. Any surplus shall be paid by Agent
to Borrowers or applied as may be otherwise required by law. Any deficiency
thereon shall be paid by Borrowers to Agent, on demand. Anything hereinabove to
the contrary notwithstanding, and subject to the fulfillment of the conditions
set forth below, Agent shall remit to Borrowers insurance proceeds received by
Agent during any calendar year under insurance policies procured and maintained
by Borrowers which insure Borrowers' insurable properties to the extent such
insurance proceeds do not exceed $300,000 in the aggregate during such calendar
year or $300,000 per occurrence. In the event the amount of insurance proceeds
received by Agent for any occurrence exceeds $300,000, then Agent shall not be
obligated to remit the insurance proceeds to Borrowers unless Borrowers shall
provide Agent with evidence reasonably satisfactory to Agent that the insurance
proceeds will be used by Borrowers to repair, replace or restore the insured
property which was the subject of the insurable loss. In the event Borrowers
have previously received (or, after giving effect to any proposed remittance by
Agent to Borrowers would receive) insurance proceeds which equal or exceed
$300,000 in the aggregate during any calendar year, then Agent may, in its sole
discretion, either remit the insurance proceeds to Borrowers upon Borrowers
providing Agent with evidence reasonably satisfactory to Agent that the
insurance proceeds will be used by Borrowers to repair, replace or restore the
insured property which was the subject of the insurable loss, or apply the
proceeds to the Obligations, as aforesaid. The agreement of Agent to remit
insurance proceeds in the manner above provided shall be subject in each
instance to satisfaction of each of the following conditions: (x) No Event of
Default or Default shall then have occurred, and (y) Borrowers shall use such
insurance proceeds to repair, replace or restore the insurable property which
was the subject of the insurable loss and for no other purpose.
4.12 Failure to Pay Insurance. If any Borrower fails to obtain
insurance as hereinabove provided, or to keep the same in force, Agent, if Agent
so elects, may obtain such insurance and pay the premium therefor on behalf of
such Borrower, and charge Borrowers' Account therefor as a Revolving Advance of
a Domestic Rate Loan and such expenses so paid shall be part of the Obligations.
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4.13 Payment of Taxes. Each Borrower will pay, when due, all Charges
lawfully levied or assessed upon such Borrower or any of the Collateral
including real and personal property taxes, assessments and charges and all
franchise, income, employment, social security benefits, withholding, and sales
taxes. If any tax by any governmental authority is or may be imposed on or as a
result of any transaction between any Borrower and Agent or any Lender which
Agent or any Lender may be required to withhold or pay (other than a tax based
on Agent's or any Lender's income) or if any Charges remain unpaid after the
date fixed for their payment, or if any claim shall be made which, in Agent's or
any Lender's opinion, may possibly create a valid Lien on the Collateral, Agent
may without notice to Borrowers pay the Charges and each Borrower hereby jointly
and severally indemnifies and holds Agent and each Lender harmless in respect
thereof. Agent will not pay any taxes, assessments or Charges to the extent that
any Borrower has Properly Contested those taxes, assessments or Charges. The
amount of any payment by Agent under this Section 4.13 shall be charged to
Borrowers' Account as a Revolving Advance and added to the Obligations and,
until Borrowers shall furnish Agent with an indemnity therefor (or supply Agent
with evidence satisfactory to Agent that due provision for the payment thereof
has been made), Agent may hold without interest any balance standing to
Borrowers' credit and Agent shall retain its security interest in any and all
Collateral held by Agent.
4.14 Payment of Leasehold Obligations. Each Borrower shall at all
times pay, when and as due, its rental obligations under all leases under which
it is a tenant, and shall otherwise comply, in all material respects, with all
other terms of such leases and keep them in full force and effect and, at
Agent's request will provide evidence of having done so.
4.15 Receivables.
(a) Nature of Receivables. Each of the Receivables shall be a
bona fide and valid account representing a bona fide indebtedness incurred by
the Customer therein named, for a fixed sum as set forth in the invoice relating
thereto (provided immaterial or unintentional invoice errors shall not be deemed
to be a breach hereof) with respect to an absolute sale or lease and delivery of
goods upon stated terms of a Borrower, or work, labor or services theretofore
rendered by a Borrower as of the date each Receivable is created. Same shall be
due and owing in accordance with the applicable Borrower's standard terms of
sale without dispute, setoff or counterclaim except as may be stated on the
accounts receivable schedules delivered by Borrowers to Agent.
(b) Solvency of Customers. Each Customer, to the best of each
Borrower's knowledge, as of the date each Receivable is created, is and will be
Solvent and able to pay all Receivables on which the Customer is obligated in
full when due or with respect to such Customers of any Borrower who are not
Solvent Borrowers has set up on its books and in its financial records bad debt
reserves adequate to cover such Receivables.
(c) Locations of Borrowers. Each Borrower's chief executive
office is located at the addresses set forth on Schedule 4.15(c) hereto. Until
written notice is given to Agent by the Borrowing Agent of any other office at
which any Borrower keeps its records pertaining to Receivables, all such records
shall be kept at such executive office.
(d) Collection of Receivables. Until any Borrower's authority to
do so is terminated by Agent (which notice Agent may give at any time following
the occurrence of an Event of Default or a Default or when Agent in its sole
discretion deems it to be in Lenders' best interest to do so), each Borrower
will, at
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such Borrower's sole cost and expense, but on Agent's and Lender's behalf and
for Agent's and Lender's account, collect as Agent's and Lender's property and
in trust for Agent and Lenders all amounts received on Receivables, and shall
not commingle such collections with any Borrower's funds or use the same except
to pay Obligations. Each Borrower shall, upon request, deliver to Agent, or
deposit in the Blocked Account, in original form and on the date of receipt
thereof, all checks, drafts, notes, money orders, acceptances, cash and other
evidences of Indebtedness relating, in each case, to the Receivables.
(e) Notification of Assignment of Receivables. At any time that
an Event of Default exists, Agent shall have the right to send notice of the
assignment of, and Agent's security interest in, the Receivables to any and all
Customers or any third party holding or otherwise concerned with any of the
Collateral. Thereafter, Agent shall have the sole right to collect the
Receivables, take possession of the Collateral, or both. Agent's actual
collection expenses, including stationery and postage, telephone and telegraph,
secretarial and clerical expenses and the salaries of any collection personnel
used for collection, may be charged to Borrowers' Account and added to the
Obligations.
(f) Power of Agent to Act on Borrowers' Behalf. Agent shall have
the right to receive, endorse, assign and/or deliver in the name of Agent or any
Borrower any and all checks, drafts and other instruments for the payment of
money relating to the Receivables, and each Borrower hereby waives notice of
presentment, protest and non-payment of any instrument so endorsed. Each
Borrower hereby constitutes Agent or Agent's designee as such Borrower's
attorney with power (i) to endorse such Borrower's name upon any notes,
acceptances, checks, drafts, money orders or other evidences of payment or
Collateral; (ii) to sign such Borrower's name on any invoice or bill of lading
relating to any of the Receivables, drafts against Customers, assignments and
verifications of Receivables; (iii) to send verifications of Receivables to any
Customer; (iv) to sign such Borrower's name on all financing statements or any
other documents or instruments deemed necessary or appropriate by Agent to
preserve, protect, or perfect Agent's interest in the Collateral and to file
same; (v) to demand payment of the Receivables; (vi) to enforce payment of the
Receivables by legal proceedings or otherwise; (vii) to exercise all of such
Borrower's rights and remedies with respect to the collection of the Receivables
and any other Collateral; (viii) to settle, adjust, compromise, extend or renew
the Receivables; (ix) to settle, adjust or compromise any legal proceedings
brought to collect Receivables; (x) to prepare, file and sign such Borrower's
name on a proof of claim in bankruptcy or similar document against any Customer;
(xi) to prepare, file and sign such Borrower's name on any notice of Lien,
assignment or satisfaction of Lien or similar document in connection with the
Receivables; and (xii) to do all other acts and things necessary to carry out
this Agreement. All acts of said attorney or designee are hereby ratified and
approved, and said attorney or designee shall not be liable for any acts of
omission or commission nor for any error of judgment or mistake of fact or of
law, unless done maliciously or with gross (not mere) negligence; this power
being coupled with an interest is irrevocable while any of the Obligations
remain unpaid. Agent shall have the right at any time following the occurrence
and during the continuance of an Event of Default or Default, to change the
address for delivery of mail addressed to any Borrower to such address as Agent
may designate and to receive, open and dispose of all mail addressed to any
Borrower.
(g) No Liability. Neither Agent nor any Lender shall, under any
circumstances or in any event whatsoever, have any liability for any error or
omission or delay of any kind occurring in the settlement, collection or payment
of any of the Receivables or any instrument received in payment thereof, or for
any damage resulting therefrom. Following the occurrence of a Default or an
Event of Default Agent may, without notice or consent from any Borrower, sue
upon or otherwise collect, extend the time of payment of, compromise or settle
for cash, credit or upon any terms any of the Receivables or any other
securities, instruments or insurance applicable thereto and/or release any
obligor thereof. Agent is authorized and
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empowered to accept following the occurrence of an Event of Default or Default
the return of the goods represented by any of the Receivables, without notice to
or consent by any Borrower, all without discharging or in any way affecting any
Borrower's liability hereunder.
(h) Establishment of Cash Management System. All proceeds of
Collateral shall, at the direction of Agent, be deposited by Borrowers into a
lockbox account, dominion account or other "blocked account" ("Blocked Account")
as Agent may require pursuant to an arrangement with such bank or banks as may
be selected by Borrowers and be acceptable to Agent. Each Borrower shall issue
to any such bank, an irrevocable letter of instruction directing said bank to
transfer such funds so deposited to Agent, either to any account maintained by
Agent at said bank or by wire transfer to appropriate account(s) of Agent. All
funds deposited into any Blocked Account shall immediately become the property
of Agent and Borrowers shall obtain the agreement by each bank at which a
Blocked Account is maintained to waive any offset rights against the funds so
deposited. Neither Agent nor any Lender assumes any responsibility for such
Blocked Account, including any claim of accord and satisfaction or release with
respect to deposits accepted by any bank thereunder. Agent may also establish
depository accounts ("Depository Accounts") in the name of Agent at a bank or
banks for the deposit of such funds and Borrowers shall deposit all proceeds of
Collateral or cause same to be deposited, in kind, in such Depository Accounts
of Agent.
(i) Adjustments. No Borrower will, without Agent's consent,
compromise or adjust any Receivables (or extend the time for payment thereof) or
accept any returns of merchandise or grant any additional discounts, allowances
or credits thereon except for those compromises, adjustments, returns,
discounts, credits and allowances as have been heretofore customary in the
business of such Borrower.
4.16 Inventory. To the extent Inventory held for sale or lease has been
produced by any Borrower, it has been and will be produced by Borrowers in
accordance with the Federal Fair Labor Standards Act of 1938 and all rules,
regulations and orders thereunder. Borrowers shall promptly notify Agent in
writing if any Borrower enters into any License Agreement other than as set
forth on Schedule 4.16 or has any Inventory located at a Processor in the United
States other than those Processors set forth on Schedule 4.16.
4.17 Maintenance of Equipment. The Equipment shall be maintained in
good operating condition and repair (reasonable wear and tear excepted) and all
necessary replacements of and repairs thereto shall be made so that the value
and operating efficiency of the Equipment shall be maintained and preserved. No
Borrowers shall use or operate the Equipment in violation of any Applicable Law.
4.18 Exculpation of Liability. Nothing herein contained shall be
construed to constitute Agent or any Lender as Borrowers' agent for any purpose
whatsoever, nor shall Agent or any Lender be responsible or liable for any
shortage, discrepancy, damage, loss or destruction of any part of the Collateral
wherever the same may be located and regardless of the cause thereof. Neither
Agent nor any Lender, whether by anything herein or in any assignment or
otherwise, assume any of any Borrower's obligations under any contract or
agreement assigned to Agent or such Lender, and neither Agent nor any Lender
shall be responsible in any way for the performance by any Borrower of any of
the terms and conditions thereof.
4.19 Intentionally Omitted.
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4.20 Financing Statements. Except as respects the financing statements
filed by Agent and the financing statements described on Schedule 1.2, no
financing statement covering any of the Collateral or any proceeds thereof is on
file in any public office.
4.21 Amounts Due From Factor. Promptly provide Agent with copies of all
reports, statements of account and other communications received by Pietrafesa
from Factor with reference to the Factoring Agreement, including, without
limitation, all Factor Status Statements (but specifically excluding daily cash
receipts), all notices of default or termination, and all amendments the
Factoring Agreement. Pietrafesa shall identify to Agent each month identifying
the Client Risk Accounts and amount the thereof. Concurrently with the
submission of each Borrowing Base Certificate, Pietrafesa shall provide to Agent
a Due From Factor Report, together with copies of all data and other information
requested by Agent from which such Due From Factor Reports are derived.
SECTION 5. REPRESENTATIONS AND WARRANTIES.
Each Borrower represents and warrants as follows:
5.1 Authority. Each Borrower has full power, authority and legal
right to enter into this Agreement and the Other Documents and to perform all
its Obligations hereunder and thereunder. The execution, delivery and
performance of this Agreement and of the Other Documents (a) are within such
Borrower's corporate powers, have been duly authorized, are not in contravention
of any Applicable Law or the terms of Borrowers' Organization Documents relating
to such Borrower's formation or to the conduct of such Borrower's business or of
any material agreement or undertaking to which such Borrower is a party or by
which such Borrower is bound, and (b) will not conflict with nor result in any
breach in any of the provisions of or constitute a default under or result in
the creation of any Lien except Permitted Encumbrances upon any asset of such
Borrower under the provisions of any agreement, Organization Documents or other
instrument to which such Borrower or its property is a party or by which such
Borrower or its property may be bound.
5.2 Formation and Qualification.
(a) Each Borrower has been duly organized and is in good standing
under the laws of the state listed on Schedule 5.2(a) and is qualified to do
business and is in good standing in the states listed on Schedule 5.2(a) which
constitute all states in which qualification and good standing are necessary for
Borrowers to conduct its business and own its property and where the failure to
so qualify could reasonably be expected to have a Material Adverse Effect. Each
Borrower has delivered to Agent true and complete copies of its Organization
Documents and will promptly notify Agent of any amendment or changes thereto.
(b) The only Subsidiaries of each Borrower as of the date hereof
are listed on Schedule 5.2(b).
5.3 Survival of Representations and Warranties. All representations and
warranties of each Borrower contained in this Agreement and the Other Documents
shall be true at the time of Borrowers' execution of this Agreement and the
Other Documents, and shall survive the execution, delivery and acceptance
thereof by the parties thereto and the closing of the transactions described
therein or related thereto.
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5.4 Tax Returns. Each Borrower's federal tax identification number is
set forth on Schedule 5.4. Each Borrower has filed all federal, state and local
tax returns and other reports each is required by law to file and has paid all
taxes, assessments, fees and other governmental charges that are due and
payable. Federal, state and local income tax returns of each Borrower have been
examined and reported upon by the appropriate taxing authority or closed by
applicable statute and satisfied for all Fiscal Years prior to and including the
Fiscal Year ending December 31, 1997. The provision for taxes on the books of
each Borrower are adequate for all years not closed by applicable statutes, and
for its current Fiscal Year, and no Borrower has any knowledge of any deficiency
or additional assessment in connection therewith not provided for on its books.
5.5 Financial Statements.
(a) The pro forma balance sheet of Borrowers and its Subsidiaries
on a consolidated and consolidating basis (the "Pro Forma Balance Sheet")
furnished to Agent on the Closing Date reflects the consummation of the
transactions contemplated by the Initial Acquisition Documents and under this
Agreement (the "Transactions") and is accurate, complete and correct and,
subject to the qualifications and assumptions stated therein, fairly reflect the
financial condition of Borrowers on a consolidated basis as of the Closing Date
after giving effect to the Transactions. The Pro Forma Balance Sheet has been
certified as accurate, complete and correct in all material respects by the
President and Chief Financial Officer of the Borrowing Agent. All financial
statements referred to in this subsection 5.5(a), including the related
schedules and notes thereto, have been prepared in accordance with GAAP, except
as may be disclosed in such financial statements.
(b) The three-year cash flow projections (including projected
borrowings) of Borrowers on a consolidated basis and their projected balance
sheets as of the Closing Date, copies of which are annexed hereto as Exhibit C
(the "Projections") were prepared by the Chief Financial Officer of the
Borrowing Agent, are based on underlying assumptions which provide a reasonable
basis for the projections contained therein and reflect Borrowers' judgment
based on present circumstances of the most likely set of conditions and course
of action for the projected period. The cash flow Projections together with the
Pro Forma Balance Sheet and the Fair Saleable Value Balance Sheet, are referred
to as the "Pro Forma Financial Statements."
5.6 Corporate Name. Except as set forth on Schedule 5.6, no Borrower
has been known by any other corporate name in the past five (5) years and no
Borrower has sold any Inventory under any other name except as set forth on
Schedule 5.6, nor has any Borrower been the surviving corporation of a merger or
consolidation or acquired all or substantially all of the assets of any Person
during the preceding five (5) years.
5.7 O.S.H.A. and Environmental Compliance.
(a) Each Borrower has duly complied with, and its facilities,
business, assets, property, leaseholds and Equipment are in compliance in all
material respects with, the provisions of the Federal Occupational Safety and
Health Act, the Environmental Protection Act, RCRA and all other Environmental
Laws; there have been no outstanding citations, notices or orders of
non-compliance issued to Borrowers or relating to its business, assets,
property, leaseholds or Equipment under any such laws, rules or regulations.
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(b) Each Borrower has been issued all required federal, state and
local licenses, certificates or permits relating to all applicable Environmental
Laws.
(c) (i) There are no visible signs of releases, spills, discharges,
leaks or disposal (collectively referred to as "Releases") of Hazardous
Substances at, upon, under or within any real property owned or leased by any
Borrower; (ii) there are no underground storage tanks or polychlorinated
biphenyls on any real property owned or leased by any Borrower; (iii) to each
Borrower's knowledge, no real property owned or leased by any Borrower has ever
been used as a treatment, storage or disposal facility of Hazardous Waste; and
(iv) no Hazardous Substances are present on the Real Property or any premises
leased by any Borrower, excepting such quantities as are handled in accordance
with all applicable manufacturer's instructions and governmental regulations and
in proper storage containers and as are necessary for the operation of the
commercial business of any Borrower or of its tenants.
5.8 Solvency; No Litigation, Violation, Indebtedness or Default.
(a) After giving effect to the Transactions, each Borrower is and
will at all time remain Solvent.
(b) Except as disclosed in Schedule 5.8(b), no Borrower has (i) any
pending or threatened litigation, arbitration, actions or proceedings which, if
adversely determined, could reasonably be expected to have a Material Adverse
Effect, and (ii) any liabilities or Indebtedness for Money Borrowed other than
the Obligations.
(c) No Borrower nor any member of the Controlled Group maintains or
contributes to any Plan other than those listed on Schedule 5.8(c) hereto, and
(i) no Plan has incurred any "accumulated funding deficiency," as defined in
Section 302(a)(2) of ERISA and Section 412(a) of the Code, whether or not
waived, and each Borrower and each member of the Controlled Group has met all
applicable minimum funding requirements under Section 302 of ERISA in respect of
each Plan, (ii) each Plan which is intended to be a qualified plan under Section
401(a) of the Code as currently in effect has been determined by the Internal
Revenue Service to be qualified under Section 401(a) of the Code and the trust
related thereto is exempt from federal income tax under Section 501(a) of the
Code, (iii) neither any Borrower nor any member of the Controlled Group has
incurred any liability to the PBGC other than for the payment of premiums, and
there are no premium payments which have become due which are unpaid, (iv) no
Plan has been terminated by the plan administrator thereof nor by the PBGC, and
there is no occurrence which would cause the PBGC to institute proceedings under
Title IV of ERISA to terminate any Plan, (v) at this time, the current value of
the assets of each Plan exceeds the present value of the accrued benefits and
other liabilities of such Plan and neither any Borrower nor any member of the
Controlled Group knows of any facts or circumstances which would materially
change the value of such assets and accrued benefits and other liabilities, (vi)
no Borrower nor any member of the Controlled Group has breached any of the
responsibilities, obligations or duties imposed on it by ERISA with respect to
any Plan, (vii) neither any Borrower nor any member of a Controlled Group has
incurred any liability for any excise tax arising under Section 4972 or 4980B of
the Code, and no fact exists which could give rise to any such liability, (viii)
neither any Borrower nor any member of the Controlled Group nor any fiduciary
of, nor any trustee to, any Plan, has engaged in a "prohibited transaction"
described in Section 406 of the ERISA or Section 4975 of the Code nor taken any
action which would constitute or result in a Termination Event with respect to
any such Plan which is subject to ERISA, (ix) each Borrower and each member of
the Controlled Group has made all contributions due and payable with respect to
each Plan, (x) there exists no event described in Section 4043(b) of ERISA, for
which the thirty (30) day
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notice period contained in 29 CFR 2615.3 has not been waived, (xi) no Borrower
nor any member of the Controlled Group has any fiduciary responsibility for
investments with respect to any plan existing for the benefit of persons other
than employees or former employees of any Borrower and any member of the
Controlled Group, and (xii) no Borrower nor any member of the Controlled Group
has withdrawn, completely or partially, from any Multiemployer Plan so as to
incur liability under the Multiemployer Pension Plan Amendments Act of 1980.
5.9 Patents, Trademarks, Copyrights and Licenses. All patents, patent
applications, trademarks, trademark applications, service marks, service mark
applications, copyrights, copyright applications, design rights, tradenames,
assumed names, trade secrets and licenses owned or utilized by Borrowers are set
forth on Schedule 5.9, are valid and have been duly registered or filed with all
appropriate governmental authorities and constitute all of the intellectual
property rights which are necessary for the operation of its business; there is
no objection to or pending challenge to the validity of any such material
patent, trademark, copyright, design right, tradename, trade secret or license
and no Borrowers is aware of any grounds for any challenge, except as set forth
in Schedule 5.9 hereto. Each patent, patent application, patent license,
trademark, trademark application, trademark license, service mark, service mark
application, service mark license, copyright, copyright application and
copyright license owned or held by Borrowers and all trade secrets used by
Borrowers consist of original material or property developed by Borrowers or was
lawfully acquired by Borrowers from the proper and lawful owner thereof. Each of
such items has been maintained so as to preserve the value thereof from the date
of creation or acquisition thereof. With respect to all proprietary software
used by Borrowers, Borrowers is in possession of all source and object codes
related to each piece of software or is the beneficiary of a source code escrow
agreement, each such source code escrow agreement being listed on Schedule 5.9
hereto.
5.10 Licenses and Permits. Except as set forth in Schedule 5.10, each
Borrower (a) is in compliance with and (b) has procured and is now in possession
of, all material licenses or permits required by any Applicable Law or
regulation for the operation of its business in each jurisdiction wherein it is
now conducting or proposes to conduct business and where the failure to procure
such licenses or permits could reasonably be expected to have a Material Adverse
Effect on such Borrower.
5.11 Default of Indebtedness. No Borrower is in default in the payment
of the principal of or interest on any Indebtedness or under any instrument or
agreement under or subject to which any Indebtedness has been issued and no
event has occurred under the provisions of any such instrument or agreement
which with or without the lapse of time or the giving of notice, or both,
constitutes or would constitute an event of default thereunder.
5.12 No Default. No Borrower is in default in the payment or
performance of any of its contractual obligations and no Default has occurred
thereunder.
5.13 No Burdensome Restrictions. No Borrower is party to any contract
or agreement the performance of which could have a Material Adverse Effect on
such Borrower. No Borrower has agreed or consented to cause or permit in the
future (upon the happening of a contingency or otherwise) any of its property,
whether now owned or hereafter acquired, to be subject to a Lien which is not a
Permitted Encumbrance.
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5.14 No Labor Disputes. No Borrower is involved in any labor dispute;
there are no strikes or walkouts or union organization of any Borrower's
employees threatened or in existence and no labor contract is scheduled to
expire during the Term other than as set forth on Schedule 5.14 hereto.
5.15 Margin Regulations. No Borrowers is engaged, nor will it engage,
principally or as one of its important activities, in the business of extending
credit for the purpose of "purchasing" or "carrying" any "margin stock" within
the respective meanings of each of the quoted terms under Regulation U of the
Board of Governors of the Federal Reserve System as now and from time to time
hereafter in effect. No part of the proceeds of any Advance will be used for
"purchasing" or "carrying" "margin stock" as defined in Regulation U of such
Board of Governors.
5.16 Investment Company Act. No Borrower is an "investment company"
registered or required to be registered under the Investment Company Act of
1940, nor is it controlled by such a company.
5.17 Disclosure. No representation or warranty made by any Borrower in
this Agreement, in any other Loan Document, in the Initial Acquisition
Documents, or in any financial statement, report, certificate or any other
document furnished in connection herewith or therewith contains any untrue
statement of fact or omits to state any fact necessary to make the statements
herein or therein not misleading. There is no fact known to any Borrower or
which reasonably should be known to any Borrower which Borrowers have not
disclosed to Agent in writing with respect to the Transactions which could
reasonably be expected to have a Material Adverse Effect on any Borrower.
5.18 Delivery of Initial Acquisition Documents. Agent has received
complete copies of the Initial Acquisition Documents and (including all
exhibits, schedules and disclosure letters referred to therein or delivered
pursuant thereto, if any) and all amendments thereto, waivers relating thereto
and other side letters or agreements affecting the terms thereof. None of such
documents and agreements has been amended or supplemented, nor have any of the
provisions thereof been waived, except pursuant to a written agreement or
instrument which has heretofore been delivered to Agent.
5.19 Swaps. No Borrower is a party to, nor will it be a party to, any
swap agreement whereby any Borrower has agreed or will agree to swap interest
rates or currencies unless same provides that damages upon termination following
an event of default thereunder are payable on an unlimited "two-way basis"
without regard to fault on the part of either party.
5.20 Conflicting Agreements. No provision of any mortgage, indenture,
contract, agreement, judgment, decree or order binding on any Borrower or
affecting the Collateral conflicts with, or requires any Consent which has not
already been obtained to, or would in any way prevent the execution, delivery or
performance of, the terms of this Agreement or the Other Documents.
5.21 Application of Certain Laws and Regulations. No Borrower nor any
Affiliate of any Borrower is subject to any statute, rule or regulation which
regulates the incurrence of any Indebtedness, including statutes or regulations
relative to common or interstate carriers or to the sale of electricity, gas,
steam, water, telephone, telegraph or other public utility services.
5.22 Business and Property of Borrowers. Upon and after the Closing
Date, Borrowers do not propose to engage in any business other than in the
apparel industry and activities necessary to conduct the
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foregoing. On the Closing Date, each Borrower will own all the property and
possess all of the rights and Consents necessary for the conduct of the business
of such Borrower.
5.23 Compliance with Laws. No Borrower is in violation of any
Applicable Law in any respect which could reasonably be expected to have a
Material Adverse Effect on such Borrower, nor is any Borrower in violation of
any order of any Governmental Body or arbitration board or other tribunal.
SECTION 6. AFFIRMATIVE COVENANTS.
Each Borrower shall, until payment in full of the Obligations and
termination of this Agreement:
6.1 Payment of Fees. Pay to Agent on demand all usual and customary
fees and expenses which Agent incurs in connection with (a) the forwarding of
Advance proceeds and (b) the establishment and maintenance of any Blocked
Account or Depository Accounts as provided for in Section 4.15(h). Agent may,
without making demand, charge Borrowers' Account for all such fees and expenses.
6.2 Conduct of Business and Maintenance of Existence and Assets. (a)
Conduct continuously and operate actively its business according to good
business practices and maintain all of its properties useful or necessary in its
business in good working order and condition (reasonable wear and tear excepted
and except as may be disposed of in accordance with the terms of this
Agreement), including all licenses, patents, copyrights, design rights,
tradenames, trade secrets and trademarks and take all actions necessary to
enforce and protect the validity of any intellectual property right or other
right included in the Collateral; (b) keep in full force and effect its
existence and comply in all material respects with all Applicable Laws governing
the conduct of its business where the failure to do so could reasonably be
expected to have a Material Adverse Effect on Borrowers; and (c) make all such
reports and pay all such franchise and other taxes and license fees and do all
such other acts and things as may be lawfully required to maintain its rights,
licenses, leases, powers and franchises under the laws of the United States or
any political subdivision thereof.
6.3 Violations. Promptly notify Agent in writing of any Applicable
Law which could reasonably be expected to have a Material Adverse Effect on any
Borrower.
6.4 Government Receivables. Take all steps necessary to protect
Agent's interest in the Collateral under the Federal Assignment of Claims Act or
other Applicable Law and deliver to Agent appropriately endorsed, any instrument
or chattel paper connected with any Receivable arising out of contracts between
any Borrower and the United States, any state or any department, agency or
instrumentality of any of them.
6.5 Intentionally Omitted.
6.6 Intentionally Omitted.
6.7 Intentionally Omitted.
6.8 Intentionally Omitted.
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6.9 Fixed Charge Coverage Ratio. Cause to be maintained as of the end
of each Fiscal Quarter, a Fixed Charge Ratio for the immediately preceding four
Fiscal Quarters of not less than 1.10 to 1.00.
6.10 Execution of Supplemental Instruments. Execute and deliver to
Agent from time to time, upon demand, such supplemental agreements, statements,
assignments and transfers, or instructions or documents relating to the
Collateral, and such other instruments as Agent may request, in order that the
full intent of this Agreement may be carried into effect.
6.11 Payment of Indebtedness. Pay, discharge or otherwise satisfy at
or before maturity (subject, where applicable, to specified grace periods and,
in the case of the trade payables, to normal payment practices) all its
obligations and liabilities of whatever nature, except when the failure to do so
could not reasonably be expected to have a Material Adverse Effect or when the
amount or validity thereof is currently being contested and diligently in good
faith by appropriate proceedings and each Borrower shall have provided for such
reserves as Agent may reasonably deem proper and necessary, subject at all times
to any applicable subordination arrangement in favor of Lenders.
6.12 Standards of Financial Statements. Cause all financial
statements referred to in Sections 9.7, 9.8, 9.9, 9.10, 9.11, 9.12, 9.13 and
9.14 as to which GAAP is applicable to be complete and correct in all material
respects (subject, in the case of interim financial statements, to normal
year-end audit adjustments) and to be prepared in reasonable detail and in
accordance with GAAP applied consistently throughout the periods reflected
therein (except as concurred in by such reporting accountants or officer, as the
case may be, and disclosed therein).
6.13 Exercise of Rights. Enforce all of its rights under the Initial
Acquisition Documents executed in connection therewith including all
indemnification rights and pursue all remedies available to it with diligence
and in good faith in connection with the enforcement of any such rights.
6.14 Year 2000 Compatibility. Take all action necessary to assure
that such Borrower's computer based systems are able to operate and effectively
process data, including dates on and after January 1, 2000. Such Borrower shall
provide Agent written assurance acceptable to Agent that such systems are Year
2000 compliant on or before July 31, 1999. Such Borrower shall (i) promptly and
in no event later than July 31, 1999, take all action necessary to ensure that
all computer based systems of such Borrower and its Subsidiaries are capable of
the following: (a) handling date information involving all and any dates before,
during and/or after January 1, 2000, including accepting input, providing output
and performing date calculations in whole or in part; (b) operating, accurately
without interruption on and in respect of any and all dates before, during
and/or after January 1, 2000, and without any change in performance; (c)
responding to and processing two-digit year input without creating any ambiguity
as to the century; (d) storing and providing date input information without
creating any ambiguity as to the century; and (ii) promptly and in no event
later than July 31, 1999, take all action necessary to ensure that all computer
based systems of each of their vendors, suppliers and customers are capable of
(a) through (d) above, where noncompliance could be reasonably expected to have
a Material Adverse Effect. In addition, at the request of Agent, such Borrower
shall provide Agent assurances in form and substance satisfactory to Agent of
such Borrower's and each of its Subsidiaries' Year 2000 compatibility.
6.15 UDC Reserve Release Conditions. Cause the UDC Reserve Release
Conditions to be satisfied on or before June 30, 1999.
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SECTION 7. NEGATIVE COVENANTS.
No Borrower shall, until satisfaction in full of the Obligations and
termination of this Agreement:
7.1 Merger, Consolidation, Acquisition and Sale of Assets.
(a) Enter into any merger, consolidation or other reorganization
with or into any other Person, or acquire all or a substantial portion of the
assets or Equity Interests of any Person other than another Borrower, or permit
any other Person (other than another Borrower) to consolidate with or merge with
it, other than Permitted Acquisitions.
(b) Sell, lease, transfer or otherwise dispose of any of its
properties or assets to any Person other than another Borrower, except (i) sales
by a Borrower of its Inventory in the ordinary course of its business as
presently conducted, (ii) transfers of Consigned Inventory by a Borrower to the
extent not prohibited by this Agreement, (iii) sales and other dispositions of
Equipment of a Borrower to the extent permitted by this Agreement, and (iv)
other dispositions expressly authorized by this Agreement.
7.2 Creation of Liens. Create or suffer to exist any Lien or transfer
upon or against any of its property or assets now owned or hereafter acquired,
except Permitted Encumbrances.
7.3 Guarantees. Become liable upon the obligations of any Person
(other than another Borrower) by assumption, endorsement or guaranty thereof or
otherwise (other than to Lenders), except (a) as set forth on Schedule 7.3, and
(b) the endorsement of checks in the ordinary course of business.
7.4 Investments. Purchase or acquire obligations or stock of, or any
other interest in, any Person, except (a) obligations issued or guaranteed by
the United States of America or any agency thereof, (b) commercial paper with
maturities of not more than 180 days and a published rating of not less than A-1
or P-1 (or the equivalent rating), (c) certificates of time deposit and bankers'
acceptances having maturities of not more than 180 days and repurchase
agreements backed by United States government securities of a commercial bank if
(i) such bank has a combined capital and surplus of at least $500,000,000, or
(ii) its debt obligations, or those of a holding company of which it is a
Subsidiary, are rated not less than A (or the equivalent rating) by a nationally
recognized investment rating agency, (d) U.S. money market funds that invest
solely in obligations issued or guaranteed by the United States of America or an
agency thereof, (e) the Initial Acquisitions, and (f) any Permitted
Acquisitions.
7.5 Loans. Make advances, loans or extensions of credit to any
Person, including any Parent, Subsidiary or Affiliate, except (i) the extension
of commercial trade credit in connection with the sale of Inventory in the
ordinary course of its business; (ii) loans or advances of money made by one
Borrower to another Borrower or to a Guarantor, provided that any instrument
given to evidence any such loan or advance is promptly pledged to Agent as
security for the Obligations; and (iii) other advances, loans or extensions of
credit to any Person not to exceed an outstanding principal balance of $250,000
in the aggregate for all such advances.
7.6 Capital Expenditures. Contract for or make any Capital
Expenditures in any Fiscal Year in an amount in excess of $750,000.
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7.7 Dividends. Declare, pay or make any dividend or distribution on
any shares of the Equity Interests of any Borrower (other than Upstream Payments
or dividends or distributions payable in its stock, or split-ups or
reclassifications of its stock) or apply any of its funds, property or assets to
the purchase, redemption or other retirement of any common or preferred stock,
or of any options to purchase or acquire any such shares of common or preferred
stock of any Borrower; except that, so long as (a) a notice of termination with
regard to this Agreement shall not be outstanding, (b) no Event of Default or
Default shall have occurred, (c) such payment would not violate Applicable Law,
(d) Borrowers shall have delivered a notice to Agent of their intent to make a
payment simultaneously with the delivery of the Borrowing Base Certificate and
supporting information pursuant to Section 9.2 hereto and providing calculations
showing Undrawn Availability of at least $2,500,000 as of the end of the
preceding month after giving effect to such payment, and (e) within 2 Business
Days of Agent's receipt of such notice, Agent has either (i) elected not to
conduct an audit of the Collateral and Borrowers' books and records, or (ii)
elected to conduct an audit of the Collateral and Borrowers' books and records
to be performed by Agent or its agents (such audit to completed within twelve
(12) Business Days of Agent's receipt of such notice) and Agent shall have
confirmed Borrowers' calculation that the Borrowers' Undrawn Availability is not
less than $2,500,000 after giving effect to such payments, as of the end of the
preceding month; Borrowers shall be permitted to make payments, after April 30,
1999, of the liability for tax distributions to partners as accrued on
Borrowers' audited balance sheet for the year ended December 31, 1998, not in
excess of $1,516,000 in the aggregate.
7.8 Indebtedness. Create, incur, assume or suffer to exist any
Indebtedness (exclusive of trade debt, Indebtedness to Lenders; Indebtedness
incurred for Capital Expenditures permitted under Section 7.6 hereof, and
Indebtedness disclosed on Schedule 5.8(b) of this Agreement) with an aggregate
outstanding balance at any time in excess of $500,000.
7.9 Nature of Business. Substantially change the nature of the
business in which it is presently engaged, nor except as specifically permitted
hereby purchase or invest, directly or indirectly, in any assets or property
other than in the ordinary course of business for assets or property which are
useful in, necessary for and are to be used in its business as presently
conducted.
7.10 Transactions with Affiliates. Except as set forth on Schedule
7.10, directly or indirectly, purchase, acquire or lease any property from, or
sell, transfer or lease any property to, or otherwise deal with, any Affiliate,
except transactions disclosed in the ordinary course of business, on an
arm's-length basis on terms no less favorable than terms which would have been
obtainable from a Person other than an Affiliate.
7.11 Leases. Enter as lessee into any lease arrangement for real or
personal property (unless capitalized and permitted under Section 7.6 hereof) if
after giving effect thereto, aggregate annual rental payments for all leased
property would exceed $750,000 in any one Fiscal Year.
7.12 Subsidiaries. Form or maintain any Subsidiary other than a
wholly-owned Subsidiary organized under the laws of a state of the United States
and formed or acquired as part of a Permitted Acquisition; enter into any
partnership, joint venture or similar arrangement; or own less than all of the
Equity Interests of any Subsidiary.
7.13 Fiscal Year and Accounting Changes. Change its Fiscal Year from
December 31, permit any Subsidiary to have a fiscal year that is different from
the Fiscal year or make any change (i) in accounting treatment and reporting
practices except as required by GAAP or (ii) in tax reporting treatment except
as required by Applicable Law.
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7.14 Pledge of Credit. Now or hereafter pledge Agent's or any
Lender's credit on any purchases or for any purpose whatsoever or use any
portion of any Advance in or for any business other than Borrowers' business as
conducted on the date of this Agreement.
7.15 Amendment of Organization Documents. Amend, modify or waive any
term or material provision of its Organization Documents except as required by
Applicable Law.
7.16 Compliance with ERISA. (a) (i) Maintain, or permit any member of
the Controlled Group to maintain, or (ii) become obligated to contribute, or
permit any member of the Controlled Group to become obligated to contribute, to
any Plan, other than those Plans disclosed on Schedule 5.8(c), (b) engage, or
permit any member of the Controlled Group to engage, in any non-exempt
"prohibited transaction," as that term is defined in Section 406 of ERISA and
Section 4975 of the Code, (c) incur, or permit any member of the Controlled
Group to incur, any "accumulated funding deficiency," as that term is defined in
Section 302 of ERISA or Section 412 of the Code, (d) terminate, or permit any
member of the Controlled Group to terminate, any Plan where such event could
result in any liability of any Borrower or any member of the Controlled Group or
the imposition of a Lien on the property of any Borrower or any member of the
Controlled Group pursuant to Section 4068 of ERISA, (e) assume, or permit any
member of the Controlled Group to assume, any obligation to contribute to any
Multiemployer Plan not disclosed on Schedule 5.8(c), (f) incur, or permit any
member of the Controlled Group to incur, any withdrawal liability to any
Multiemployer Plan; (g) fail promptly to notify Agent of the occurrence of any
Termination Event, (h) fail to comply, or permit a member of the Controlled
Group to fail to comply, with the requirements of ERISA or the Code or other
Applicable Laws in respect of any Plan, (i) fail to meet, or permit any member
of the Controlled Group to fail to meet, all minimum funding requirements under
ERISA or the Code or postpone or delay or allow any member of the Controlled
Group to postpone or delay any funding requirement with respect of any Plan.
7.17 Prepayment of Indebtedness. Except as permitted pursuant to
Section 7.18 hereof, at any time, directly or indirectly, prepay any
Indebtedness (other than the Obligations), or repurchase, redeem, retire or
otherwise acquire any Indebtedness of any Borrower, including the Subordinated
Indebtedness.
7.18 Initial Acquisition Documents. At any time, directly or
indirectly, (a) amend or modify the terms of any agreement applicable to the
Subordinated Indebtedness, other than to extend the time of payment thereof or
to reduce the rate of interest payable in connection therewith, or (b) make any
payment on account of any principal of, interest on or premium payable in
connection with any of the Subordinated Indebtedness except as expressly
permitted in the Subordination Agreements.
7.19 Upstream Payments. Create or suffer to exist any encumbrance or
restriction on the ability of any Borrower or a Subsidiary of any Borrower to
make any Upstream Payment, except for encumbrances or restrictions (a) pursuant
to any of the Other Documents and (b) existing under Applicable Law.
7.20 Consigned Inventory. Permit the aggregate Value of all
Borrowers' Consigned Inventory to exceed five percent (5.0%) of the Value of all
Borrowers' Inventory on any date. If and to the extent requested to do so by
Agent, each Borrower having any Consigned Inventory shall execute and deliver to
Agent, for its benefit and the pro rata benefit of Lenders, collateral
assignments of all UCC consignment filings and other documents at any time
executed, delivered or filed with any Governmental Body to evidence or perfect
such Borrower's rights with respect to such Consigned Inventory.
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7.21 Tax Consolidation. File or consent to the filing of any
consolidated income tax return with any Person other than a Subsidiary.
7.22 Conduct of Business. Engage in any business other than the
business engaged by it on the Closing Date and any business or activities that
are substantially similar, related or incidental thereto.
7.23 Other Agreements. Enter into any material amendment, waiver or
modification of the Initial Acquisition Documents.
7.24 Amendment to Factoring Agreement. Enter into or permit any
amendment or modification to the Factoring Agreement except to the extent
expressly permitted under the Factor Intercreditor Agreement.
SECTION 8. CONDITIONS PRECEDENT.
8.1 Conditions to Initial Advances. The agreement of Lenders to make
the initial Advances requested to be made on the Closing Date is subject to the
satisfaction, or waiver by Lenders, immediately prior to or concurrently with
the making of such Advances, of the following conditions precedent:
(a) Other Documents. Agent shall have received each of the Other
Documents duly executed and delivered by an authorized officer of each of the
parties thereto, including each Borrower;
(b) Filings, Registrations and Recordings. Each document
(including any UCC financing statement) required by this Agreement, or any Other
Documents or under Applicable Law or reasonably requested by the Agent to be
filed, registered or recorded in order to create, in favor of Agent, a perfected
security interest in or Lien upon the Collateral shall have been properly filed,
registered or recorded in each jurisdiction in which the filing, registration or
recordation thereof is so required or requested, and Agent shall have received
an acknowledgment copy, or other evidence satisfactory to it, of each such
filing, registration or recordation and satisfactory evidence of the payment of
any necessary fee, tax or expense relating thereto;
(c) Corporate Proceedings of Borrowers. Agent shall have received
a copy of the resolutions in form and substance reasonably satisfactory to
Agent, of the Board of Directors of each Borrower authorizing (i) the execution,
delivery and performance of this Agreement, the Notes, the Mortgage, any related
agreements, the Initial Acquisition Documents, and each of the other Loan
Documents and (ii) the granting by each Borrower of the security interests in
and Liens upon the Collateral in each case certified by the Secretary or an
Assistant Secretary of each Borrower as of the Closing Date; and, such
certificate shall state that the resolutions thereby certified have not been
amended, modified, revoked or rescinded as of the date of such certificate;
(d) Incumbency Certificates of Borrowers. Agent shall have
received a certificate of the Secretary or an Assistant Secretary of each
Borrower, dated the Closing Date, as to the incumbency and signature of the
officers of each Borrower executing this Agreement, any certificate or other
documents to be delivered by it pursuant hereto, together with evidence of the
incumbency of such Secretary or Assistant Secretary;
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(e) Organization Documents. Agent shall have received a copy of
the Organization Documents of each Borrower, and all amendments thereto,
certified by the Secretary of State or other appropriate official of its
jurisdiction of organization together with copies of the By-Laws of each
Borrower and all agreements of each Borrower's shareholders certified as
accurate and complete by the Secretary of each Borrower;
(f) Good Standing Certificates. Agent shall have received good
standing certificates for each Borrower dated not more than fifteen (15) days
prior to the Closing Date, issued by the Secretary of State or other appropriate
official of each Borrower's jurisdiction of incorporation and each jurisdiction
where the conduct of each Borrower's business activities or the ownership of its
properties necessitates qualification;
(g) Legal Opinion. Agent shall have received favorable legal
opinions of Borrowers' counsel (qualified to practice in the States of New York)
in form and substance satisfactory to Agent, which shall cover such matters
incident to the transactions contemplated by this Agreement and the other Loan
Documents as Agent may require, and each Borrower hereby authorizes and directs
each such counsel to deliver such opinions to Agent;
(h) No Litigation. No litigation, investigation or proceeding
before or by any arbitrator or Governmental Body shall be continuing or
threatened against any Borrower or against the officers or directors of any
Borrower (A) in connection with any of the Loan Documents or any of the
transactions contemplated thereby and which, in the reasonable opinion of Agent,
is deemed material or (B) which could, in the reasonable opinion of Agent, have
a Material Adverse Effect; and no injunction, writ, restraining order or other
order of any nature materially adverse to any Borrower or the conduct of its
business or inconsistent with the due consummation of the transactions
contemplated hereby shall have been issued by any Governmental Body;
(i) Financial Condition Certificate. Agent shall have received an
executed Financial Condition Certificate in the form of Exhibit D.
(j) Collateral Examination. Agent shall have completed Collateral
examinations and received appraisals, the results of which shall be satisfactory
in form and substance to Lenders, of the Receivables, Inventory, General
Intangibles, Real Property, Leasehold Interests and Equipment of each Borrower
and all books and records in connection therewith;
(k) Fees. Agent shall have received all fees payable to Agent and
Lenders on or prior to the Closing Date pursuant to Section 3 hereof;
(l) Pro Forma Financial Statements. Agent shall have received a
copy of the Pro Forma Financial Statements which shall be satisfactory in all
respects to Agent;
(m) Initial Acquisition Documents. Agent shall have received
final executed copies of the Initial Acquisition Documents and all related
agreements, documents and instruments as in effect on the Closing Date and the
transactions contemplated by such documentation shall be consummated prior to
the making of the initial Advance;
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(n) Subordination Agreements. Agent shall have entered into the
Subordination Agreements which shall set forth the basis upon which the holders
of the Subordinated Indebtedness may receive, and Borrowers may make, payments,
which basis shall be satisfactory in form and substance to Agent in its sole
discretion;
(o) Other Documents. Agent shall have received all Other
Documents, duly executed, and each in form and substance satisfactory to Agent
and Lenders;
(p) Insurance. Agent shall have received in form and substance
satisfactory to Agent, certified copies of each Borrower's casualty insurance
policies, together with loss payable endorsements on Agent's standard form of
loss payee endorsement naming Agent as loss payee, and certified copies of each
Borrower's liability insurance policies, together with endorsements naming Agent
as a co-insured;
(q) Title Insurance. Agent shall have received fully paid
mortgagee title insurance policies (or binding commitments to issue title
insurance policies, marked to Agent's satisfaction to evidence the form of such
policies to be delivered with respect to the Mortgage), in standard ALTA form,
issued by a title insurance company satisfactory to Agent, each in an amount
equal to not less than the fair market value of the Real Property subject to the
Mortgage, insuring the Mortgage to create a valid Lien on the Real Property with
no exceptions which Agent shall not have approved in writing and no survey
exceptions;
(r) Environmental Reports. Agent shall have received all
environmental studies and reports prepared by independent environmental
engineering firms with respect to all Real Property owned or leased by any
Borrower;
(s) Payment Instructions. Agent shall have received written
instructions from Borrowers directing the application of proceeds of the initial
Advances made pursuant to this Agreement;
(t) Lockbox and Blocked Account Agreements. Agent shall have
received duly executed agreements establishing the Blocked Accounts acceptable
in all respects to Agent for the collection and servicing of the Receivables and
other proceeds of Collateral;
(u) Consents. Agent shall have received any and all Consents
necessary to permit the effectuation of the transactions contemplated by any of
the Loan Documents; and, Agent shall have received such Consents and waivers of
such third parties as might assert claims with respect to the Collateral, as
Agent and its counsel shall deem necessary;
(v) No Adverse Material Change. Since December 31, 1998, there
shall not have occurred any event, condition or state of facts which could
reasonably be expected to have a Material Adverse Effect and no representations
made or information supplied to Agent shall have been proven to be inaccurate or
misleading in any material respect;
(w) Leasehold Agreements. Agent shall have received landlord,
mortgagee or warehouseman agreements satisfactory to Agent with respect to all
premises leased by any Borrower at which any Inventory or Equipment is located;
(x) Processor Conditions. The Processor Conditions shall have
been satisfied for SourceOne.
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(y) Mortgage. Agent shall have received in form and substance
satisfactory to Lenders (i) an executed Mortgage for the Liverpool Property and
(ii) a plat of survey thereof satisfactory to Agent; and
(z) Contract Review. Agent shall have reviewed all Material
Contracts of each Borrower including leases, union contracts, labor contracts,
vendor supply contracts, license agreements and distributorship agreements and
such contracts and agreements shall be satisfactory in all respects to Agent;
(aa) Closing Certificate. Agent shall have received a closing
certificate signed by the President of each Borrower dated as of the date
hereof, stating that (i) all representations and warranties set forth in this
Agreement and the other Loan Documents are true and correct on and as of such
date, (ii) Borrowers are on such date in compliance with all the terms and
provisions set forth in this Agreement and the other Loan Documents and (iii) on
such date no Default or Event of Default has occurred or is continuing;
(bb) Borrowing Base. Agent shall have received evidence from
Borrowers that the aggregate amount of Eligible Receivables and Eligible
Inventory is sufficient in value and amount to support Advances in the amount
requested by Borrowers on the Closing Date;
(cc) Undrawn Availability. After giving effect to the initial
Advances hereunder, Borrowers shall have Undrawn Availability on the Closing
Date of at least $2,000,000;
(dd) No Labor Disputes. Agent shall have received assurances
satisfactory to it that there are no threats of strikes or work stoppages by any
employees, or organization of employees, of any Borrower or any Guarantor, which
Agent reasonably determines may have a Material Adverse Effect; and
(ee) Other. All corporate and other proceedings, and all
documents, instruments and other legal matters in connection with the
Transactions shall be satisfactory in form and substance to Agent and its
counsel.
8.2 Conditions to Each Advance. The agreement of Lenders to make any
Advance requested to be made on any date (including the initial Advance) is
subject to the satisfaction of the following conditions precedent as of the date
such Advance is made:
(a) Representations and Warranties. Each of the representations and
warranties made by Borrowers in or pursuant to this Agreement and any of the
Other Documents, and each of the representations and warranties contained in any
certificate, document or financial or other statement furnished at any time
under or in connection with this Agreement or any of the Other Documents all be
true and correct in all material respects on and as of such date as if made on
and as of such date;
(b) No Default. No Event of Default or Default shall have occurred
and be continuing on such date, or would exist after giving effect to the
Advances requested to be made, on such date and, in the case of the initial
Advance, after giving effect to the consummation of the Transactions; provided,
however that Lenders, in their sole discretion, may continue to make Advances
notwithstanding the existence of an Event of Default or Default and that any
Advances so made shall not be deemed a waiver of any such Event of Default or
Default; and
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(c) Borrowing Base Certificates; Maximum Advances. Agent shall have
received each Borrowing Base Certificate required by the terms of this Agreement
or otherwise requested by Agent, and, in the case of any Advances requested to
be made, after giving effect thereto, the aggregate Advances shall not exceed
the maximum amount of Advances permitted under Section 2.1 hereof;
(d) No Litigation. No action, proceeding, investigation, regulation
or legislation shall have been instituted, threatened or proposed before any
court or Governmental Body to enjoin, restrain or prohibit, or to obtain damages
in respect of, or which is related to or arises out of, this Agreement or any of
the Other Documents or the consummation of the transactions contemplated hereby
or thereby; and
(e) No Material Adverse Effect. No event shall have occurred and no
condition shall exist which has or could be reasonably expected to have a
Material Adverse Effect.
Each request for an Advance by any Borrower hereunder shall constitute a
representation and warranty by each Borrower as of the date of such Advance that
the conditions contained in this subsection shall have been satisfied.
SECTION 9. INFORMATION AS TO BORROWERS.
Each Borrower shall, until satisfaction in full of the Obligations
and the termination of this Agreement:
9.1 Disclosure of Material Matters. Promptly upon learning thereof,
report to Agent all matters materially affecting the value, enforceability or
collectibility of any portion of the Collateral including any Borrower
reclamation or repossession of, or the return to any Borrower of, a material
amount of goods or claims or disputes asserted by any Customer or other obligor.
9.2 Schedules. Deliver to Agent on or before the fifteenth (15th) day
of each month as and for the prior month (a) accounts receivable agings, (b)
accounts payable schedules, (c) Inventory reports, and (d) a Borrowing Base
Certificate. In addition, each Borrower will deliver to Agent at such intervals
as Agent may reasonably request: (i) confirmatory assignment schedules, (ii)
copies of Customer's invoices, (iii) evidence of shipment or delivery, and (iv)
such further schedules, documents and/or information regarding the Collateral as
Agent may require including trial balances and test verifications. Agent shall
have the right to confirm and verify all Receivables by any manner and through
any medium it considers advisable and do whatever it may deem reasonably
necessary to protect its interests hereunder. The items to be provided under
this Section are to be in form satisfactory to Agent and executed by each
Borrower and delivered to Agent from time to time solely for Agent's convenience
in maintaining records of the Collateral, and any Borrower's failure to deliver
any of such items to Agent shall not affect, terminate, modify or otherwise
limit Agent's Lien with respect to the Collateral.
9.3 Environmental Reports. Furnish Agent, concurrently with the
delivery of the financial statements referred to in Sections 9.7 and 9.8, with a
certificate signed by the Chief Operating Officer of the Borrowing Agent, on
behalf of each Borrower, on behalf of Borrowers stating, to the best of his
knowledge, that each Borrower is in compliance in all material respects with all
Environmental Laws and laws relating to occupational safety and health. To the
extent any Borrower is not in compliance with the foregoing laws,
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the certificate shall set forth with specificity all areas of non-compliance and
the proposed action such Borrower will implement in order to achieve full
compliance.
9.4 Litigation. Promptly notify Agent in writing of any litigation,
suit or administrative proceeding affecting Borrowers, whether or not the claim
is covered by insurance, and of any suit or administrative proceeding, which in
any such case could reasonably be expected to have a Material Adverse Effect on
such Borrower.
9.5 Material Occurrences. Promptly notify Agent in writing upon the
occurrence of (a) any Default or Event of Default; (b) any event of default
under any Acquisition Document; (c) any event, development or circumstance
whereby any financial statements or other reports furnished to Agent fail in any
material respect to present fairly, in accordance with GAAP consistently
applied, the financial condition or operating results of Borrowers as of the
date of such statements; (d) any accumulated retirement plan funding deficiency
which, if such deficiency continued for two plan years and was not corrected as
provided in Section 4971 of the Code, could subject any Borrower to a tax
imposed by Section 4971 of the Code; (e) each and every default by any Borrower
which might result in the acceleration of the maturity of any Indebtedness,
including the names and addresses of the holders of such Indebtedness with
respect to which there is a default existing or with respect to which the
maturity has been or could be accelerated, and the amount of such Indebtedness;
and (f) any other development in the business or affairs of any Borrower which
could reasonably be expected to have a Material Adverse Effect; in each case
describing the nature thereof and the action any Borrower propose to take with
respect thereto.
9.6 Government Receivables. Notify Agent immediately if any of its
Receivables arise out of contracts between any Borrower and any Governmental
Body.
9.7 Annual Financial Statements. Furnish Agent within ninety (90)
days after the end of each Fiscal Year of Borrowers, financial statements of
Borrowers on a consolidating and consolidated basis including statements of
income and stockholders' equity and cash flow from the beginning of the current
Fiscal Year to the end of such Fiscal Year and the balance sheet as at the end
of such Fiscal Year, all prepared in accordance with GAAP applied on a basis
consistent with prior practices, and in reasonable detail and reported upon
without qualification by Ernst & Young LLP or such other independent certified
public accounting firm selected by Borrowers and satisfactory to Agent (the
"Accountants"). The report of the Accountants shall be accompanied by a
statement of the Accountants certifying that (i) they have caused the Loan
Agreement to be reviewed, (ii) in making the examination upon which such report
was based either no information came to their attention which to their knowledge
constituted an Event of Default or a Default under this Agreement or any related
agreement or, if such information came to their attention, specifying any such
Default or Event of Default, its nature, when it occurred and whether it is
continuing, and such report shall contain or have appended thereto calculations
which set forth Borrowers' compliance with the requirements or restrictions
imposed by Sections 6.9, 7.6 and 7.11 hereof. In addition, the reports shall be
accompanied by a Compliance Certificate.
9.8 Quarterly Financial Statements. Furnish Agent within ninety (90)
days after the end of each Fiscal Quarter, an unaudited balance sheet of
Borrowers and their Subsidiaries on a consolidated and consolidating basis and
unaudited statements of income and stockholders' equity and cash flow of
Borrowers and their Subsidiaries on a consolidated and consolidating basis
reflecting results of operations from the beginning of the Fiscal Year to the
end of such quarter and for such quarter, prepared on a basis consistent
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with prior practices and complete and correct in all material respects, subject
to normal year end adjustments. The reports shall be accompanied by a Compliance
Certificate.
9.9 Monthly Financial Statements. Furnish Agent within thirty (30)
days after the end of each month, an unaudited balance sheet of Borrowers and
their Subsidiaries on a consolidated and consolidating basis and unaudited
statements of income and stockholders' equity and cash flow of Borrowers and
their Subsidiaries on a consolidated and consolidating basis reflecting results
of operations from the beginning of the Fiscal Year to the end of such month and
for such month, prepared on a basis consistent with prior practices and complete
and correct in all material respects, subject to normal year end adjustments.
The reports shall be accompanied by a Compliance Certificate.
9.10 Other Reports. Furnish Agent as soon as available, but in any
event within ten (10) days after the issuance thereof, (i) with copies of such
financial statements, reports and returns as each Borrower shall send to its
stockholders and (ii) copies of all notices sent pursuant to the Initial
Acquisition Documents.
9.11 Additional Information. Furnish Agent with such additional
information as Agent shall reasonably request in order to enable Agent to
determine whether the terms, covenants, provisions and conditions of this
Agreement and the Notes have been complied with by any Borrower including, and
without the necessity of any request by Agent, (a) copies of all environmental
audits and reviews, (b) at least thirty (30) days prior thereto, notice of any
Borrower's opening of any new office or place of business or Borrowers' closing
of any existing office or place of business, (c) promptly upon any Borrower's
learning thereof, notice of any labor dispute to which any Borrower may become a
party, any strikes or walkouts relating to any of its plants or other
facilities, and the expiration of any labor contract to which any Borrower is a
party or by which any Borrower is bound, and (d) notice of each payment made by
any Borrower that is subject to Section 7.7 hereof.
9.12 Projected Operating Budget. Furnish Agent, no later than thirty
(30) days prior to the beginning of Borrowers' Fiscal Years commencing with
Fiscal Year 2000, a month by month projected operating budget and cash flow of
Borrowers and their Subsidiaries on a consolidated and consolidating basis for
such Fiscal Year (including an income statement for each month and a balance
sheet as at the end of the last month in each fiscal quarter), such projections
to be accompanied by a certificate signed by the President or Chief Financial
Officer of the Borrowing Agent to the effect that such projections have been
prepared on the basis of sound financial planning practice consistent with past
budgets and financial statements and that such officer has no reason to question
the reasonableness of any material assumptions on which such projections were
prepared.
9.13 Variances From Operating Budget. Furnish Agent, concurrently
with the delivery of the financial statements referred to in Sections 9.7 and
9.8, a written report summarizing all material variances from budgets submitted
by Borrowers pursuant to Section 9.12 and a discussion and analysis by
management with respect to such variances.
9.14 Notice of Suits, Adverse Events. Furnish Agent with prompt
notice of (i) any lapse or other termination of any Consent issued to any
Borrower by any Governmental Body or any other Person that is material to the
operation of any Borrower's business, (ii) any refusal by any Governmental Body
or any other Person to renew or extend any such Consent; and (iii) copies of any
periodic or special reports filed by Any Borrower with any Governmental Body or
Person, if such reports indicate any material change in the business,
operations, affairs or condition of any Borrower, or if copies thereof are
requested by Lender, and
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(iv) copies of any material notices and other communications from any
Governmental Body or Person which specifically relate to any Borrower.
9.15 ERISA Notices and Requests. Furnish Agent with immediate written
notice in the event that (i) any Borrower or any member of the Controlled Group
knows or has reason to know that a Termination Event has occurred, together with
a written statement describing such Termination Event and the action, if any,
which any Borrower or member of the Controlled Group has taken, is taking, or
proposes to take with respect thereto and, when known, any action taken or
threatened by the Internal Revenue Service, Department of Labor or PBGC with
respect thereto, (ii) any Borrower or any member of the Controlled Group knows
or has reason to know that a prohibited transaction (as defined in Sections 406
of ERISA and 4975 of the Code) has occurred together with a written statement
describing such transaction and the action which any Borrower or any member of
the Controlled Group has taken, is taking or proposes to take with respect
thereto, (iii) a funding waiver request has been filed with respect to any Plan
together with all communications received by any Borrower or any member of the
Controlled Group with respect to such request, (iv) any increase in the benefits
of any existing Plan or the establishment of any new Plan or the commencement of
contributions to any Plan to which any Borrower or any member of the Controlled
Group was not previously contributing shall occur, (v) any Borrower or any
member of the Controlled Group shall receive from the PBGC a notice of intention
to terminate a Plan or to have a trustee appointed to administer a Plan,
together with copies of each such notice, (vi) any Borrower or any member of the
Controlled Group shall receive any favorable or unfavorable determination letter
from the Internal Revenue Service regarding the qualification of a Plan under
Section 401(a) of the Code, together with copies of each such letter; (vii) any
Borrower or any member of the Controlled Group shall receive a notice regarding
the imposition of withdrawal liability, together with copies of each such
notice; (viii) any Borrower or any member of the Controlled Group shall fail to
make a required installment or any other required payment under Section 412 of
the Code on or before the due date for such installment or payment; (ix) any
Borrower or any member of the Controlled Group knows that (a) a Multiemployer
Plan has been terminated, (b) the administrator or plan sponsor of a
Multiemployer Plan intends to terminate a Multiemployer Plan, or (c) the PBGC
has instituted or will institute proceedings under Section 4042 of ERISA to
terminate a Multiemployer Plan.
9.16 Additional Documents. Execute and deliver to Agent, upon
request, such documents and agreements as Agent may, from time to time,
reasonably request to carry out the purposes, terms or conditions of this
Agreement.
SECTION 10. EVENTS OF DEFAULT.
The occurrence of any one or more of the following events shall
constitute an "Event of Default":
10.1 failure by any Borrower to pay any principal or interest on the
Obligations when due, whether at maturity or by reason of acceleration pursuant
to the terms of this Agreement or by notice of intention to prepay, or by
required prepayment or failure to pay any other liabilities or make any other
payment, fee or charge provided for herein or in any Other Document when due;
10.2 any representation or warranty made or deemed made by any
Borrower in this Agreement or any Other Document or in any certificate, document
or financial or other statement furnished at any time in connection herewith or
therewith shall prove to have been misleading in any material respect on the
date when made or deemed to have been made;
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10.3 issuance of a notice of Lien, levy, assessment, injunction or
attachment against a material portion of any Borrower's property;
10.4 except as otherwise provided for in Sections 10.1, failure or
neglect of any Borrower to perform, keep or observe any term, provision,
condition, covenant herein contained, or contained in any other agreement or
arrangement, now or hereafter entered into between any Borrower and Agent or any
Lender except for a failure or neglect of any Borrower to perform, keep or
observe any term, provision, condition or covenant, contained in Sections 4.6,
4.7, 4.9, 4.11, 6.1, 6.3, 6.4, 9.4 or 9.6 hereof which is cured within twenty
(20) days from the occurrence of such failure or neglect;
10.5 any judgment or judgments are rendered against any Borrower or
any Guarantor and either (i) enforcement proceedings shall have been commenced
upon such judgment or (ii) the amount of such judgment exceeds $250,000 there
shall be any period of thirty (30) consecutive days during which a stay of
enforcement of such judgment, by reason of a pending appeal or otherwise, shall
not be in effect;
10.6 Any Borrower shall (i) apply for, consent to or suffer the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
liquidator or similar fiduciary of itself or of all or a substantial part of its
property, (ii) make a general assignment for the benefit of creditors, (iii)
commence a voluntary case under any state or federal bankruptcy laws (as now or
hereafter in effect), (iv) be adjudicated a bankrupt or declared insolvent, (v)
file a petition seeking to take advantage of any other law providing for the
relief of debtors, (vi) acquiesce to, or fail to have dismissed, within thirty
(30) days, any petition filed against it in any involuntary case under such
bankruptcy laws, or (vii) take any action for the purpose of effecting any of
the foregoing;
10.7 Any Borrower or any Guarantor shall admit in writing its
inability, or be generally unable, to pay its debts as they become due, cease
operations of its present business or cease to be Solvent;
10.8 any Subsidiary of any Borrower or any Guarantor shall (i) apply
for, consent to or suffer the appointment of, or the taking of possession by, a
receiver, custodian, trustee, liquidator or similar fiduciary of itself or of
all or a substantial part of its property, (ii) admit in writing its inability,
or be generally unable, to pay its debts as they become due or cease operations
of its present business, (iii) make a general assignment for the benefit of
creditors, (iv) commence a voluntary case under any state or federal bankruptcy
laws (as now or hereafter in effect), (v) be adjudicated a bankrupt or
insolvent, (vi) file a petition seeking to take advantage of any other law
providing for the relief of debtors, (vii) acquiesce to, or fail to have
dismissed, within thirty (30) days, any petition filed against it in any
involuntary case under such bankruptcy laws, or (viii) take any action for the
purpose of effecting any of the foregoing;
10.9 any change in any Borrower's condition or affairs (financial or
otherwise) which, in Agent's opinion, has a Material Adverse Effect;
10.10 any Lien created hereunder or provided for hereby or under any
Other Document for any reason ceases to be or is not a valid and perfected Lien
having a first priority interest;
10.11 an event of default has occurred and been declared under any
the documents evidencing the Subordinated Indebtedness which default shall not
have been cured or waived within any applicable grace period and for which the
holder of such Subordinated Indebtedness is permitted to accelerate the maturity
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of such Subordinated Indebtedness, take enforcement action, or exercise any
remedies take action pursuant to the terms of the documents evidencing such
Subordinated Indebtedness as in effect on the Closing Date;
10.12 a default of the obligations of any Borrower under any other
agreement to which it is a party shall occur that has or could reasonably be
expected to have a Material Adverse Effect and which is not cured within any
applicable grace period;
10.13 termination or breach of any Guaranty or any Guarantor
Security Agreement executed and delivered to Agent in connection with the
Obligations or, if any Guarantor attempts to terminate or challenges the
validity of or its liability under, any such Guaranty or Guarantor Security
Agreement or similar agreement;
10.14 any Change of Control shall occur;
10.15 any material provision of this Agreement or any of the Other
Documents shall, for any reason, cease to be valid and binding on any Borrower,
or any Borrower shall so claim in writing to Agent;
10.16 (i) any Governmental Body shall (A) revoke, terminate, suspend
or adversely modify any license, permit, patent trademark or tradename of any
Borrower, the continuation of which is material to the continuation of such
Borrower's business, or (B) commence proceedings to suspend, revoke, terminate
or adversely modify any such license, permit, trademark, tradename or patent and
such proceedings shall not be dismissed or discharged within sixty (60) days, or
(c) schedule or conduct a hearing on the renewal of any license, permit,
trademark, tradename or patent necessary for the continuation of any Borrower's
business and the staff of such Governmental Body issues a report recommending
the termination, revocation, suspension or material, adverse modification of
such license, permit, trademark, tradename or patent; (ii) any agreement which
is necessary or material to the operation of any Borrower's business shall be
revoked or terminated and not replaced by a substitute acceptable to Agent
within thirty (30) days after the date of such revocation or termination, and
such revocation or termination and non-replacement would reasonably be expected
to have a Material Adverse Effect on a Borrower;
10.17 any portion of the Collateral shall be seized or taken by a
Governmental Body, or any Borrower or the title and rights of any Borrower which
is the owner of any material portion of the Collateral shall have become the
subject matter of litigation which might, in the opinion of Agent, upon final
determination, result in impairment or loss of the security provided by this
Agreement or the Other Documents;
10.18 the operations of any Borrower's manufacturing facility in
Liverpool, New York are interrupted at any time for more than forty-eight (48)
hours during any period of five (5) consecutive days, unless such Borrower shall
(i) be entitled to receive for such period of interruption, proceeds of business
interruption insurance sufficient to assure that its per diem cash needs during
such period is at least equal to its average per diem cash needs for the
consecutive three (3) month period immediately preceding the initial date of
interruption and (ii) receive such proceeds in the amount described in clause
(i) preceding not later than thirty (30) days following the initial date of any
such interruption; provided, however, that notwithstanding the provisions of
clauses (i) and (ii) of this section, an Event of Default shall be deemed to
have occurred if Borrowers shall be receiving the proceeds of business
interruption insurance for a period of thirty (30) consecutive days;
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10.19 an event or condition specified in Sections 7.16 or 9.15
hereof shall occur or exist with respect to any Plan and, as a result of such
event or condition, together with all other such events or conditions, any
Borrower or any member of the Controlled Group shall incur, or in the opinion of
Agent be reasonably likely to incur, a liability to a Plan or the PBGC (or both)
which, in the reasonable judgment of Agent, could reasonably be expected to have
a Material Adverse Effect on any Borrower; or
10.20 any Borrower shall cease to be entitled to use or operate any
machinery or equipment leased by it from another Person by reason of such
Person's insolvency, bankruptcy, dissolution, receivership or other winding up
of its affairs or liquidation of its assets which could reasonably be expected
to have a Material Adverse Effect on any Borrower.
SECTION 11. LENDERS' RIGHTS AND REMEDIES AFTER DEFAULT.
11.1 Rights and Remedies. Upon the occurrence of (i) an Event of
Default pursuant to Section 10.6 all Obligations shall be immediately due and
payable and this Agreement and the obligation of Lenders to make Advances shall
be deemed terminated; and, (ii) any of the other Events of Default and at any
time thereafter (such default not having previously been cured), at the option
of Required Lenders all Obligations shall be immediately due and payable and
Lenders shall have the right to terminate this Agreement and to terminate the
obligation of Lenders to make Advances and (iii) a filing of a petition against
any Borrower in any involuntary case under any state or federal bankruptcy laws,
the obligation of Lenders to make Advances hereunder shall be terminated other
than as may be required by an appropriate order of the bankruptcy court having
jurisdiction over such Borrower. Upon or after the occurrence of any Event of
Default, Agent shall have the right to exercise any and all other rights and
remedies provided for herein, under the UCC and at law or equity generally,
including the right to foreclose the security interests granted herein and to
realize upon any Collateral by any available judicial procedure and/or to take
possession of and sell any or all of the Collateral with or without judicial
process. Agent may enter any of any Borrower's premises or other premises
without legal process and without incurring liability to any Borrower therefor,
and Agent may thereupon, or at any time thereafter, in its discretion without
notice or demand, take the Collateral and remove the same to such place as Agent
may deem advisable and Agent may require Borrowers to make the Collateral
available to Agent at a convenient place. With or without having the Collateral
at the time or place of sale, Agent may sell the Collateral, or any part
thereof, at public or private sale, at any time or place, in one or more sales,
at such price or prices, and upon such terms, either for cash, credit or future
delivery, as Agent may elect. Except as to that part of the Collateral which is
perishable or threatens to decline speedily in value or is of a type customarily
sold on a recognized market, Agent shall give the Borrowing Agent reasonable
notification of such sale or sales, it being agreed that in all events written
notice mailed to the Borrowing Agent at least five (5) days prior to such sale
or sales is reasonable notification. At any public sale Agent or any Lender may
bid for and become the purchaser, and Agent, any Lender or any other purchaser
at any such sale thereafter shall hold the Collateral sold absolutely free from
any claim or right of whatsoever kind, including any equity of redemption and
such right and equity are hereby expressly waived and released by Borrowers. In
connection with the exercise of the foregoing remedies, Agent is granted
permission to use all of each Borrower's trademarks, trade styles, trade names,
patents, patent applications, licenses, franchises and other proprietary rights
which are used in connection with (a) Inventory for the purpose of marketing,
advertising for sale and disposing of such Inventory and (b) Equipment for the
purpose of completing the manufacture of unfinished goods. The proceeds realized
from the sale of any Collateral shall be applied as follows: first, to the
reasonable costs, expenses and attorneys' fees and expenses incurred by Agent
for collection and for acquisition, completion, protection, removal, storage,
sale and delivery of the Collateral; second, to interest due upon any of the
Obligations and any fees
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payable under this Agreement; and, third, to the principal of the Obligations.
If any deficiency shall arise, Borrowers shall remain liable to Agent and
Lenders therefor.
11.2 Agent's Discretion. Agent shall have the right in its sole
discretion to determine which rights, Liens, security interests or remedies
Agent may at any time pursue, relinquish, subordinate, or modify or to take any
other action with respect thereto and such determination will not in any way
modify or affect any of Agent's or Lenders' rights hereunder.
11.3 Setoff. In addition to any other rights which Agent or any
Lender may have under Applicable Law, upon the occurrence of an Event of Default
hereunder, Agent and such Lender shall have a right to apply Borrowers' property
held by Agent and such Lender to reduce the Obligations.
11.4 Rights and Remedies not Exclusive. The enumeration of the
foregoing rights and remedies is not intended to be exhaustive and the exercise
of any right or remedy shall not preclude the exercise of any other right or
remedies provided for herein or otherwise provided by law, all of which shall be
cumulative and not alternative.
SECTION 12. WAIVERS AND JUDICIAL PROCEEDINGS.
12.1 Waiver of Notice. Each Borrower hereby waives notice of
non-payment of any of the Receivables, demand, presentment, protest and notice
thereof with respect to any and all instruments, notice of acceptance hereof,
notice of loans or advances made, credit extended, Collateral received or
delivered, or any other action taken in reliance hereon, and all other demands
and notices of any description, except such as are expressly provided for
herein.
12.2 Delay. No delay or omission on Agent's or any Lender's part in
exercising any right, remedy or option shall operate as a waiver of such or any
other right, remedy or option or of any default.
12.3 Jury Waiver. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY
WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR
AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR
ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR
AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE AND EACH PARTY
HEREBY CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE
DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY
FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENTS OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO
TRIAL BY JURY.
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SECTION 13. EFFECTIVE DATE AND TERMINATION.
13.1 Term. This Agreement shall become effective on the date hereof
and shall continue in full force and effect until April 15, 2002 (the "Term")
unless sooner terminated as herein provided. Borrowers may terminate this
Agreement at any time upon ninety (90) days prior written notice from the
Borrowing Agent to Agent upon payment in full of the Obligations. In the event
the Obligations are prepaid in full prior to the last day of the Term (the date
of such prepayment hereinafter referred to as the "Early Termination Date"),
Borrowers shall pay to Agent for the benefit of Lenders an early termination fee
in an amount equal to (x) three percent (3.0%) of the Maximum Revolving Amount
plus the Scheduled Term Loan Balance if the Early Termination Date occurs on or
after the Closing Date to and including the date immediately preceding the first
anniversary of the Closing Date, (y) two percent (2.0%) of the Maximum Revolving
Amount plus the Scheduled Term Loan Balance if the Early Termination Date occurs
on or after the first anniversary of the Closing Date to and including the date
immediately preceding the second anniversary of the Closing Date, and (z) one
percent (1.0%) of the Maximum Revolving Amount plus the Scheduled Term Loan
Balance if the Early Termination Date occurs on or after the second anniversary
of the Closing Date to and including the date immediately preceding the third
anniversary of the Closing Date.
13.2 Termination. The termination of the Agreement shall not affect
any Borrower's, Agent's or any Lender's rights, or any of the Obligations having
their inception prior to the effective date of such termination, and the
provisions hereof shall continue to be fully operative until all transactions
entered into, rights or interests created or Obligations have been fully
disposed of, concluded or liquidated. The security interests, Liens and rights
granted to Agent and Lenders hereunder and the financing statements filed
hereunder shall continue in full force and effect, notwithstanding the
termination of this Agreement or the fact that Borrowers' Account may from time
to time be temporarily in a zero or credit position, until all of the
Obligations of each Borrower have been paid or performed in full after the
termination of this Agreement or each Borrower has furnished Agent and Lenders
with an indemnification satisfactory to Agent and Lenders with respect thereto.
Accordingly, except for dispositions of assets that are permitted under this
Agreement or that are approved in writing by Agent and Borrowing Agent, each
Borrower waives any rights which it may have under Section 9-404(1) of the UCC
to demand the filing of termination statements with respect to the Collateral,
and Agent shall not be required to send such termination statements to any
Borrower, or to file them with any filing office, unless and until this
Agreement shall have been terminated in accordance with its terms and all
Obligations paid in full in immediately available funds. All representations,
warranties, covenants, waivers and agreements contained herein shall survive
termination hereof until all Obligations are paid or performed in full.
SECTION 14. REGARDING AGENT.
14.1 Appointment. Each Lender hereby designates PNC to act as Agent
for such Lender under this Agreement and the Other Documents. Each Lender hereby
irrevocably authorizes Agent to take such action on its behalf under the
provisions of each of the Loan Documents and to exercise such powers and to
perform such duties hereunder and thereunder as are specifically delegated to or
required of Agent by the terms hereof and thereof and such other powers as are
reasonably incidental thereto and Agent shall hold all Collateral, payments of
principal and interest, fees (except the fees set forth in Sections 3.3(a) and
3.4), charges and collections (without giving effect to any collection days)
received pursuant to this Agreement, for its benefit and the ratable benefit of
Lenders. Agent may perform any of its duties hereunder by or through its agents
or employees. As to any matters not expressly provided for by this Agreement
(including collection of the Notes) Agent shall not be required to exercise any
discretion or take any action, but shall be required to act or to refrain from
acting (and shall be fully protected in so acting or refraining from acting)
upon the instructions of the Required Lenders, and such instructions shall be
binding; provided, however,
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that Agent shall not be required to take any action which exposes Agent to
liability or which is contrary to this Agreement or the Other Documents or
Applicable Law unless Agent is furnished with an indemnification reasonably
satisfactory to Agent with respect thereto.
14.2 Nature of Duties. Agent shall have no duties or
responsibilities except those expressly set forth in this Agreement and the
Other Documents. Neither Agent nor any of its officers, directors, employees or
agents shall be (i) liable for any action taken or omitted by them as such
hereunder or in connection herewith, unless caused by their gross (not mere)
negligence or willful misconduct, or (ii) responsible in any manner for any
recitals, statements, representations or warranties made by any Borrower or any
officer thereof contained in this Agreement, or in any of the Other Documents or
in any certificate, report, statement or other document referred to or provided
for in, or received by Agent under or in connection with, any of the Loan
Documents or for the value, validity, effectiveness, genuineness, enforceability
or sufficiency of any of the Loan Documents or for any failure of any Borrower
to perform its obligations hereunder. Agent shall not be under any obligation to
any Lender to ascertain or to inquire as to the observance or performance of any
of the agreements contained in, or conditions of, any of the Loan Documents, or
to inspect the properties, books or records of any Borrower. The duties of Agent
as respects the Advances to Borrowers shall be mechanical and administrative in
nature; Agent shall not have by reason of this Agreement a fiduciary
relationship in respect of any Lender; and nothing in this Agreement, expressed
or implied, is intended to or shall be so construed as to impose upon Agent any
obligations in respect of this Agreement except as expressly set forth herein.
14.3 Lack of Reliance on Agent and Resignation.
(a) Independently and without reliance upon Agent or any other
Lender, each Lender has made and shall continue to make (i) its own independent
investigation of the financial condition and affairs of each Borrower in
connection with the making and the continuance of the Advances hereunder and the
taking or not taking of any action in connection herewith, and (ii) its own
appraisal of the creditworthiness of each Borrower. Agent shall have no duty or
responsibility, either initially or on a continuing basis, to provide any Lender
with any credit or other information with respect thereto, whether coming into
its possession before making of the Advances or at any time or times thereafter
except as shall be provided by any Borrower pursuant to the terms hereof. Agent
shall not be responsible to any Lender for any recitals, statements,
information, representations or warranties herein or in any agreement, document,
certificate or a statement delivered in connection with or for the execution,
effectiveness, genuineness, validity, enforceability, collectibility or
sufficiency of any of the Loan Documents, or of the financial condition of any
Borrower, or be required to make any inquiry concerning either the performance
or observance of any of the terms, provisions or conditions of this Agreement,
the Notes, the Other Documents or the financial condition of any Borrower, or
the existence of any Event of Default or any Default.
(b) Agent may resign (unless Agent is the only Lender) on sixty
(60) days written notice to each of Lenders and the Borrowing Agent and upon
such resignation, the Required Lenders will promptly designate a successor Agent
reasonably satisfactory to Borrowers. Any such successor Agent shall succeed to
the rights, powers and duties of Agent, and the term "Agent" shall mean such
successor agent effective upon its appointment, and the former Agent's rights,
powers and duties as Agent shall be terminated, without any other or further act
or deed on the part of such former Agent. After any Agent's resignation as
Agent, the provisions of this Section 14 shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement.
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14.4 Certain Rights of Agent. If Agent shall request instructions
from Lenders with respect to any act or action (including failure to act) in
connection with this Agreement or any Other Document, Agent shall be entitled to
refrain from such act or taking such action unless and until Agent shall have
received instructions from the Required Lenders; and Agent shall not incur
liability to any Person by reason of so refraining. Without limiting the
foregoing, Lenders shall not have any right of action whatsoever against Agent
as a result of its acting or refraining from acting hereunder in accordance with
the instructions of the Required Lenders.
14.5 Reliance. Agent shall be entitled to rely, and shall be fully
protected in relying, upon any note, writing, resolution, notice, statement,
certificate, telex, teletype or telecopier message, cablegram, order or other
document or telephone message believed by it to be genuine and correct and to
have been signed, sent or made by the proper person or entity, and, with respect
to all legal matters pertaining to this Agreement and the Other Documents and
its duties hereunder, upon advice of counsel selected by it. Agent may employ
agents and attorneys-in-fact and shall not be liable for the default or
misconduct of any such agents or attorneys-in-fact selected by Agent with
reasonable care.
14.6 Notice of Default. Agent shall not be deemed to have knowledge
or notice of the occurrence of any Default or Event of Default hereunder or
under the Other Documents, unless Agent has received notice from a Lender or
Borrowers referring to this Agreement or the Other Documents, describing such
Default or Event of Default and stating that such notice is a "notice of
default." In the event that Agent receives such a notice, Agent shall give
notice thereof to Lenders. Agent shall take such action with respect to such
Default or Event of Default as shall be reasonably directed by the Required
Lenders; provided, however, that, unless and until Agent shall have received
such directions, Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable in the best interests of Lenders.
14.7 Indemnification. To the extent Agent is not reimbursed and
indemnified by Borrowers, each Lender will reimburse and indemnify Agent in
proportion to its respective portion of the Advances (or, if no Advances are
outstanding, according to its Commitment Percentage), from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind or nature whatsoever which
may be imposed on, incurred by or asserted against Agent in performing its
duties hereunder, or in any way relating to or arising out of this Agreement or
any Other Document; provided, however, that, Lenders shall not be liable for any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from Agent's gross
(not mere) negligence or willful misconduct.
14.8 Agent in its Individual Capacity. With respect to the
obligation of Agent to lend under this Agreement, the Advances made by it shall
have the same rights and powers hereunder as any other Lender and as if it were
not performing the duties as Agent specified herein; and the term "Lender" or
any similar term shall, unless the context clearly otherwise indicates, include
Agent in its individual capacity as a Lender. Agent may engage in business with
any Borrower as if it were not performing the duties specified herein, and may
accept fees and other consideration from any Borrower for services in connection
with this Agreement or otherwise without having to account for the same to
Lenders.
14.9 Delivery of Documents. To the extent Agent receives financial
statements required under Sections 9.7, 9.8, and 9.9 from any Borrower pursuant
to the terms of this Agreement, Agent will promptly furnish such documents and
information to Lenders.
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14.10 Borrowers' Undertaking to Agent. Without prejudice to their
respective obligations to Lenders under the other provisions of this Agreement,
each Borrowers hereby undertakes with Agent to pay to Agent from time to time on
demand all amounts from time to time due and payable by it for the account of
Agent or Lenders or any of them pursuant to this Agreement to the extent not
already paid. Any payment made pursuant to any such demand shall pro tanto
satisfy the relevant Borrowers' obligations to make payments for the account of
Lenders or the relevant one or more of them pursuant to this Agreement.
SECTION 15. CO-BORROWERS PROVISIONS.
15.1 Borrowing Agency Provisions.
(a) Each Borrower hereby irrevocably designates the Borrowing
Agent to be its attorney and agent and in such capacity to borrow, sign and
endorse notes, and execute and deliver all instruments, documents, writings and
further assurances now or hereafter required hereunder, on behalf of such
Borrower or Borrowers, and hereby authorizes Agent to pay over or credit all
loan proceeds hereunder in accordance with the request of the Borrowing Agent.
(b) The handling of this credit facility as a co-borrowing
facility with a borrowing agent in the manner set forth in this Agreement is
solely as an accommodation to Borrowers and at their request. In order to
utilize the financial powers of each Borrower in the most efficient and
economical manner, and in order to facilitate the financing of each Borrower's
needs, Lenders will, at the request of the Borrowing Agent, make Advances and
other financial accommodations to all Borrowers on a combined basis and in
accordance with the provisions set forth in this Agreement. Borrowers
acknowledge that their business is a mutual and collective enterprise and
Borrowers believe that the consolidation of all Advances and other financial
accommodations under this Agreement will enhance the aggregate borrowing powers
of each Borrower and ease the administration of their loan relationship with
Lenders, all to the mutual advantage of Borrowers. Agent's and Lenders'
willingness to extend credit to Borrowers pursuant to the terms hereof and to
administer each Borrower's portion of the Collateral therefor, on a combined
basis as more fully set forth in this Agreement, is done solely as an
accommodation to Borrowers, at their request and in furtherance of their mutual
and collective enterprise. To induce Agent and Lenders to do so and in
consideration thereof, each Borrower hereby jointly and severally indemnifies
Agent and each Lender and holds Agent and each Lender harmless from and against
any and all liabilities, expenses, losses, damages and claims of damage or
injury asserted against Agent or any Lender by any Person arising from or
incurred by reason of the handling of the financing arrangements of Borrowers as
and to the extent provided herein, reliance by Agent or any Lender on any
request or instruction from the Borrowing Agent or any other action taken by
Agent or any Lender with respect to this Section 15.1 except due to willful
misconduct or gross (not mere) negligence by the indemnified party.
(c) All Obligations shall be joint and several, and each
Borrower shall make payment upon the maturity of the Obligations by acceleration
or otherwise, and such obligation and liability on the part of each Borrower
shall in no way be affected by any extensions, renewals and forbearance granted
to Agent or any Lender to any Borrower, failure of Agent or any Lender to give
any Borrower notice of borrowing or any other notice, any failure of Agent or
any Lender to pursue or preserve its rights against any Borrower, the release by
Agent or any Lender of any Collateral now or thereafter acquired from any
Borrower, and such agreement by any Borrower to pay upon any notice issued
pursuant thereto is
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unconditional and unaffected by prior recourse by Agent or any Lender to the
other Borrowers or any Collateral for such Borrower's Obligations or the lack
thereof.
(d) Each Borrower's joint and several liability hereunder with
respect to the Advances and other Obligations shall, to the fullest extent
permitted by Applicable Law, be unconditional irrespective of (i) the validity,
enforceability, avoidance or subordination of any of the Obligations or of any
promissory note or other document evidencing all or any part of the Obligations,
(ii) the absence of any attempt to collect any of the Obligations from any other
Borrower or Guarantor or any Collateral or other security therefor, or the
absence of any other action to enforce the same, (iii) the waiver, consent,
extension, forbearance or granting of any indulgence by Agent or any Lender with
respect to any of the Obligations or any instrument or agreement evidencing or
securing the payment of any of the Obligations, or any other agreement now or
hereafter executed by any other Borrower and delivered to Agent or any Lender,
(iv) the failure by Lender to take any steps to perfect or maintain the
perfected status of its security interest in or Lien upon, or to preserve its
rights to, any of the Collateral or other security for the payment or
performance of any of the Obligations, or Agent's or any Lender's release of any
Collateral or of its Liens upon any Collateral, (v) Agent's or any Lenders'
election, in any proceeding instituted under the Bankruptcy Code, for the
application of Section 1111(b)(2) of the Bankruptcy Code, (vi) any borrowing or
grant of a security interest by any other Borrowers, as debtor-in-possession
under Section 364 of the Bankruptcy Code, (vii) the release or compromise, in
whole or in part, of the liability of any Borrower or Guarantor for the payment
of any of the Obligations, (viii) any amendment or modification of any of the
Loan Documents or waiver of any Default or Event of Default thereunder, (ix) any
increase in the amount of the Obligations beyond any limits imposed herein or in
the amount of any interest, fees or other charges payable in connection
therewith, or any decrease in the same, (x) the disallowance of all or any
portion of Lender's claims for the repayment of any of the Obligations under
Section 502 of the Bankruptcy Code, or (xi) any other circumstance that might
constitute a legal or equitable discharge or defense of any Borrower and
Guarantor. At any time an Event of Default exists, Lender may proceed directly
and at once, without notice to any Borrower or Guarantor, against any or all
Borrowers or Guarantors to collect and recover all or any part of the
Obligations, without first proceeding against any other Borrower or Guarantor or
against any Collateral or other security for the payment or performance of any
of the Obligations, and each Borrower waives any provision that might otherwise
require Agent or any Lender under Applicable Law to pursue or exhaust its
remedies against any Collateral or any other Borrowers or Guarantor before
pursuing Borrower. Borrowers consents and agrees that Agent and any Lender shall
be under no obligation to marshall any assets in favor of Borrowers or Guarantor
or against or in payment of any or all of the Obligations.
(e) Each Borrower is unconditionally obligated to repay the
Obligations as a joint and several obligor under this Agreement. If, as of any
date, the aggregate amount of payments made by Borrowers on account of the
Obligations and proceeds of Borrowers' Collateral that are applied to the
Obligations exceeds the aggregate amount of Advances actually used by Borrower
in its business (such excess amount being referred to as an "Accommodation
Payment"), then each of the other Borrowers shall be obligated to make
contribution to such Borrower (the "Paying Borrower") in an amount equal to (A)
the product derived by multiplying the sum of each Accommodation Payment of each
Borrower by the Allocable Percentage of the Borrower from whom contribution is
sought less (B) the amount, if any, of the then outstanding Accommodation
Payment of such Contributing Borrower (such last mentioned amount which is to be
subtracted from the aforesaid product to be increased by any amounts theretofore
paid by such Contributing Borrower by way of contribution hereunder, and to be
decreased by any amounts theretofore received by such Contributing Borrower by
way of contribution hereunder); provided, however, that a Paying
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Borrower's recovery of contribution hereunder from the other Borrowers shall be
limited to that amount paid by the Paying Borrower in excess of its Allocable
Percentage of all Accommodation Payments then outstanding of all Borrowers. As
used herein, the term "Allocable Percentage" shall mean, on any date of
determinations thereof, a fraction the denominator of which shall be equal to
the number of Borrowers who are parties to this Agreement on such date and the
numerator of which shall be 1; provided, however, that such percentages shall be
modified in the event that contribution from a Borrower is not possible by
reason of insolvency, bankruptcy or otherwise by reducing Borrower's Allocable
Percentage equitably and by adjusting the Allocable Percentage of the other
Borrowers proportionately so that the Allocable Percentages of all Borrowers at
all times equals 100%.
15.2 Subordination. Each Borrower expressly subordinates and
postpones the exercise of any and all rights of subrogation, reimbursement,
indemnity, exoneration, contribution of any other claim that Borrowers may now
or hereafter have against the other Borrowers or other Person directly or
contingently liable for the Obligations hereunder, or against or with respect to
the other Borrowers' property (including any property which is Collateral for
the Obligations), arising from the existence or performance of this Agreement,
until termination of this Agreement and repayment in full of the Obligations.
SECTION 16. MISCELLANEOUS.
16.1 Governing Law; Process. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applied to
contracts to be performed wholly within the State of New York without giving
effect to the conflicts of laws principles thereof. Any judicial proceeding
brought by or against any Borrower with respect to any of the Obligations, this
Agreement or any related agreement may be brought in any court of competent
jurisdiction in the State of New York, United States of America, and, by
execution and delivery of this Agreement, Each Borrower accepts for itself and
in connection with its properties, generally and unconditionally, the
non-exclusive jurisdiction of the aforesaid courts, and irrevocably agrees to be
bound by any judgment rendered thereby in connection with this Agreement. Each
Borrower hereby waives personal service of any and all process upon it and
consents that all such service of process may be made by registered mail (return
receipt requested) directed to the Borrowing Agent at its address set forth in
Section 16.6 and service so made shall be deemed completed five (5) days after
the same shall have been so deposited in the mails of the United States of
America, or, at the Agent's and/or any Lender's option, by service upon the
Borrowing Agent. Nothing herein shall affect the right to serve process in any
manner permitted by law or shall limit the right of Agent or any Lender to bring
proceedings against any Borrower in the courts of any other jurisdiction. Each
Borrower waives any objection to jurisdiction and venue of any action instituted
hereunder and shall not assert any defense based on lack of jurisdiction or
venue or based upon forum non conveniens. Any judicial proceeding by any
Borrower against Agent or any Lender involving, directly or indirectly, any
matter or claim in any way arising out of, related to or connected with this
Agreement or any related agreement, shall be brought only in a federal or state
court located in the Borough of Manhattan, State of New York.
16.2 Entire Understanding.
(a) This Agreement and the documents executed concurrently
herewith contain the entire understanding between each Borrower, Agent and each
Lender and supersedes all prior agreements and understandings, if any, relating
to the subject matter hereof. Any promises, representations, warranties or
guarantees not herein contained and hereinafter made shall have no force and
effect unless in writing, signed by the Borrowing Agent's, Agent's and each
Lender's respective officers. Neither this Agreement nor
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any portion or provisions hereof may be changed, modified, amended, waived,
supplemented, discharged, cancelled or terminated orally or by any course of
dealing, or in any manner other than by an agreement in writing, signed by the
party to be charged. Each Borrower acknowledges that it has been advised by
counsel in connection with the execution of this Agreement and Other Documents
and is not relying upon oral representations or statements inconsistent with the
terms and provisions of this Agreement.
(b) The Required Lenders, Agent with the consent in writing of
the Required Lenders, and Borrowers may, subject to the provisions of this
Section 16.2(b), from time to time enter into written supplemental agreements to
this Agreement or any of the Other Documents executed by Borrowers, for the
purpose of adding or deleting any provisions or otherwise changing, varying or
waiving in any manner the rights of Lenders, Agent or Borrowers thereunder or
the conditions, provisions or terms thereof of waiving any Event of Default
thereunder, but only to the extent specified in such written agreements;
provided, however, that no such supplemental agreement shall, without the
consent of all Lenders:
(i) increase the Commitment Percentage of any Lender;
(ii) extend the maturity of any Note or the due date for
any amount payable hereunder, or decrease the rate of interest
or reduce any fee payable by Borrowers to Lenders pursuant to
this Agreement;
(iii) alter the definition of the term Required Lenders or
alter, amend or modify this Section 16.2(b);
(iv) release any Collateral during any calendar year (other
than in accordance with the provisions of this Agreement)
having an aggregate value in excess of $500,000;
(v) change the rights and duties of Agent;
(vi) increase the Maximum Revolving Advance Amount or
permit any Out-of- Formula Loan to be made if after giving
effect thereto the total of Revolving Advances outstanding
hereunder would exceed the Formula Amount for more than sixty
(60) consecutive Business Days or exceed one hundred and ten
percent (110%) of the Formula Amount;
(vii) increase the Advance Rates above the Advance Rates in
effect on the Closing Date.
Any such supplemental agreement shall apply equally to each Lender and shall be
binding upon Borrowers, Lenders and Agent and all future holders of the
Obligations. In the case of any waiver, Borrowers, Agent and Lenders shall be
restored to their former positions and rights, and any Event of Default waived
shall be deemed to be cured and not continuing, but no waiver of a specific
Event of Default shall extend to any subsequent Event of Default (whether or not
the subsequent Event of Default is the same as the Event of Default which was
waived), or impair any right consequent thereon.
In the event that Agent requests the consent of a Lender pursuant to
this Section 16.2 and such Lender shall not respond or reply to Agent in writing
within five (5) days of delivery of such request, such Lender shall be deemed to
have consented to matter that was the subject of the request. In the event that
Agent requests the consent of a Lender pursuant to this Section 16.2 and such
consent is denied, then PNC
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may, at its option, require such Lender to assign its interest in the Advances
to PNC or to another Lender or to any other Person designated by the Agent (the
"Designated Lender"), for a price equal to the then outstanding principal amount
thereof plus accrued and unpaid interest and fees due such Lender, which
interest and fees shall be paid when collected from Borrowers. In the event PNC
elects to require any Lender to assign its interest to PNC or to the Designated
Lender, PNC will so notify such Lender in writing within forty five (45) days
following such Lender's denial, and such Lender will assign its interest to PNC
or the Designated Lender no later than five (5) days following receipt of such
notice pursuant to a Commitment Transfer Supplement executed by such Lender, PNC
or the Designated Lender, as appropriate, and Agent.
16.3 Successors and Assigns; Participations; New Lenders.
(a) This Agreement shall be binding upon and inure to the
benefit of Borrowers, Agent, each Lender, all future holders of the Obligations
and their respective successors and assigns, except that no Borrower may assign
or transfer any of its rights or obligations under this Agreement without the
prior written consent of Agent and each Lender.
(b) Each Borrower acknowledges that in the regular course of
commercial banking business one or more Lenders may at any time and from time to
time sell participating interests in the Advances to other financial
institutions (each such transferee or purchaser of a participating interest, a
"Participant"). Each Participant may exercise all rights of payment (including
rights of set-off) with respect to the portion of such Advances held by it or
other Obligations payable hereunder as fully as if such Participant were the
direct holder thereof provided that Borrowers shall not be required to pay to
any Participant more than the amount which it would have been required to pay to
Lender which granted an interest in its Advances or other Obligations payable
hereunder to such Participant had such Lender retained such interest in the
Advances hereunder or other Obligations payable hereunder and in no event shall
Borrowers be required to pay any such amount arising from the same circumstances
and with respect to the same Advances or other Obligations payable hereunder to
both such Lender and such Participant. Each Borrower hereby grants to any
Participant a continuing security interest in any deposits, moneys or other
property actually or constructively held by such Participant as security for the
Participant's interest in the Advances.
(c) Any Lender may with the consent of Agent (which shall not
be unreasonably withheld or delayed) sell, assign or transfer all or any part of
its rights under the Loan Documents to one or more Eligible Assignees, and one
or more Eligible Assignments may commit to make Advances hereunder (each a
"Purchasing Lender"), in minimum amounts of not less than $5,000,000, pursuant
to a Commitment Transfer Supplement, executed by an Eligible Assignee, the
transferor Lender, and Agent and delivered to Agent for recording; provided,
however, that nothing contained herein shall prohibit or restrict PNC from
assigning any of its rights and obligations under the Loan Document to any other
Person after the Closing Date. Upon such execution, delivery, acceptance and
recording, from and after the transfer effective date determined pursuant to
such Commitment Transfer Supplement, (i) Eligible Assignee thereunder shall be a
party hereto and, to the extent provided in such Commitment Transfer Supplement,
have the rights and obligations of a Lender thereunder with a Commitment
Percentage as set forth therein, and (ii) the transferor Lender thereunder
shall, to the extent provided in such Commitment Transfer Supplement, be
released from its obligations under this Agreement, the Commitment Transfer
Supplement creating a novation for that purpose. Such Commitment Transfer
Supplement shall be deemed to amend this Agreement to the extent, and only to
the extent, necessary to reflect the addition of such Eligible Assignee and the
resulting adjustment of the Commitment Percentages arising from the purchase by
such Eligible Assignee of all or a
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portion of the rights and obligations of such transferor Lender under this
Agreement and the Other Documents. Each Borrower hereby consent to the addition
of such Eligible Assignee and the resulting adjustment of the Commitment
Percentages arising from the purchase by such Eligible Assignee of all or a
portion of the rights and obligations of such transferor Lender under this
Agreement and the Other Documents. Borrowers shall execute and deliver such
further documents and do such further acts and things in order to effectuate the
foregoing.
(d) Agent shall maintain at its address a copy of each
Commitment Transfer Supplement delivered to it and a register (the "Register")
for the recordation of the names and addresses of the Advances owing to each
Lender from time to time. The entries in the Register shall be conclusive, in
the absence of manifest error, and Borrowers, Agent and Lenders may treat each
Person whose name is recorded in the Register as the owner of the Advance
recorded therein for the purposes of this Agreement. The Register shall be
available for inspection by Borrowers or any Lender at any reasonable time and
from time to time upon reasonable prior notice. Agent shall receive a fee in the
amount of $3,500 payable by the applicable Eligible Assignee upon the effective
date of each transfer or assignment to such Eligible Assignee.
(e) Borrowers authorize each Lender to disclose to any
Participant or Eligible Assignee and any prospective Participant or Eligible
Assignee any and all financial information in such Lender's possession
concerning Borrowers which has been delivered to such Lender by or on behalf of
Borrowers pursuant to this Agreement or in connection with such Lender's credit
evaluation of Borrowers.
16.4 Application of Payments. Agent shall have the continuing and
exclusive right to apply or reverse and re-apply any payment and any and all
proceeds of Collateral to any portion of the Obligations. To the extent that any
Borrower makes a payment or Agent or any Lender receives any payment or proceeds
of the Collateral for any Borrower's benefit, which are subsequently
invalidated, declared to be fraudulent or preferential, set aside or required to
be repaid to a trustee, debtor in possession, receiver, custodian or any other
party under any bankruptcy law, common law or equitable cause, then, to such
extent, the Obligations or part thereof intended to be satisfied shall be
revived and continue as if such payment or proceeds had not been received by
Agent or such Lender.
16.5 Indemnity. Borrowers shall indemnify Agent, each Lender and
each of their respective officers, directors, Affiliates, employees and agents
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses and disbursements of any
kind or nature whatsoever (including fees and disbursements of counsel) which
may be imposed on, incurred by, or asserted against Agent or any Lender in any
litigation, proceeding or investigation instituted or conducted by any
Governmental Body or any other Person with respect to any aspect of, or any
transaction contemplated by, or referred to in, or any matter related to, any of
the Loan Documents, whether or not Agent or any Lender is a party thereto,
except to the extent that any of the foregoing arises out of the willful
misconduct or gross negligence of the party being indemnified.
16.6 Notice. Any notice or request hereunder may be given to any
Borrower or to Agent or any Lender at their respective addresses set forth below
or at such other address as may hereafter be specified in a notice designated as
a notice of change of address under this Section. Any notice or request
hereunder shall be given by (a) hand delivery, (b) overnight courier, (c)
registered or certified mail, return receipt requested, (d) telex or telegram,
subsequently confirmed by registered or certified mail, or (e) telecopy to the
number set out below (or such other number as may hereafter be specified in a
notice designated as a notice of change of address) with electronic confirmation
of its receipt. Any notice or other communication
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required or permitted pursuant to this Agreement shall be deemed given (a) when
personally delivered to any officer of the party to whom it is addressed, (b) on
the earlier of actual receipt thereof or three (3) days following posting
thereof in the U.S. Mail by certified or registered mail, postage prepaid, or
(c) upon actual receipt thereof when sent by a recognized overnight delivery
service or (d) upon actual receipt thereof when sent by telecopier to the number
set forth below with electronic confirmation of its receipt, in each case
addressed to each party at its address set forth below or at such other address
as has been furnished in writing by a party to the other by like notice:
(A) If to Agent or PNC Bank, National Association
PNC at: 1600 Market Street, 31st Floor
Philadelphia, Pennsylvania 19103
Attention: Frank Phillips
Telephone: (215) 585-4747
Telecopier: (215) 585-4771
with a copy to: Parker, Hudson, Rainer & Dobbs LLP
1500 Marquis Two Tower
285 Peachtree Center Avenue, N.E.
Atlanta, Georgia 30303
Attention: C. Edward Dobbs, Esq.
Telephone: (404) 523-5300
Telecopier: (404) 522-8409
(B) If to a Lender other than Agent, as specified on the signature
pages hereof
(C) If to the Borrowing Agent
or any Borrower, at: The Pietrafesa Corporation
7400 Morgan Road
Liverpool, New York 13090
Attention: Chief Financial Officer
Telephone: (315) 453-4300
Telecopier: (315) 451-4073
with a copy to: Roberts, Sheridan & Kotel
Tower 49
12 East 49th Street
New York, New York 10017
Attention: Kevin Sheridan, Esq.
Telephone: (212) 299-8600
Telecopier: (212) 299-8686
16.7 Survival. The obligations of Borrowers under Sections 2.16(d),
3.7, 3.8, 3.9, 4.19(h), 14.7 and 16.5 hereof and under the Environmental
Indemnity Agreement shall survive termination of this Agreement and the Other
Documents and payment in full of the Obligations.
16.8 Severability. If any part of this Agreement is contrary to,
prohibited by, or deemed invalid under Applicable Laws or regulations, such
provision shall be inapplicable and deemed omitted to the extent
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so contrary, prohibited or invalid, but the remainder hereof shall not be
invalidated thereby and shall be given effect so far as possible.
16.9 Expenses. All costs and expenses including reasonable
attorneys' fees (including the allocated costs of in house counsel) and
disbursements incurred by Agent, Agent on behalf of Lenders and Lenders (a) in
all efforts made to enforce payment of any Obligation or effect collection of
any Collateral, (b) in connection with the entering into, modification,
amendment, administration and enforcement of this Agreement or any consents or
waivers hereunder and all related agreements, documents and instruments, (c) in
instituting, maintaining, preserving, enforcing and foreclosing on Agent's
security interest in or Lien on any of the Collateral, whether through judicial
proceedings or otherwise, (d) in defending or prosecuting any actions or
proceedings arising out of or relating to Agent's or any Lender's transactions
with any Borrower, or (e) in connection with any necessary advice given to Agent
or any Lender with respect to its rights and obligations under this Agreement
and all related agreements, may be charged to Borrowers' Account and shall be
part of the Obligations.
16.10 Injunctive Relief. Each Borrower recognizes that, in the event
any Borrower fails to perform, observe or discharge any of its obligations or
liabilities under this Agreement, any remedy at law may prove to be inadequate
relief to Lenders; therefore, Agent, if Agent so requests, shall be entitled to
temporary and permanent injunctive relief in any such case without the necessity
of proving that actual damages are not an adequate remedy.
16.11 Consequential Damages. Neither Agent nor any Lender, nor any
agent or attorney for any of them, shall be liable to any Borrower for
consequential damages arising from any breach of contract, tort or other wrong
relating to the establishment, administration or collection of the Obligations.
16.12 Captions. The captions at various places in this Agreement are
intended for convenience only and do not constitute and shall not be interpreted
as part of this Agreement.
16.13 Counterparts; Telecopied Signatures. This Agreement may be
executed in any number of and by different parties hereto on separate
counterparts, all of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute one and the same agreement. Any signature
delivered by a party by facsimile transmission shall be deemed to be an original
signature hereto.
16.14 Construction. The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of construction to
the effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement or any amendments,
schedules or exhibits thereto.
16.15 Confidentiality; Sharing Information.
(a) Agent, each Lender and each Participant shall hold all
non-public information obtained by Agent, such Lender or such Participant
pursuant to the requirements of this Agreement in accordance with Agent's, such
Lender's and such Participant's customary procedures for handling confidential
information of this nature; provided, however, Agent, each Lender and each
Participant may disclose such confidential information (a) to its examiners,
affiliates, outside auditors, counsel and other professional advisors, (b) to
Agent, any Lender or to any prospective Participants and Eligible Assignees, and
(c) as required or requested by any Governmental Body or representative thereof
or pursuant to legal process;
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provided, further that (i) unless specifically prohibited by Applicable Law or
court order, Agent, each Lender and each Participant shall use its best efforts
prior to disclosure thereof, to notify the applicable Borrower of the applicable
request for disclosure of such non-public information (A) by a Governmental Body
or representative thereof (other than any such request in connection with an
examination of the financial condition of a Lender or a Participant by such
Governmental Body) or (B) pursuant to legal process and (ii) in no event shall
Agent, any Lender or any Participant be obligated to return any materials
furnished by any Borrower other than those documents and instruments in
possession of Agent or any Lender in order to perfect its Lien on the Collateral
once the Obligations have been paid in full and this Agreement has been
terminated.
(b) Each Borrower acknowledges that from time to time
financial advisory, investment banking and other services may be offered or
provided to such Borrower or one or more of its Affiliates (in connection with
this Agreement or otherwise) by any Lender or by one or more Subsidiaries or
Affiliates of such Lender and each Borrower hereby authorizes each Lender to
share any information delivered to such Lender by such Borrower and its
Subsidiaries pursuant to this Agreement, or in connection with the decision of
such Lender to enter into this Agreement, to any such Subsidiary or Affiliate of
such Lender, it being understood that any such Subsidiary or Affiliate of any
Lender receiving such information shall be bound by the provision of Section
16.15 as if it were a Lender hereunder. Such authorization shall survive the
repayment of the other Obligations and the termination of the Loan Agreement.
16.16 Intentionally Omitted.
16.17 Acknowledgment. The parties hereto acknowledge that this
Agreement is intended (i) to act as a "Credit Support Document" (as defined in
the 1992 ISDA Master Agreement (together with any and all schedules, annexes,
confirmations and amendments relating thereto or any successor ISDA agreement,
the "Master Agreement")) in respect of Interest Rate Agreements with respect to
each party and is made part of the Schedule to said Master Agreement by and
between or which may be entered into by and between some of the parties hereto,
and (ii) as a "transfer" under a swap agreement, made by or to a swap
participant, in connection with a swap agreement within the meaning of U.S.
Bankruptcy Code Section 546(g).
Each of the parties has executed and delivered this Agreement in New
York, New York as of the day and year first above written.
THE PIETRAFESA CORPORATION
By: /s/ Eugene R. Sunderhaft
--------------------------------------
Eugene R. Sunderhaft, Chief Financial
Officer, Senior Vice President and Secretary/
Treasurer
[CORPORATE SEAL]
7400 Morgan Road
Liverpool, New York 13090
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DAG ACQUISITION CORP.
By: /s/ Eugene R. Sunderhaft
----------------------------------------
Eugene R. Sunderhaft, Vice President
and Secretary
[CORPORATE SEAL]
7400 Morgan Road
Liverpool, New York 13090
COMPONENTS ACQUISITION CORP.
By: /s Eugene R. Sunderhaft
----------------------------------------
Eugene R. Sunderhaft, Vice President
and Secretary
[CORPORATE SEAL]
7400 Morgan Road
Liverpool, New York 13090
GLOBAL SOURCING NETWORK, LTD.
By: /s/ Eugene R. Sunderhaft
----------------------------------------
Eugene R. Sunderhaft, Vice President
and Secretary
[CORPORATE SEAL]
7400 Morgan Road
Liverpool, New York 13090
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PNC BANK, NATIONAL ASSOCIATION, as
Lender and as Agent
By: /s/ Kurt V. Putkonen
----------------------------------------
Name:___________________________________
Title:__________________________________
Commitment Percentage: 100%
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<PAGE>
STATE OF NEW YORK )
) ss.
COUNTY OF NEW YORK )
On this _____ day of April, 1999, before me personally came EUGENE R.
SUNDERHAFT, to me known, who, being by me duly sworn, did depose and say that he
is the Chief Financial Officer, Senior Vice President and Secretary/Treasurer of
THE PIETRAFESA CORPORATION, the corporation described in and which executed the
foregoing instrument; that he knows the seal of said corporation; that the seal
affixed to said instrument is such corporate seal; that it was so affixed by
order of the board of directors of said corporation, and that he signed his name
thereto by like order.
/s/
------------------------------
NOTARY PUBLIC
STATE OF NEW YORK )
) ss.
COUNTY OF NEW YORK )
On this _____ day of April, 1999, before me personally came EUGENE R.
SUNDERHAFT, to me known, who, being by me duly sworn, did depose and say that he
is the Vice President and Secretary of DAG ACQUISITION CORP., the corporation
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by order of the board of directors of said
corporation, and that he signed his name thereto by like order.
/s/
------------------------------
NOTARY PUBLIC
STATE OF NEW YORK )
) ss.
COUNTY OF NEW YORK )
On this _____ day of April, 1999, before me personally came EUGENE R.
SUNDERHAFT, to me known, who, being by me duly sworn, did depose and say that he
is the Vice President and Secretary of COMPONENTS ACQUISITION CORP., the
corporation described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by order of the board of directors
of said corporation, and that he signed his name thereto by like order.
/s/
------------------------------
NOTARY PUBLIC
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<PAGE>
STATE OF NEW YORK )
) ss.
COUNTY OF NEW YORK )
On this _____ day of April, 1999, before me personally came EUGENE R.
SUNDERHAFT, to me known, who, being by me duly sworn, did depose and say that he
is the Vice President and Secretary of GLOBAL SOURCING NETWORK, LTD., the
corporation described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by order of the board of directors
of said corporation, and that he signed his name thereto by like order.
/s/
------------------------------
NOTARY PUBLIC
STATE OF NEW YORK )
) ss.
COUNTY OF NEW YORK )
On this _____ day of April, 1999, before me personally came KURT V.
PUTKONEN, to me known, who, being by me duly sworn, did depose and say that he
is a Vice President of PNC BANK, NATIONAL ASSOCIATION, the national banking
association described in and which executed the foregoing instrument and that he
signed his name thereto by on behalf of said national banking association.
/s/
------------------------------
NOTARY PUBLIC
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Exhibit A-1
Form of Term Note
TERM NOTE
$__________ ___________________
_________, New York
This Term Note is executed and delivered under and pursuant to the
terms of that certain Revolving Credit, Term Loan and Security Agreement dated
April ___, 1999 (as amended, restated, supplemented or modified from time to
time, the "Loan Agreement") by and among THE PIETRAFESA CORPORATION, a
corporation organized under the laws of the State of Delaware, DAG ACQUISITION
CORP., a Delaware corporation and a wholly-owned Subsidiary of Pietrafesa
("DAGA"), COMPONENTS ACQUISITION CORP., a Delaware corporation and a
wholly-owned Subsidiary of Pietrafesa ("Components"), GLOBAL SOURCING NETWORK,
LTD., a New York corporation and a wholly-owned Subsidiary of Pietrafesa ("GSN";
Pietrafesa, DAGA, Components and GSN, each a "Borrower" and collectively
"Borrowers"); the financial institutions which are now or which hereafter become
a party hereto (collectively, the "Lenders" and individually a "Lender"); and
PNC BANK, NATIONAL ASSOCIATION, a national banking association ("PNC"), as
collateral and administrative agent for Lenders (PNC, together with its
successors and assigns in such capacity, the "Agent"). Capitalized terms not
otherwise defined herein shall have the meanings provided in the Loan Agreement.
FOR VALUE RECEIVED, Borrowers hereby jointly and severally promise to
pay to the order of ____________________ ("________"), at the office of Agent
located at _____________, __________, __________, ____________ _____ or at such
other place as Agent may from time to time designate to Borrowers in writing:
(i) the principal sum of ______________ AND __/100 DOLLARS
($__________), payable in accordance with the provisions of the Loan Agreement,
subject to acceleration upon the occurrence of an Event of Default under the
Loan Agreement or earlier termination of the Loan Agreement pursuant to the
terms thereof; and
(ii) interest on the unpaid principal amount of this Note from time to
time outstanding until such principal amount is paid in full at the applicable
Term Loan Rate in accordance with the provisions of the Loan Agreement. Upon and
after the occurrence of an Event of Default, and during the continuation
thereof, interest shall be payable at the Default Rate. In no event, however,
shall interest exceed the maximum interest rate permitted by law.
This Note is one of the Term Notes referred to in the Loan Agreement
and is secured by the liens granted pursuant to the Loan Agreement and the Other
Documents, is entitled to the benefits of the Loan Agreement and the Other
Documents and is subject to all of the agreements, terms and conditions therein
contained.
This Note is subject to mandatory prepayment and may be voluntarily
prepaid, in whole or in part, on the terms and conditions set forth in the Loan
Agreement.
Exhibit A-1 - Page 1
<PAGE>
If an Event of Default under Section 10.6 of the Loan Agreement shall
occur, then this Note shall immediately become due and payable, without notice,
together with reasonable attorneys' fees if the collection hereof is collected
by or through an attorney at law. If any other Event of Default shall occur
under the Loan Agreement or any of the Loan Documents, which is not cured within
any applicable grace period, then this Note may, as provided in the Loan
Agreement, be declared to be immediately due and payable, without notice,
together with reasonable attorneys' fees, if the collection hereof is placed in
the hands of an attorney to obtain or enforce payment hereof.
This Note shall be construed and enforced in accordance with the
internal laws of the State of New York without regard to principles of conflicts
of laws and is intended to take effect as a sealed instrument under New York
law.
Each Borrower expressly waives any presentment, demand, protest, notice
of protest, or notice of any kind except as expressly provided in the Loan
Agreement.
SIGNED, SEALED AND DELIVERED in ___________, New York.
THE PIETRAFESA CORPORATION
By:__________________________________
Title:_________________________
[CORPORATE SEAL]
DAG ACQUISITION CORP.
By:__________________________________
Title:_________________________
[CORPORATE SEAL]
Exhibit A-1 - Page 2
<PAGE>
COMPONENTS ACQUISITION CORP.
By:__________________________________
Title:_________________________
[CORPORATE SEAL]
GLOBAL SOURCING NETWORK, LTD.
By:__________________________________
Title:_________________________
[CORPORATE SEAL]
Exhibit A-1 - Page 3
<PAGE>
STATE OF ________ )
) ss.
COUNTY OF ______ )
On the ____ day of _______, _____, before me personally came
____________________________, to me known, who being by me duly sworn, did
depose and say that he is the ________________________ of THE PIETRAFESA
CORPORATION, the corporation described in and which executed the foregoing
instrument; and that he signed his name thereto as the act and deed of such
corporation by order of the board of directors of said corporation.
------------------------------
Notary Public
STATE OF ________ )
) ss.
COUNTY OF ______ )
On the ____ day of _______, _____, before me personally came
____________________________, to me known, who being by me duly sworn, did
depose and say that he is the ____________________________ of DAG ACQUISITION
CORP., the corporation described in and which executed the foregoing instrument;
and that he signed his name thereto as the act and deed of such corporation by
order of the board of directors of said corporation.
------------------------------
Notary Public
STATE OF ________ )
) ss.
COUNTY OF ______ )
On the ____ day of _______, _____, before me personally came
____________________________, to me known, who being by me duly sworn, did
depose and say that he is the ____________________________ of COMPONENTS
ACQUISITION CORP., the corporation described in and which executed the foregoing
instrument; and that he signed his name thereto as the act and deed of such
corporation by order of the board of directors of said corporation.
------------------------------
Notary Public
Exhibit A-1 - Page 4
<PAGE>
STATE OF ________ )
) ss.
COUNTY OF ______ )
On the ____ day of _______, _____, before me personally came
____________________________, to me known, who being by me duly sworn, did
depose and say that he is the ____________________________ of GLOBAL SOURCING
NETWORK, LTD., the corporation described in and which executed the foregoing
instrument; and that he signed his name thereto as the act and deed of such
corporation by order of the board of directors of said corporation.
------------------------------
Notary Public
Exhibit A-1 - Page 5
<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. 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.
<PAGE>
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
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
<PAGE>
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
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
<PAGE>
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 [***].
[***] Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
7
<PAGE>
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 [***].
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.
[***] Confidental treatment requested. Omitted portions have been filed
separately with the Commission.
8
<PAGE>
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 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.
[***] Confidental treatment requested. Omitted portions have been filed
separately with the Commission.
9
<PAGE>
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 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.
[***] Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
10
<PAGE>
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.
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.
[***] Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
11
<PAGE>
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
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.
12
<PAGE>
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.
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.
13
<PAGE>
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 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.
14
<PAGE>
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 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.
15
<PAGE>
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.
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>
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 13, as to which the
date is May __, 1999), in the Pre-Effective Amendment No. 1 to Registration
Statement (Form S-1 No. 333-74439) and related prospectus of The Pietrafesa
Corporation for the registration of 000,000 shares of its commons stock.
Ernst & Young LLP
Syracuse, New York
The foregoing consent is in the form that will be signed upon the completion
of the acquisitions, public offering and restatement of capital accounts
described in Note 13 to the financial statements.
/s/ Ernst & Young LLP
Syracuse, New York
May 28, 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 Pre-Effective
Amendment No. 1 to the Registration Statement (Form S-1) and related prospectus
of The Pietrafesa Corporation for the registration of shares of its common
stock.
/s/ Lawrence B. Goodman & Co. P.A.
Certified Public Accountants
Fair Lawn, New Jersey
May 24, 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
Pre-Effective Amendment No. 1 to the Registration Statement (Form S-1 --
No. 333-74439) and related prospectus of The Pietrafesa Corporation for the
registration of its common stock.
/s/ Pasquale & Bowers, LLP
Syracuse, New York
May 28, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Expert" and to the
use of our reports dated May 7, 1999 and February 15, 1999, respectively for the
Financial Statements of Windsong, Inc. at December 31, 1996, December 31, 1998
and 1997, in the Pre-Effective Amendment No. 1 to Registration Statement (Form
S-1 -- No. 333-74439) and related prospectus of The Pietrafesa Corporation for
the registration of 000,000 shares of its common stock.
/s/ Weissbarth, Altman & Michaelson LLP
---------------------------------------
New York, New York
May 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PIETRAFESA CORPORATION'S STATEMENT OF INCOME FOR THE YEAR AND THREE MONTHS ENDED
DECEMBER 31, 1998 AND MARCH 31, 1999, RESPECTIVELY, AND BALANCE SHEETS AS OF
DECEMBER 31, 1998 AND MARCH 31, 1999, RESPECTIVELY, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 DEC-31-1998
<CASH> 13 14
<SECURITIES> 0 0
<RECEIVABLES> 8,488 7,967
<ALLOWANCES> 35 35
<INVENTORY> 12,682 13,117
<CURRENT-ASSETS> 22,496 22,229
<PP&E> 11,105 10,995
<DEPRECIATION> 4,582 4,409
<TOTAL-ASSETS> 29,944 29,379
<CURRENT-LIABILITIES> 11,976 12,990
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 3,473 2,383
<TOTAL-LIABILITY-AND-EQUITY> 29,944 29,375
<SALES> 17,803 56,763
<TOTAL-REVENUES> 17,803 56,763
<CGS> 14,833 47,062
<TOTAL-COSTS> 14,833 47,062
<OTHER-EXPENSES> 1,269 6,581
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 296 1,209
<INCOME-PRETAX> 1,405 1,911
<INCOME-TAX> 565 514
<INCOME-CONTINUING> 840 1,397
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 840 1,397
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
