FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1999
REGISTRATION NO. 333-74439
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE PIETRAFESA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 2311 22-3607757
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
7400 MORGAN ROAD
LIVERPOOL, NY 13090
(315) 453-4300
ATTN: MR. RICHARD C. PIETRAFESA, JR.
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
IT IS REQUESTED THAT COPIES OF COMMUNICATIONS BE SENT TO:
L. KEVIN SHERIDAN, JR., ESQ. STEPHEN T. BURDUMY, ESQ.
ROBERTS, SHERIDAN & KOTEL, KLEHR, HARRISON,
A PROFESSIONAL CORPORATION HARVEY, BRANZBURG & ELLERS LLP
12 EAST 49TH STREET, 30TH FLOOR 260 SOUTH BROAD STREET
NEW YORK, NEW YORK 10017 PHILADELPHIA, PENNSYLVANIA 19102-3163
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the Securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box: |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
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AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE PRICE(2) FEE
- ------------------------------ --------------- ------------------- ---------------------- ---------------
<S> <C> <C> <C> <C>
Class A Common Stock ...... 4,658,333 $ 13.00 $60,600,000 $ 16,847(3)
============================== =============== =================== ====================== ===============
</TABLE>
(1) Includes up to 600,000 shares that may be purchased from The Pietrafesa
Corporation at the option of the underwriters solely to cover
over-allotments, if any, and 58,333 shares being registered for resale by
a stockholder of The Pietrafesa Corporation on a continuous basis.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(3) $14,095 of which has been previously paid.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 15, 1999
4,000,000 SHARES
CLASS A COMMON STOCK
[LOGO]
$ PER SHARE
All of the shares of The Pietrafesa Corporation's Class A Common Stock
being offered in this prospectus are being offered by 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 $11.00 and $13.00 per share. The market price of the
shares after the offering may be higher or lower than the offering price. 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.
PER SHARE TOTAL
----------- ------
Price to the public ...........................
Underwriting discounts and commissions ........
Proceeds to The Pietrafesa Corporation ........
The Pietrafesa Corporation has granted an over-allotment option to the
underwriters. Under this option, the underwriters may elect to purchase up to
600,000 shares of Class A Common Stock from The Pietrafesa Corporation within 30
days following the date of this prospectus.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
JANNEY MONTGOMERY SCOTT INC.
FIRST SECURITY VAN KASPER
MORGAN SCHIFF & CO., INC.
Prospectus dated , 1999
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[ARTWORK]
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TABLE OF CONTENTS
PAGE
----
Prospectus Summary ......................................................... 5
Risk Factors ............................................................... 14
Forward Looking Statements ................................................. 21
Use of Proceeds ............................................................ 22
Capitalization ............................................................. 23
Dividend Policy ............................................................ 24
Dilution ................................................................... 24
Selected Historical Consolidated Financial Data ............................ 26
Pro Forma Combined Financial Data .......................................... 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations .............................................................. 38
Business ................................................................... 52
Management ................................................................. 63
Certain Relationships and Related Transactions ............................. 67
Principal Stockholders ..................................................... 69
Description of Capital Stock ............................................... 71
Shares Eligible for Future Sale ............................................ 74
Underwriting ............................................................... 75
Legal Matters .............................................................. 76
Experts .................................................................... 76
Additional Information ..................................................... 77
Index to Financial Statements .............................................. F-1
------------------------------
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.
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[THIS PAGE INTENTIONALLY LEFT BLANK]
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE
"RISK FACTORS" SECTION, THE FINANCIAL STATEMENTS AND THE NOTES TO THOSE
STATEMENTS, BEFORE MAKING YOUR INVESTMENT DECISION. THIS PROSPECTUS CONTAINS
MARKET DATA, FOR THE MOST RECENT PERIODS FOR WHICH SUCH DATA IS GENERALLY
AVAILABLE, THAT WE OBTAINED FROM INDUSTRY TRADE GROUPS AND FROM INDUSTRY
PUBLICATIONS AND OTHER PUBLICLY AVAILABLE INFORMATION.
THE PIETRAFESA CORPORATION WAS INCORPORATED IN 1998 AND IS THE SUCCESSOR
TO A BUSINESS FOUNDED IN 1922. IN OCTOBER 1998, MS PIETRAFESA, L.P., OUR
PREDECESSOR OPERATING PARTNERSHIP AND SOLE CLASS B STOCKHOLDER, TRANSFERRED ALL
OF ITS ASSETS AND LIABILITIES TO US. IN APRIL 1999, WE ACQUIRED TWO INDEPENDENT
MERCHANDISING/SOURCING BUSINESSES. WE WILL COMPLETE TWO ADDITIONAL ACQUISITIONS
SIMULTANEOUSLY WITH THE CONSUMMATION OF THIS OFFERING.
UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, ALL SHARE,
PER SHARE AND BUSINESS AND FINANCIAL INFORMATION CONTAINED IN THIS PROSPECTUS:
o GIVES EFFECT TO OUR ACQUISITION OF DIVERSIFIED APPAREL GROUP, LTD.,
GLOBAL SOURCING NETWORK, LTD. AND COMPONENTS BY JOHN MCCOY, INC. AND
OUR ACQUISITION OF ALL ASSETS AND LIABILITIES OF MS PIETRAFESA,
L.P.;
o GIVES EFFECT TO OUR ACQUISITION OF WINDSONG, INC. AND THE ISSUANCE
OF $4.0 MILLION WORTH OF CLASS A COMMON STOCK VALUED AT THE INITIAL
PUBLIC OFFERING PRICE AS PART OF THE ACQUISITION CONSIDERATION;
o ASSUMES THAT NO SHARES OF CLASS A COMMON STOCK WILL BE ISSUED AS
PART OF THE CONSIDERATION PAID IN THE DIVERSIFIED APPAREL, GLOBAL
SOURCING NETWORK AND COMPONENTS ACQUISITIONS;
o ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION; AND
o GIVES EFFECT RETROACTIVELY TO THE ISSUANCE TO MS PIETRAFESA, L.P.,
OUR SOLE STOCKHOLDER IMMEDIATELY PRIOR TO THE OFFERING, OF A TOTAL
OF 3,775,567 SHARES OF CLASS B COMMON STOCK PRIOR TO THE
CONSUMMATION OF THE OFFERING.
THE PIETRAFESA CORPORATION
GENERAL. We believe that we are the only major apparel business that
offers companies that license brand names and major retailers "one-stop
shopping" for dress apparel products for men. By providing design,
merchandising, sourcing and other services, we act as "The Brand behind the
Brand." Our product line includes everything that a man might wear to the office
Monday through Friday and on formal occasions. Our products include suits, sport
jackets, dress shirts, woven sport shirts, casual pants, knitwear, neckwear and
topcoats, at a wide range of price points. Our strategy is to satisfy all the
product needs of our customers who otherwise might have to maintain separate
purchasing or licensing arrangements with different suppliers for each product.
One of our key strengths is the ability to satisfy our customers' cost,
quality, construction and delivery requirements through a worldwide network of
third party manufacturers. This capability is referred to as "sourcing."
We sell men's apparel to a variety of well-known retailers, including:
Belk Neiman Marcus
Bergdorf Goodman Nordstrom
Bijan S&K Famous Brands
Bloomingdale's Saks Fifth Avenue
Brooks Brothers Sam's Club
Dillards Sulka
Filene's Basement The Men's Wearhouse
Jos.A.Bank Today's Man
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5
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In 1998, we generated 70% of our net revenues from our seven largest
customers, Brooks Brothers, Dillards, Jos.A.Bank, Nordstrom, Polo Retail, S&K
Famous Brands and Sam's Club. None of these customers individually accounted for
more than 20% of our net revenues in 1998. Sales to Polo Retail, which accounted
for 6% of our net revenues in 1998, terminated with the spring 1999 season, but
the loss of such revenues is not expected to have a material adverse effect on
our overall revenues because we anticipate that our revenues from other
customers will increase.
INDUSTRY. Retail sales of men's apparel in the United States in 1998 were
approximately $54 billion, an increase of 6.8% over the prior year, as compared
to increases of 3.7% in women's apparel and 4.7% in all apparel. The men's
apparel industry is highly fragmented and includes a large number of small,
privately-held merchandising/sourcing companies that specialize in specific
products, price points or distribution channels. We believe that two important
trends among our customers benefit us:
o Retailers of private label apparel are experiencing increased 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 companies that
are larger and better capitalized than we are.
BUSINESS, GROWTH AND ACQUISITION STRATEGIES. We seek to be the most
efficient source of men's apparel products for major retailers and companies
that license brand names by offering:
o "one-stop shopping";
o the ability to develop customized lines of men's apparel in a
variety of styles;
o the lowest available cost for each product line, by using third
party manufacturers throughout the world;
o design, merchandising, statistical quality control, inventory
management and other services;
o technological innovations that enable us to compress delivery
schedules; and
o the scale and financial stability required by major retailers in
connection with long-term supply arrangements.
We believe that our business strategy will create numerous growth
opportunities. The principal components of our growth strategy include:
o achieving greater penetration among our existing customers and
developing new customer relationships;
o acquiring, developing and licensing brands in order to leverage our
merchandising and sourcing capabilities;
o expanding internationally by offering our merchandising/sourcing
services to foreign retailers; and
o growing revenues through selective acquisitions that are consistent
with our business strategy.
To increase the range of products, price points and sourcing options
available to our customers and to add new customers, we intend to identify and
acquire leading merchandising/sourcing companies. The major elements of our
acquisition strategy include:
o making, whenever possible, the payment of a significant portion of
the purchase price contingent on achieving projected results for the
acquired business over several years following the acquisition. We
will also include other performance-based incentives for the sellers
of each business;
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6
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o operating each newly-acquired business as an independent unit and
holding it accountable for its utilization of capital and overhead;
and
o improving and standardizing the financial controls, quality control
practices and back-office functions of each acquired business and
eliminating duplicative operational facilities.
RECENT ACQUISITIONS AND LICENSING ARRANGEMENTS. Upon the completion of
this offering, we will have completed four acquisitions and will have entered
into, or acquired as a result of these acquisitions, four new licensing
arrangements. These transactions expand our product offerings and customers.
The acquisitions are:
o Diversified Apparel Group, Ltd., which merchandises and sources
men's suits, dress shirts, neckwear and knits primarily from the
Caribbean Basin, the United States and Europe;
o Global Sourcing Network, Ltd., which designs and imports low-to-mid
priced men's suits primarily from Eastern Europe and Asia;
o Components by John McCoy, Inc., which merchandises and sources
higher-priced tailored clothing, sportswear, dress shirts, neckwear,
topcoats and casual slacks from Italy; and
o Windsong, Inc., which merchandises and sources men's sportswear
worldwide.
Our licenses cover tailored and other categories of men's apparel bearing
the Alexander Julian, FUBU, Greg Norman Collection and DKNY trademarks. FUBU,
the Greg Norman Collection and DKNY are new licensing arrangements for us. Sales
of Alexander Julian licensed products constituted 27% of our 1998 pro forma
combined revenues. All four licenses require us to pay royalties to the
licensors at rates which we believe to be consistent with other license
arrangements in the industry.
RISK FACTORS. See the section of this prospectus entitled "Risk Factors"
for a discussion of factors that you should consider before investing in the
Class A Common Stock offered by this prospectus. These risk factors include our
customer concentration, the significance to our business of revenues from sales
of Alexander Julian licensed products, our reliance on third party
manufacturers, the unpredictability of our operating results, the challenges
raised by our acquisition strategy and the fact that holders of the Class A
Common Stock will have limited voting rights.
The Pietrafesa Corporation is a Delaware corporation. Our principal
executive offices are located at 7400 Morgan Road, Liverpool, New York 13090 and
our telephone number is (315) 453-4300.
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7
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THE OFFERING
Common Stock offered by The
Pietrafesa Corporation .......... 4,000,000 shares of Class A Common Stock
Common Stock to be outstanding
after our offering .............. 4,333,333 shares of Class A Common Stock(1)
3,775,667 shares of Class B Common Stock,
all of which are owned by MS Pietrafesa,
L.P., our sole stockholder prior to the
offering. Holders of Class B Common Stock
may convert their shares at any time on a
one-for-one basis into shares of Class A
Common Stock.
Use of proceeds ................... To pay the purchase price of the Components
and Windsong acquisitions, to fund the
escrow in connection with the Windsong
acquisition and to repay indebtedness in
connection with the Diversified Apparel and
Global Sourcing Network acquisitions and
under our revolving credit line.
Voting rights ..................... Holders of Class A Common Stock, voting as a
class, are entitled to elect 25% of the
members of our Board of Directors. Other
than such right to elect directors, holders
of Class A Common Stock will have very
limited voting rights until all of the
shares of Class B Common Stock are converted
into shares of Class A Common Stock or
otherwise cease to be issued and
outstanding. See "Description of Capital
Stock."
Nasdaq National
Market symbol ................... BRND
- ----------
(1) Excludes:
o shares of Class A Common Stock equal to 10% of our outstanding
shares after the offering which may be issued in the future under
our Stock Option Plan;
o shares of Class A Common Stock which may be issued as deferred
purchase price to the sellers of Diversified Apparel, Global
Sourcing Network, Components and Windsong; and
o up to 600,000 shares of Class A Common Stock which will be issued to
the underwriters if they exercise their over-allotment option.
See "Management," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Significant Acquisitions" and
"Underwriting."
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8
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SUMMARY HISTORICAL CONSOLIDATED AND PRO FORMA COMBINED FINANCIAL DATA
The following tables present our summary historical consolidated financial
data for each year in the five-year period ended December 31, 1998 and for the
three-month periods ended March 31, 1998 and 1999, as well as pro forma combined
and pro forma combined, as adjusted financial data. The summary historical
consolidated annual financial data were derived from our audited consolidated
financial statements. The summary historical consolidated financial data as of
March 31, 1998 and March 31, 1999 and for the three-month periods then ended
were derived from our unaudited interim financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which we consider necessary for a fair presentation of the financial
position and results of operations for these periods. Operating results for the
three-month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1999. You
should read this financial data in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
and pro forma financial statements and the notes thereto, included elsewhere in
this prospectus.
Our pro forma combined financial data includes our statement of operations
data which reflects our historical results after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions as if they had occurred on January 1, 1998, and also includes our
balance sheet data, which reflects our balance sheet and the balance sheets of
Diversified Apparel, Global Sourcing Network, Components and Windsong as if the
acquisitions of such businesses had occurred on the respective balance sheet
dates. Our 1998 pro forma combined, as adjusted financial data includes our pro
forma combined financial data as adjusted for this offering and the application
of the proceeds of this offering. The pro forma combined and pro forma combined,
as adjusted financial data are based upon preliminary estimates, available
information and assumptions that management deems appropriate, but are not
necessarily indicative of the results that would have been obtained had such
events occurred at the times assumed. See our Pro Forma Combined Financial
Statements included elsewhere in this prospectus.
Our statement of operations, balance sheet and other data include a number
of items that require further explanation. These items include:
o Impairment loss on fixed assets, which relates to the reduction of
property, plant, and equipment to their net realizable value less
sale costs based on independent appraisals. In 1995, we discontinued
the low price point tailored clothing segment of our business and
closed the related manufacturing facilities located in Carrollton,
Georgia. Accordingly, in 1995 we reduced the net book value of plant
and equipment, as well as furniture and fixtures, located at the
Carrollton facility to their net realizable value and recorded an
impairment loss of $2.3 million. The impairment loss of $170,000 in
1996 related to equipment which we disposed of at our former
Sturgis, Kentucky facility;
o Public offering costs, which relate to the abandonment of our public
offering in 1998 due to adverse market conditions;
o Provision for income taxes, which was not included in our statement
of operations data prior to October 1998 because our predecessor, MS
Pietrafesa, L.P., was not subject to state or federal income taxes;
o Extraordinary item, which relates to the forgiveness of all of our
outstanding subordinated debt in 1996;
o The pro forma weighted average number of common shares outstanding,
basic and diluted, for 1998 and the first quarter of 1999 consists
of the 3,775,667 shares of Class B Common Stock owned by our sole
stockholder as of the date of the offering;
o Pro forma combined weighted average number of shares outstanding,
basic and diluted, consists of the 3,775,667 shares of Class B
Common Stock owned by our sole stockholder as of the date of the
offering, and the 333,333 shares of Class A Common Stock issued to
Windsong at the initial public offering price as part of our
acquisition of Windsong, based on an assumed offering price of
$12.00 per share; and
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o Pro forma combined, as adjusted weighted average number of common
shares outstanding, basic and diluted, consists of the shares of
Class A Common Stock which will be issued in the offering, as part
of the initial purchase price in the Windsong acquisition, and the
3,775,667 shares of Class B Common Stock owned by our sole
stockholder as of the date of the offering.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview" and " -- Results of Operations" for a more
detailed explanation of these items.
In addition, we have included under "Other Data" below and in our Selected
Historical Consolidated Financial Data, the line item "EBITDA plus public
offering costs," which represents income (loss) before provision (benefit) for
income taxes plus depreciation and amortization plus interest expense plus
public offering costs. EBITDA plus public offering costs is not intended to
represent cash flows from operations and should not be considered as an
alternative to net income as an indicator of our operating performance or to
cash flows as a measure of liquidity. We believe that EBITDA is a standard
measure commonly reported and widely used by analysts, investors and other
interested parties in the apparel industry. Accordingly, as modified to exclude
our public offering costs, it has been disclosed in this prospectus to permit a
more complete description of our performance relative to other companies in the
apparel industry. Our definition of EBITDA may not be identical to the
definitions used by other companies and, therefore, may not necessarily provide
an accurate basis for comparison.
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<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
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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>
STATEMENT OF OPERATIONS DATA:
Net revenues ............................. $54,859 $ 51,431 $44,000 $37,582 $ 56,763 $ 161,081 $ 161,081
Cost of sales ............................ 45,803 46,533 34,769 29,218 47,062 130,311 130,311
------- -------- ------- ------- ---------- ---------- ----------
Gross profit ............................. 9,056 4,898 9,231 8,364 9,701 30,770 30,770
Operating expenses:
Selling, general and administrative
expenses .............................. 7,250 10,080 7,427 6,150 5,536 19,048 19,048
Impairment loss on fixed assets ......... -- 2,324 170 -- -- -- --
Depreciation and amortization
expenses .............................. 99 102 165 151 222 1,982 1,982
------- -------- ------- ------- ---------- ---------- ----------
7,349 12,506 7,762 6,301 5,758 21,030 21,030
------- -------- ------- ------- ---------- ---------- ----------
Operating income (loss) .................. 1,707 (7,608) 1,469 2,063 3,943 9,740 9,740
Interest expense ......................... 1,648 1,914 1,962 1,507 1,209 3,321 2,385
Public offering costs .................... -- -- -- -- 823 823 823
------- -------- ------- ------- ---------- ---------- ----------
Income (loss) before income taxes
and extraordinary item .................. 59 (9,522) (493) 556 1,911 5,596 6,532
Provision for income taxes ............... -- -- -- -- 514 2,238 2,612
------- -------- ------- ------- ---------- ---------- ----------
Income (loss) before extraordinary
item .................................... 59 (9,522) (493) 556 1,397 3,358 3,920
Extraordinary item ....................... -- -- 3,150 -- -- -- --
------- -------- ------- ------- ---------- ---------- ----------
Net income (loss) ........................ $ 59 $ (9,522) $ 2,657 $ 556 $ 1,397 $ 3,358 $ 3,920
------- -------- ------- ------- ---------- ---------- ----------
PRO FORMA INCOME DATA:
Income before income taxes ............... $ 1,911 $ 5,596 $ 6,532
Pro forma provision for income taxes ..... 764 2,238 2,612
---------- ---------- ----------
Pro forma net income ..................... $ 1,147 $ 3,358 $ 3,920
========== ========== ==========
Pro forma basic and diluted net
income per common share ................. $ 0.30 $ 0.82 $ 0.48
Pro forma basic and diluted weighted
average number of common shares
outstanding ............................. 3,775,667 4,109,000 8,109,000
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
--------------------------------------
PRO FORMA
PRO FORMA COMBINED,
ACTUAL COMBINED AS ADJUSTED
--------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ......................................... $ 9,239 $12,134 $13,710
Total assets ............................................ 29,375 86,913 86,913
Total long-term debt, net of current maturities ......... 12,561 16,517 5,838
Total stockholders' equity .............................. 2,383 6,383 49,583
</TABLE>
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<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
PRO FORMA
PRO FORMA COMBINED,
COMBINED AS ADJUSTED
1994 1995 1996 1997 1998 1998 1998
----------- ------------ ---------- ---------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA plus public offering costs ......... $ 2,719 $ (6,411) $ 2,415 $ 2,865 $ 4,731 $ 12,288 $ 12,288
Capital expenditures ...................... 1,103 368 105 59 592 895 895
Cash (used in) provided by operating
activities ............................... (3,022) 3,779 2,445 3,056 (1,395) (3,002) (2,440)
Cash (used in) provided by investing
activities ............................... (1,035) (265) 419 2,185 (563) (36,501) (36,501)
Cash (used in) provided by financing
activities ............................... 4,540 (4,001) (2,866) (5,242) 1,969 39,581 39,581
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------
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 4,311 4,433 4,311 4,433
Depreciation and amortization
expenses .............................. 64 68 504 507 504 507
---------- ---------- ---------- ---------- ---------- ----------
1,369 1,269 4,815 4,940 4,815 4,940
---------- ---------- ---------- ---------- ---------- ----------
Operating income ........................ 1,106 1,701 3,261 3,627 3,261 3,627
Interest expense ........................ 253 296 607 712 350 539
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes .............. 853 1,405 2,654 2,915 2,911 3,088
Provision for income taxes .............. -- 565 1,061 1,169 1,164 1,235
---------- ---------- ---------- ---------- ---------- ----------
Net income .............................. $ 853 $ 840 $ 1,593 $ 1,746 $ 1,747 $ 1,853
========== ========== ========== ========== ========== ==========
PRO FORMA INCOME DATA:
Income before income taxes .............. $ 853 $ 1,405 $ 2,654 $ 2,915 $ 2,911 $ 3,088
Pro forma provision for income taxes..... 341 565 1,061 1,169 1,164 1,235
---------- ---------- ---------- ---------- ---------- ----------
Pro forma net income .................... $ 512 $ 840 $ 1,593 $ 1,746 $ 1,747 $ 1,853
========== ========== ========== ========== ========== ==========
Pro forma basic and diluted net
income per common share ................ $ 0.14 $ 0.22 $ 0.39 $ 0.42 $ 0.22 $ 0.23
Pro forma basic and diluted weighted
average number of common shares
outstanding ............................ 3,775,667 3,775,667 4,109,000 4,109,000 8,109,000 8,109,000
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
---------------------------------------
PRO FORMA
PRO FORMA COMBINED,
ACTUAL COMBINED AS ADJUSTED
---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ......................................... $10,520 $14,392 $15,592
Total assets ............................................ 29,944 95,698 95,698
Total long-term debt, net of current maturities ......... 13,054 16,969 5,914
Total stockholders' equity .............................. 3,473 7,473 50,673
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------
PRO FORMA PRO FORMA
PRO FORMA PRO FORMA COMBINED, COMBINED,
COMBINED COMBINED AS ADJUSTED AS ADJUSTED
1998 1999 1998 1999 1998 1999
--------- --------- ----------- ----------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA plus public offering costs ............. $1,308 $1,886 $ 3,904 $ 4,253 $ 3,904 $ 4,253
Capital expenditures .......................... 90 109 186 313 186 313
Cash (used in) provided by operating
activities ................................... 28 (613) (9,223) (4,496) (11,471) (6,868)
Cash used in investing activities ............. (90) (109) (35,731) (35,858) (35,731) (35,858)
Cash provided by financing activities ......... 62 721 42,805 39,905 43,533 39,905
</TABLE>
- --------------------------------------------------------------------------------
13
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RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE RISKS DESCRIBED BELOW AND OTHER
INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES OF CLASS A
COMMON STOCK.
RISKS ASSOCIATED WITH OUR BUSINESS
OUR SIGNIFICANT RELIANCE ON A LIMITED NUMBER OF CUSTOMERS MAY SUBJECT US
TO A SIGNIFICANT DECREASE IN REVENUES IF WE LOSE ONE OR MORE CUSTOMERS
S&K Famous Brands, Sam's Club, Brooks Brothers, Dillards, Jos.A.Bank,
Nordstrom and Polo Retail, our seven most significant customers in 1998,
accounted for 70% of our net revenues in 1998. S&K Famous Brands, Sam's Club,
Brooks Brothers and Dillards each accounted for over 10% of our net revenues in
1998. Sales to our six largest customers in 1997 accounted for 68% of our net
revenues in 1997.
Our licensing agreement with Polo Corporation expired in June 1999 and
sales to Polo Retail under this agreement terminated with the spring 1999
season. A failure to replace such lost business, the loss of or decrease in
business from any other significant customer or the replacement of lost business
with business that produces lower margins would result in a significant decrease
in our revenues. Various factors, including a deterioration in the business or
financial condition of one or more of our customers or in our relationship with
any of these customers, may cause their level of business with us to decrease.
In addition, consolidations, restructurings and reorganizations involving our
customers could reduce the number of stores that carry our products and decrease
our revenues. Any increase in the ownership concentration within the retail
industry could make us more dependent on fewer customers and could increase the
effect of losing a customer. See "Business -- Industry Overview."
IF OUR ALEXANDER JULIAN LICENSE IS TERMINATED OUR REVENUES AND
PROFITABILITY WOULD DECREASE SIGNIFICANTLY
Approximately 27% of our pro forma combined revenues and approximately 28%
of our pro forma combined net income during 1998 were attributable to sales of
products which we are entitled to produce and sell under a license agreement
with Alexander Julian, Inc. We have monetary and nonmonetary obligations under
the Alexander Julian license, as we do under our three new licenses which were
not in effect in 1998. If we fail to perform our obligations, Alexander Julian
and our other licensors could terminate the licenses and we would lose the right
to sell the products, which would substantially reduce our revenues and net
income. See "Business -- Intellectual Property."
OUR FOREIGN SOURCING OF PRODUCTS EXPOSES US TO DELAYS IN PRODUCTION, WHICH
MAY RESULT IN INCREASED COSTS AND REDUCED PROFITABILITY
A significant portion of the products we sell are produced by foreign
manufacturers. Products from Italy, the Dominican Republic, Mexico, Eastern
Europe and the Far East accounted for 66% of our 1998 revenues. Foreign sourcing
exposes us to numerous risks, including work stoppages, natural disasters,
transportation delays and interruptions, political instability, economic
disruptions and the imposition of increased tariffs and more stringent import
and export restrictions. If any of these events were to occur, we may not have
sufficient quantities of raw materials or products to meet our customers' needs
in a timely manner, which could cause us to lose material revenues, customer
orders and goodwill.
Bilateral textile agreements between the United States and a number of
other countries contain provisions that impose quotas on the amount and type of
goods that can be imported into the United States from those countries. These
agreements allow the United States to impose restraints at any time on the
importation of specified categories of merchandise. Substantially all of the
countries from which we import products are subject to these agreements. In
addition, the United States imposes customs duties on our imported products. The
United States may impose additional tariffs on products that are found to have
been manufactured by convict, forced or indentured labor. In addition, the
United States may withdraw the "most favored nation" status of countries in
which our products are manufactured, which could result in the imposition of
reduced quotas and/or higher tariffs on products imported from these countries.
New or less favorable quotas, duties,
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tariffs or import restrictions could result in an increase in our cost of
products. We may not be able to pass these increased costs on to our customers,
which would reduce our profitability. See "Business -- Imports and Import
Regulations."
OUR INTERNATIONAL SOURCING OF PRODUCTS AND RAW MATERIALS MAY SUBJECT US TO
INCREASED COSTS AND UNPROFITABLE TRANSACTIONS
We currently source production and purchase raw materials from providers
located outside the United States. As a result, we are exposed to various risks,
including:
o currency exchange rate fluctuations when our agreements are
denominated in currencies other than U.S. dollars;
o changes to foreign legal and regulatory requirements;
o deterioration in the stability of foreign governments or their
trading relationships with the United States;
o difficulties in staffing and managing foreign operations;
o variances in financial reporting standards; and
o differences in the manner in which different cultures do business.
Any of these risks could increase the costs of doing business in the
affected countries or preclude us from transacting business in the affected
countries, either of which could reduce our profitability.
THE ADOPTION OF THE EURO MAY BE DISRUPTIVE TO OUR EUROPEAN SUPPLIERS,
IMPAIR THEIR ABILITY TO SATISFY THEIR OBLIGATIONS TO US AND DISRUPT OUR
DELIVERIES OF PRODUCTS
On January 1, 1999, 11 member countries of the European Union replaced
their local currencies with a single currency, the Euro, in an effort toward the
economic and monetary union of Europe. During a three-year transition period,
the currencies of these countries will continue to circulate but only as fixed
denominations of the Euro. The Euro has become the predominant currency to
settle wholesale transactions previously denominated in the participants'
currencies.
In 1998, we purchased approximately 46% of our raw materials from
suppliers based in countries which are participating in the Euro in 1999. The
adoption of the Euro may be disruptive to the accounting and financial reporting
operations of some of these suppliers and may have an adverse impact on the
financial results of such suppliers or their ability to meet their manufacturing
obligations. Material delays in manufacturing by our significant European
suppliers could cause us to lose material revenues, customer orders and
goodwill. See " -- Failure by Third Party Manufacturers to Perform their
Obligations could Adversely Affect our Ability to Deliver Products in a Timely
Manner."
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE APPAREL
INDUSTRY
The men's tailored clothing and apparel businesses are intensely
competitive. We have experienced and will continue to experience competition
from domestic and international sources, including independent brand name and
private label producers. We also consider retailers' in-house product
development and sourcing capabilities to be a source of competition. Some of our
competitors and potential competitors have greater financial, manufacturing and
distribution resources than us.
Although factors may differ by product line, we believe that we compete
primarily on the basis of quality of design and workmanship, pricing and
customer service. We believe that our success depends in large part upon our
ability to anticipate, gauge and respond to our customers' changing needs in a
timely manner. If we fail to identify and respond appropriately to their
changing needs, or to otherwise compete successfully, we could lose our market
share, be required to reduce our prices or pay higher production costs.
A RECESSION IN THE APPAREL INDUSTRY COULD INCREASE OUR BAD DEBT EXPENSE
AND REDUCE OUR REVENUES AND PROFITABILITY
Apparel retailers have experienced significant financial difficulties over
the past several years, including restructurings, bankruptcies and liquidations.
These developments have increased our risk of extending credit to
15
<PAGE>
our customers. If any of our customers were to suffer financial problems, it
could cause us to reduce or discontinue business with that customer, require us
to assume more credit risk relating to its receivables or result in excess
inventory requiring liquidation at discounted prices, each of which would reduce
our profitability.
SEASONAL FLUCTUATIONS IN REVENUE AND NET INCOME MAY AFFECT OUR CASH FLOW,
LIQUIDITY AND PROFITABILITY
Some of our principal products are organized into seasonal lines in
response to the marketing strategies of our customers. As a result, our net
revenues and net income have fluctuated and may continue to fluctuate on a
seasonal basis. A disproportionate amount of our net revenues and a majority of
our net income are typically realized during the third quarter. Historically,
this seasonality has resulted in reductions in working capital during the first
and third quarters. If we are unable to finance our seasonal cash requirements
adequately, our ability to conduct business will be restricted. Moreover, as a
result of the seasonality of net revenues, if our net revenues decrease
substantially in the third quarter it could have a material adverse effect on
our liquidity and on our profitability for the entire year.
WE WILL NOT BE ABLE TO FULFILL OUR EXPANSION PLANS IF WE ARE UNABLE TO
OBTAIN ADDITIONAL FINANCING AND MAINTAIN A STRONG INFRASTRUCTURE
In 1998, we experienced rapid sales growth, expansion of our product and
service offerings and an increase in our customer base. Our continued growth
will depend on our ability to develop successful new product lines, distribution
channels and merchandise categories. The integration of Diversified Apparel,
Global Sourcing Network, Components and Windsong, as well as our future growth
objectives, will require increasing amounts of working capital and financing and
may place a significant strain on our management and information processing
systems. Our failure to respond effectively to the demands associated with our
business expansion could render our growth strategy unsuccessful.
VARIATIONS IN OUR HISTORICAL FINANCIAL PERFORMANCE MAY CONTINUE
We have experienced inconsistent financial results in recent years. For
example, during the years 1995 through 1998, excluding the financial results of
Diversified Apparel, Global Sourcing Network, Components and Windsong, our
operating income (loss) fluctuated between $(7.6) million and $3.9 million and
net income (loss) fluctuated between $(9.5) million and $1.4 million. See
"Summary Historical Consolidated and Pro Forma Combined Financial Data." Our
future financial performance depends on various factors, including successfully
implementing our growth strategy.
THE LOSS OF ANY OF OUR KEY MANAGEMENT PERSONNEL COULD REDUCE OUR REVENUES
AND PROFITABILITY
Our ability to successfully implement our growth strategy and operate
profitably depends on the continued employment of our senior management team led
by Richard C. Pietrafesa, Jr., John McCoy, Jarrod Nadel, Joseph Sweedler and
Joseph J. Pietrafesa II, all of whom would be difficult to replace. The
termination of Mr. McCoy's, Mr. Nadel's or Mr. Sweedler's employment with us
would likely reduce revenues and profitability of our Components, Diversified
Apparel and Windsong divisions. In addition, these managers, as well as other
members of our senior management, have only recently been assembled and
management controls are still in their formative stages. We cannot assure you
that this team will perform well together.
Although we have entered into or will enter into multi-year employment and
non-competition agreements with Mr. McCoy, Mr. Nadel and Mr. Sweedler, it is our
general policy not to enter into such agreements with our executives. See
"Management." This policy could enable the members of our management team to
change jobs more freely. If the principal members of our management team become
unable or unwilling to continue in their present positions, it would become more
difficult for us to pursue our growth strategy, which could reduce our revenues
and profitability.
If Richard Pietrafesa ceases to be our Chief Executive Officer, or if
Philip Ean Cohen ceases to control The Pietrafesa Corporation other than by
reason of death or disability, our deferred purchase price obligations under the
Components and Windsong acquisition agreements may be accelerated. The
accelerated payment of these deferred purchase price obligations could deplete
our capital resources. In addition, the Alexander Julian
16
<PAGE>
license terminates if Mr. Cohen transfers control of the Pietrafesa Corporation
without Alexander Julian's consent. See " -- Some of our Acquisition Agreements
Contain Terms that could Prevent a Change of Control or a Change in Management
and may Discourage Transactions which would Benefit our Shareholders."
While we generally do not maintain key person life insurance covering our
executive officers or other employees, we intend to purchase key person life
insurance in the amount of $10 million covering Richard Pietrafesa prior to the
consummation of the offering. In addition, we intend to purchase key person life
insurance for Messrs. McCoy and Nadel in an amount equal to the up-front portion
of the purchase price for Components and Diversified Apparel, respectively. We
cannot assure you that we will be able to maintain such policies in effect or
that the proceeds of such policies would adequately compensate us for the loss
of the services of any of these people.
OUR SIGNIFICANT RELIANCE ON TWO FABRIC MANUFACTURERS COULD CAUSE OUR COST
OF SALES TO INCREASE, IMPAIR OUR ABILITY TO MEET OUR CUSTOMERS' DEMANDS AND
REDUCE OUR REVENUES AND PROFITABILITY
In 1998, we purchased 54% (by dollar value) of our total fabric
requirements directly from two suppliers, Burlington Industries and Loro Piana.
While we believe that we have had good relations with each of these two
suppliers for over 10 years, we do not have long-term formal supply contracts
with either of them. If our relationship with any significant supplier is
interrupted, we will have to purchase fabric from alternate suppliers. These
alternate suppliers might not provide us with fabrics at comparable prices,
comparable quality or on a timely basis. If the price, availability or quality
of fabrics or other raw materials used by us fluctuate significantly, it could
increase our cost of sales or impair our ability to meet our customers' demands,
each of which would reduce our revenues and profitability.
FAILURE BY THIRD PARTY MANUFACTURERS TO FULFILL THEIR OBLIGATIONS COULD
ADVERSELY AFFECT OUR ABILITY TO DELIVER PRODUCTS IN A TIMELY MANNER AND COULD
REDUCE OUR PROFITABILITY
As of December 31, 1998, we sourced approximately 72% of total product
orders (by sales dollar value) with independent manufacturers. We intend for
this percentage to increase. If our independent manufacturers fail to finance
production adequately, maintain production capacity or otherwise produce
finished goods on schedule, it will adversely affect our ability to deliver
products to our customers in a timely fashion. Alternative manufacturers, if
available, may not be able to provide us with products or services of comparable
quality at an acceptable price or on a timely basis. Therefore, a failure by our
independent manufacturers to fulfill their obligations could prevent us from
meeting our clients' requirements in a timely manner, which could result in
cancelled purchases by our clients and impair our relationships with them, each
of which could reduce our profitability.
IF OUR OR OUR CUSTOMERS' OR SUPPLIERS' YEAR 2000 COMPLIANCE EFFORTS ARE
NOT SUCCESSFUL, OUR OPERATIONS MAY BE DISRUPTED AND OUR REVENUES AND
PROFITABILITY COULD BE REDUCED
We are highly dependent upon the proper function of our computer systems
as well as those of our suppliers and customers. Arthur Andersen & Co. has
advised us that we will have to upgrade, modify or replace portions of our
financial systems to make them Year 2000 compliant. We currently estimate that
the total cost of implementing our Year 2000 program will be approximately
$200,000. If our computer systems or the computer systems of any of our
suppliers or customers are not Year 2000 compliant or are unable to recover from
system interruptions which may result from the Year 2000 date change, we may
experience a disruption to our operations which could adversely affect our
ability to process or fulfill orders from our customers, deliver products in a
timely manner, send invoices or engage in normal business activities for an
indefinite period of time. Such a disruption to our operations could result in a
loss of revenues and a reduction of our profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Impact of the Year 2000 Issue."
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
17
<PAGE>
the operations of these businesses with our pre-existing operations. Our pro
forma results of operations and the historical results of Diversified Apparel,
Global Sourcing Network, Components and Windsong cover periods when these
businesses were not under our control or management and may not be indicative of
our future financial or operating results or the results that would have been
achieved if these businesses had been operating on a consolidated basis with us
for the periods presented.
Our management team has only recently been assembled and will be burdened
by the integration and supervision of our combined operations and the
implementation of our operating and growth strategies. We cannot assure you that
the managers of Diversified Apparel, Global Sourcing Network, Components and
Windsong will work effectively with our senior management or as part of a larger
entity. Our inability to successfully integrate and supervise the operations,
services, technologies and personnel of these acquired businesses, or implement
our operating or growth strategies, could reduce our profitability and inhibit
future growth.
OUR INABILITY TO IMPLEMENT OUR GROWTH STRATEGY COULD REDUCE OUR REVENUES
AND PROFITABILITY
Our growth strategy depends heavily on the identification, acquisition and
successful management of additional businesses. Pursuit of this growth strategy
will divert our management's attention from other business concerns. It is also
possible that our management, including the respective managers of our
Diversified Apparel, Global Sourcing Network, Components and Windsong divisions,
will not have the skills necessary to manage an aggressive acquisition program.
Although we may recruit additional managers to supplement the existing
management of any acquired businesses, we may not be able to recruit additional
managers with the skills necessary to enhance the management of such businesses.
Any or all of these factors could cause our growth strategy to fail and reduce
our revenues and profitability.
UNFORESEEN, UNKNOWN LIABILITIES IN CONNECTION WITH THE OPERATION OF
ACQUIRED BUSINESSES MAY ADVERSELY AFFECT OUR WORKING CAPITAL AND LIQUIDITY AND
REDUCE OUR PROFITABILITY
Unforeseen, unknown liabilities may arise in connection with the ownership
and operation of Diversified Apparel, Global Sourcing Network, Components,
Windsong or any future acquired business. These liabilities could relate to such
matters as previously unasserted contract or tort claims against such businesses
and product liability claims relating to the design or production of the apparel
distributed by such businesses, among others. Although we believe that the risk
of pre-existing claims being successfully asserted against The Pietrafesa
Corporation has been minimized by the acquisition structures we have employed,
we cannot assure you that no such claims will be asserted or, if asserted, that
such claims will not result in material liabilities to us. Contractual purchase
price adjustments, as well as other contractual rights or other remedies
available to us, may not be sufficient to compensate us in the event that such
unforeseen liabilities arise. The occurrence of any such liability could have a
material adverse effect on our working capital and liquidity and reduce our
profitability.
FUTURE PERFORMANCE OF THE ACQUIRED BUSINESSES MAY NOT BE COMMENSURATE WITH
THEIR PURCHASE PRICES
Valuations of Diversified Apparel, Global Sourcing Network, Components and
Windsong were not established by independent appraisals, but were determined
through purchase price negotiations among the parties. The consideration paid
for each such business was based exclusively on these negotiations. A variety of
factors played a role in these negotiations, including the financial performance
of each business, its markets and its management. The consideration paid does
not necessarily bear any relationship to the net book value of the acquired
assets or to any other recognized measure of value. Independent valuations of
Diversified Apparel, Global Sourcing Network, Components and Windsong may have
been less than the consideration paid or to be paid by us for the acquisition of
any of these businesses.
REDUCTIONS IN OUR FUTURE NET INCOME CAUSED BY THE AMORTIZATION OF GOODWILL
MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
Approximately $29 million, or 31%, of our pro forma combined, as adjusted
total assets as of March 31, 1999 consisted of goodwill arising from the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions. Goodwill is an intangible asset that represents the difference
between the aggregate
18
<PAGE>
purchase price for the assets acquired, including deferred purchase price
actually paid, and the amount of such purchase price allocated to the identified
assets for purposes of an as-adjusted balance sheet. We are required to amortize
the goodwill from the acquisitions over a period of time, with the amount
amortized in a particular period constituting an expense that reduces our net
income for that period.We plan to amortize goodwill associated with the
acquisitions over a period of 20 years for Windsong, 15 years for Global
Sourcing Network and Components and 10 years for Diversified Apparel, in each
case beginning at the closing of each such acquisition. The amount amortized
will not be less than $1.6 million per year for 10 years, of which $167,000 per
year will not give rise to a corresponding tax benefit. We plan to evaluate
continually whether events or circumstances have occurred that could result in
an acceleration of the amount to be amortized. Such acceleration would reduce
our net income by a corresponding amount.
Further, each of the above-referenced acquisitions involves a deferred
purchase price which we will pay if the acquired business achieves specified
earnings targets. This deferred purchase price may result in additional goodwill
of up to $29.7 million that will be amortized over a period of time to be
determined at the date any deferred purchase price payments are made. The
initial goodwill plus the additional goodwill, if any, resulting from such
deferred purchase price provisions would result in an aggregate maximum goodwill
amortization of $2.1 million for the year ending December 31, 2000, $2.3 million
for the year ending December 31, 2001, $2.5 million for the year ending December
31, 2002, $2.9 million for the year ending December 31, 2003, $3.3 million for
the year ending December 31, 2004 and $3.7 million for the year ending December
31, 2005. In addition, we will also be required to amortize the goodwill, if
any, from any future acquisitions. Reductions in our net income resulting from
the amortization of goodwill may adversely affect the market price of our Class
A Common Stock.
IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OR REALIZE COST SAVINGS CREATED
BY OUR ACQUISITIONS, OUR OPERATING RESULTS MAY BE REDUCED
We believe that our integration of Diversified Apparel, Global Sourcing
Network, Components and Windsong will result in cost savings, including a
reduction in operating expenses as a result of the elimination of duplicative
administrative functions and personnel. Significant uncertainties, however,
accompany any business combination, and we cannot assure you that we will be
able to achieve our anticipated operating efficiencies or otherwise realize cost
savings from the Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions or future acquisitions. The inability to achieve
anticipated operating efficiencies or cost savings could reduce our income or
cause us to sustain a loss.
SOME OF OUR AGREEMENTS CONTAIN TERMS THAT COULD IMPEDE A CHANGE IN CONTROL
OR A CHANGE IN MANAGEMENT AND MAY DISCOURAGE TRANSACTIONS WHICH WOULD BENEFIT
OUR SHAREHOLDERS
If Philip Ean Cohen ceases to control The Pietrafesa Corporation, other
than by reason of death or disability, we will immediately be required to pay
Windsong, Inc. up to $17.8 million, representing the net present value of all
unpaid amounts of the $22.0 million deferred portion of the purchase price for
the assets of Windsong, Inc. The Alexander Julian license terminates if Mr.
Cohen transfers control of The Pietrafesa Corporation without Alexander Julian's
prior consent. If Richard Pietrafesa is no longer our chief executive officer,
all unpaid amounts of the $4.7 million deferred portion of the purchase price
under the Components acquisition agreement will be accelerated. These and other
provisions included in the Components and Windsong acquisition agreements may
entrench management or discourage transactions in which we are assigned an
attractive valuation that would otherwise benefit our shareholders because a
change in control is involved.
RISKS ASSOCIATED WITH OUR CAPITAL STRUCTURE
HOLDERS OF CLASS A COMMON STOCK WILL HAVE LIMITED VOTING RIGHTS
Following the offering, MS Pietrafesa, L.P., which is controlled by
Phillip Ean Cohen, will continue to own all of the outstanding shares of Class B
Common Stock. As such, MS Pietrafesa, L.P. will elect 75% of our directors and,
except in very limited circumstances, will have the power to decide all other
matters submitted to our stockholders. Holders of Class A Common Stock will
generally have no voting rights except
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<PAGE>
the right to elect 25% of our directors, until all shares of Class B Common
Stock are converted into shares of Class A Common Stock or otherwise cease to be
outstanding. As a result, Mr. Cohen will control the outcome of substantially
all matters submitted to a vote of our stockholders. See "Description of Capital
Stock."
THE INTERESTS OF OUR CONTROLLING STOCKHOLDER MAY CONFLICT WITH THE
INTERESTS OF THE HOLDERS OF OUR CLASS A COMMON STOCK
The interests of Mr. Cohen may conflict with the interests of holders of
Class A Common Stock. The concentration of voting power described above may make
us an unattractive takeover target and may discourage acquisition proposals,
even if such proposals are supported by holders of Class A Common Stock. In
addition, Mr. Cohen's voting power permits him to implement policies not favored
by, or in the best interests of, the holders of the Class A Common Stock. In
addition, as long as any Class B Common Stock is outstanding, Mr. Cohen will be
able to transfer voting control to a third party at a premium that will not be
enjoyed by holders of the Class A Common Stock. Voting power will, in all
likelihood, continue to be concentrated following conversion of all of the
outstanding shares of Class B Common Stock, since MS Pietrafesa, L.P. would own
approximately 46.6% of the outstanding shares of Class A Common Stock following
the full conversion.
FAILURE TO COMPLY WITH SIGNIFICANT COVENANT RESTRICTIONS IN OUR AGREEMENTS
WITH OUR LENDERS COULD RESULT IN ACCELERATION OF OUR REPAYMENT OBLIGATIONS
We may incur substantial additional indebtedness to fund our growth
strategy. Incurring substantial additional indebtedness would reduce our
financial flexibility and expose us to additional risks, including greater
vulnerability to economic downturns and competitive pressures.
Our agreements with our lenders contain significant operating and
financial restrictions. Our current credit agreements and other loan documents
contain restrictive covenants, including restrictions on incurrence of debt,
dividend payments, sales of assets, acquisitions and other business
combinations, transactions with affiliates, liens and investments. If we fail to
comply with existing or future debt covenants, we could default under these
agreements. If a default were to occur, the lender under such agreement could
accelerate our repayment of the indebtedness evidenced by that agreement.
Acceleration of our repayment obligations may also be required under any other
agreements then in effect containing cross-acceleration or cross-default
provisions. Any acceleration of our outstanding indebtedness could result in
foreclosure against our operating and working capital assets, the termination of
our license or other agreements and our bankruptcy. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
THE MARKET PRICE OF OUR CLASS A COMMON STOCK COULD BE ADVERSELY AFFECTED
BY FUTURE SALES OF SUBSTANTIAL AMOUNTS OF SHARES IN THE PUBLIC MARKET
There will be an aggregate of 4,333,333 shares of Class A Common Stock
outstanding immediately after the offering, which amount could increase by up to
600,000 shares if the underwriters exercise their over-allotment option. Of
these shares, the 4,000,000 shares of Class A Common Stock sold in this offering
and, commencing six months after the completion of this offering, 58,333 shares
of Class A Common Stock registered for resale, from time to time, by Windsong,
Inc. will be freely tradable under the Securities Act of 1933.
The balance of the shares of Class A Common Stock issued to Windsong, Inc.
in connection with the Windsong acquisition and the up to 3,775,667 shares of
Class A Common Stock to be issued upon conversion of the 3,775,667 outstanding
shares of Class B Common Stock will be "restricted securities" and may, in the
future, be sold in compliance with Rule 144 under the Securities Act, subject,
in the case of the shares issued to Windsong, Inc., to the resale restrictions
in the Windsong acquisition agreement. See "Shares Eligible for Future Sale."
The sale or availability for sale of a large number of shares in the
market after the offering could cause a decline in the market price of the Class
A Common Stock. This could make it more difficult for us to raise funds through
future offerings of our stock.
20
<PAGE>
ABSENCE OF CURRENT PUBLIC MARKET, DETERMINATION OF PUBLIC OFFERING PRICE
AND MARKET UNCERTAINTY MAY CAUSE THE MARKET PRICE OF THE CLASS A COMMON STOCK TO
FLUCTUATE
There has not been a public market for the Class A Common Stock. We have
applied for listing of the Class A Common Stock on the Nasdaq National Market.
We do not know the extent to which investor interest in our stock will cause an
active trading market to develop or be sustained, or how liquid that market
might be. The market price for the Class A Common Stock could also fluctuate in
response to various factors and events, including liquidity of the market for
our shares, quarter-to-quarter variations in our results of operations and our
significant developments and of other industry participants, pricing and
competition in our industry, broad market fluctuations and economic and
political conditions not directly related to our business. The initial public
offering price of the Class A Common Stock will be determined by negotiation
between us and representatives of the underwriters. Investors may not be able to
resell their shares at or above the price that they pay in the initial public
offering.
PURCHASERS OF CLASS A COMMON STOCK WILL EXPERIENCE IMMEDIATE DILUTION AND
WILL BE SUBJECT TO POTENTIAL FUTURE DILUTION
Based upon our pro forma net tangible book value as of March 31, 1999,
purchasers of Class A Common Stock in the offering will experience an immediate
dilution of $9.37 in the pro forma net tangible book value per share of Class A
Common Stock from the initial public offering price of $12.00 per share.
Moreover, additional issuances of Class A Common Stock pursuant to the exercise
of stock options or warrants that we may issue from time to time, or as payment
of the deferred purchase price in connection with the Diversified Apparel,
Global Sourcing Network, Components and Windsong acquisitions, could cause
further dilution in the net tangible book value per share of the Class A Common
Stock. See "Dilution."
FORWARD-LOOKING STATEMENTS
An investment in the Class A Common Stock offered hereby is speculative in
nature and involves a high degree of risk. Some statements made in this
prospectus under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements. Forward-looking statements are identified by use of terms such as
"may," "will," "expect," "anticipate," "believe," "estimate," "intend," "plan"
and similar expressions, although some forward-looking statements are expressed
differently. Although we believe these statements are reasonable, there are
important risks and uncertainties, including those discussed in the "Risk
Factors" section above, that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements, including
changes in general economic and business conditions, actions of competitors,
changes in our business strategies and the factors set forth under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
21
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of 4,000,000 shares of Class A Common Stock
in this offering, after payment of expenses of this offering, are estimated to
be approximately $43.2 million, or $49.9 million if the underwriters'
over-allotment option is exercised in full, assuming an initial public offering
price of $12.00 per share, the midpoint of the range set forth on the cover page
of this prospectus. We intend to apply the net proceeds as follows:
(In thousands)
Windsong acquisition ............................ $22,000
Windsong escrow ................................. 4,250(1)
Notes due to sellers of Diversified Apparel and
Global Sourcing Network ......................... 1,200(2)
Components acquisition .......................... 4,695
Repay indebtedness .............................. 11,055(3)
-------
$43,200
=======
- ----------
(1) Indicates the amount that we will deposit in escrow prior to the closing
of the Windsong acquisition to secure the payment of a performance-based
portion of the purchase price of the Windsong acquisition. These funds
will be released from escrow to Windsong, no later than March 31, 2000 if
Windsong achieves targeted performance results. If these results are not
achieved, the funds will be released to us and used for general corporate
purposes.
(2) These notes bear interest at a rate of 10% per annum and mature in May
2002.
(3) Indicates the amount of proceeds that will be used to repay indebtedness
under our revolving credit line with PNC Bank, National Association, which
matures April 15, 2002. Borrowings under the PNC Bank revolving credit
line bear interest, at our option, at a rate based on either the bank's
commercial lending rate plus 0.5% or LIBOR plus 2.75%. In addition to the
funding of our working capital requirements, borrowings under the PNC Bank
revolving credit line were used to fund a $1.56 million tax distribution,
the $1.4 million initial cash portion of the purchase price for Global
Sourcing Network and the $800,000 initial cash portion of the Diversified
Apparel purchase price. See "Certain Relationships and Related
Transactions" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Significant Acquisitions." As of
June 30, 1999, $11.8 million was outstanding under the revolving credit
line.
22
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1999:
(1) our actual capitalization, giving retroactive effect to the
issuances of Class B Common Stock to our sole stockholder which have
occurred or will occur prior to the completion of the offering;
(2) our pro forma combined capitalization after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions, including the issuance of 333,333 shares of
Class A Common Stock to Windsong, based on an assumed initial
offering price of $12.00 per share, as part of our acquisition of
Windsong; and
(3) our pro forma combined capitalization, as adjusted to give effect to
the Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions, our sale of 4,000,000 shares of Class A
Common Stock pursuant to the offering, assuming an initial public
offering price of $12.00 per share, and the application of the net
proceeds of the offering as described under "Use of Proceeds." Our
pro forma combined capitalization, as adjusted, set forth below,
excludes shares of Class A Common Stock which may be issued as
deferred purchase price under the terms of the Diversified Apparel,
Global Sourcing Network, Components and Windsong acquisitions.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Pro Forma Combined
Financial Data" and the audited financial statements and the notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
------------------------------------------------
PRO FORMA
COMBINED,
ACTUAL PRO FORMA COMBINED AS ADJUSTED
---------- -------------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Long term debt, net of current maturities .............. $13,054 $16,969 $ 5,914
Stockholders' equity:
Class A Common Stock, par value $.001 per share;
12,000,000 shares authorized, no shares issued and
outstanding, 333,333 shares issued and outstanding
pro forma combined and 4,333,333 shares issued and
outstanding pro forma combined, as adjusted ......... -- -- 4
Class B Common Stock, par value $.0002 per share;
10,000,000 shares authorized, 3,775,667 shares
issued and outstanding actual, pro forma combined
and pro forma combined, as adjusted ................. -- -- --
Additional paid-in capital ............................. 3,191 7,191 50,387
Retained earnings ...................................... 282 282 282
------- ------- -------
Total stockholders' equity ........................... 3,473 7,473 50,673
------- ------- -------
Total capitalization ................................... $16,527 $24,442 $56,587
======= ======= =======
</TABLE>
23
<PAGE>
DIVIDEND POLICY
We have not declared or paid any cash or other dividends on our capital
stock and we do not expect to pay dividends for the foreseeable future. We
anticipate that all of our earnings in the foreseeable future will be used for
the operation of our business, to support our growth strategy and to reduce our
indebtedness. Any future determination to pay dividends will be at the
discretion of our Board of Directors and will depend upon, among other factors,
our results of operations, financial condition and capital requirements. In
addition, our existing credit facility with PNC Bank, National Association, and
other loan agreements contain, and any successor facility will likely contain,
prohibitions on our ability to pay dividends. Please refer to the "Certain
Relationships and Related Transactions" section of this prospectus, however, for
a description of tax-related distributions required to be made by MS Pietrafesa,
L.P. to its partners under its partnership agreement. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
DILUTION
Our net tangible book value as of March 31, 1999, was $3.3 million, or
$0.88 per share of Common Stock. Net tangible book value per share represents
the amount of total tangible assets less total liabilities, divided by the
aggregate number of shares of Common Stock outstanding. Dilution in the net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of Class A Common Stock in this offering and
the net tangible book value per share of Common Stock immediately afterwards.
After giving effect to the Diversified Apparel, Global Sourcing Network,
Components and Windsong acquisitions and our obligation to issue to Windsong,
Inc. as part of our acquisition of Windsong, $4.0 million worth of Class A
Common Stock at our initial public offering price, which would result in the
issuance of 333,333 shares of Class A Common Stock, our net tangible book value
as of March 31, 1999 would have been $(21.9) million or $(5.33) per share. After
giving effect to the sale of 4,000,000 shares of Class A Common Stock offered
hereby at an assumed initial public offering price of $12.00 per share, and the
application of the net proceeds therefrom, our pro forma net tangible book value
as of March 31, 1999 would have been approximately $21.3 million, or $2.63 per
share. This represents an immediate increase in net tangible book value of $7.96
per share to the holder of our Class B Common Stock and an immediate dilution in
net tangible book value of $9.37 per share to purchasers of Class A Common Stock
in the offering. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share ....................................... $ 12.00
Net tangible book value per share of Common Stock as of March 31,1999 ................ $ 0.88
Decrease in net tangible book value per share of Common Stock attributable to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions ....................................................................... (6.21)
-------
Pro forma net tangible book value per share of Common Stock after the acquisitions ... (5.33)
Increase in pro forma net tangible book value per share of Common Stock
attributable to new investors ...................................................... 7.96
-------
Pro forma net tangible book value per share of Common Stock after the acquisitions
and the offering ................................................................... 2.63
--------
Dilution per share of Class A Common Stock to new investors .......................... $ 9.37
========
</TABLE>
24
<PAGE>
The following table sets forth, on the pro forma basis described above, as
of March 31, 1999, the difference between the number of shares purchased, the
total consideration paid and the average price per share paid by the existing
stockholder and new investors purchasing shares of Class A Common Stock in this
offering. The information presented is based upon an assumed initial public
offering price of $12.00 per share, the midpoint of the range set forth on the
cover page of this prospectus, before deducting the estimated offering expenses
and underwriting discounts and commissions:
<TABLE>
<CAPTION>
SHARES TOTAL CONSIDERATION
------------------------------ -------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------------ --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholder ......... 3,775,667 46.6% $ 8,184,454 13.6% $ 2.17
Windsong, Inc. ............... 333,333(1) 4.1 4,000,000 6.6 12.00
New investors ................ 4,000,000 49.3 48,000,000 79.8 12.00
--------- ----- ----------- -----
8,109,000(2) 100.0% $60,184,454 100.0%
========= ===== =========== =====
</TABLE>
- ----------
(1) Represents shares issued as part of the purchase price of the Windsong
acquisition.
(2) Excludes shares of Class A Common Stock to be reserved for issuance upon
the exercise of options which may be issued under our Stock Option Plan,
under which options to purchase a number of shares equal to 10% of our
outstanding capital stock immediately following the offering may be
granted. See "Management -- Stock Option Plan."
25
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables present our selected historical statement of
operations and historical balance sheet data for each year in the five-year
period ended December 31, 1998 and for the three-month periods ended March 31,
1998 and 1999. The selected annual historical financial data were derived from
audited consolidated financial statements. The selected historical financial
data as of March 31, 1998 and 1999 and for the three-month periods then ended
were derived from our unaudited interim financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which we consider necessary for a fair presentation of the financial
position, and the results of operations for these periods. Operating results for
the three-month period ended March 31, 1999 are not necessarily indicative of
the results that may be expected for the entire year ending December 31, 1999.
Our statement of operations, balance sheet and other data include a number
of items that require further explanation. These items include:
o Impairment loss on fixed assets, which relates to the reduction of
property, plant, and equipment to their net realizable value less
sale costs based on independent appraisals. In 1995, we discontinued
the low price point tailored clothing segment of our business and
closed the related manufacturing facilities located in Carrollton,
Georgia. Accordingly, in 1995 we reduced the net book value of plant
and equipment, as well as furniture and fixtures, located at the
Carrollton facility, to their net realizable value and realized an
impairment loss of $2.3 million. The impairment loss of $170,000 in
1996 related to equipment which we disposed of at our former
Sturgis, Kentucky facility;
o Public offering costs, which relate to the abandonment of our public
offering in 1998 due to adverse market conditions;
o Provision for income taxes, which was not included in our statement
of operations data prior to October, 1998 because our predecessor,
MS Pietrafesa, L.P., was not subject to state or federal income
taxes;
o Extraordinary item, which relates to the forgiveness of all of our
outstanding subordinated debt in 1996; and
o Pro forma weighted average number of common shares outstanding,
basic and diluted, for 1998 and the first quarter of 1999, which
consists of the 3,775,667 shares of Class B Common Stock owned by
our sole stockholder as of the date of the offering.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and " -- Results of Operations" for a more detailed
explanation of these items.
In addition, we have included under "Other Data" below and in our Selected
Historical Consolidated Financial Data, the line item "EBITDA plus public
offering costs," which represents income (loss) before provision (benefit) for
income taxes plus depreciation and amortization plus interest expense plus
public offering costs. EBITDA plus public offering costs is not intended to
represent cash flows from operations and should not be considered as an
alternative to net income as an indicator of our operating performance or to
cash flows as a measure of liquidity. We believe that EBITDA is a standard
measure commonly reported and widely used by analysts, investors and other
interested parties in the apparel industry. Accordingly, as modified to exclude
our public offering costs, it has been disclosed in this prospectus to permit a
more complete description of our performance relative to other companies in the
apparel industry. Our definition of EBITDA may not be identical to the
definitions used by other companies and, therefore, may not necessarily provide
an accurate basis for comparison.
The selected historical financial data set forth below should be read in
conjunction with our financial statements and notes thereto included elsewhere
in this prospectus, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and other financial data included herein.
26
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------------- --------------------------
1994 1995 1996 1997 1998 1998 1999
---------- ------------- ----------- ----------- ------------ ------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ......................... $54,859 $ 51,431 $ 44,000 $ 37,582 $ 56,763 $ 9,503 $ 17,803
Cost of sales ........................ 45,803 46,533 34,769 29,218 47,062 7,028 14,833
------- --------- -------- -------- ---------- ---------- ----------
Gross profit ......................... 9,056 4,898 9,231 8,364 9,701 2,475 2,970
Operating expenses:
Selling, general and
administrative expenses ........... 7,250 10,080 7,427 6,150 5,536 1,305 1,201
Impairment loss on fixed assets ..... -- 2,324 170 -- -- -- --
Depreciation and amortization
expense ........................... 99 102 165 151 222 64 68
------- --------- -------- -------- ---------- ---------- ----------
7,349 12,506 7,762 6,301 5,758 1,369 1,269
------- --------- -------- -------- ---------- ---------- ----------
Operating income (loss) .............. 1,707 (7,608) 1,469 2,063 3,943 1,106 1,701
Interest expense ..................... 1,648 1,914 1,962 1,507 1,209 253 296
Public offering costs ................ -- -- -- -- 823 -- --
------- --------- -------- -------- ---------- ---------- ----------
Income (loss) before income taxes
and extraordinary item .............. 59 (9,522) (493) 556 1,911 853 1,405
Provision for income taxes ........... -- -- -- -- 514 -- 565
------- --------- -------- -------- ---------- ---------- ----------
Income (loss) before
extraordinary item .................. 59 (9,522) (493) 556 1,397 853 840
------- --------- -------- -------- ---------- ---------- ----------
Extraordinary item ................... -- -- 3,150 -- -- -- --
------- --------- -------- -------- ---------- ---------- ----------
Net income (loss) .................... $ 59 $ (9,522) $ 2,657 $ 556 $ 1,397 $ 853 $ 840
======= ========= ======== ======== ========== ========== ==========
PRO FORMA INCOME DATA:
Income before income taxes ........... $ 1,911 $ 853 $ 1,405
Pro forma provision for income
taxes ............................... 764 341 565
---------- ---------- ----------
Pro forma net income ................. $ 1,147 $ 512 $ 840
========== ========== ==========
Pro forma basic and diluted net
income per common share ............. $ 0.30 $ 0.14 $ 0.22
Pro forma basic and diluted
weighted average number of
common shares outstanding ........... 3,775,667 3,775,667 3,775,667
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
-------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
--------- ------------- ------------ --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency) ......... $ 4,713 $ (3,287) $ (2,412) $ 4,642 $ 9,239 $ 5,707 $ 10,520
Total assets ......................... 40,035 27,116 23,627 19,673 29,375 21,838 29,944
Total long-term debt, net of current
maturities .......................... 7,429 3,746 3,036 8,663 12,561 8,754 13,054
Total partners' capital and
stockholders' equity ................ 8,818 (704) 2,153 2,709 2,383 3,562 3,473
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
----------- ------------- ----------- ---------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA plus public offering costs $ 2,719 $ (6,411) $ 2,415 $ 2,865 $ 4,731 $1,308 $1,886
Capital expenditures ............ 1,103 368 105 59 592 90 109
Cash (used in) provided by
operating activities ........... (3,022) 3,779 2,445 3,056 (1,395) 28 (613)
Cash (used in) provided by
investing activities ........... (1,035) (265) 419 2,185 (563) (90) (109)
Cash (used in) provided by
financing activities ........... 4,540 (4,001) (2,866) (5,242) 1,969 62 721
</TABLE>
28
<PAGE>
PRO FORMA COMBINED FINANCIAL DATA
Our pro forma combined financial data includes our statement of operations
data which reflects our historical results after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions as if they occurred on January 1, 1998, and also includes our
balance sheet data, which reflects our balance sheet and the balance sheets of
Diversified Apparel, Global Sourcing Network, Components and Windsong as if the
acquisitions of such businesses had occurred on March 31, 1999. The acquisitions
of Diversified Apparel and Global Sourcing Network were consummated on April 15,
1999. We have entered into definitive agreements to purchase the Components and
Windsong businesses. Our acquisition of Components and Windsong will occur
simultaneously with this offering. The pro forma combined, as adjusted financial
data includes our pro forma combined information as adjusted for this offering
and the application of the proceeds of this offering. The pro forma combined
financial data are based upon preliminary estimates, available information and
assumptions that management deems appropriate, but are not necessarily
indicative of the results that would have been obtained had such events occurred
at the times assumed or our future results. The pro forma combined financial
statements should be read in conjunction with the other financial statements and
notes thereto included elsewhere in this prospectus.
The acquisitions have been recorded in the pro forma financial statements
as a purchase in accordance with Accounting Principle Board Opinion No. 16.
Accordingly, the purchase price of each acquisition has been allocated to the
fair value of the assets acquired and the amount of the liabilities assumed,
with the remainder allocated to goodwill. No other intangible assets were
acquired as part of the acquisitions. The initial purchase price of Components
will be paid entirely in cash. The initial purchase prices of Global Sourcing
Network and Diversified Apparel were paid in cash and by the issuance of notes.
The initial purchase price of Windsong will be paid in cash and $4.0 million
worth of Class A Common Stock valued at the initial public offering price,
assumed to be $12.00 per share, or 333,333 shares. A summary of the purchase
price of the acquisitions and allocation of each such price to the fair value of
assets acquired and liabilities assumed is shown below:
SCHEDULE OF ALLOCATION OF PURCHASE PRICE OF ACQUISITIONS
<TABLE>
<CAPTION>
GLOBAL
DIVERSIFIED SOURCING TOTAL
APPAREL NETWORK COMPONENTS WINDSONG COMBINED
------------- ------------ ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PURCHASE PRICE:
Cash portion ............................... $ 800 $ 1,400 $ 4,695 $ 22,000 $ 28,895
Equity portion ............................. -- -- -- 4,000 4,000
Sellers' notes ............................. 400 800 -- -- 1,200
Costs directly associated with the
acquisition ............................... 350 350 350 400 1,450
--------- -------- -------- --------- ---------
Total purchase price ....................... $ 1,550 $ 2,550 $ 5,045 $ 26,400 $ 35,545
ALLOCATION OF PURCHASE PRICE:
Fair value of assets acquired .............. $ (2,457) $ (1,171) $ (8,660) $ (19,998) $ (32,286)
Assumption of liabilities .................. $ 1,955 $ 1,121 $ 6,021 $ 16,862 $ 25,959
--------- -------- -------- --------- ---------
Goodwill acquired .......................... $ 1,048 $ 2,500 $ 2,406 $ 23,264 $ 29,218
========= ======== ======== ========= =========
Pro forma amortization expense ............. $ 105 $ 167 $ 160 $ 1,163 $ 1,595
========= ======== ======== ========= =========
Pro forma amortization for quarter ......... $ 26 $ 42 $ 40 $ 291 $ 399
========= ======== ======== ========= =========
</TABLE>
29
<PAGE>
Goodwill will be amortized over a period ranging from 10 to 20 years. The
principal assets acquired or to be acquired for each of the acquisitions are
accounts receivable, inventory and goodwill. The principal liabilities assumed
for each of the acquisitions are accounts payable, accrued expenses and debt
facilities. The amount of goodwill recorded in the pro forma financial
statements is based on the assets and liabilities of the acquisitions as of
March 31, 1999, which are estimated to approximate fair value at that date. The
actual amount of goodwill recorded when the acquisitions are completed will vary
depending on the actual amount of assets and liabilities of the acquisitions on
the acquisition dates. However, we do not believe there will be a material
difference between the assumed and actual amount of goodwill recorded since the
purchase agreements contain mandatory purchase price adjustments to the extent
that net assets or working capital do not meet targeted amounts. In addition, a
portion of the purchase price for each of the above-referenced acquisitions will
be deferred, which we will pay upon the achievement by the acquired business of
specified performance targets. These deferred purchase price provisions may
result in additional goodwill of $29.7 million that will be amortized over a
period ranging from nine to 19 years. The initial goodwill plus the additional
goodwill, if any, resulting from such deferred purchase price provisions would
result in aggregate goodwill amortization of $2.1 million for the year ending
December 31, 2000, $2.3 million for the year ending December 31, 2001, $2.5
million for the year ending December 31, 2002, $2.9 million for the year ending
December 31, 2003, $3.3 million for the year ending December 31, 2004 and $3.7
million for the year ending December 31, 2005.
The statement of operations data reflects the following pro forma
adjustments:
o A reduction of selling, general and administrative expenses totaling
$2.7 million in 1998 representing the excess of actual 1998
compensation expense and benefits over the compensation and benefits
to be paid to the former owners of Diversified Apparel, Global
Sourcing Network, Components and Windsong, under their respective
employment agreements. This pro forma information is shown solely to
demonstrate the changed circumstances that will exist following the
consummation of the acquisitions. Although the administrative
expenses of the acquired businesses will decline after the offering
as a result of the reduced compensation payable to the former owners
of these businesses, the roles and responsibilities and the
administrative function of these individuals will not be diminished
as a result of the acquisitions. We do not expect to incur any
additional administrative expense beyond those reflected in the
adjustments going forward. We believe this information is necessary
for investors to realistically assess the impact of these
acquisitions;
o The amortization of goodwill resulting from the Diversified Apparel,
Global Sourcing Network, Components and Windsong acquisitions as if
the acquisitions occurred on January 1, 1998. The calculation of
this adjustment is shown in the table above entitled, "Schedule of
Allocation of Purchase Price of Acquisitions";
o The reduction of interest expense incurred during 1998, the first
quarter of 1999 and the first quarter of 1998 on interest-bearing
subordinated accounts payable of Windsong that we will not assume as
part of the Windsong acquisition;
o The reduction of interest expense resulting from repayment of debt
with the proceeds of the offering, net of a fee for unused
availability under the PNC Bank credit facility that will result
from the repayment of the PNC Bank credit facility with the proceeds
of this offering;
o 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%.
See footnote 1 to the Pro Forma Statement of Operations for further
information;
o Pro forma combined weighted average number of shares outstanding,
basic and diluted, includes, in addition to the 3,775,667 shares of
Class B Common Stock owned by our sole stockholder as of the date of
the offering, 333,333 shares of Class A Common Stock issued to
Windsong at the initial public offering price as part of our
acquisition of Windsong, based on an assumed offering price of
$12.00 per share; and
o Pro forma combined, as adjusted weighted average number of common
shares outstanding, basic and diluted, which includes, in addition
to all shares of Class A Common Stock to be issued in the offering
30
<PAGE>
and the initial portion of the Windsong acquisition price, 3,775,667
shares of Class B Common Stock owned by our sole stockholder as of
the date of the offering.
The balance sheet data reflects the following pro forma adjustments:
o Goodwill as a result of the Diversified Apparel, Global Sourcing
Network, Components and Windsong acquisitions as calculated in the
table above entitled, "Schedule of Allocation of Purchase Price of
Acquisitions";
o Deposit of $4.25 million cash in escrow which will be paid to the
sellers of Windsong if Windsong achieves specified earnings targets
during 1999;
o Elimination of certain liabilities that are not being assumed as
part of the acquisition of Windsong;
o For purposes of the acquisition pro forma adjustments, we have
assumed an acquisitions payable amount, which represents the initial
purchase price owed for the Components and Windsong acquisitions and
the Windsong escrow amount. No interest expense has been provided
for the Windsong and Components acquisitions as those acquisitions
will be funded by the proceeds of the offering. See "Use of
Proceeds";
o Elimination of common stock and retained earnings of the
acquisitions;
o Elimination of the additional paid-in capital of the acquisitions;
o Issuance of $4.0 million worth of Class A Common Stock associated
with the acquisition of Windsong at an assumed price of $12.00 per
share;
o Assumed net proceeds of approximately $43.2 million from this
offering; and
o Our use of the net proceeds of the offering. See "Use of Proceeds."
In addition to the adjustments included in the pro forma combined
financial data, our acquisition and integration of the acquired businesses may
affect their operations in other ways. We expect the acquired businesses to be
able to use our existing merchandising, sourcing, sales and accounting staff to
perform certain functions performed for the acquired businesses historically by
third party consultants. For example, as a condition to our acquisition of
Global Sourcing Network, it agreed to stop paying royalties and commissions to
third party consultants who assisted in the development, merchandising and
international sourcing of apparel programs for S&K Famous Brands. These
terminated commissions and royalties totaled $870,000 in 1998. We expect that
our existing staff will perform these services for Global Sourcing Network at no
additional cost to us and without any loss of revenues. We also expect to incur
additional costs associated with being a public company which are estimated to
be $300,000 per year.
31
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
THE GLOBAL
PIETRAFESA DIVERSIFIED SOURCING TOTAL
CORPORATION APPAREL NETWORK COMPONENTS WINDSONG COMBINED
------------- ------------- ---------- ------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ................................ $56,763 $ 2,633 $18,062 $19,993 $63,630 $ 161,081
Cost of sales ............................... 47,062 1,590 16,768 15,007 49,884 130,311
------- ------- ------- ------- ------- ---------
Gross profit ................................ 9,701 1,043 1,294 4,986 13,746 30,770
Operating expenses:
Selling, general and administrative
expenses .................................. 5,536 765 1,390 3,107 10,917 21,715
Depreciation and amortization expenses ..... 222 3 4 1 157 387
------- ------- ------- ------- ------- ---------
5,758 768 1,394 3,108 11,074 22,102
------- ------- ------- ------- ------- ---------
Operating income (loss) ..................... 3,943 275 (100) 1,878 2,672 8,668
Interest expense ............................ 1,209 1 -- 293 1,661 3,164
Public offering costs ....................... 823 -- -- -- -- 823
------- ------- ------- ------- ------- ---------
Income (loss) before income taxes ........... 1,911 274 (100) 1,585 1,011 4,681
Provision for income taxes .................. 514 24 (46) 158 46 696
------- ------- ------- ------- ------- ---------
Net income (loss) ........................... $ 1,397 $ 250 $ (54) $ 1,427 $ 965 $ 3,985
======= ======= ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
COMPANY ACQUISITION PRO FORMA
PRO FORMA PRO FORMA PRO FORMA OFFERING COMBINED,
ADJUSTMENTS ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
------------- ------------- ------------- ------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues .................................... $ -- $ -- $ 161,081 $ -- $ 161,081
Cost of sales ................................... -- -- 130,311 -- 130,311
------ -------- ---------- ------ ----------
Gross profit .................................... -- -- 30,770 -- 30,770
Operating expenses:
Selling, general and administrative
expenses ...................................... -- (2,667) 19,048 -- 19,048
Depreciation and amortization expenses ......... -- 1,595 1,982 -- 1,982
------ -------- ---------- ------ ----------
-- (1,072) 21,030 -- 21,030
------ -------- ---------- ------ ----------
Operating income (loss) ......................... -- 1,072 9,740 -- 9,740
Interest expense ................................ -- 157 3,321 (936) 2,385
Public offering costs ........................... -- -- 823 -- 823
Income (loss) before income taxes ............... -- 915 5,596 936 6,532
Provision for income taxes ...................... 250(1) 1,292(1) 2,238 374 2,612
-------- ---------- ---------- ------ ----------
Net income (loss) ............................... $ (250) $ (377) $ 3,358 $ 562 $ 3,920
======== ========== ========== ====== ==========
Basic and diluted net income (loss) per
common share ................................... $ 0.82 $ 0.48
Basic and diluted weighted average number
of common shares outstanding ................... 4,109,000 8,109,000
</TABLE>
32
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
THE GLOBAL
PIETRAFESA DIVERSIFIED SOURCING TOTAL
CORPORATION APPAREL NETWORK COMPONENTS WINDSONG COMBINED
------------- ------------- ---------- ------------ ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ................................ $17,803 $2,233 $6,040 $5,384 $14,552 $46,012
Cost of sales ............................... 14,833 1,697 5,622 4,123 11,170 37,445
------- ------ ------ ------ ------- -------
Gross profit ................................ 2,970 536 418 1,261 3,382 8,567
Operating expenses:
Selling, general and administrative
expenses .................................. 1,201 336 261 604 2,030 4,432
Depreciation and amortization expenses ..... 68 -- -- -- 40 108
------- ------ ------ ------ ------- -------
1,269 336 261 604 2,070 4,540
------- ------ ------ ------ ------- -------
Operating income ............................ 1,701 200 157 657 1,312 4,027
Interest expense ............................ 296 4 -- 76 334 710
Public offering cost ........................ -- -- -- -- -- --
------- ------ ------ ------ ------- -------
Income before income taxes .................. 1,405 196 157 581 978 3,317
Provision for income taxes .................. 565 (1) -- -- 44 608
------- -------- ------ ------ ------- -------
Net income .................................. $ 840 $ 197 $ 157 $ 581 $ 934 $ 2,709
======= ======= ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
COMPANY ACQUISITION PRO FORMA
PRO FORMA PRO FORMA PRO FORMA OFFERING COMBINED, AS
ADJUSTMENTS ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues .................................... -- $ -- $ 46,012 $ -- $ 46,012
Costs of sales .................................. -- -- 37,445 -- 37,445
-- ------ ---------- ------ ----------
Gross profit .................................... -- -- 8,567 -- 8,567
Operating expenses:
Selling, general and administrative
expenses ...................................... -- 1 4,433 -- 4,433
Depreciation and amortization expenses ......... -- 399 507 -- 507
-- ------ ---------- ------ ----------
-- 400 4,940 -- 4,940
-- ------ ---------- ------ ----------
Operating income (loss) ......................... -- (400) 3,627 -- 3,627
Interest expense ................................ -- 2 712 (173) 539
-- ------ ---------- ------ ----------
Income (loss) before income taxes ............... -- (402) 2,915 173 3,088
Provision for income taxes ...................... -- 561(1) 1,169 66 1,235
-- -------- ---------- ------ ----------
Net income (loss) ............................... -- $ (963) $ 1,746 $ 107 $ 1,853
== ======== ========== ====== ==========
Basic and diluted net income (loss) per
common share ................................... $ 0.42 $ 0.23
Basic and diluted weighted average number
of common shares outstanding ................... 4,109,000 8,109,000
</TABLE>
33
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
THE GLOBAL
PIETRAFESA DIVERSIFIED SOURCING TOTAL
CORPORATION APPAREL NETWORK COMPONENTS WINDSONG COMBINED
------------- ------------- ---------- ------------ ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ................................ $9,503 $260 $5,831 $4,868 $17,312 $37,774
Cost of sales ............................... 7,028 18 5,372 3,596 13,684 29,698
------ ---- ------ ------ ------- -------
Gross profit ................................ 2,475 242 459 1,272 3,628 8,076
Operating expenses:
Selling, general and administrative
expenses .................................. 1,305 176 324 509 2,090 4,404
Depreciation and amortization expenses ..... 64 -- -- -- 41 105
------ ---- ------ ------ ------- -------
1,369 176 324 509 2,131 4,509
------ ---- ------ ------ ------- -------
Operating income ............................ 1,106 66 135 763 1,497 3,567
Interest expense ............................ 253 -- -- 67 448 768
Public offering costs ....................... -- -- -- -- -- --
------ ---- ------ ------ ------- -------
Income before income taxes .................. 853 66 135 696 1,049 2,799
Provision for income taxes .................. -- 13 2 16 47 78
------ ---- ------ ------ ------- -------
Net income .................................. $ 853 $ 53 $ 133 $ 680 $ 1,002 $ 2,721
====== ==== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
COMPANY ACQUISITION PRO FORMA
PRO FORMA PRO FORMA PRO FORMA OFFERING COMBINED, AS
ADJUSTMENTS ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenues .................................... $ -- $ -- $ 37,774 $ -- $ 37,774
Costs of sales .................................. -- -- 29,698 -- 29,698
------ ------ ---------- ------ ----------
Gross profit .................................... -- -- 8,076 -- 8,076
Operating expenses:
Selling, general and administrative
expenses ...................................... -- (93) 4,311 -- 4,311
Depreciation and amortization expenses ......... -- 399 504 -- 504
------ ------ ---------- ------ ----------
-- 306 4,815 -- 4,815
------ ------ ---------- ------ ----------
Operating income (loss) ......................... -- (306) 3,261 -- 3,261
Interest expense ................................ -- (161) 607 (257) 350
Public offering costs ........................... -- -- -- -- --
------ ------ ---------- ------ ----------
Income (loss) before income taxes ............... -- (145) 2,654 257 2,911
Provision for income taxes ...................... 341(1) 642(1) 1,061 103 1,164
-------- -------- ---------- ------ ----------
Net income (loss) ............................... $ (341) $ (787) $ 1,593 $ 154 $ 1,747
======== ======== ========== ====== ==========
Basic and diluted net income per common
share .......................................... $ 0.39 $ 0.22
Basic and diluted weighted average number
of common shares outstanding ................... 4,109,000 8,109,000
</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. Prior to October 1, 1998, The Pietrafesa Corporation
operated as a limited partnership with income and loss included in the
taxable income of the individual partners.
34
<PAGE>
Diversified Apparel, Components and Windsong operated as S-corporations
for federal income tax purposes. Accordingly, the income and loss of
Diversified Apparel, Components and Windsong were included in the taxable
income of their shareholders. These adjustments are summarized as follows:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS FOR THE
FOR THE YEAR ENDED ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999 MARCH 31, 1998
----------------------------- ---------------- ----------------------------
COMPANY ACQUISITION ACQUISITION COMPANY ACQUISITION
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- ---------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
To adjust historical income tax
expense to an effective tax rate
of 40%
The Pietrafesa Corporation ......... $250 $341
Diversified Apparel ................ $ 86 $ 79 $ 13
Global Sourcing Network ............ 6 63 52
Components ......................... 476 232 262
Windsong ........................... 358 348 373
Tax effect of pro forma adjustments
assuming a 40% tax rate ............ 366 (161) (58)
------- ------ -----
Total .............................. $250 $ 1,292 $ 561 $341 $ 642
==== ======= ====== ==== =====
</TABLE>
35
<PAGE>
PRO FORMA COMBINED BALANCE SHEET DATA
AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
THE GLOBAL
PIETRAFESA DIVERSIFIED SOURCING TOTAL
CORPORATION APPAREL NETWORK COMPONENTS WINDSONG COMBINED
------------- ------------- ---------- ------------ ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets
Current assets
Cash ......................................... $ 13 $ 116 $ -- $ 187 $ 21 $ 337
Accounts receivable .......................... 8,488 1,471 589 5,199 8,527 24,274
Inventories .................................. 12,682 792 434 2,454 9,473 25,835
Prepaid expenses and other assets ............ 1,313 56 139 -- 1,308 2,816
------- ------ ------ ------ ------- -------
Total current assets .......................... 22,496 2,435 1,162 7,840 19,329 53,262
Property, plant and equipment, net ............. 6,523 13 9 312 598 7,455
Goodwill ....................................... -- -- -- -- -- --
Other assets ................................... 925 9 -- 508 71 1,513
------- ------ ------ ------ ------- -------
Total assets ................................... $29,944 $2,457 $1,171 $8,660 $19,998 $62,230
======= ====== ====== ====== ======= =======
Liabilities and stockholders' equity
Current liabilities
Credit facility .............................. $ -- $ 150 $ -- $3,369 $10,707 $14,226
Accounts payable ............................. 7,166 1,300 898 2,494 6,365 18,223
Other current liabilities .................... 2,767 357 223 158 859 4,364
Tax distribution payable ..................... 1,516 70 -- -- -- 1,586
Current maturities of long-term
debt ....................................... 527 -- -- -- 124 651
------- ------ ------ ------ ------- -------
Total current liabilities ..................... 11,976 1,877 1,121 6,021 18,055 39,050
Deferred tax liability ......................... 1,441 -- -- -- -- 1,441
Long-term debt, net of current
maturities .................................... 13,054 -- -- -- 187 13,241
Stockholders' equity
Common stock .................................. -- 1 1 300 1 303
Additional paid-in capital .................... 3,191 -- -- -- 6 3,197
Retained earnings ............................. 282 579 49 2,339 1,749 4,998
------- ------ ------ ------ ------- -------
Total stockholders' equity ..................... 3,473 580 50 2,639 1,756 8,498
------- ------ ------ ------ ------- -------
Total liabilities and stockholders' equity ..... $29,944 $2,457 $1,171 $8,660 $19,998 $62,230
======= ====== ====== ====== ======= =======
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------------------------------------------------------------
COMPANY ACQUISITION PRO FORMA
TOTAL PRO FORMA PRO FORMA PRO FORMA COMBINED,
COMBINED ADJUSTMENTS ADJUSTMENTS COMBINED OFFERING AS ADJUSTED
---------- ------------- ------------- ----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (CONT.):
Assets
Current assets
Cash ........................................ $ 337 $ -- $ -- $ 337 $ -- $ 337
Accounts receivable ......................... 24,274 -- -- 24,274 -- 24,274
Inventories ................................. 25,835 -- -- 25,835 -- 25,835
Prepaid expenses and other assets ........... 2,816 -- -- 2,816 -- 2,816
------- ------- -------- ------- --------- -------
Total current assets ......................... 53,262 -- -- 53,262 -- 53,262
------- ------- -------- ------- --------- -------
Property, plant and equipment, net ............ 7,455 -- -- 7,455 -- 7,455
Goodwill ...................................... -- -- 29,218 29,218 -- 29,218
Other assets .................................. 1,513 -- 4,250 5,763 -- 5,763
------- ------- -------- ------- --------- -------
Total assets .................................. $62,230 $ -- $ 33,468 $95,698 $ -- $95,698
======= ======= ======== ======= ========= =======
Liabilities and stockholders' equity
Current liabilities
Credit facility ............................. $14,226 $ -- $ -- $14,226 $ -- $14,226
Accounts payable ............................ 18,223 -- (1,380) 16,843 -- 16,843
Other current liabilities ................... 4,364 -- 1,200 5,564 (1,200) 4,364
Tax distribution payable .................... 1,586 -- -- 1,586 -- 1,586
Current maturities of long-term
debt ...................................... 651 -- -- 651 -- 651
------- ------- -------- ------- --------- -------
Total current liabilities .................... 39,050 -- (180) 38,870 (1,200) 37,670
------- ------- -------- ------- --------- -------
Acquisitions payable:
Components ................................... 4,695 4,695 (4,695) --
Windsong ..................................... 22,000 22,000 (22,000) --
Windsong escrow .............................. 4,250 4,250 (4,250) --
-------- ------- --------- -------
30,945 30,945 (30,945) --
Deferred tax liability ........................ 1,441 -- -- 1,441 -- 1,441
Long-term debt, net of current maturities 13,241 -- 3,728 16,969 (11,050) 5,914
Stockholders' equity
Common stock ................................. 303 -- (303) -- 4 4
Additional paid in capital ................... 3,197 -- 3,994 7,191 43,196 50,387
Retained earnings ............................ 4,998 -- (4,716) 282 -- 282
------- ------- -------- ------- --------- -------
Total stockholders' equity .................... 8,498 -- (1,025) 7,473 43,200 50,673
------- ------- -------- ------- --------- -------
Total liabilities and stockholders' equity .... $62,230 $ -- $ 33,468 $95,698 $ -- $95,698
======= ======= ======== ======= ========= =======
</TABLE>
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 1970s started producing directly for large
retailers. In 1990, an investment group led by Richard C. Pietrafesa, Jr. and
Joseph J. Pietrafesa II created MS Pietrafesa, L.P. and acquired the business in
a management buyout from their father and uncle. In the early 1990s, we
formalized our growth strategy of focusing on developing proprietary brand
programs for major retailers. Our strategy at that time was to support these
programs by increasing production capacity to serve a broader range of price
points and to develop state-of-the-art manufacturing capabilities at our
Liverpool, New York facility. Our proprietary brand strategy produced
significant revenue growth.
Despite material revenue growth from 1993 to 1994, our profits grew only
modestly. Our profitability was adversely impacted during this period by the
costs of expanding operations and manufacturing facilities to support planned
growth and meet customers' expanding production needs, as well as by competition
from products supplied by foreign sources.
During the period 1995 through 1997, we divested all of our manufacturing
assets other than the Liverpool facility, refinanced our secured lending
arrangements and negotiated the forgiveness of our subordinated indebtedness.
Beginning in 1997, we developed a new business strategy designed to
leverage our reputation as a developer of innovative dress apparel programs for
retailers. This strategy was far less reliant on our own manufacturing assets,
and emphasized our expertise in garment design and production management through
sourcing arrangements with third party manufacturers. See "Risk Factors --
Failure by Third Party Manufacturers to Fulfill their Obligations could
Adversely Affect our Ability to Deliver Products in a Timely Manner and could
Reduce our Profitability," As part of this new strategy, in 1998 we commenced
acquisition discussions with various independent merchandising and sourcing
companies. See "Business -- Business Strategy" and "Business -- Acquisition
Strategy."
SIGNIFICANT ACQUISITIONS
TERMS OF THE ACQUISITIONS. In addition to the measures described above and
taken during 1995 through 1997, we have completed the acquisitions of
Diversified Apparel and Global Sourcing Network. We will complete the
acquisitions of Components and Windsong simultaneously with the consummation of
this offering. We believe that the terms of each acquisition satisfy all
elements of our acquisition strategy. See "Business -- Reorganization,
Acquisitions and Operating Unit Structure." The terms of each acquisition are as
follows:
On April 15, 1999, we purchased all of the assets of Diversified Apparel.
Under the terms of the Diversified Apparel acquisition agreement, we paid
$800,000 in cash and issued a promissory note in the principal amount of
$400,000. In addition, we assumed some existing liabilities of Diversified
Apparel totaling $2.0 million as of March 31, 1999, which consisted of
approximately $1.3 million of trade payables, as well as third party
indebtedness. Diversified Apparel merchandises and sources apparel, including
lower to mid-priced suits and dress shirts, to value-priced apparel retailers.
The purchase price also includes a potential five-year earn-out of $800,000
payable in cash or, in limited circumstances, shares of Class A Common Stock at
our option, based on Diversified Apparel's achievement of specified annual
pre-tax earnings targets. These targets require aggregate growth of 46% in
pre-tax earnings over the five-year period from 1999 through 2003. These targets
are measured annually and, if an annual target is missed, the earn-out payment
for such year will be deferred or forfeited, depending on the extent to which
actual performance falls short of the target.
38
<PAGE>
On April 15, 1999, we purchased all of the issued and outstanding capital
stock of Global Sourcing Network. Under the terms of the Global Sourcing Network
acquisition agreement, the initial purchase price consisted of $1.4 million in
cash and the issuance of a promissory note payable to the sole stockholder of
Global Sourcing Network, in the principal amount of $800,000. Global Sourcing
Network sources men's suits for S&K Famous Brands. The purchase price also
includes a potential five-year earn-out of $2.2 million payable in cash based on
Global Sourcing Network's achievement of specified annual pre-tax earnings
targets. These targets require aggregate growth of 31% in pre-tax earnings over
the five-year period from 1999 through 2003. These targets are measured annually
and, if an annual target is missed, the earn-out payment for such year will be
deferred or forfeited, depending on the extent to which actual performance falls
short of the target.
Concurrent with the closing of this offering, we will acquire all of the
assets of Components. The purchase price will consist of $4.7 million in cash.
In addition, we will assume some existing liabilities of Components totaling
$6.0 million as of March 31, 1999, consisting of approximately $5.0 million of
trade payables and factor advances, as well as third party indebtedness.
Components merchandises and sources St. Andrews tailored clothing, as well as
sportswear, dress shirts, neckwear, topcoats and casual slacks in Italy. The
purchase price also includes a potential six-year earn-out of $4.7 million
payable in cash or, in limited circumstances, shares of Class A Common Stock
based on Components' achievement of specified annual pre-tax earnings targets.
These targets require aggregate growth of 76.5% in pre-tax earnings over the
six-year period from 1999 through 2004. These targets are measured annually and,
if an annual target is missed, the earn-out payment for such year will be
deferred or forfeited, depending on the extent to which actual performance falls
short of the target.
Concurrent with the closing of this offering, we will acquire
substantially all of the assets of Windsong. Windsong merchandises and sources
men's sportswear worldwide. The purchase price will consist of $22.0 million in
cash, $4.0 million in shares of Class A Common Stock valued at the initial
public offering price, and our assumption of approximately $16.9 million of
Windsong liabilities as of March 31, 1999. See "Use of Proceeds." The
liabilities to be assumed include approximately $16.7 million of operating
liabilities, including the balance outstanding under Windsong's factoring
agreement with FINOVA, which was $10.7 million as of March 31, 1999 but exclude
subordinated accounts payable of $1.4 million as of March 31, 1999 and
liabilities associated with Windsong's defined benefit pension plan. As of June
30, 1999, the outstanding balance under the Finova Factoring Agreement was $8.0
million. The purchase price also includes a potential six-year earn-out of $22.0
million. Aside from $1.0 million worth of shares of Class A Common Stock which
Windsong, Inc. may earn in year one of the earn-out, the earn-out is payable in
cash or, in limited circumstances, at our option, shares of Class A Common
Stock, based on Windsong's achievement of specified annual pre-tax earnings
targets. These targets require Windsong to achieve $6.3 million in pre-tax
earnings during 1999 and to increase pre-tax earnings by approximately 33% by
2004. 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 expense will be significantly higher
than the corresponding amounts from prior to the acquisitions and will never be
less than $1.6 million per year over the next 10 years. Additionally, the
earn-out portions of the purchase prices of Diversified Apparel, Global Sourcing
Network, Components and Windsong will be recorded as additional goodwill to the
extent they are earned. Accordingly, our depreciation and amortization expense
will increase as a result of the amortization of this additional goodwill. See
"Risk Factors -- Reductions in our Future Net Income Caused by the Amortization
of Goodwill may Adversely Affect the Market Price of our Common Stock."
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
39
<PAGE>
forth items within The Pietrafesa Corporation's, Global Sourcing Network's,
Components' and Windsong's statements of income as a percentage of net revenues
for the periods indicated. Cost of sales for The Pietrafesa Corporation include
costs associated with manufacturing and sourcing of product. Cost of sales for
manufactured product includes raw materials, direct and indirect labor, and
manufacturing overhead. The Pietrafesa Corporation's cost of sales for sourced
product includes raw materials and contractor costs. Global Sourcing Network's,
Components' and Windsong's cost of sales include raw materials and contractor
costs. Selling, general, and administrative expenses for The Pietrafesa
Corporation and the acquired companies primarily include payroll costs
associated with selling and administrative functions, licensing fees, travel,
sample, rent, legal, and other general office expenses. Financial information
for Diversified Apparel has not been included because its historical results of
operations are not material as compared to the results of operations of the
other companies.
The following discussion of the results of operations and financial
position should be read in conjunction with the financial statements, including
the notes thereto, appearing elsewhere in this prospectus.
THE PIETRAFESA CORPORATION
The following table sets forth financial data as a percentage of net
revenues for The Pietrafesa Corporation. This information may not be indicative
of our future results. For more information, see the financial statements of The
Pietrafesa Corporation, including the notes thereto, appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues ................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 79.0 77.7 82.9 74.0 83.3
----- ----- ----- ----- -----
Gross profit ................................ 21.0 22.3 17.1 26.0 16.7
Selling, general and administrative ......... 16.9 16.4 9.8 13.7 6.7
Impairment loss on fixed assets ............. 0.4 -- -- -- --
Depreciation and amortization ............... 0.4 0.4 0.4 0.7 0.4
----- ----- ----- ----- -----
Operating income ............................ 3.3 5.5 6.9 11.6 9.6
Interest expense ............................ 4.5 4.0 2.1 2.7 1.7
Public offering costs ....................... -- -- 1.4 -- --
----- ----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item ......................... ( 1.2) 1.5 3.4 8.9 7.9
Provision for income taxes .................. -- -- 0.9 -- 3.2
----- ----- ----- ----- -----
Income (loss) before extraordinary item ..... ( 1.2) 1.5 2.5 8.9 4.7
Extraordinary item .......................... 7.2 -- -- -- --
----- ----- ----- ----- -----
Net income .................................. 6.0% 1.5% 2.5% 8.9% 4.7%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
NET REVENUES. Net revenues for the three months ended March 31, 1999
increased by 87.4% to $17.8 million from $9.5 million for the three months ended
March 31, 1998. The increase in net revenues was due principally to our
commencement of sales to Jos.A.Bank under a long-term arrangement. This increase
represented approximately 63% of the increase in net revenues. The balance of
the increase in net revenues was due to increased sales to existing customers.
In June 1999, our license with the Polo Corporation expired. We believe
that the loss of sales of Polo products will not have a material adverse effect
on our revenues. We anticipate replacing revenues generated from the sales of
Polo products with revenues from sales to other customers.
COST OF SALES. Cost of sales for the three months ended March 31, 1999
increased by 111.4% to $14.8 million from $7.0 million for the three months
ended March 31, 1998, which amount is consistent with our
40
<PAGE>
increased net revenues. Cost of sales as a percentage of net revenues for the
three months ended March 31, 1999 increased to 83.3% from 74.0% for the three
months ended March 31, 1998, due primarily to the new cost-plus
sourcing/manufacturing services arrangement with Jos.A.Bank. Under this
long-term arrangement, Jos.A.Bank receives a cost-plus pricing structure in
consideration for minimum annual purchase commitments. Gross margin on sales to
Jos.A.Bank is less than gross margin earned on seasonal business. However, this
lower gross margin did not reduce the operating income that we realized from
such revenues because our sales to Jos.A.Bank do not require us to make capital
investments or overhead expenditures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 1999 decreased by
7.7% to $1.2 million from $1.3 million for the three months ended March 31,
1998, due to the implementation of cost control programs. Despite this decline,
we anticipate that such expenses will continue to increase in the future to
support growth in revenues.
OPERATING INCOME. Operating income for the three months ended March 31,
1999 increased by 54.5% to $1.7 million from $1.1 million for the three months
ended March 31, 1998, due primarily to increased gross profit associated with
increased revenues and the reduction of selling, general and administrative
expenses.
INTEREST EXPENSE. Interest expense for the three months ended March 31,
1999 increased by 20.0% to $300,000 from $250,000 for the three months ended
March 31, 1998, due primarily to increased borrowing.
PROVISION FOR INCOME TAXES. Provision for income taxes for the three
months ended March 31, 1999 was $600,000 as compared to $0 for the three months
ended March 31, 1998, due to MS Pietrafesa, L.P.'s transfer of its assets and
liabilities to The Pietrafesa Corporation, a C-corporation, on October 1, 1998.
NET INCOME. Net income remained constant at $800,000 for the three months
ended March 31, 1999 and for the three months ended March 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
NET REVENUES. Net revenues for 1998 increased by 51.1% to $56.8 million
from $37.6 million for 1997. The increase in net revenues was due principally to
our commencement of sales to Jos.A.Bank under a long term arrangement. This
increase represented approximately 74% of the increase in net revenues. The
balance of the increase in net revenues was due to increased sales to existing
customers.
COST OF SALES. Cost of sales for 1998 increased by 61.3% to $47.1 million
from $29.2 million for 1997 consistent with our increased net revenues. Cost of
sales as a percentage of net revenues for 1998 increased to 82.9% from 77.7% for
1997, due primarily to the new cost-plus sourcing/manufacturing services
arrangement with Jos.A.Bank. Under this long-term arrangement, Jos.A.Bank
receives a cost-plus pricing structure in consideration for minimum annual
purchase commitments. Gross margin on sales to Jos.A.Bank is less than gross
margin earned on seasonal business. However, this lower gross margin did not
reduce the operating income that we realized from such revenues because our
sales to Jos.A.Bank do not require us to make capital investments or overhead
expenditures. Additionally, $500,000 or 0.8% of the increase in cost of sales as
a percent of net revenues resulted from an increase in inventory reserves which
resulted from our ordering excess raw materials and finished goods that exceeded
our forecasted sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1998 decreased by 9.8% to $5.5 million from $6.1
million for 1997, due to the cost-plus nature of the Jos.A.Bank arrangement and
the elimination of advertising and licensing expenses incurred in 1997 under an
agreement with Polo Corporation which expired in June 1999. This decline in
selling, general and administrative expenses was partially offset by costs
associated with establishing new customer relationships. Despite this decline,
we anticipate that such expenses will increase in the future to support growth
in revenues.
OPERATING INCOME. Operating income for 1998 increased by 85.7% to $3.9
million from $2.1 million for 1997, due primarily to increased gross profit
associated with increased revenue and the elimination of advertising and license
expenses to Polo Corporation.
INTEREST EXPENSE. Interest expense for 1998 decreased by 20.0% to $1.2
million from $1.5 million for 1997, due primarily to improved operating cash
flow which was used to reduce outstanding principal balances.
41
<PAGE>
PUBLIC OFFERING COSTS. In 1998, MS Pietrafesa, L.P. incurred $800,000 of
public offering costs. Such costs related to a public offering that was
abandoned due to adverse market conditions. The public offering costs include
costs for legal ($200,000), accounting ($300,000) and investment banking
services ($60,000), as well as travel-related expenses ($200,000).
PROVISION FOR INCOME TAXES. Provision for income taxes for 1998 was
$500,000 as compared to $0 for 1997, due to MS Pietrafesa, L.P.'s transfer of
its assets and liabilities to The Pietrafesa Corporation, a C-corporation, in
October 1998.
NET INCOME. As a result of the above factors, net income for 1998
increased by 133.3% to $1.4 million from $600,000 for 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
NET REVENUES. Net revenues for 1997 decreased by 14.8% to $37.5 million
from $44.0 million for 1996, due principally to the discontinuance of Polo
Corporation's "Ralph Lauren" labeled products and a decline in sales to Brooks
Brothers. In 1996, our net revenues from sales to Brooks Brothers were unusually
high because of the launch of, and initial product deliveries for, the new
"Brooksease" product program. In 1997, our net revenues from sales to Brooks
Brothers for such program, although lower, were consistent with our past
experiences involving the production of replenishment inventory for existing
programs.
COST OF SALES. Cost of sales for 1997 decreased by 16.1% to $29.2 million
from $34.8 million for 1996, primarily due to overall lower sales. Cost of sales
as a percentage of net revenues for 1997 declined to 77.7% from 79.0% for 1996
due to lower overhead costs and a shift in the business away from general
manufacturing to the sourcing of a greater percentage of total product.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1997 decreased by 19.7% to $6.1 million from $7.6
million for 1996, due primarily to the impact of reductions in management
personnel implemented in late 1996. This decrease was partially offset by a
reduction of bad debt expenses in 1996 of $180,000 due to lower bad debt
exposures in 1996. There was no similar reduction in 1997. Selling, general and
administrative expenses as a percentage of net revenues for 1997 decreased to
16.4% from 16.9% for 1996.
IMPAIRMENT LOSS ON FIXED ASSETS. At the end of 1996, it was determined
that assets held for sale at our Sturgis, Kentucky facility would be disposed of
at a loss of $170,000. The loss was recorded in 1996 and actually realized in
1997 when the property was sold. The net realizable value of the assets was
determined using estimated selling prices less sale costs based on an
independent appraisal.
INTEREST EXPENSE. Interest expense for 1997 decreased by 25.0% to $1.5
million from $2.0 million for 1996, due primarily to lower outstanding principal
balances resulting from improved operating cash flow.
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM. Income (loss)
before income taxes and extraordinary item for 1997 increased to $600,000 from
$(500,000) for 1996, due to lower cost of sales and decreases in selling,
general and administrative expenses.
EXTRAORDINARY ITEM. There was no extraordinary item for 1997 as compared
to an extraordinary item of $3.2 million for 1996. This item resulted from an
agreement between the owners of a predecessor company of MS Pietrafesa, L.P. to
forgive its subordinated indebtedness in exchange for an equity interest in a
limited partnership that is a limited partner of MS Pietrafesa, L.P.
NET INCOME. As a result of the above factors, net income for 1997
decreased by 77.8% to $600,000 from $2.7 million for 1996.
42
<PAGE>
GLOBAL SOURCING NETWORK
The following table sets forth financial data as a percentage of net
revenues for Global Sourcing Network. This information may not be indicative of
the future results of Global Sourcing Network's business. For more information,
see the financial statements of Global Sourcing Network, including the Notes
thereto, appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues ................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 93.4 92.8 92.1 93.1
----- ----- ----- -----
Gross profit ................................ 6.6 7.2 7.9 6.9
Selling, general and administrative ......... 1.5 1.7 0.9 0.9
Royalties and commissions ................... 5.2 6.1 4.7 3.4
----- ----- ----- -----
Operating (loss) income ..................... ( 0.1) ( 0.6) 2.3 2.6
Provision for income taxes .................. -- ( 0.3) -- --
----- ----- ----- -----
Net loss .................................... ( 0.1)% ( 0.3)% 2.3% 2.6%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
NET REVENUES. Net revenues for the three months ended March 31, 1999
increased by 3.4% to $6.0 million from $5.8 million for the three months ended
March 31, 1998. The increase in net revenues was due principally to earlier
sales of spring season products to S&K Famous Brands through March 31, 1999.
COST OF SALES. Cost of sales for the three months ended March 31, 1999
increased by 3.7% to $5.6 million from $5.4 million for the three months ended
March 31, 1998 consistent with our increased net revenues. Cost of sales as a
percentage of net revenues for the three months ended March 31, 1999 increased
to 93.1% from 92.1% for the three months ended March 31, 1998, due primarily to
a sale of higher margin product during the three months ended March 31, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 1999 increased by
17.4% to $54,000 from $46,000 for the three months ended March 31, 1998, due to
increased legal and accounting expenses associated with the sale of Global
Sourcing Network.
ROYALTIES AND COMMISSIONS. Royalties and commissions for the three months
ended March 31, 1999 decreased by 33.3% to $200,000 from $300,000 for the three
months ended March 31, 1998. Royalties and commissions decreased due to the
termination of the remaining commission relationship early in the three months
ended March 31, 1999. Historically, Global Sourcing Network has paid significant
royalties and commissions on its total net revenues. All such royalties and
commission costs were eliminated upon our acquisition, with no anticipated
adverse effect on the generation of sales.
PROVISION FOR INCOME TAXES. A provision for income taxes for the three
months ended March 31, 1999 was not established due to the anticipated sale of
the business. A provision for income taxes for the three months ended March 31,
1998 was $2,000.
NET INCOME. As a result of the above factors, net income for the three
months ended March 31, 1999 increased by 23.1% to $160,000 from $130,000 for the
three months ended March 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
NET REVENUES. Net revenues for 1998 decreased by 4.7% to $18.1 million
from $19.0 million for 1997, due principally to a decline in sales to Global
Sourcing Network's primary customer, S&K Famous Brands.
43
<PAGE>
COST OF SALES. Cost of sales for 1998 decreased by 5.6% to $16.8 million
from $17.8 million for 1997. Cost of sales as a percentage of net revenues for
1998 decreased to 92.8% from 93.4% for 1997. The reduction in cost of sales was
due to reduced revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1998 remained constant at $300,000.
ROYALTIES AND COMMISSIONS. Royalties and commissions for 1998 increased by
10.0% to $1.1 million from $1.0 million for 1997. Royalties and commissions
increased due to an increase in commission rate. Historically, Global Sourcing
Network has paid significant royalties and commissions on its total net
revenues. All such royalties and commission costs were eliminated upon our
acquisition, with no anticipated adverse effect on the generation of sales.
NET LOSS. As a result of the above factors, the net loss for 1998
increased to $(50,000) from a loss of $(10,000) for 1997.
COMPONENTS
The following table sets forth financial data as a percentage of net
revenues for Components. This information may not be indicative of the future
results of Components' business. For more information, see the financial
statements of Components, including the Notes thereto, appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues ................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 78.8 75.1 73.9 76.6
----- ----- ----- -----
Gross profit ................................ 21.2 24.9 26.1 23.4
Selling, general and administrative ......... 14.1 15.5 10.5 11.2
----- ----- ----- -----
Operating income ............................ 7.1 9.4 15.6 12.2
Interest expense ............................ 1.6 1.5 1.4 1.4
----- ----- ----- -----
Income before taxes ......................... 5.5 7.9 14.2 10.8
Provision for income taxes .................. 0.5 0.8 0.3 --
----- ----- ----- -----
Net income .................................. 4.9% 7.1% 13.9% 10.8%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
NET REVENUES. Net revenues for the three months ended March 31, 1999
increased by 10.2% to $5.4 million from $4.9 million for the three months ended
March 31, 1998. The increase in net revenues was due principally to increased
volume of sportswear sales through existing distribution channels.
COST OF SALES. Cost of sales for the three months ended March 31, 1999
increased by 13.9% to $4.1 million from $3.6 million for the three months ended
March 31, 1998 due primarily to our increased net revenues. Cost of sales as a
percentage of net revenues for the three months ended March 31, 1999 increased
to 76.6% from 73.9% for the three months ended March 31, 1998, due primarily to
an increase in sales allowances and discounts. Sales allowances and discounts
increased $128,000 due to increases in sales discounts and advertising
allowances associated with sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 1999 increased by
20.0% to $600,000 from $500,000 for the three months ended March 31, 1998, due
to increased commission and travel expenses.
OPERATING INCOME. Operating income for the three months ended March 31,
1999 decreased by 12.5% to $700,000 from $800,000 for the three months ended
March 31, 1998, due primarily to increased sales volume offset by increases in
sales allowances and selling expenses.
44
<PAGE>
PROVISION FOR INCOME TAXES. A provision for income taxes for the three
months ended March 31, 1999 was not established due to immateriality. Provision
for income taxes for the three months ended March 31, 1998 was $20,000.
NET INCOME. As a result of the above factors, net income for the three
months ended March 31, 1999 decreased by 14.3% to $600,000 from $700,000 for the
three months ended March 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
NET REVENUES. Net revenues for 1998 increased by 34.2% to $20.0 million
from $14.9 million for 1997, due principally to increased sales to Brooks
Brothers.
COST OF SALES. Cost of sales for 1998 increased by 27.1% to $15.0 million
from $11.8 million for 1997, due primarily to overall increased sales. Cost of
sales as a percentage of net revenues for 1998 decreased to 75.1% as compared to
78.8% for 1997, due primarily to cost efficiencies in sourcing larger quantities
of products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1998 increased by 47.6% to $3.1 million from $2.1
million for 1997, due primarily to a $400,000 increase in salary payable to the
business owner, as well as bad debt expense and advertising expense.
Historically, such owner's salary has varied considerably because, as an
S-corporation, all year-end net cash balances were paid as salary. Selling,
general and administrative expenses as a percentage of net revenues for 1998
increased to 15.5% from 14.1% for 1997.
OPERATING INCOME. Operating income for 1998 increased by 72.7% to $1.9
million from $1.1 million for 1997. The increase was due to increases in net
revenues and gross profit.
NET INCOME. As a result of the above factors, net income for 1998
increased by 100% to $1.4 million from $700,000 for 1997.
WINDSONG
The following table sets forth financial data as a percentage of net
revenues for Windsong. This information may not be indicative of our future
results. For more information, see the financial statements of Windsong,
including the notes thereto, appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues ................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 87.8 78.7 78.4 79.0 76.8
----- ----- ----- ----- -----
Gross profit ................................ 12.2 21.3 21.6 21.0 23.2
Selling and distribution expenses ........... 6.4 6.1 7.1 5.8 5.9
General and administrative expenses ......... 5.5 12.8 10.3 6.5 8.3
----- ----- ----- ----- -----
Operating income ............................ 0.3 2.4 4.2 8.7 9.0
Interest expense ............................ ( 0.2) ( 1.3) ( 2.7) ( 2.6) ( 2.3)
Other income ................................ -- 0.2 0.1 -- --
----- ----- ----- ----- -----
Income before taxes ......................... 0.1 1.3 1.6 6.1 6.7
Provision for income taxes .................. ( 0.1) 0.1 0.1 0.3 0.3
----- ----- ----- ----- -----
Net income .................................. 0.0% 1.2% 1.5% 5.8% 6.4%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
NET REVENUES. Net revenues for the three months ended March 31, 1999
decreased by 15.6% to $14.6 million from $17.3 million for the three months
ended March 31, 1998. The decrease in net revenues was a result of a management
decision to reduce low margin private label sales and reduce certain department
store
45
<PAGE>
sales due to the increased markdowns and allowances associated with these
customers. During the last quarter of 1998, Windsong's management decided to
reduce sales to department stores that took large markdowns and sales allowances
resulting from the department stores lower than anticipated retail margins on
these products. Windsong's decision to reduce sales to these stores was based on
the lower profitability of sales to these customers after taking account of the
markdowns and sales allowances, which totalled approximately $1.4 million in
1998. Overall, sales to the most significant customer in the three months ended
March 31, 1999 amounted to 57.8% of total net revenues, as compared to 33.8% for
the three months ended March 31, 1998.
COST OF SALES. Cost of sales for the three months ended March 31, 1999
decreased by 18.2% to $11.2 million from $13.7 million for the three months
ended March 31, 1998. This decline resulted from decreased net revenues. Cost of
sales as a percentage of net revenues for the three months ended March 31, 1999
decreased to 76.8% from 79.0% for the three months ended March 31, 1998, due
primarily to the reduction in low margin private label sales and a decrease in
markdowns and allowances in the three months ended March 31, 1999 compared to
the three months ended March 31, 1998. The reduction in discounts and allowances
was due to the discontinuation of sales to department store customers which
accounted for a disproportionate amount of the March 31, 1998 discounts and
allowances.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses for
the three months ended March 31, 1999 decreased by 10.0% to $900,000 from $1.0
million for the three months ended March 31, 1998. Selling and distribution
expenses as a percentage of net revenues for the three months ended March 31,
1999 increased to 5.9% from 5.8% for the three months ended March 31, 1998 as a
result of decreased sales, a net increase in royalty fees on license sales
offset by a decrease in warehouse expense due to less labor intensive department
store sales which decreased in the quarter compared to 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended March 31, 1999 increased by 9.1% to $1.2 million from
$1.1 million for the three months ended March 31, 1998. General and
administrative expenses as a percentage of net revenues for the three months
ended March 31, 1999 increased to 8.3% from 6.5% for the three months ended
March 31, 1998. This percentage increase was primarily due to a general increase
in the payroll and payroll-related expenses and lower sales.
OPERATING INCOME. Operating income for the three months ended March 31,
1999 decreased by 13.3% to $1.3 million from $1.5 million for the three months
ended March 31, 1998 due to the factors described above. Operating income as a
percentage of net revenues for the three months ended March 31, 1999 increased
to 9.0% from 8.7% for the three months ended March 31, 1998. The 0.3%
improvement in operating income as a percentage of net revenues is attributable
to a 2.2% increase in gross profit margin compared to a 1.9% increase in
operating expenses for the three months ended March 31, 1999.
INTEREST EXPENSE. Interest expense for the three months ended March 31,
1999 decreased by 25.0% to $300,000 from $400,000 for the three months ended
March 31, 1998, due primarily to interest expense on accounts
payable-subordinated debt. Effective January 1, 1998, Windsong's management
agreed to pay a supplier interest at a rate of 8.5% per year on a subordinated
loan balance related to goods purchased prior to 1998 that Windsong owed to such
supplier. The interest was to accrue on Windsong's balance as of May 15, 1996.
Accordingly, the liability for 1996 and 1997 interest expense was not incurred
or known before 1998 and is reflected as a retroactive interest expense
adjustment. In addition, commencing in 1998, Windsong agreed to pay interest to
the same supplier on Windsong's open accounts payable balance at an interest
rate equal to the supplier's bank borrowing rate.
INCOME BEFORE INCOME TAXES. As a result of the above factors, income
before income taxes remained constant at $1.0 million for the three months ended
March 31, 1999 and the three months ended March 31, 1998.
NET INCOME. As a result of the above factors, net income for the three
months ended March 31, 1999 decreased by 10.0% to $900,000 from $1.0 million for
the three months ended March 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
NET REVENUES. Net revenues for 1998 increased by 109.9% to $63.6 million
from $30.3 million in 1997. The increase in net revenues included an aggregate
increase in sales of $21.0 million to the most significant
46
<PAGE>
customer, $10.2 million to department stores, and $3.2 million to the second
most significant customer, primarily as a result of an increased volume of unit
sales.
COST OF SALES. Cost of sales for 1998 increased by 108.8% to $49.9 million
from $23.9 million for 1997 which is consistent with increased net revenues.
Cost of sales as a percentage of net revenues for 1998 decreased to 78.4% from
78.7% for 1997 due to a management decision to reduce low margin private label
sales and increase licensed product sales that carry higher margins.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses for
1998 increased by 136.8% to $4.5 million from $1.9 million in 1997. Selling and
distribution expenses as a percentage of net revenues for 1998 increased to 7.1%
from 6.1% for 1997. This percentage increase is primarily due to the opening of
a new, expanded, computerized warehouse facility, higher royalty expenses due to
increased sales volume for all customers, and in particular, increased sales
with department stores that required increased expenses as compared to other
customers.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for 1998 increased by 66.7% to $6.5 million from $3.9 million for 1997. General
and administrative expenses as a percentage of net revenues for 1998 decreased
to 10.3% from 12.8% for 1997. Overall, general and administrative expenses for
1998 included increases in officer bonus accruals, increased staffing,
insurance, travel and entertainment, computer costs, and training, offset by a
decrease in the pension expense. The allowance for bad debts includes an
allowance for returns and discounts as well as bad debt expense. Special
officers' bonus accruals for 1998 were $1.6 million, including payroll taxes, as
compared to $0 for 1997. Windsong's management decided in 1998 to convert
stockholder loans receivable into officers' bonuses at the end of 1998 due to
Windsong's profitability. Accordingly, the officers' bonuses reflected in 1998
are higher than those in previous years.
OPERATING INCOME. Operating income for 1998 increased by 285.7% to $2.7
million from $700,000 for 1997, due to increased sales to significant customers
and management's decision to reduce low margin private label sales and increase
licensed product sales that carry higher margins. Operating income as a
percentage of net revenues for 1998 increased to 4.2% from 2.4% for 1997. This
increase in operating income as a percentage of net revenues was due to the
increase in gross profit, which amounted to $7.3 million reduced by an increase
in selling and distribution expenses, which amounted to a $2.7 million and an
increase in general and administrative expenses of $2.7 million.
INTEREST EXPENSE. Interest expense for 1998 increased by 325.0% to $1.7
million from $400,000 for 1997, due primarily to increased borrowings and factor
costs consistent with sales growth.
INCOME BEFORE INCOME TAXES. Income before income taxes for 1998 increased
by 150.0% to $1.0 million from $400,000 for 1997 due to the factors described
above. Income before income taxes as a percentage of net revenues for 1998
increased to 1.6% from 1.3% for 1997 due to the factors described above.
NET INCOME. As a result of the above factors, net income for 1998
increased by 150.0% to $1.0 million from $400,000 for 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
NET REVENUES. Net revenues for 1997 increased by 388.7% to $30.3 million
from $6.2 million for 1996. The increase in net revenues included an aggregate
increase in sales of $19.0 million to the primary customers.
COST OF SALES. Cost of sales for 1997 increased by 342.6% to $23.9 million
from $5.4 million for 1996, and is consistent with increased net revenues. Cost
of sales as a percentage of net revenues for 1997 decreased to 78.7% from 87.8%
for 1996 due to better margins with significant customers.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses for
1997 increased by 375.0% to $1.9 million from $400,000 for 1996. Selling and
distribution expenses as a percentage of net revenues for 1997 decreased to 6.1%
from 6.4% for 1996. The increase of $1.5 million is primarily due to an increase
in royalty and commission expenses, which amounted to 2.6% and 1.8% of net
revenues, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for 1997 increased by 1,200.0% to $3.9 million from $300,000 for 1996. General
and administrative expenses as a percentage of net
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revenues for 1997 increased to 12.8% from 5.5% for 1996. This increase was
primarily due to the significant increase in sales growth in 1997.
OPERATING INCOME. Operating income for 1997 increased to $700,000 from
$17,000 for 1996. Operating income as a percentage of net revenues for 1997
increased to 2.4% from 0.3% for 1996 due to the factors described above.
INTEREST EXPENSE. Interest expense for 1997 increased to $400,000 from
$15,000 for 1996. Interest expense as a percentage of net revenues for 1997
increased to 1.3% from 0.2% for 1996. This increase is primarily the result of
increased borrowings in working capital due to growth in 1997.
INCOME BEFORE INCOME TAXES. Income before income taxes for 1997 increased
to $400,000 from $3,000 for 1996. Income before income taxes as a percentage of
net revenues for 1997 increased to 1.3% from 0.1% for 1996. This increase in
income before income taxes as a percentage of net revenues was due to factors
discussed previously.
NET INCOME. Net income for 1997 increased to $400,000 from $0 for 1996 as
a result of the above factors.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of liquidity and capital resources is derived
from our historical consolidated financial statements.
Our primary capital requirements are the funding of operations and capital
expenditures. MS Pietrafesa, L.P. historically financed its growth in sales and
the resulting increases in inventory and receivables through a combination of
operating cash flow and borrowings under its working capital facilities.
During the three months ended March 31, 1999, we used $600,000 for
operating activities. This was primarily the result of net income of $800,000
offset by a $1.0 million decrease in current liabilities and a $500,000 increase
in accounts receivable.
During the year ended December 31, 1998, we generated negative cash from
operations of $1.4 million. This was primarily the result of a $3.9 million
increase in accounts receivable and a $4.8 million increase in inventories
offset by net income of $1.4 million and a $4.6 million increase in other
current liabilities. The increase in accounts receivable was primarily the
result of a 51.0% increase in net revenues for the year ended December 31, 1998
as compared to the year ended December 31, 1997. The increases in other current
liabilities and inventories were due primarily to the sourcing of product for
Jos.A.Bank and other customers at manufacturing facilities managed by an
affiliate.
On April 15, 1999, we, together with our subsidiaries, entered into a
senior secured credit facility with PNC Bank, National Association. The PNC Bank
credit facility consists of an $18.0 million revolving credit line, $1.0 million
of which can be utilized for the issuance of letters of credit, and a $7.0
million term note. The amount available for borrowing under the revolving credit
line at any given time is determined by a formula based upon levels of accounts
receivable and inventory. The term note is payable in 33 monthly payments of
$116,667 which commenced on May 1, 1999, with a final payment of all unpaid
principal on April 15, 2002. As of June 30, 1999, $11.8 million was outstanding
under the revolving credit line and $6.8 million was outstanding under the term
note. The credit facility is secured by a senior lien on substantially all of
our assets. We have also pledged all of the stock of our subsidiaries as
collateral.
Borrowings under the PNC Bank credit facility bear interest, at our
option, based upon either domestic interest rates or Euro interest rates. Under
the revolving credit line, the domestic interest rate is 0.5% per annum above
the higher of (a) PNC Bank's base commercial lending rate and (b) 0.5% per annum
above the Fed Funds rate. Under the revolving credit line, the Euro interest
rate is a multiple of 2.75% above LIBOR, where the multiple is equal to 1.00
minus the Federal Reserve's reserve requirement percentage. Under the term note,
the domestic interest rate is 1.0% higher than the domestic interest rate
calculated under the revolving credit line, and the Euro interest rate is 0.75%
higher than the Euro interest rate calculated under the revolving credit line.
Upon consummation of the offering, all of the foregoing domestic and Euro
interest rates will decrease by 0.25% if we receive net proceeds of at least $20
million from the offering.
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The PNC Bank credit facility includes significant financial and operating
covenants, including prohibitions on our ability to pay dividends, to make
capital expenditures of more than $750,000, to assume additional indebtedness
exceeding $500,000 in total, except for trade debt and permitted capital
expenditures, and requirements that we maintain a minimum fixed charge coverage
ratio. The fixed charge coverage ratio requires us to maintain EBITDA plus
capital expenditures of at least 110% of required debt payments under the PNC
Bank credit facility. We are currently in compliance with all covenants under
the PNC Bank credit facility. The PNC Bank credit facility also contains
customary events of default, including a cross-default provision which provides
that if we or any of our subsidiaries fail to perform our obligations under the
Diversified Apparel and Global Sourcing Network acquisition agreements, then it
would result in a default under the PNC Bank credit facility.
In November 1996, Windsong entered into a factoring agreement with FINOVA
Capital Corporation whereby Windsong receives monthly advances from FINOVA. The
amount of these advances outstanding at any time may not exceed $20.0 million
and is primarily determined based upon the net face amount of Windsong's
receivables and inventory. Windsong repays the advances to FINOVA as the
receivables are collected. As of June 30, 1999, $8.0 million was outstanding
under the FINOVA agreement.
FINOVA earns a factoring commission for services rendered under the FINOVA
agreement equal to 0.5% of assigned receivables. FINOVA also receives customary
charges in connection with letters of credit issued for Windsong's account to
its suppliers and the servicing of assigned receivables. The amounts of
outstanding balances due to or from FINOVA currently bear interest at a rate of
prime plus 0.5%, except that over-advances bear interest at a rate of prime plus
1.0%. All amounts due to FINOVA, as well as any outstanding letters of credit,
are secured by Windsong's trade receivables and inventory. Upon our acquisition
of Windsong, we will become a party to the FINOVA agreement. The FINOVA
agreement terminates on December 31, 2000 and is terminable by FINOVA at will
prior to that date on thirty days prior notice.
In November 1995, MS Pietrafesa, L.P. entered into a loan agreement with
the New York State Urban Development Corporation ("UDC"), pursuant to which MS
Pietrafesa, L.P. borrowed $1.0 million from UDC to finance the purchase of
machinery and equipment. As of June 30, 1999, $500,000 of the UDC loan was
outstanding. The UDC loan matures January 2003, bears interest at 1.0% and is
secured by a senior lien on specified machinery and equipment and a subordinate
mortgage on the Liverpool facility. The UDC loan agreement contains restrictive
covenants similar to those contained in the PNC Bank credit facility. We are
currently in compliance with all covenants under the UDC loan agreement.
Our capital expenditures were $600,000 for 1998, primarily for replacing
manufacturing equipment. We expect capital expenditures to be approximately
$700,000 during 1999. Capital expenditure spending in 1999 will primarily fund
technology investments and replacement in kind of manufacturing equipment. We
anticipate that operating income and the amounts available under the PNC Bank
credit facility will be sufficient to fund our capital expenditures in 1999.
We had working capital of $10.5 million at March 31, 1999 and $9.2 million
at December 31, 1998. The increase in working capital was due primarily to a
$1.0 million decrease in current liabilities, a $500,000 increase in accounts
receivable offset by a $400,000 decrease in inventory. We expect that our
working capital needs will continue to fluctuate based on seasonal increases in
sales and accounts receivable and seasonal decreases in trade accounts payable.
We had working capital of $9.2 million at December 31, 1998 and $4.6
million at December 31, 1997. The increase in working capital was due primarily
to a $3.9 million increase in accounts receivable. In addition, inventories
increased by $4.8 million, which was offset by a $4.6 million increase in
accounts payable. In part, the new sourcing/manufacturing services arrangement
with Jos.A.Bank accounted for the changes in accounts receivable, inventories
and other current liabilities. We expect that our working capital needs will
continue to fluctuate based on seasonal increases in sales and accounts
receivable and seasonal decreases in trade accounts payable.
Management believes that the combination of existing working capital,
funds anticipated to be generated from operating activities, the borrowing
availability under the PNC Bank credit facility, advances under the FINOVA
factoring agreement and the anticipated net proceeds of the offering will be
sufficient to fund both our
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short-term and long-term capital and our liquidity needs, other than in respect
of future acquisitions. As part of our growth strategy, we intend to seek out
and acquire merchandising/sourcing businesses. These acquisitions may require
additional capital in the form of equity, debt or a combination of the two. We
cannot assure you that additional capital will be available to us if and when
required, or, if available, that the terms of such additional capital will be
acceptable to us.
MARKET RISK
Our earnings are affected by changes in short-term interest rates as a
result of our variable rate debt instruments. If market interest rates for
similar debt obligations had averaged 10% more in 1998, interest expense for The
Pietrafesa Corporation, excluding any of the acquired businesses, would have
increased, and income before income taxes would have decreased by $103,803. This
analysis does not consider the effects of the reduced level of borrowings that
could exist in such an environment if management took actions to mitigate our
exposure to the change. However, due to the uncertainty of the specific actions
that would be taken and their possible effects, this sensitivity analysis
assumes no change in our debt structure.
BACKLOG
Our backlog of orders is affected by a number of factors, including
revisions in the scheduling of manufacturing and shipment of product which, in
some instances, depends on the demands of the retail consumer. Accordingly, a
comparison of unfilled orders from period to period is not necessarily
meaningful, and the level of unfilled orders at any given time may not be
indicative of actual shipments.
SEASONALITY
Some of our principal products are organized into seasonal lines in
response to the seasonal marketing of such products by our customers. As a
result, our net revenues and net income may fluctuate on a seasonal basis. A
disproportionate amount of our net revenues and a majority of our net income are
typically realized during the third quarter. Given that orders are usually
placed six to nine months in advance of shipping, net revenues and net income
are generally weakest during the second and fourth quarters, the two peak retail
seasons of our customers. Our greatest cash requirements occur in the later part
of the first and third quarters to support production and sales costs and a
buildup in customer receivables, resulting in reductions in working capital in
each of those quarters. If we are unable to finance our seasonal cash
requirements adequately, our ability to conduct business will be restricted.
Moreover, as a result of this seasonality of net revenues, a substantial
decrease in our net revenues in the third quarter of the year could have a
material adverse effect on our liquidity and on our profitability for the entire
year. See "Risk Factor -- Seasonal Fluctuations in Revenue and Net Income may
Affect our Cash Flow, Liquidity and Profitability."
EFFECTS OF INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
We believe that inflation has not had a material impact on our results of
operations for the periods discussed herein. Because a significant portion of
our purchases of raw materials are denominated in U.S. dollars, to date we have
not been materially adversely affected by foreign currency fluctuations. See
"Risk Factors -- Our Foreign Sourcing of Products Exposes us to Delays in
Production, which may Result in Increased Costs and Reduced Profitability" and "
- -- Our International Sourcing of Products and Raw Materials may Subject us to
Increased Costs and Unprofitable Transactions."
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement amends the accounting for
derivatives and hedging activities effective for fiscal years beginning after
June 15, 1999. We have not historically engaged in hedging activities to
mitigate foreign currency risk. In the event that we engage in hedging
activities in the future, SFAS No. 133 may have an impact on the accounting
treatment of these hedging activities.
IMPACT OF THE YEAR 2000 ISSUE
Many institutions around the world are currently reviewing and modifying
their computer systems to ensure that they are Year 2000 compliant. The issue,
in general terms, is that many existing computer systems
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and microprocessors with date functions use only two digits to identify a year
in the date field with the assumption that the first two digits are always "19."
Consequently, on January 1, 2000, any computers that are not Year 2000 compliant
may read the year as 1900. The failure to correct any computers that calculate,
compare or sort using the incorrect date could result in system failures or
malfunctions causing disruptions of operations, including a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
Our computerized production and sourcing systems are not reliant on
date-sensitive information. We are working to resolve the potential impact of
the Year 2000 on the ability of our computerized financial information systems
to accurately process date-sensitive information. We engaged Arthur Andersen &
Co. for a fee of $33,400 to conduct an analysis of our financial information
processing systems to determine whether we are Year 2000 compliant. Based on
their study it was determined that we need to upgrade, modify or replace
portions of our financial systems to make them Year 2000 compliant.
Modifications to our in-house software programs have been completed and
are Year 2000 compliant. Certain software programs of third parties require
installation of new versions that are Year 2000 compliant. All third party
software, except financial systems and production systems, has been installed
with Year 2000 compliant programs that are currently in use. We are in the
process of installing a new Year 2000 compliant version of our production
system. We have installed Year 2000 compliant software in our AS400 system,
completed systems testing, trained our staff and have tested our conversion
process. We have developed a detailed implementation plan and intend to complete
our conversion and implementation prior to September 30, 1999. We believe that
completing the program within the time-frame we have set will avoid any adverse
impact on our operating systems. We currently estimate that the total cost of
implementing our Year 2000 program will be approximately $200,000, of which
$160,000 had been spent as of June 30, 1999. We believe, however, that such Year
2000 compliance costs will not have a material adverse impact on our financial
condition. Year 2000 compliance costs are expected to be funded from our working
capital.
We do not believe that there will be a need to outsource financial systems
and therefore we have not made detailed contingency plans. However, in the event
that we fail to correct our computerized financial information systems prior to
December 31, 1999, we intend to out-source appropriate aspects of our financial
systems and manually execute any functions we retain. We will implement
standardized financial controls and back-office functions of Diversified
Apparel, Global Sourcing Network, Components and Windsong and hope to resolve
all Year 2000 issues with regard to these acquired businesses at the same time
we resolve our own issues.
During 1997, MS Pietrafesa, L.P. initiated formal communications with its
customers to determine the business risk to it related to customer Year 2000
compliance issues. Communications with other third parties, such as suppliers,
commenced in 1998. The majority of our customers and suppliers have responded
positively to our Year 2000 inquiries. Contingency plans are in the process of
being formalized with customers and suppliers to assure the continuance of
business. We believe the majority of our customers and suppliers will be Year
2000 compliant and that any non-compliant customers or suppliers would have
minimal impact on our business.
In the worst case scenario in which our computer systems or the computer
systems of any of our suppliers or customers are not Year 2000 compliant and are
unable to recover from the resulting system failure or interruption, we will
engage alternative suppliers to manufacture and deliver products to our
customers. The founders of Diversified Apparel, Global Sourcing Network,
Components and Windsong have initiated formal communications with their
customers and other third parties to determine their business risks related to
Year 2000 compliance issues. Our failure, the failure of such founders or the
failure of third parties with which we do business or upon which we rely, to
address Year 2000 compliance issues in a timely manner could cause system
failures or a disruption in operations and could adversely affect our ability to
process or fulfill orders from our customers, deliver products in a timely
manner, send invoices or engage in similar normal business activities for an
indefinite period of time. Such a disruption in operations could result in a
loss of revenues and a reduction of our profitability.
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BUSINESS
GENERAL
The Pietrafesa Corporation develops and manages men's dress apparel
programs for proprietary and third party brands. Our brand development and
management programs include comprehensive design, merchandising and sourcing
services for apparel covering a broad range of price points and products,
including suits, sport jackets, dress shirts, woven sport shirts, casual pants,
knitwear, neckwear and topcoats.
We have been a contract manufacturer for branded tailored clothing since
1922 and started producing directly for large retailers after entering into a
contract with Brooks Brothers in the 1970s. As a result of this experience, we
have identified and responded to two significant trends among our customers:
o Retailers of private label apparel are experiencing increased 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 our ability to satisfy our customers' cost,
quality, construction and delivery requirements through a worldwide network of
third party manufacturers. This capability is referred to as sourcing.
INDUSTRY OVERVIEW
Retail sales of men's apparel in the United States in 1998 were
approximately $54 billion, an increase of 6.8% over the prior year, as compared
to retail sales increases of 3.7% in women's apparel and 4.7% in all apparel.
The following important trends in the apparel industry have redefined the manner
in which our business must be conducted:
PRIVATE LABEL SALES ARE INCREASING. Based upon our 1998 sales and the
announced store opening plans of our customers, we believe that there is an
increased consumer acceptance of and demand for high quality, private label
apparel such as that sold by Brooks Brothers and Jos.A.Bank. Private label
apparel bears the retailer's own name or a brand name exclusive to the retailer.
RETAILERS ARE CONCENTRATING MORE BUSINESS WITH FEWER SUPPLIERS TO ACHIEVE
GREATER EFFICIENCY IN MERCHANDISING, PURCHASING AND INVENTORY MANAGEMENT. Many
larger retailers are concentrating more business with fewer suppliers to achieve
greater efficiency in distribution and quality control, to reduce the retailers'
merchandising costs and to ensure that their most important requirements are
satisfied with reliable and financially stable organizations. Retailers are also
requiring higher levels of service from all suppliers, such as operating through
network computer systems through which retailers electronically submit purchase
orders, receive invoices and pay bills, maintaining strict quality control
procedures, creating a system for maintaining inventories of private label
products at specified levels, as well as placing size and price information on
products and shipping to the retail outlet. We believe that many
merchandising/sourcing businesses, however, lack the systems, capital or scale
to comply with the increasing demands of larger retailers.
SPECIALTY CHAINS ARE ACHIEVING STRONG SALES GROWTH. Over the last five
years, sales of clothing by chain retailers and high-end specialty chains, many
of which sell private label brands primarily or exclusively, have grown
significantly due to both new store openings and comparable store sales
increases. In 1998, specialty chains reported dollar increases in sales of men's
clothing of 6.5% and captured 10.5% of all dollars spent on men's clothing. This
growth is evidenced by the growth of men's apparel retailers such as The Men's
Wearhouse and Today's Man and the publicly announced national store opening
plans of Brooks Brothers and Jos.A.Bank.
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 Savile Row to FUBU's urban contemporary
look, at a full range of price points;
o THE LOWEST AVAILABLE COST for each product line, by using third
party manufacturers throughout the world to satisfy the
specifications, country of origin and delivery requirements of each
customer. Unlike traditional clothing manufacturers, this strategy
permits us to seek the best manufacturer worldwide for a specific
product at the lowest marginal cost, and minimizes our investments
in plant and equipment;
o VALUABLE SERVICES such as design and merchandising services,
statistical quality control and inventory management, which permit
major retailers to achieve greater efficiency by outsourcing many
aspects of their private label product offerings;
o TECHNOLOGICAL INNOVATIONS, such as interactive sales software and
inventory management and replenishment systems, that enable us to
compress delivery schedules and better manage product selection for
our customers; and
o THE SCALE AND FINANCIAL STABILITY required of vendors by major
retailers in connection with long-term supply arrangements.
We believe that our business strategy is unique in its focus on the
constantly changing merchandising and sourcing needs of retailers. By contrast,
our competitors continue to emphasize product lines and sourcing options that
are tied to the capabilities of their own manufacturing facilities.
GROWTH STRATEGY
We believe that our business strategy will create numerous growth
opportunities. The principal components of our growth strategy include:
o ACHIEVING GREATER PENETRATION among our existing customers. In
particular, we believe that our ability to develop a broad range of
product lines, as well as our sophisticated services, scale and
financial stability, will result in increased sales to our existing
customers;
o DEVELOPING NEW CUSTOMER RELATIONSHIPS by aggressively marketing our
capabilities. We believe that our development of new relationships
will be enhanced by the Diversified Apparel, Global Sourcing
Network, Components and Windsong acquisitions, each of which has
unique customer relationships;
o ACQUIRING, DEVELOPING AND LICENSING BRANDS in order to leverage our
existing merchandising and sourcing capabilities. We believe that
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 EXPANDING INTERNATIONALLY by offering our merchandising/sourcing
services to foreign retailers. We believe that our strong global
sourcing relationships, along with our merchandising and production
expertise, position us to capitalize on the fundamental dynamics of
the menswear market in Europe both through securing foreign
retailers as customers in Europe and through participation in global
distribution arrangements involving merchandise supplied to our
customers; and
o GROWING REVENUES THROUGH SELECTIVE ACQUISITIONS. Our acquisition
strategy is to identify and acquire leading merchandising/sourcing
companies that specialize in specific menswear products and specific
quality or price segments. In addition to increasing revenues, these
acquisitions will increase the range of products, price points and
sourcing options available to our customers and add new customers.
We believe this will lead to significant opportunities to sell
products to, and source products for, customers of one business unit
that were previously sold to or sourced for customers of another
business unit, thereby increasing the value of each customer and
sourcing relationship.
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:
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o identifying and acquiring leading merchandising and sourcing
companies that specialize in specific menswear products and specific
quality or price segments, in order to increase the range of
products, price points and sourcing options available to our
customers and to add new customers;
o including in each acquisition, when possible, incentives for the
sellers of each acquired business that are realized only if the
acquired business meets or exceeds growth and profitability targets
subsequent to the closing of the acquisition, including by
conditioning payment of a substantial portion of the purchase price
on the achievement of such targets for several years;
o allowing newly acquired businesses to operate as an independent
operating unit, while holding each accountable for its
profitability, utilization of capital and overhead; and
o improving and standardizing the financial controls, quality control
practices and back-office functions of each acquired business and
eliminating duplicative operational facilities, such as leased
office and warehouse space and personnel, whenever possible.
We believe that many of our potential acquisition candidates are unable to
fully serve the needs of their customers or effectively market product lines
developed for one retailer to other customers. We believe that these limitations
are often due to their narrow product offerings, limited systems expertise,
capital constraints and lack of an industry-wide reputation. Our acquisition
strategy is intended to address these limitations and to provide acquisition
candidates with a compelling opportunity to leverage their existing customer
base and to build new customer relationships. Our acquisition strategy offers
each candidate:
o the opportunity to be a part of a diversified apparel products
company, thereby enhancing the candidate's competitive position in
its particular product segment through an expansion of distribution
channels and improved production and distribution capacities;
o greater purchasing power of raw materials and other supplies and
services, and other economies of scale;
o enhanced financial strength and visibility as part of a public
company;
o the opportunity for its management to remain involved in, and to
profit from, future operations; and
o an opportunity for liquidity through the receipt of cash or
securities.
See "Risk Factors -- Risks Relating To Our Acquisition Strategy And Future
Acquisitions" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Significant Acquisitions."
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PRODUCTS
We produce high quality men's tailored clothing, trousers, outerwear,
sportswear and accessories across a variety of fashion directions, price points
and distribution channels. We focus primarily on developing a style for each
private label or licensed product line that is distinctive to the relevant
brand, yet not susceptible to fashion obsolescence. Key fabrics include 100%
wool, camel hair, cashmere, silk, cotton and linen. Key fabric constructions
include 100% mechanical stretch, 4-ply worsteds, storm proof wovens and worsted
camel hair. The table below sets forth our sales by product category, expressed
as a percentage of net revenues:
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
Sport shirts ...................... 28.4% 38.2%
Men's suits ....................... 33.6 25.7
Men's sport jackets ............... 13.5 14.0
Suit separates (trousers) ......... 7.9 7.9
Outerwear ......................... 4.2 5.1
Suit separates (jackets) .......... 4.4 4.8
Women's tailored .................. 3.4 2.3
Dress Shirts ...................... 1.3 1.1
Other ............................. 3.3 0.9
----- -----
100.0% 100.0%
===== =====
Our design staff examines domestic and international trends in the apparel
industry to determine trends in styling, color, consumer preferences and
lifestyle. Virtually all of our products are designed by our in-house staff,
utilizing computer-aided design technology, through which we can quickly
generate samples in response to customer input. The use of computer-aided design
technology minimizes the time and costs associated with producing sewn samples
prior to production and allows us to create custom designed products meeting the
specific needs of each customer.
DISTRIBUTION CHANNELS, CUSTOMERS AND SALES AND MARKETING
DISTRIBUTION CHANNELS. We market our products across all major apparel
retail channels. Because we market private label products designed specifically
for each of our customers, our sales are not constrained by competition among
our customers.
During 1997 and 1998, we generated our net revenues from the following
distribution channels:
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
Mass merchandise chains ...................... 37.2% 37.7%
National chains .............................. 16.7 22.9
Department stores ............................ 14.5 16.2
High-end specialty stores and chains ......... 19.0 13.3
Other ........................................ 12.6 9.9
----- -----
100.0% 100.0%
===== =====
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CUSTOMERS. We sell to a variety of customers within each of the
distribution channels discussed above. The following table summarizes the
percentage of our net revenues attributable to each of our customers that
accounted for more than 5% of our net revenues in 1997 and 1998 after giving
effect to the Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions:
FOR THE YEAR ENDED
DECEMBER 31,
-------------------
1997 1998
-------- --------
Sam's Club ................ 10% 20%
S&K Famous Brands ......... 18 11
Brooks Brothers ........... 8 11
Dillards .................. 12 10
Jos.A.Bank ................ -- 9
Polo Retail ............... 12 6
Nordstrom ................. 8 3
-- --
Total .................... 68% 70%
== ==
SALES AND MARKETING. In contrast to traditional apparel companies, which
attempt primarily to sell customers product that they manufacture, we apply our
sourcing relationships and contacts and our ability to provide sophisticated
design, raw material procurement, merchandising, statistical quality control and
other services to solve customer problems and/or create new retail opportunities
for our customers. We believe that this consultative approach to sales and
marketing results in long-term relationships with successful retailers.
Our flexibility in sourcing products does not restrict us to offering
solutions that are dependent on our manufacturing capabilities. Our consultative
approach to sales and marketing has evolved over the last decade, and involves
providing both products and services. For example, in 1991 MS Pietrafesa, L.P.
analyzed a manufacturing facility owned by a major national retailer, and we
concluded that there were structural barriers that precluded that facility from
ever becoming an efficient manufacturing source. We proposed closing the
facility and moving the relevant production to our Liverpool facility, where
production lines were established specifically for that product. In 1994, MS
Pietrafesa, L.P. performed a similar analysis for a major brand, resulting in
the closure of the brand's manufacturing facility and the sourcing of its
product between the Liverpool facility and two other contractors. Most recently,
MS Pietrafesa, L.P. assisted a national chain in phasing out its manufacturing
division and its exclusive reliance on its in-house merchandisers.
We assign each of our major customers their own sales teams -- which
include design, specification, quality control and sales administration
personnel -- focused on the needs and requirements of that particular customer.
In order to maintain exclusivity for each customer, all products remain unique
to their respective sales team. On a seasonal basis, merchandising concepts,
including exclusive or special fabrics, model enhancements and marketing ideas,
are presented to customers. When a customer adopts one of our merchandising
strategies, that strategy is executed exclusively for that customer unless
otherwise agreed.
MERCHANDISING TECHNOLOGY
SYSTEMS EXPERTISE. We continually develop new systems, services and
production methods that make buying from us more attractive to retailers. We
generally use computer-aided design systems to develop products and program
fabric cutting for all products to ensure color consistency and maximize
material yield. We employ a proprietary system to insure consistency of products
among production facilities. In addition, our interactive ordering, invoicing
and payment system significantly enhances customer order execution and inventory
tracking. All such systems are intended to enhance customer profitability and
loyalty. In addition, our sales forecasting, production planning and logistics
and inventory management are performed on systems that are unique to us.
MADE-TO-MEASURE SOFTWARE. In November 1998, we launched a point-of-sale
made-to-measure system at two retail stores and introduced the system in five
Brooks Brothers stores in the first quarter of 1999. This system, which uses
software developed exclusively by us, offers retailers the opportunity
simultaneously to
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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, we sourced approximately 72% (by sales
dollar volume) of our products with over 50 independent manufacturers worldwide.
Further, 66% (by sales dollar volume) of our products were produced outside the
United States in 1998, principally in Italy, the Dominican Republic, Mexico,
Eastern Europe and the Far East. No manufacturer accounted for more than 10% of
our total production in 1998. We monitor our selection of independent factories
to attempt to minimize the instances in which one manufacturer or country is the
source of a disproportionate amount of our merchandise. These manufacturers are
selected, monitored and coordinated by our employees located in regional offices
to assure conformity to strict quality standards. We believe the use of
dedicated sourcing personnel rather than independent agents reduces our sourcing
costs and cycle times. Personnel who are focused narrowly on our interests are
more responsive to our needs than independent agents would be, and are more
likely to build long-term relationships with key vendors. We believe that the
use of these independent manufacturers increases our production capacity and
delivery flexibility, reduces our costs and allows us to match each of these
criteria to specific customer needs. See "Risk Factors -- Our Foreign Sourcing
of Products Exposes us to Delays in Production, which may Result in Increased
Costs and Reduced Profitability."
We have long-standing relationships with our most important independent
manufacturers. In a number of cases, we are the largest customer of our
independent manufacturers, providing as much as 50% of such manufacturers'
annual order volume (by unit). As a result, we are able to pass through to our
customers the benefits of the significant leverage we have with such
manufacturers and the resulting production, delivery and cost flexibility. For
many of our lower priced products, we have established numerous alternative
manufacturing sources. As a result, production of such products can be placed on
the most competitive delivery and price terms on a season-by-season basis, and
significant dependence on single manufacturers of such products is minimized. We
believe that our sourcing relationships enable us to offer our customers
valuable brand management services, including risk reduction achieved through
decreasing reliance on particular product sources.
RAW MATERIALS SOURCING. We obtain our raw materials, which include fabric,
linings, thread, buttons and labels, from domestic and foreign sources based on
quality, pricing, customer requirements and availability. Our principal raw
material is fabric, including woolens, cashmere, camel hair, silks, linen,
cotton and blends of wool with other fibers, as well as thread, trim and
labeling and packaging materials. Whenever practicable, fabric is procured by
our contract manufacturers directly but in accordance with our specifications,
thus reducing capital employed by us in work-in-process inventory. For some of
our product offerings, we select fabric suppliers to jointly develop fabric for
our exclusive use. In order to assure quality control, we send samples of all
new fabrics to laboratories in order to test their sewing characteristics. For a
significant portion of the products we sell, the customer or manufacturer
purchases the raw materials. A substantial portion of these purchases are
denominated in U.S. dollars. We purchased 54% (by dollar value) of our total
fabric requirements in 1998 from two suppliers. No other supplier accounted for
more than 10% of our purchases. As is customary in our industry, we do not have
long-term contracts with our suppliers. We believe that there are alternative
sources of supply available to satisfy our raw material requirements.
MANUFACTURING. We have over 75 years of experience as a leading domestic
manufacturer of premium tailored clothing. As a result, unlike many of our
competitors, we have the expertise to offer retailers private label services
that include styling developments, quick replenishment, statistical quality
control, delivery reliability and systems integration that are competitive with
the largest domestic manufacturers. In addition, we believe that we can improve
retailer margins by leveraging our experience in manufacturing technology. In
particular, we believe that our fabric-maximizing manufacturing technology, our
unit production process, and "just-in-time" inventory and distribution
management systems, which reduce customers' working capital costs by lowering
stocking and warehousing requirements, will lower raw material and inventory
costs, and result in better customer order fulfillment.
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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, which may
Result in Increased Costs and Reduced Profitability."
SourceOne took over operation of the Baltimore facilities in April 1998.
We are not financially liable, or otherwise obligated, for any overhead or other
operating expenses or liabilities of the Baltimore facilities. We source
approximately one-third of our production for Jos.A.Bank with SourceOne pursuant
to a subcontractor agreement. Under that agreement, SourceOne is paid based on
the production costs of the agreement, without mark-up. None of our employees
receive additional compensation from SourceOne. The Baltimore facilities were
formerly operated by Jos.A.Bank. As part of its announced plan to phase out its
domestic manufacturing operations and focus on a publicly announced national
five-year store opening plan, Jos.A.Bank sought our assistance in executing this
plan. SourceOne was established to ensure an orderly continuation of the
operations of the Baltimore facilities, without exposing us to any associated
overhead or other operating liabilities. SourceOne is obligated to operate the
Baltimore facilities through February 2000. In addition, SourceOne's obligations
are contingent on Jos.A.Bank satisfying its minimum order commitments to us for
the corresponding period.
QUALITY CONTROL. As of June 30, 1999 we had eight quality control
personnel in three foreign centers, as well as five additional inspectors for
United States and Caribbean based manufacturing contractors. In addition, as of
such date, we had nine people in our headquarters facility overseeing and
coordinating global quality control standards and efforts. We believe our
quality control program is an important component of our private label and
licensed brand product capabilities.
Our quality control program is designed to ensure that our products meet
high quality standards. This program is based on the "green seal/black seal"
process to ensure that all garments we source or produce meet specifications and
original expectations for the production of such garments. Before a new product
order is placed, an exact sample garment is sent to the customer. Upon customer
approval, a "green seal" tag is placed on the garment to indicate acceptance by
both us and the customer and to provide a standard for future reference. Prior
to shipping the first production unit of the green sealed product, a size run
from the order is shipped to the customer for "black seal" approval. If the
items sufficiently match the "green seal" garment, "black seal" approval is
given, and the balance of the order is completed and distributed.
We also monitor the quality of fabrics and inspect each roll before
production runs are commenced. We perform in-line inspections during and after
production before garments leave the factory. Our quality control personnel
visit most of our independent manufacturers' facilities at least once every two
weeks.
DELIVERY AND CUSTOMER ORDERS. In most cases, our independent manufacturers
are at risk for the quality and timely delivery of the products. Our
international production requirements are financed with letters of credit or
under open credit terms. Whenever possible, we push related financing
requirements down to our contractors, matching payment terms to the contractor
with payment terms from our customers. This minimizes inventory financing and
keeps the contractors vested in the process.
We transact business on an order-by-order basis and do not maintain any
long-term or exclusive commitments or arrangements to purchase from any vendor
other than SourceOne in respect of minimum product quantities for Jos.A.Bank. We
receive most of our customers' orders prior to placing our manufacturing orders,
except in instances where our customers have agreed to purchase specific amounts
of products in order to maintain desired inventory levels on a continuing basis.
OPERATING UNITS
Upon the consummation of the offering, our operations will be divided into
five business units: the Windsong Unit, the Pietrafesa Unit, the Components
Unit, the Global Sourcing Network Unit and the Diversified Apparel Unit. Each of
our current business units operates, and it is intended that each new business
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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
FOR THE YEAR ENDED
BUSINESS UNIT DECEMBER 31, 1998
- ---------------------------------------- -------------------
Windsong ........................ 39.5%
Pietrafesa ...................... 35.2
Components ...................... 12.4
Global Sourcing Network ......... 11.2
Diversified Apparel ............. 1.7
-----
Total .......................... 100.0%
=====
The Windsong Unit supplies designer label and private label sportswear to
department stores, specialty stores and mass merchandise chains. This unit will
be headed by Joseph Sweedler, with whom we will enter into a five-year
employment contract upon the consummation of the offering. Windsong supplies
knit shirts at retail price points from $28 to $75, woven shirts from $35 to $65
and sweaters from $55 to $150 to customers that include major retailers such as
Belk, Dillards and Sam's Club. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Significant Acquisitions."
The Pietrafesa Unit, our oldest unit, merchandises, sources and
manufactures tailored clothing, including suits, suit separates, sport coats,
dress trousers and formal wear. The Pietrafesa Unit consists primarily of a
Men's Division which is headed by Joseph J. Pietrafesa II, the brother of our
Chief Executive Officer. Mr. Pietrafesa joined the predecessor of MS Pietrafesa,
L.P. in 1979 as Director of Sales, becoming Vice President of Sales and
Merchandising when MS Pietrafesa, L.P. was formed in 1990. For the years 1993
through 1996 Mr. Pietrafesa served as President of our Polo Clothing Unit. The
Pietrafesa Unit also operates a Women's Division. The Women's Division is headed
by Alisa Rothstein, who joined MS Pietrafesa, L.P. in October 1991 as President
of the Women's Division. Ms. Rothstein is responsible for product design,
merchandising, and marketing of all products promoted by this Division. Prior to
joining MS Pietrafesa, L.P., Ms. Rothstein spent eight years as President of
Pincus Brothers-Maxwell's women's unit.
The Components Unit merchandises and sources tailored clothing, as well as
sportswear, dress shirts, neckwear, topcoats and casual slacks in Italy. This
unit will be headed by John McCoy with whom we will enter into a six-year
employment contract upon the consummation of the offering. Customers of
Components are the highest tier retailers including Bergdorf Goodman, Saks Fifth
Avenue, Brooks Brothers and Sulka, at retail price points from $695 to $3,000
for men's suits, $125 to $400 for dress shirts and $65 to $95 for silk neckwear.
Mr. McCoy founded Components in 1985 after spending three years as an
independent sales representative for a variety of imported apparel lines. Mr.
McCoy served as President of Fitzgerald, Inc., a men's clothing unit of Warren
Sewell, for the years 1977 through 1979, and a unit of the Palm Beach Company
for the years 1979 through 1982. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Significant Acquisitions."
The Global Sourcing Network Unit designs and imports men's suits. This
unit is headed by Peter Lister with whom we have entered into a five-year
employment contract. Using manufacturers in Slovakia, the Czech Republic,
Bulgaria, Moldova, Indonesia, the Philippines, India and China, Global Sourcing
Network contracts for the production and delivery of men's suits. In all cases,
Global Sourcing Network takes ownership of products while in transit, but ships
directly to customers against firm orders. Global Sourcing Network's largest
customer is S&K Famous Brands. Typical retail price points are $99 to $295 for
men's suits. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations -- Significant Acquisitions."
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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 Italy. Prior
to 1994, Mr. Nadel spent two years as Director of Sourcing for After Six Ltd.
For the years 1988 to 1992, Mr. Nadel served as Vice President of Sales and
Merchandising for the Pierre Balmain Division of Capital Fashions Corporation.
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Significant Acquisitions."
IMPORTS AND IMPORT REGULATIONS
We presently import garments under four separate scenarios having distinct
customs consequences: (1) imports of finished goods mostly from the Pacific Rim
and the Middle East; (2) imports from the Caribbean Basin and Central America;
(3) imports from Mexico and Canada; and (4) imports from Europe.
For direct importations, mostly from the Pacific Rim and the Middle East,
imported garments are normally assessed with customs duties at "most favored
nation" tariff rates. The tariffs for most of the countries from which we
currently import or intend to import have been set by international negotiations
under the auspices of the World Trade Organization and implemented into U.S.
law. These tariffs generally range between 17% and 35%, depending upon the
nature of the garment, such as shirt or pants, its construction and its chief
weight by fiber. Currently, the only countries not enjoying "most favored
nation" treatment are Afghanistan, Cuba, Laos, North Korea, and Vietnam.
In addition to tariffs, merchandise from virtually all of the countries
from which we import is also subject to bilateral quota restraints, pursuant to
U.S. domestic law or the Multi-Lateral Agreement on Textile and Clothing, which
exists under the auspices of the World Trade Organization. Most bilateral quotas
are negotiated on a calendar year basis. After the United States and a
particular country agree to a particular level of exports in a particular quota
category (for instance, wool men's suits), the country that receives the quota
has the right to determine the method by which such quota is assigned to its
manufacturers. Some jurisdictions, such as Hong Kong, have a free market under
which quotas are bought and sold. Most countries, however, assign it to the
factories that actually produce the garments. Shipments which are exported to
the United States must, in addition to the usual commercial documentation, have
appropriate and official textile visas, in either an electronic or paper format,
which confirm their quota status. This documentation must be filed prior to the
admission and clearance of the merchandise into the United States. Accordingly,
we usually demand that this paperwork be submitted prior to payment.
We also import garments from countries in the Caribbean Basin and Central
America, most notably the Dominican Republic and Costa Rica. Although
merchandise imported from these jurisdictions is potentially subject to tariffs
and quotas of the kind described for Far Eastern importations, there are special
programs which provide for reduced tariffs for some merchandise sourced from the
Caribbean Basin and Central America. The principal program is the so-called
"807" program. Under this program, merchandise described by tariff subheading
9802.00.80, Harmonized Tariff Schedule ("HTS"), is admitted into the United
States with a substantial tariff reduction when the standards of subheading
9802.00.80 are met. Specifically, in qualifying circumstances, the provision
exempts from collection that duty which would be based on the value of exported
U.S. components assembled into a product in a foreign jurisdiction which is
subsequently re-imported into the United States. In essence, the duty reduction
is equal to the duty that would otherwise be assessed on the value of the
components incorporated into these assembled goods plus southbound international
freight and insurance. For apparel products, such U.S. components normally
consist of cut-to-shape U.S. fabric parts, finishing and trim, such as buttons
or thread.
In addition, if the fabric which is cut to create the cut component parts
is also knitted, woven or formed in the United States, there is a special
program which provides for more liberalized access to the U.S.
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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 zero rate and is not
subject to any quota.
In addition to our imports eligible for entry under the NAFTA program,
some imports made by us are also subject to a tariff preference which was
created and enacted as part of the NAFTA-enabling legislation. This tariff
provision, subheading 9802.00.90, HTS, provides for immediate duty-free entry
into the United States from Mexico of garments made from components which are
cut to shape in the United States from U.S. knit, woven or formed cloth. Such
articles enter quota-free. This duty-free, quota-free entry would be available
for articles produced in Mexico from U.S. components cut from U.S. knitted/woven
fabric. This merchandise, therefore, has an even more favorable treatment than
merchandise being imported from the Caribbean Basin. We currently import a
limited amount of such merchandise from Mexico.
Finally, non-NAFTA qualifying goods may be imported from Mexico. As noted,
this merchandise could be imported with reduced duties under the 807 program, as
well as under special tariff rate quotas called "TPLs." Otherwise, it is subject
to full "most favored nation" duty. Such merchandise may also be subject to
Mexican quotas which are effective for some products until 2004.
COMPETITION
The apparel industry in the United States is highly competitive and
characterized by a relatively small number of multi-line manufacturers and a
larger number of specialty manufacturers, including brand name and private label
producers. We have the ability to compete with internal product development and
sourcing capabilities of retailers. Our products also compete with a substantial
number of designer and non-designer product lines. Some of our competitors and
potential competitors have greater financial, manufacturing and distribution
resources than us. We believe that we compete favorably based on the quality and
value of our programs and products, price, the production flexibility resulting
from of our cutting and sourcing network, and the long-term customer
relationships we have developed. See "Risk Factors -- We may be Unable to
Compete Successfully in the Highly Competitive Apparel Industry."
INTELLECTUAL PROPERTY
In connection with the Windsong acquisition, Windsong's 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
ends on December 31, 2001, but if our net sales of specified items of "Colours
by Alexander Julian" apparel exceed a specified sales target for the
twelve-month period ending December 31, 2000, we will have the option to extend
the term of the Alexander Julian license agreement until December 31, 2006.
Windsong's sales of such apparel were substantially in excess of this sales
target in 1998. We will be obligated under the license agreement to make annual
minimum payments to Alexander Julian, Inc., as well as royalty payments based on
net sales of Colours by Alexander Julian apparel. Sales of Alexander Julian
products represent 27% of our pro forma combined revenues and 24% of our pro
forma combined net income for 1998.
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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.
PROPERTIES
We own our corporate headquarters, principal manufacturing facility and
warehouse facility, all of which are located in Liverpool, New York. Such
facilities are the subject of a lease and lease-back transaction with the
Onondaga County Industrial Development Authority, pursuant to which we received
a Payment In Lieu Of Taxes agreement which significantly reduced real estate
taxes on the facility, and fixed the assessment for a period of 18 years. Our
Liverpool facility is also subject to mortgages held by PNC Bank and the UDC
securing indebtedness owed to such parties. See "Management's Discussion and
Analysis of Results of Operations -- Liquidity and Capital Resources." During
1998, our Liverpool facility operated at approximately 62.5% of space capacity
and 75% of current machine capacity. We also lease one retail store in Syracuse,
New York, at which we operate under the name Learbury Clothes. This store has
been in continuous operation since 1941. The Learbury lease expires in 2007. We
also maintain an office in New York City. The lease on this space commenced in
July 1999 and expires in July 2009, with escalating annual rental payments of
$243,000 in year one and $345,000 in year ten.
Diversified Apparel, Global Sourcing Network, Components and Windsong each
lease office space in New York City and Windsong leases office space in
Connecticut, in each case to conduct administrative and sales operations. In
addition, Windsong leases warehouse space in New Jersey. None of these
businesses own any real property.
We believe that our existing facilities are adequate to meet our current
and forseeable needs. We also believe our existing facilities are well
maintained and in good operating condition.
EMPLOYEES
As of June 30, 1999, we had 523 employees. Of the total, 55 hold executive
and administrative positions, eight are engaged in design and merchandising, 406
are engaged in production activities such as marking, cutting and labeling, 45
are engaged in sales, 17 are engaged in distribution and 22 are engaged in
quality control. Approximately 70% of our work force is covered under collective
bargaining agreements, which expire in 2002. We have not experienced work
stoppages in the past and believe that our relations with our employees are
satisfactory.
LEGAL PROCEEDINGS
From time to time, we are a party to litigation arising in the ordinary
course of our business. We are not currently a party to any litigation that, if
determined adversely to us, we believe would have a material adverse effect on
us.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of June 30, 1999 with
respect to the members of our Board of Directors and our executive officers:
NAME AGE POSITIONS
- ---------------------------------- --- --------------------------------------
Richard C. Pietrafesa, Jr.(1) .... 42 President, Chief Executive Officer,
Director
Sterling B. Brinkley, Jr.(1) ..... 47 Chairman of the Board
Thomas A. Minkstein(1) ........... 52 Chief Operating Officer, Director
Eugene R. Sunderhaft ............. 51 Vice President -- Finance, Chief
Financial Officer, Secretary,
Treasurer
David McDonough .................. 35 Vice President -- Business Development
Mark C. Pickup(2) ................ 47 Director
Robert J. Bennett(2)(3) .......... 58 Director
Paul M. McNicol(2)(3) ............ 43 Director
- ----------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
RICHARD C. PIETRAFESA, JR. has served as our President, Chief Executive
Officer and Director since June 1990. Mr. Pietrafesa is also a member of our
Executive Committee. Mr. Pietrafesa joined our predecessor in 1979 and became
Director of Operations in 1981. Over his 20 years in the men's apparel industry,
Mr. Pietrafesa has been awarded the U.S. Senate Medal for Productivity in 1984,
the Apparel Industry Magazine All Star Award in 1985 and again in 1991, the
Bobbin Magazine C.E.O. of the Year Award in 1994, and, along with his brother
Joseph J. Pietrafesa II, the President of the Pietrafesa for Men Unit, the Sales
and Marketing Association Award for Innovation in 1997. Mr. Pietrafesa earned an
honors degree in Economics and Government from Harvard College.
STERLING B. BRINKLEY, JR. serves as our Chairman of the Board of Directors
and Chairman of our Executive Committee and has been a Director since June 1990.
Mr. Brinkley was a Managing Director of Morgan Schiff & Co., Inc., one of the
underwriters of this offering, for the years 1986 to 1990. Since 1990, Mr.
Brinkley has been a consultant to Morgan Schiff. Prior to 1986, Mr. Brinkley was
a Managing Director in the Corporate Finance Department of Shearson Lehman
Brothers, Inc. Mr. Brinkley is also Chairman of the Board of Directors of
EZCORP, Inc., a publicly-traded pawnshop chain, and Friedman's Inc., a
publicly-traded retail jewelry chain, and Chairman of the Executive Committee of
the Board of Directors of The Farm Journal Corporation, a publisher of
agricultural information. All three companies are affiliates of The Pietrafesa
Corporation and Morgan Schiff. Mr. Brinkley also serves on the boards of
directors of various privately held companies that are affiliates of The
Pietrafesa Corporation and Morgan Schiff. Mr. Brinkley received a B.A. from Yale
University and an M.B.A. from the Stanford Graduate School of Business.
THOMAS A. MINKSTEIN joined us in August 1998 as Chief Operating Officer
and Director. Mr. Minkstein is also a member of our Executive Committee. Prior
to joining us, Mr. Minkstein served for 10 years as Chief Operating Officer of
Empire Vision, a division of Highmark, Inc., and the thirteenth largest optical
retailer in the United States. In this position, Mr. Minkstein was responsible
for the operation of over 4,000 distribution points and six manufacturing
facilities throughout the United States, and managed that division's rapid
growth and earnings expansion through acquisitions and the operations of large
managed care programs. For the years 1973 through 1988, Mr. Minkstein held
various management positions with Frank's Nursery & Craft, a division of General
Host, a publicly-traded company.
EUGENE R. SUNDERHAFT joined us in August 1998 as Vice President --
Finance, Chief Financial Officer, Secretary, Treasurer. Prior to joining us, Mr.
Sunderhaft served for four years as Senior Vice President-Finance, Chief
Financial Officer and Secretary of The Penn Traffic Company, a publicly-traded
$3.2 billion retail, wholesale and manufacturing company, where he was
responsible for all accounting
63
<PAGE>
activities, treasury functions, strategic and tactical planning, SEC compliance,
investor relations and information technology. For the years 1972 through 1993,
Mr. Sunderhaft served P&C Foods, a subsidiary of Penn Traffic, in a variety of
management positions including controller for the years 1982 through 1989, and
Chief Financial Officer for the years 1989 through 1993. Prior to joining P&C,
Mr. Sunderhaft was employed by Ernst & Ernst, the predecessor of Ernst & Young
LLP. Mr. Sunderhaft is a graduate of the University of Dayton.
DAVID MCDONOUGH currently serves as our Vice President -- Business
Development. In this position, Mr. McDonough is responsible for financial and
structural analysis of all acquisitions, and implementation of consolidation
efficiencies and back office integration efforts. Mr. McDonough joined us in
January 1995 as Controller, and became Chief Financial Officer in 1996, a
position held until August of 1998. Prior to joining us, Mr. McDonough was Vice
President-Finance of Ferris Industries, a $14 million equipment manufacturer for
two years. Prior to that, Mr. McDonough was Corporate Finance Manager at CIS
Corporation, a publicly-traded company, where he worked for six years. Mr.
McDonough holds a B.S. in Economics from Cornell University.
MARK C. PICKUP serves as a Director and Chairman of our Audit Committee.
Mr. Pickup is also a director of EZCORP, Inc., Friedman's Inc. and The Farm
Journal Corporation, each an affiliate of ours and Morgan Schiff. Since 1995, he
has served as an independent business consultant with a variety of companies.
Mr. Pickup served as Vice Chairman of Crescent Jewelers, a privately-held retail
jewelry chain which is an affiliate of ours and Morgan Schiff, from December
1994 until February 1995, and served as President and Chief Executive Officer of
Crescent Jewelers from August 1993 to December 1994. >From October 1992 until
August 1993, Mr. Pickup served as the Senior Vice President and Chief Financial
Officer for Crescent Jewelers. For more than five years prior to October 1992,
Mr. Pickup held various positions with the predecessors of Ernst & Young LLP,
leaving as a partner in its San Francisco, California office in October 1992.
Mr. Pickup received a B.S. in mathematics from Brigham Young University.
ROBERT J. BENNETT serves as a Director and member of our Audit Committee
and as Chairman of our Compensation Committee. Mr. Bennett is also Chairman of
the Board of M&T Bank Corporation, Vice-Chairman of the Board of Manufacturers
and Traders Trust Company and a director of Traders Mutual Life Insurance Co. He
also serves as Director for the Syracuse University School of Management, Crouse
Hospital, the Federal Home Loan Bank of New York, the Metropolitan Development
Association of Syracuse and Central NY, the Pan African Business Association and
the New York Bankers Association. Mr. Bennett was also the Chairman, President
and CEO of ONBANCorp, Inc. for the years 1987 until April 1998 when it merged
with M&T Bank Corporation. Mr. Bennett received his B.S. from Babson College and
his M.B.A. from the University of Massachusetts, Amherst, and holds a graduate
degree from the Harvard Business School Advanced Management Program.
PAUL M. MCNICOL serves as a Director and member of our Audit and
Compensation Committees. Mr. McNicol is also Senior Vice President-Legal,
Cendant Corporation. For the years 1994 to 1996, Mr. McNicol served as Senior
Vice President-General Counsel of Six Flags Theme Parks, Inc. Mr. McNicol
received his B.A. from Harvard College and his J.D. from Fordham University
School of Law.
Our directors are currently elected annually, 25% by the holders of the
Class A Common Stock and 75% by the holders of the Class B Common Stock, to
serve during the ensuing year or until their respective successors are duly
elected and qualified. Officers serve at the discretion of our Board of
Directors. For a description of class voting rights see "Description of Capital
Stock."
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors currently has three committees: (1) the Audit
Committee; (2) the Executive Committee; and (3) the Compensation Committee.
The Audit Committee is comprised of Messrs. Pickup, Bennett and McNicol,
with Mr. Pickup as Chairman. The Audit Committee recommends the independent
accountants appointed by the Board to audit 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.
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<PAGE>
The Executive Committee is comprised of Messrs. Pietrafesa, Minkstein and
Brinkley, with Mr. Brinkley as Chairman. The Executive Committee exercises the
authority of the Board, to the extent permitted by law, in the management of our
business between meetings of the Board. The Executive Committee of the Board
also serves as the nominating committee in connection with annual meetings of
stockholders.
The Compensation Committee is comprised of Messrs. Bennett and McNicol,
with Mr. Bennett as Chairman. The function of the Compensation Committee is to
review and approve the compensation of executive officers and establish targets
and incentive awards under our incentive compensation plans.
COMPENSATION OF THE BOARD OF DIRECTORS
Sterling Brinkley, the Chairman of the Board and Chairman of our Executive
Committee, will receive fees of $100,000 per year. All other directors who are
not our current employees will receive an annual retainer of $10,000 payable
quarterly, plus an additional fee of $1,500 per meeting, and will be eligible to
receive stock option grants under our Stock Option Plan. See " -- Stock Option
Plan." Committee members, other than Mr. Brinkley, who are not our current
employees will receive an additional fee of $500 for each committee meeting
attended. In addition, our directors may be eligible to participate in other
incentive arrangements from time to time.
We will reimburse directors for travel and other out-of-pocket expenses
incurred in connection with their services as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
To date, executive compensation has been determined by our Chief Executive
Officer. Upon completion of this offering, the Compensation Committee will make
all compensation decisions. No interlocking relationship exists between the
Board or Compensation Committee and the board of directors or compensation
committee of any other company.
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<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table presents summary information concerning compensation
that we paid or accrued for services rendered in all capacities during the last
three years for our Chief Executive Officer, our other most highly compensated
executive officer and one additional individual who served as one of our
executive officers for a portion of the last completed year. With respect to the
persons and periods covered in the following table, we made no restricted stock
awards and had no long-term incentive plan pay-outs. Our contributions to our
401(k) retirement plan, as well as premium amounts paid for Mr. Pietrafesa's
life insurance benefits, are included under "All Other Compensation." 1998 bonus
amounts include payments related to performance in prior years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION
- --------------------------------------- ------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Richard C. Pietrafesa, Jr. ............ 1998 $100,000 $255,600 $38,729
PRESIDENT, CHIEF EXECUTIVE OFFICER 1997 100,000 100,000 33,650
AND DIRECTOR 1996 100,000 40,000 34,602
David McDonough ....................... 1998 $ 90,000 $ 30,000 $ 1,698
VICE PRESIDENT OF BUSINESS DEVELOPMENT 1997 90,000 20,000 1,683
1996 90,000 10,000 1,050
Ross W. Stefano(1) .................... 1998 $ 50,000 $155,000 $ 1,689
CHIEF OPERATING OFFICER AND DIRECTOR 1997 100,000 100,000 1,171
1996 100,000 100,000 1,546
</TABLE>
- ----------
(1) Mr. Stefano ceased to be an employee and director on June 22, 1998.
STOCK OPTION PLAN
We intend to establish our 1999 Stock Option Plan for key employees and
directors prior to the closing of the offering. Under the Stock Option Plan,
awards of options to purchase shares of Class A Common Stock may be made to our
key employees and directors, including employees who are also our officers or
directors. We may award options to purchase a number of shares equal to 10% of
our outstanding capital stock immediately following the offering. Options
awarded under the Stock Option Plan may be either "incentive stock options," as
that term is defined in Section 422 of the Internal Revenue Code of 1986, as
amended, or nonqualified stock options.
The Stock Option Plan will be administered by our Compensation Committee.
The Compensation Committee will have the authority to establish the terms and
conditions of the options in any manner not inconsistent with the terms of the
Stock Option Plan, adopt any rules it considers appropriate for the
administration of the Stock Option Plan, make interpretations of the Stock
Option Plan that it deems consistent with its provisions, and take any other
action it considers appropriate in connection with the Stock Option Plan. Each
option granted under the Stock Option Plan will be evidenced by an agreement
between The Pietrafesa Corporation and the employee and/or director to whom the
option is granted.
Prior to the adoption of the Stock Option Plan, we have made no provision
for the grant of options to purchase equity interests in The Pietrafesa
Corporation and no executive officer named in the above table holds or has ever
exercised any stock appreciation rights.
At the time of the offering, no options will have been granted to our
executive officers, employees or directors under the Stock Option Plan.
RETIREMENT PLANS
Our 401(k) Retirement Plan, as restated and amended, is a qualified
retirement plan available to all of our eligible employees (together, the
"Participants").
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Annual contributions to employees, if any, are declared by the Board at
the end of each year. Pursuant to the Retirement Plan, employees may also make
non-matching contributions. The contribution amounts for the executive officers
named in the Summary Compensation Table are included under "All Other
Compensation."
Contributions to the Retirement Plan are made to a trust where the funds
are invested in available investment options selected by the Participant and
managed by the trustee. The trust may be invested and reinvested in common or
preferred stocks, bonds, mortgages, leases, notes, debentures, mutual funds,
guaranteed investment contracts and other contracts and funds of insurance
companies, other securities and other real or personal property. The account
balances grow until finally distributed. Employee contributions to the
Retirement Plan are 100% vested upon contribution, and employer contributions to
the Retirement Plan vest over five years. Upon the occurrence of a distributive
event, a Participant may elect to receive funds according to the respective
plans' provisions. Pursuant to these provisions, a Participant is also entitled
to rollover eligible distribution amounts into another eligible retirement plan.
We may amend the Retirement Plan and our associated trusts, retroactively
or prospectively, in our sole discretion, except where prohibited by the
Internal Revenue Code of 1986, as amended, or the Employee Retirement Income
Security Act of 1974, as amended, and so long as such amendment does not exclude
a Participant, reduce a Participant's account, reduce a Participant's vested
percentage or modify the vesting schedule for a Participant eligible under the
Retirement Plan prior to the effective date of the amendment. The Retirement
Plan may be merged or consolidated, or its assets and liabilities may be
transferred, in whole or in part, to another qualified retirement plan. We also
reserve the right to terminate the Retirement Plan and our associated trusts, or
to cease or suspend further contributions, upon which occurrence accounts of
Participants shall become nonforfeitable. The Retirement Plan is a qualified
retirement plan and trust under Section 401 of the Code, ERISA and all
regulations issued thereunder.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1998, MS Pietrafesa, L.P. transferred all of its assets and
liabilities to us in exchange for 100 shares of Class B Common Stock. To
establish our initial capital structure as a public company, immediately prior
to the consummation of the offering, we will issue an additional 3,775,567
shares of Class B Common Stock to our sole stockholder, MS Pietrafesa, L.P., in
exchange for nominal consideration.
We are controlled by Phillip Ean Cohen through his sole ownership of MS
Pietrafesa Acquisition Corporation, the general partner of MS Pietrafesa, L.P.
(the "General Partner"). See "Risk Factors -- The Interests of our Controlling
Stockholder may Conflict with the Interests of the Holders of our Class A Common
Stock." Morgan Schiff, which is owned by Mr. Cohen, is one of the managing
underwriters of the offering. We reimbursed Morgan Schiff for expenses incurred,
principally employee salary, legal and accounting fees of $192,300 in 1998, in
connection with our formation and will continue to reimburse Morgan Schiff for
ongoing administrative expenses, principally legal and accounting services
rendered to us. In the future, we may engage Morgan Schiff for business and
financial advisory services. Mr. Brinkley, a consultant to Morgan Schiff, is our
Chairman of the Board. Morgan Schiff is acting as one of the underwriters in the
offering and, in such capacity, will receive an underwriter's discount equal to
7.0% of the gross proceeds of the shares of Class A Common Stock allocated to
it.
Mr. Brinkley, Richard C. Pietrafesa, Jr., Mr. Minkstein and Joseph J.
Pietrafesa, II own indirect limited partnership interests in MS Pietrafesa, L.P.
through their ownership of limited partnership interests in MSJP, L.P., a
limited partner of MS Pietrafesa, L.P. See "Principal Stockholders." In
addition, Messrs. Pietrafesa own indirect limited partnership interests in MS
Pietrafesa, L.P. through their ownership of limited partnership interests in RJP
Investment Assoc., L.P. ("RJP"), a limited partner of MS Pietrafesa, L.P. See
"Principal Stockholders." In the event that the limited partners of MS
Pietrafesa, L.P. receive a specified minimum investment return, RJP, and, as a
result, Messrs. Pietrafesa will be allocated by MS Pietrafesa, L.P. shares of
Class B Common Stock and/or other property that would otherwise be allocated to
the other limited partners. MS Pietrafesa, L.P.'s Partnership Agreement contains
similar provisions in favor of the General Partner, which is owned by Mr. Cohen.
None of the foregoing provisions require that we issue additional shares of
Class A or Class B Common Stock or other securities of any kind.
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<PAGE>
We lease a retail store facility in Syracuse, New York from Robert D.
Pietrafesa and Richard C. Pietrafesa, uncle and father, respectively, of our
President and Chief Executive Officer, under a 10-year lease expiring in 2007
requiring rental payments totaling $145,000 per year. A portion of this retail
store facility is subleased to a third party. The sublease will expire in 2000
and provides minimum rental income of $30,000 per year.
We source customer orders, including a substantial volume of the aggregate
orders for Jos.A.Bank, with an affiliate, SourceOne. SourceOne is owned by the
General Partner. SourceOne operates two manufacturing facilities in Baltimore,
Maryland of 54,000 and 125,000 square feet. SourceOne leases, directly and
through a sublease, these facilities from Jos.A.Bank. All production performed
for us by SourceOne is performed on a "cost" basis, without mark-up. None of our
employees receive compensation from SourceOne.
Morgan Schiff, an affiliate of the General Partner, provides financial
advisory and strategic consulting services to us under an agreement requiring
monthly retainer payments of $25,000. The agreement also requires us to pay
specified fees to Morgan Schiff when we consummate various acquisitions, capital
raising and financing transactions. The agreement may be terminated annually by
either party upon 30 days notice. Morgan Schiff has waived all retainer payments
otherwise payable to it for financial advisory services for 1996, 1997, 1998 and
1999, as well as all fees associated with the Diversified Apparel, Global
Sourcing Network, Components and Windsong acquisitions, the PNC Bank credit
facility and this offering. No such services were provided to us by Morgan
Schiff during those periods and in respect of those transactions, other than
investment banking and financial analyst services for which Morgan Schiff was
paid, and we received no benefit under the agreement during those periods.
Our agreement with Morgan Schiff does not compel Morgan Schiff to provide
any actual services in return for the $25,000 monthly retainer payment. However,
it was in our interest to enter into the agreement at the time of our
acquisition by MS Pietrafesa, L.P., an affiliate of Morgan Schiff, because it
was anticipated that we would be financially successful and that Morgan Schiff
would provide meaningful services in the form of merger and acquisition advice
and assistance in private capital raising activities and that the cost of those
services would be less than or equal to the cost of procuring those services
from an unaffiliated third party. However, after we were acquired in the early
1990s, our revenues increased rapidly, but our profitability declined. As a
result, during the period from 1995 through 1997, we divested our non-core
manufacturing assets, refinanced our secured lending arrangements and negotiated
the forgiveness of our subordinated indebtedness. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
Financial analysis related to these transactions was provided by our financial
management and consultants and not by Morgan Schiff.
In April 1998, MS Pietrafesa, L.P. made a distribution of $207,000 to its
partners in accordance with its Amended and Restated Agreement of Limited
Partnership dated January 1, 1996, for the payment of income taxes incurred by
such partners on the portion of partnership income attributable to their
respective interests during 1997. In May 1999, we paid $1.5 million to MS
Pietrafesa, L.P. from amounts borrowed under the PNC Bank credit facility to
cover the tax distribution to be made by MS Pietrafesa, L.P. to its partners in
accordance with its Partnership Agreement for the payment of income taxes
incurred by such partners on the portion of partnership income attributable to
their respective interests during the period from January 1, 1998 through
September 30, 1998. A portion of the net proceeds of the offering will be
applied toward the repayment of the PNC Bank credit facility.
We reimburse, on a per-flight basis, operating expenses of an aircraft
owned by Twins Aviation, Inc., a corporation owned by our President and Chief
Executive Officer. We use this aircraft on a regularly scheduled, weekly basis
to fly staff to production meetings in New York City, as well as for customer
and contractor visits. Such reimbursements amounted to $225,000 for the year
ended December 31, 1996, $223,000 for the year ended December 31, 1997 and
$454,000 for the year ended December 31, 1998.
We believe that each of the affiliate transactions described above are on
terms no less favorable than would be generally available to us from
unaffiliated third parties. After the closing of the offering, all related party
transactions will be approved by our independent, disinterested directors. See
also "Management," "Principal Stockholders" and "Underwriting."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The table below sets forth information as of June 30, 1999 regarding the
beneficial ownership of Class A Common Stock and Class B Common Stock, as well
as the percentage ownership of our Class A Common Stock and Class B Common
Stock. Shares of Class B Common Stock are convertible into Class A Common Stock
on a one-for-one basis, as described under "Description of Capital Stock."
Percentage ownership numbers are based on shares of Class A Common Stock and
shares of Class B Common Stock outstanding immediately following the offering
and, in the case of Class B Common Stock, immediately prior to the offering.
Although shares of Class B Common Stock may be converted into shares of Class A
Common Stock at any time, the table below does not reflect the shares of Class A
Common Stock issuable to holders of Class B Common Stock upon conversion as
being beneficially owned by those holders.
Information is provided as to each of our directors, the executive
officers named in the Summary Compensation Table under "Management --
Compensation of Executive Officers," each person we know to own beneficially
more than 5% of the outstanding shares of Class A Common Stock or Class B Common
Stock and all of our directors and executive officers as a group. Except as
described below, the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned by
them.
MS Pietrafesa Acquisition Corporation is the general partner of MS
Pietrafesa, L.P. and has the sole right to vote the shares of Class B Common
Stock owned by MS Pietrafesa, L.P. and to direct the disposition of such shares.
Philip Ean Cohen is the sole stockholder of MS Pietrafesa Acquisition
Corporation. See "Risk Factors -- The Interests of our Controlling Stockholder
may Conflict with the Interests of the Holders of our Class A Common Stock."
MSJP, L.P. and RJP Investments Assoc., L.P. indirectly own shares of Class
B Common Stock through their respective ownership of limited partnership
interests in MS Pietrafesa, L.P. Neither MSJP nor RJP has any right to vote or
to direct the disposition of their respective shares. Shares of Class B Common
Stock indicated below as beneficially owned by MSJP and RJP exclude additional
shares of Class B Common Stock that MSJP and RJP are entitled to receive
pursuant to MS Pietrafesa, L.P.'s Partnership Agreement. See "Certain
Relationship and Related Transactions."
Shares of Class B Common Stock indicated below as beneficially owned by
Sterling B. Brinkley, Jr. and Thomas A. Minkstein are owned indirectly through
their ownership of limited partnership interests in MSJP, L.P. Such individuals
have no right to vote or to direct the disposition of these shares. Shares of
Class B Common Stock indicated below as beneficially owned by Richard C.
Pietrafesa, Jr. and Joseph J. Pietrafesa II are owned indirectly through their
ownership of limited partnership interests in MSJP, L.P. and RJP Investments
Assoc., L.P. Such individuals have no right to vote or to direct the disposition
of these shares.
<TABLE>
<CAPTION>
SHARES OF CLASS A SHARES OF CLASS B PERCENTAGE OF
COMMON STOCK COMMON STOCK CLASS A AND
----------------------- -------------------------- CLASS B
BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE COMMON STOCK
- ----------------------------------------------- -------- ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
MS Pietrafesa, L.P. ........................... -- -- 3,775,667 100.0% 46.6%
MSJP, L.P. .................................... -- -- 3,151,549 83.5% 38.9%
MS Pietrafesa Acquisition Corporation ......... -- -- 3,775,667 100.0% 46.6%
Phillip Ean Cohen ............................. -- -- 3,775,667 100.0% 46.6%
350 Park Avenue, 8th Floor
New York, NY 10022
Richard C. Pietrafesa, Jr. .................... -- -- 504,683 13.4% 6.2%
Thomas A. Minkstein ........................... -- -- 94,231 2.5% 1.2%
David McDonough ............................... -- -- -- -- --
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SHARES OF CLASS A SHARES OF CLASS B PERCENTAGE OF
COMMON STOCK COMMON STOCK CLASS A AND
------------------------- ------------------------ CLASS B
BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE COMMON STOCK
- ----------------------------------------- ---------- ------------ --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
RJP Investments Assoc., L.P. ............ -- -- 586,361 15.5% 7.2%
7400 Morgan Road
Liverpool, NY 13090
Sterling B. Brinkley, Jr. ............... -- -- 245,077 6.5% 3.0%
350 Park Avenue, 8th Floor
New York, NY 10022
Mark C. Pickup .......................... -- -- -- -- --
6734 Corte Segunda
Martinez, CA 94553
Robert J. Bennett ....................... -- -- -- -- --
M&T Bank Corp.
101 South Salina Street
Syracuse, NY 13202
Paul M. McNicol ......................... -- -- 47,131 1.3% *
305 Oakley Court
Mill Neck, NY 11765
Ross W. Stefano ......................... -- -- -- -- --
30 The Orchard
Fayetteville, NY 13066
Windsong, Inc. .......................... 333,333 7.7% -- -- 4.1%
1599 Post Road East
Westport, CT 06880
All executive officers and directors as a
group (eight persons) .................. -- -- 891,122 23.6% 11.0%
</TABLE>
- ----------
* Represents less than 1.0%.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following summary describes the material provisions of our capital
stock and is subject to, and qualified in its entirety by, our Certificate of
Incorporation and By-laws that are included as exhibits to the Registration
Statement of which this prospectus is a part and by the provisions of applicable
law.
We have filed our Certificate of Incorporation to (1) authorize 12,000,000
shares of Class A Common Stock, 10,000,000 shares of Class B Common Stock and
5,000,000 shares of Preferred Stock; and (2) set forth the rights and privileges
of the Class A Common Stock, Class B Common Stock and Preferred Stock as
described below. Upon completion of the offering, 4,333,333 shares of Class A
Common Stock, 3,775,667 shares of Class B Common Stock and no shares of
Preferred Stock will be issued and outstanding. The discussion herein describes
our capital stock, Certificate of Incorporation and By-laws in effect upon
effectiveness of the Registration Statement of which this prospectus is a part.
CLASS A AND CLASS B COMMON STOCK
The holders of shares of Class A Common Stock and Class B Common Stock
have identical rights and privileges on a per share basis, except as set forth
below. The holders of shares of Common Stock have no preemptive rights to
maintain their respective percentage ownership interest in or other subscription
rights for our other securities. Shares of Common Stock are not redeemable or
subject to further calls or assessments. The shares of Common Stock to be
outstanding after the offering, including the shares of Class A Common Stock to
be issued hereby, when paid for and issued, will be fully paid and
non-assessable. Holders of shares of Common Stock are entitled to share pro rata
in dividends, if any, as may be declared by our Board of Directors out of funds
legally available therefor; provided, however, that any dividend upon the Common
Stock that is payable in Common Stock shall be paid only in Class A Common Stock
to the holders of Class A Common Stock, but is payable in Class A or Class B
Common Stock to the holders of Class B Common Stock. Upon our liquidation,
dissolution and winding up, holders of shares of Common Stock are entitled to
share ratably in the net assets available for distribution to such holders. The
consent of the holder or holders of a majority of the Class B Common Stock is
required to authorize the issuance of additional Class B Common Stock.
LIMITED VOTING RIGHTS. The holders of Class A Common Stock have the right
as a class to elect that minimum number of directors constituting 25% of the
members of the Board, which presently represents two of the six directors. The
minimum number of directors shall be rounded to the next highest whole number if
such percentage is not equal to a whole number of directors. Directors elected
by the holders of Class A Common Stock will first be elected at the annual
meeting of stockholders to be held in 1999.
Other than the right to elect directors and as otherwise required by
Delaware law, the holders of Class A Common Stock will have very limited voting
rights until all of the shares of Class B Common Stock are converted into shares
of Class A Common Stock or otherwise cease to be issued and outstanding. At such
time, the holders of Class A Common Stock will be entitled to vote on all
matters submitted to a vote of the stockholders and will be entitled to one vote
per share held. Generally, the vote of the majority of the shares represented at
a meeting of the stockholders and entitled to vote is sufficient for actions
that require a vote of the stockholders. Our Certificate of Incorporation does
not provide for cumulative voting. Because sole voting power has been granted to
the holders of Class B Common Stock, except as stated above and as otherwise
required by Delaware law, substantially all corporate actions can be taken
without any vote by the holders of the Class A Common Stock including, without
limitation:
o amending our Certificate of Incorporation or By-laws, including
authorizing the issuance of additional shares of Class A Common
Stock;
o authorizing stock options, restricted stock and other compensation
plans for employees, executives and directors;
o authorizing a merger or disposition or change in control;
o approving indemnification of our directors, officers and eligible
employees; and
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<PAGE>
o approving conflict of interest transactions involving our affiliates
which are approved by our disinterested directors.
The holders of the outstanding shares of Class A Common Stock will be
entitled, however, to vote as a class upon any proposed amendment to our
Certificate of Incorporation which would increase or decrease the par value of
the shares of Class A Common Stock, or alter or change the powers, preferences
or special rights of the shares of the Class A Common Stock so as to affect them
adversely. See "Risk Factors -- The Interests of our Controlling Stockholder may
Conflict with the Interests of the Holders of our Class A Common Stock."
All of the shares of the Class B Common Stock are owned by MS Pietrafesa,
L.P. and can be voted by the General Partner, which is wholly-owned by Mr.
Cohen. See "Principal Stockholders" and "Underwriting."
CONVERSION RIGHTS. At the option of any holder of shares of Class B Common
Stock, such holder may, at any time and from time to time, convert all or part
of such holder's shares of Class B Common Stock into an equal number of shares
of Class A Common Stock. The shares of Class B Common Stock are also subject to
mandatory conversion into an equal number of shares of Class A Common Stock, in
whole or in part, at any time and from time to time, at the option of the holder
or holders of a majority of the outstanding shares of Class B Common Stock. If,
and only if, all the outstanding shares of Class B Common Stock converted into
Class A Common Stock or are otherwise no longer outstanding, the holders of the
Class A Common Stock will have general voting power in the election of all
members of the Board and in all other matters upon which our stockholders are
entitled to vote. Holders of shares of Class A Common Stock have no right to
convert Class A Common Stock into any of our other securities.
PREFERRED STOCK
Our Certificate of Incorporation authorizes 5,000,000 shares of Preferred
Stock. Upon the affirmative vote or the written consent of the holders of a
majority of the outstanding shares of Class B Common Stock, shares of Preferred
Stock may be issued in one or more series. Each such series will have such
distinctive designation as stated in resolutions adopted by the Board. Authority
is expressly vested in the Board to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series of the designation of such series,
without further vote or action by the stockholders. The Preferred Stock may be
granted voting powers provided, however that (1) so long as any Class B Common
Stock is outstanding, the holders of the Class B Common Stock will always have
the absolute right to elect a majority of the Board and (2) if voting powers are
granted, the holders of shares of Preferred Stock will be entitled to vote
together with the holders of the Class A Common Stock as a class on all matters
on which holders of Class A Common Stock are entitled to vote. At present, we
have no plans to issue any shares of the Preferred Stock.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law as currently or hereafter in effect.
Delaware law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duty as a director,
except for liability
(1) for breach of their duty of loyalty to the corporation or its
stockholders;
(2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the General Corporation
Law of the State of Delaware (the "DGCL"); or
(4) for any transaction from which the director derives an improper
personal benefit.
Our Certificate of Incorporation provides for the mandatory
indemnification of, and advancement of expenses to our directors and officers.
72
<PAGE>
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are subject to Section 203 of the DGCL, which prevents an "interested
stockholder" from engaging in a "business combination" with a publicly-held
Delaware corporation for three years following the date such person became an
interested stockholder, unless
(1) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved
the business combination;
(2) upon consummation of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced; or
(3) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of 662/3% of the
outstanding voting stock of the corporation not owned by the
interested stockholder.
The DGCL defines an "interested stockholder" as a person owning 15% or
more of a corporation's outstanding voting stock. A "business combination"
includes mergers, stock or asset sales and other transactions resulting in a
financial benefit to the interested stockholder.
The disproportionate voting rights between the Class A Common Stock and
the Class B Common Stock and the provisions of Section 203 of the DGCL could
have the effect of delaying, deferring or preventing a change in control. See
"Risk Factors -- The Interests of our Controlling Stockholder may Conflict with
the Interests of the Holders of our Class A Common Stock."
TRANSFER AGENT
The transfer agent and registrar for the Class A Common Stock is American
Stock Transfer & Trust Company.
73
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have a total of 4,333,333 shares
of Class A Common Stock, 4,933,333 if the Underwriters' over-allotment option is
exercised in full, and 3,775,667 shares of Class B Common Stock outstanding. All
shares of Class A Common Stock sold in the offering and, after the expiration of
the 180 day lock-up period, described below, the 58,333 shares of Class A Common
Stock being registered for resale, from time to time, by Windsong, Inc. will be
freely tradable under the Securities Act unless they are purchased or held by
"affiliates" of ours as defined in Rule 144. The balance of the shares of Class
A Common Stock issued to Windsong, Inc. in connection with the Windsong
acquisition will be "restricted securities" within the meaning of Rule 144 under
the Securities Act and may, after the expiration of the 180 day lock-up period,
be sold in compliance with Rule 144 under the Securities Act, subject to
additional resale restrictions under the Windsong acquisition agreement. In
addition, all shares of Class B Common Stock and the 3,775,667 shares of Class A
Common Stock issuable upon conversion thereof, all of which are subject to the
180 day lock-up period, will be "restricted" securities within the meaning of
Rule 144 under the Securities Act and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemption provided by Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned "restricted" shares for at least one year, including
a person who may be deemed our affiliate, is entitled to sell within any
three-month period a number of shares of Class A Common Stock that does not
exceed the greater of 1% of the then-outstanding shares of our Class A Common
Stock or the average weekly trading volume of the Class A Common Stock on the
Nasdaq National Market during the four calendar weeks preceding such sale. Sales
under Rule 144 are subject to restrictions relating to manner of sale, notice
and the availability of current public information about us. A person who is not
our affiliate and has not been such at any time during the 90 days preceding a
sale, and who has beneficially owned "restricted" shares for at least two years,
would be entitled to sell such shares immediately following the offering without
regard to the volume limitations, manner of sale provisions or notice or other
requirements of Rule 144 of the Securities Act. However, the transfer agent,
American Stock Transfer & Trust Company, may require an opinion of counsel that
a proposed sale of "restricted" shares comes within the terms of Rule 144 of the
Securities Act prior to effecting a transfer of such shares. Such opinion would
be provided by and at the cost of the transferor.
Our officers and directors and certain other stockholders, including the
principal officers of Diversified Apparel, Global Sourcing Network, Components
and Windsong, have agreed, pursuant to the underwriting agreement and lock-up
agreement, that they will not sell any shares of our capital stock owned by
them, either publicly or privately, without the prior consent of Janney
Montgomery Scott Inc., as representative of the underwriters, for a period of
180 days from the date of this prospectus. See "Underwriting."
MS Pietrafesa, L.P. has offered its limited partners the right to withdraw
from the partnership under its Partnership Agreement and receive a distribution
of Class A Common Stock. Such right to withdraw may be exercised by a limited
partner at any time between the consummation of the offering and 14 days before
the expiration of the lock-up period. The withdrawal will be effective at the
end of the month in which the lock-up period expires. The shares acquired
through a limited partner's withdrawal will be subject to the resale limitations
under Rule 144.
Limited partners electing to withdraw from MS Pietrafesa, L.P. will
generally be deemed to have held the shares of Class A Common Stock distributed
to them from the date they acquired their partnership interest. Accordingly,
original investors in MS Pietrafesa, L.P. will be entitled to sell such shares
pursuant to Rule 144 immediately upon distribution of such shares from MS
Pietrafesa, L.P., subject to volume, manner of sale and other limitations.
Prior to the offering, there has been no public market for either class of
our Common Stock and no predictions can be made of the effect, if any, that the
sale or availability for sale of additional shares of our Common Stock or our
other securities, or the development of a public trading market for the Class B
Common Stock, will have on the market price of the Class A Common Stock.
Nevertheless, sales of substantial amounts of shares of Class A Common Stock in
the public market, the perception that such sales could occur, the
74
<PAGE>
development of a public trading market for the Class B Common Stock or the
issuance of other securities, could adversely affect the market price of the
Class A Common Stock and could impair our future ability to raise capital
through an offering of our equity securities.
UNDERWRITING
Subject to the terms of an underwriting agreement among Janney Montgomery
Scott Inc., First Security Van Kasper, Morgan Schiff & Co., Inc., as
representatives of the underwriters and The Pietrafesa Corporation, the
underwriters have each severally agreed to purchase from us and we have agreed
to sell to the underwriters the number of shares of Class A Common Stock set
forth opposite their respective names below. The underwriters will not be
purchasing any of the shares which may be offered, from time to time, by the
selling stockholder. Pursuant to the terms of the underwriting agreement, the
commitments of non-defaulting underwriters may be increased.
UNDERWRITER NUMBER OF SHARES
----------- ----------------
Janney Montgomery Scott Inc. ..........
First Security Van Kasper .............
Morgan Schiff & Co., Inc. .............
Total ................................ 4,000,000
=========
The underwriting agreement provides that obligations of the underwriters
to pay for and accept delivery of the Class A Common Stock are subject to the
approval of specific conditions. The underwriters are obligated to take and pay
for all of the shares of the Class A Common Stock offered by this prospectus,
other than shares of Class A Common Stock covered by the over-allotment option
described below, if any shares are taken.
The underwriters propose to offer the shares of Class A Common Stock to
the public initially at the offering price per share shown on the cover page of
this prospectus and to dealers at such price, less a concession not in excess of
$___ per share. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $___ per share to other dealers. After this offering
of the Class A Common Stock, the public offering price and the concessions may
be changed by the Representatives.
In addition to the discounts and commissions shown on the cover page of
this prospectus, we will pay to Janney Montgomery Scott Inc. a financial
advisory fee of $100,000 upon completion of the offering. In addition, we have
agreed to pay to Klehr, Harrison, Harvey, Branzburg & Ellers LLP, underwriters'
counsel, legal fees and expenses incurred in connection with the preparation of
a preliminary Blue Sky memorandum and the qualification of the securities for
sale in any state and in connection with securing any review or approvals by the
National Association of Securities Dealers.
We have granted to the underwriters an option for 30 days after the date
of this prospectus to purchase up to 600,000 additional shares of Class A Common
Stock, at the same price per share as the public offering price, less the
underwriting discounts and commissions shown on the cover page of this
prospectus. The underwriters may exercise the option only to cover
over-allotments in the sale of the shares of Class A Common Stock offered by
this prospectus. To the extent the underwriters exercise this option, each of
the underwriters has a firm commitment, subject to certain conditions, to
purchase a number of the additional shares of Class A Common Stock proportionate
to such underwriter's initial commitment as indicated in the preceding table.
In connection with this offering and in compliance with applicable
securities laws, the underwriters may over-allot, or sell more shares of Class A
Common Stock than is shown on the cover page of this prospectus, and may effect
transactions on the Nasdaq National Market which stabilize, maintain or
otherwise affect the market price of the Class A Common Stock at prices above
those which might otherwise prevail in the open market. Such transactions may
include placing bids for the Class A Common Stock or effecting purchases of the
Class A Common Stock for the purpose of pegging, fixing or maintaining the price
of the Class A Commons Stock or for the purpose of reducing a short position
created in connection with the offering. A short position may be covered by
exercise of the over-allotment option described above in place of or in addition
to
75
<PAGE>
open market purchases. The underwriters are not required to engage in any of
these activities and if the underwriters commence any of these activities, they
may discontinue them at any time.
We and the underwriters make no representation or prediction as to the
direction or magnitude of any effect that the transactions described above may
have on the price of the Class A Common Stock. In addition, we and the
underwriters make no representation that the underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
The underwriters do not intend to confirm sales of the Class A Common
Stock to any accounts over which they exercise discretionary authority.
Our directors and executive officers and the sole holder of Class B Common
Stock have agreed that they will not, directly or indirectly, sell or otherwise
dispose of any Class A Common Stock or Class B Common Stock for a period of 180
days after the completion of this offering, without Janney Montgomery Scott
Inc.'s prior written consent. Together, this group directly and indirectly owns,
prior to the offering, all of the outstanding shares of the Class B Common
Stock.
We have agreed to indemnify the underwriters and persons who control the
underwriters against, or contribute to losses arising out of, some liabilities
that may be incurred in connection with this offering, including liabilities
under the Securities Act of 1933, as amended.
Morgan Schiff, one of the underwriters, is owned by Philip Ean Cohen. Mr.
Cohen has voting power over all of our outstanding Class B Common Stock and,
accordingly, has the power to determine virtually all matters submitted to our
stockholders and to appoint 75% of the members of our board of directors. See
"Certain Relationships and Related Transactions" and "Description of Capital
Stock." As a result of our affiliation with Morgan Schiff, the offering is being
conducted in accordance with the provisions of Rule 2720 of the National
Association of Securities Dealers, Inc. Conduct Rules. Rule 2720 requires that
the initial public offering price of the shares be no higher than the price
recommended by a "qualified independent underwriter" meeting specified
standards. In accordance with this requirement, Janney Montgomery Scott Inc. is
assuming the responsibilities of acting as a qualified independent underwriter
in pricing the offering and conducting due diligence. The price of the shares
will be no higher than the price recommended by Janney Montgomery Scott Inc.
There is no established trading market for the shares. The offering price
for the shares has been determined through negotiations between us and the
Representatives, based on the following factors:
o prevailing market conditions;
o our past and present operations;
o market capitalizations and stages of development of other companies
which we and the Representatives believe to be comparable to us;
o an assessment of our management;
o the history of, and prospects for, our business and the industry in
which it competes; and
o our prospects for future earnings.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed
upon by Roberts, Sheridan & Kotel, a Professional Corporation, which firm
provides legal services from time to time for Morgan Schiff and its affiliates.
The validity of the shares of Class A Common Stock will be passed upon for the
underwriters by Klehr, Harrison, Harvey, Branzburg & Ellers LLP.
EXPERTS
The Consolidated Financial Statements and schedule of The Pietrafesa
Corporation at December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998, appearing in this prospectus
76
<PAGE>
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>
THE PIETRAFESA CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
THE PIETRAFESA CORPORATION
Report of Independent Auditors ........................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 ............. F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998 ..................................................... F-5
Consolidated Statements of Changes in Partners' Capital and
Shareholder's Equity for the years ended December 31, 1996, 1997
and 1998 ................................................................ F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 ........................................ F-7
Notes to Consolidated Financial Statements ............................... F-8
Consolidated Balance Sheets as of December 31, 1998 and at
March 31, 1999 (unaudited) .............................................. F-16
Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1999 (unaudited) ..................................... F-17
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1999 (unaudited) ..................................... F-18
Notes to Quarterly Consolidated Financial Statements ..................... F-19
GLOBAL SOURCING NETWORK, LTD.
Independent Auditors' Report ............................................. F-21
Balance Sheets as of December 31, 1997 and 1998 .......................... F-22
Statements of Operations and Accumulated Deficit for the years ended
December 31, 1997 and 1998 .............................................. F-23
Statements of Cash Flows for the years ended December 31, 1997 and 1998 .. F-24
Notes to Financial Statements ............................................ F-25
Balance Sheets as of December 31, 1998 and March 31, 1999 (unaudited) .... F-28
Statements of Operations and Accumulated Deficit for the three months
ended March 31, 1998 and 1999 (unaudited) ............................... F-29
Statements of Cash Flows for the three months ended March 31,
1998 and 1999 (unaudited) ............................................... F-30
Notes to Quarterly Financial Statements .................................. F-31
COMPONENTS BY JOHN MCCOY, INC.
Report of Independent Auditors ........................................... F-32
Balance Sheets as of December 31, 1997 and 1998 .......................... F-33
Statements of Income and Retained Earnings for the years ended
December 31, 1997 and 1998 .............................................. F-34
Statements of Cash Flows for the years ended December 31, 1997 and 1998 .. F-35
Notes to Financial Statements ............................................ F-36
Balance Sheets as of December 31, 1998 and March 31, 1999 (unaudited) .... F-39
Statements of Income and Retained Earnings for the three months ended
March 31, 1998 and 1999 (unaudited) ..................................... F-40
Statements of Cash Flows for the three months ended March 31, 1998
and 1999 (unaudited) .................................................... F-41
Notes to Quarterly Financial Statements .................................. F-42
WINDSONG, INC.
Independent Auditors' Report ............................................. F-43
Balance Sheets as of December 31, 1997 and 1998 .......................... F-44
Statements of Income and Retained Earnings (Accumulated Deficit) for
the years ended December 31, 1996, 1997 and 1998 ........................ F-46
Statements of Cash Flows for the years ended December 31, 1996,
1997 and 1998 ........................................................... F-47
Notes to Financial Statements ............................................ F-50
Balance Sheets as of December 31, 1998 and March 31, 1999 (unaudited) .... F-63
Statements of Income and Retained Earnings (Accumulated Deficit) for
the three months ended March 31, 1998 and 1999 (unaudited) .............. F-64
Statements of Cash Flows for the three months ended March 31, 1998
and 1999 (unaudited) .................................................... F-65
Notes to Quarterly Financial Statements .................................. F-66
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Pietrafesa Corporation
We have audited the accompanying consolidated balance sheets of The
Pietrafesa Corporation (formerly MS Pietrafesa, L.P.) as of December 31, 1997
and 1998, and the related consolidated statements of operations, changes in
partners' capital and shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Pietrafesa Corporation at December 31, 1997 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Syracuse, New York
February 12, 1999, except as to Note 12
as to which the date is July 15, 1999
F-2
<PAGE>
THE PIETRAFESA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-------------------------
1997 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash .............................................................. $ 3 $ 14
Accounts receivable, less allowance for doubtful accounts of $35 in
1997 and 1998 ................................................... 4,066 7,967
Inventories:
Finished goods .................................................. 3,510 4,273
Work-in-process ................................................. 1,902 3,865
Raw materials ................................................... 3,319 4,979
-------- --------
8,731 13,117
Prepaid expenses .................................................. 143 193
Deferred taxes .................................................... -- 938
-------- --------
Total current assets ............................................... 12,943 22,229
Property, plant, and equipment, at cost:
Land .............................................................. 297 297
Buildings and improvements ........................................ 3,157 3,215
Machinery and equipment ........................................... 6,199 6,485
Furniture and fixtures ............................................ 699 708
Construction in progress .......................................... -- 290
-------- --------
10,352 10,995
Accumulated depreciation .......................................... 3,806 4,409
-------- --------
6,546 6,586
Other assets ....................................................... 184 560
-------- --------
$ 19,673 $ 29,375
======== ========
</TABLE>
F-3
<PAGE>
THE PIETRAFESA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-------------------------
1997 1998
---------- ------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
LIABILITIES, PARTNERS' CAPITAL AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable ................................................... $ 6,610 $ 7,893
Other current liabilities .......................................... 1,204 3,054
Tax distribution payable ........................................... -- 1,516
Current maturities of long-term debt ............................... 487 527
-------- --------
Total current liabilities ........................................... 8,301 12,990
Deferred tax liability .............................................. -- 1,441
Long-term debt, net of current maturities ........................... 8,663 12,561
Partners' capital and shareholder's equity:
Partners' capital:
General partner .................................................. 27 --
Limited partners ................................................. 2,682 --
-------- --------
Total partners' capital ......................................... 2,709 --
Shareholder's equity:
Preferred stock, $.001 par value: ................................
Authorized shares -- 5,000,000 ..................................
Issued shares -- none
Common stock:
Authorized shares -- 12,000,000 Class A, $.001 par value ........
-- 10,000,000 Class B, $.0002 par value .......
Issued shares -- 3,775,667 Class B .............................. -- --
-------- --------
Additional paid-in capital ....................................... -- 2,941
Retained earnings (accumulated deficit) .......................... -- (558)
Total shareholder's equity ...................................... 2,383
-------- --------
$ 19,673 $ 29,375
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
THE PIETRAFESA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C> <C>
Net revenues ..................................................... $ 44,000 $ 37,582 $ 56,763
Cost of sales .................................................... 34,769 29,218 47,062
-------- -------- ----------
Gross profit ..................................................... 9,231 8,364 9,701
Operating expenses:
Selling, general, and administrative expenses ................... 7,427 6,150 5,536
Impairment loss on fixed assets ................................. 170 -- --
Depreciation and amortization expense (excludes amounts
in cost of sales) ............................................. 165 151 222
-------- -------- ----------
7,762 6,301 5,758
-------- -------- ----------
Operating income ................................................. 1,469 2,063 3,943
Public offering costs ............................................ -- -- 823
-------- -------- ----------
Income (loss) before income taxes and extraordinary item ......... (493) 556 1,911
Provision for income taxes ....................................... -- -- 514
-------- -------- ----------
Income (loss) before extraordinary item .......................... (493) 556 1,397
Extraordinary item ............................................... 3,150 -- --
-------- -------- ----------
Net income ....................................................... $ 2,657 $ 556 $ 1,397
======== ======== ==========
Pro forma net income data (Note 2):
Income before income taxes, as reported above ................... $ 1,911
Pro forma provision for income taxes ............................ 764
----------
Pro forma net income ............................................ $ 1,147
==========
Pro forma basic and diluted earnings per share (Notes 2
and 12) ......................................................... $ 0.30
==========
Pro forma basic and diluted weighted average number of
common shares outstanding ....................................... 3,775,667
==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
THE PIETRAFESA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
AND SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
ADDITIONAL
GENERAL LIMITED COMMON PAID-IN RETAINED
PARTNER PARTNERS STOCK CAPITAL EARNINGS TOTAL
----------- ---------- -------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 .......... $ (6) $ (698) $ -- $ -- $ -- $ (704)
YEAR ENDED DECEMBER 31, 1996
Net income ............................ 26 2,631 -- -- -- 2,657
Capital contribution .................. 2 198 -- -- -- 200
---- -------- ---- ------- ------- --------
Balance at December 31, 1996 .......... 22 2,131 -- -- -- 2,153
YEAR ENDED DECEMBER 31, 1997
Net income ............................ 5 551 -- -- -- 556
Balance at December 31, 1997 .......... 27 2,682 -- -- -- 2,709
YEAR ENDED DECEMBER 31, 1998
Net income (loss) ..................... 19 1,936 -- -- (558) 1,397
Distributions to partners for income
taxes ................................ (17) (1,706) -- -- -- (1,723)
Incorporation of the Company .......... (29) (2,912) -- 2,941 -- --
Issuance of 3,775,567 shares of Class B
Common Stock for par value
(Note 12) ............................ -- -- -- -- -- --
---- -------- ---- ------- ------- --------
Balance at December 31, 1998 .......... $ -- $ -- $ -- $ 2,941 $ (558) $ 2,383
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
THE PIETRAFESA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1997 1998
-------------- -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .................................................. $ 2,657 $ 556 $ 1,397
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Extraordinary item ........................................ (3,150) -- --
Depreciation and amortization ............................. 946 802 788
Provision for doubtful accounts ........................... (179) -- 10
Impairment loss on fixed assets ........................... 170 -- --
Loss on fixed asset disposals ............................. 24 149 16
Deferred taxes ............................................ -- -- 503
Changes in operating assets and liabilities:
Accounts receivable ...................................... (392) 1,549 (3,911)
Inventories, prepaid expenses and other assets ........... 3,267 1,533 (4,847)
Accounts payable and accrued expenses .................... (898) (1,533) 4,649
-------- -------- ---------
Net cash provided by (used in) operating activities ......... 2,445 3,056 (1,395)
INVESTING ACTIVITIES
Purchases of property, plant, and equipment ................. (105) (59) (592)
Proceeds from disposal of fixed assets ...................... 524 2,244 29
-------- -------- ---------
Net cash provided by (used in) investing activities ......... 419 2,185 (563)
FINANCING ACTIVITIES
Borrowings under credit line ................................ 51,854 39,981 46,639
Repayments of credit line ................................... (52,419) (42,516) (43,348)
Proceeds from long-term debt ................................ 2,530 -- 1,115
Principal payments on long-term debt ........................ (4,581) (2,666) (596)
Payment of debt issuance costs .............................. (250) (41) (77)
Principal payments under capital lease obligations .......... -- -- (41)
Distributions payable to partners for income taxes .......... -- -- (1,723)
-------- -------- ---------
Net cash (used in) provided by financing activities ......... (2,866) (5,242) 1,969
-------- -------- ---------
(Decrease) increase in cash ................................. (2) (1) 11
Cash at beginning of period ................................. 6 4 3
======== ======== =========
Cash at end of period ....................................... $ 4 $ 3 $ 14
======== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
THE PIETRAFESA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
1. THE COMPANY AND BASIS OF PRESENTATION
The Pietrafesa Corporation (the "Company") was formed on October 1, 1998
through the issuance of 3,775,667 shares of Class B common stock in exchange for
the net assets of MS Pietrafesa, L.P. (the "Partnership"). The exchange was
recorded at the Partnership's historical cost basis as both entities were under
common control.
The accompanying financial statements include the financial position and
operations of the Partnership for 1996 and 1997 and the Company and the
Partnership combined for 1998.
The Company operates principally in one business segment, the sourcing of
proprietary brands of men's and women's clothing for major domestic retailers.
Sourced products are manufactured by the Company and third parties.
Approximately 77% of the Company's work force is represented under collective
bargaining agreements. The Company also has one retail outlet whose operations
are not significant.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany transactions are
eliminated.
REVENUE RECOGNITION
Revenue is recognized when products are shipped or services have been
provided and is net of returns and allowances.
CASH
Cash consists of demand deposits at banks.
INVENTORIES
Inventories are stated at the lower of standard costs (which approximate
cost determined on a first in, first out basis) or market.
PROPERTY, PLANT, AND EQUIPMENT
Depreciation is provided using the straight line method over the estimated
useful lives of the respective assets (buildings and improvements -- 25 years;
machinery and equipment -- 15 years; and furniture and fixtures -- 10 years).
The Company recorded losses on disposals of machinery and equipment in the
normal course of business of $24, $149 and $16 as of December 31, 1996, 1997 and
1998, respectively. These losses are recorded in the selling, general and
administrative expenses caption of the income statement.
LONG-LIVED ASSETS
The Company accounts for long-lived assets pursuant to Statement of
Financial Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment
losses to be recorded on long-lived assets used in operations when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Management reviews long-lived assets and the related intangible
assets for impairment whenever events or changes in circumstances indicate the
assets may be
F-8
<PAGE>
THE PIETRAFESA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
impaired. When such circumstances exist, the Company estimates expected future
cash flows to determine whether an asset is impaired by grouping assets at the
lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets.
The Company recorded an impairment loss of $170 as of December 31, 1996.
The impairment loss of $170 relates to the reduction of the book value to net
realizable value of equipment which was to be disposed of at the Sturgis,
Kentucky facility. The net realizable value was determined based on estimated
selling price minus the costs to sell. The property was sold in 1997.
OTHER ASSETS
Other assets include debt issuance costs which are amortized over the
terms of the related debt using the interest method.
INCOME TAXES AND TAX DISTRIBUTIONS
Prior to October 1, 1998, the Company operated as a limited partnership
and income or loss of the Partnership was included in the taxable income of the
individual partners. The Company is required under the Partnership Agreement to
distribute cash to the partners which approximates the tax on taxable income
reported by the Partnership through September 30, 1998. The Company has accrued
a liability of $1,516 related to distributions for taxable income for the nine
month period ended September 30, 1998.
As of October 1, 1998, effective with the net asset transfer discussed in
Note 1, the Company is subject to federal and state corporate income taxes. The
Company accounts for income taxes using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred tax assets and liabilities are determined
based on differences between the tax basis of assets and liabilities and are
measured using currently enacted tax laws and rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions.
Those estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates and such differences could be
material.
PRO FORMA NET INCOME AND EARNINGS PER SHARE
Pro forma net income and earnings per share for 1998 reflect adjustments
for federal and state income taxes as if the Company were subject to these taxes
for the entire year. The weighted average number of shares issued and
outstanding includes the 3,775,567 shares of Class B Common Stock issued
subsequent to year for the nominal consideration of par value (see Note 12).
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
3. BORROWING ARRANGEMENTS
Long-term debt consisted of the following:
F-9
<PAGE>
THE PIETRAFESA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Revolving credit agreements due June 30, 2001 ............................... $6,147 $ 9,439
Equipment notes with monthly principal and interest payments ranging from $7
to $13 through December of 2002 ............................................ 762 612
Capital equipment leases with monthly principal and interest payments ranging
from $1 to $4 through July 2002 ............................................ 107 234
Term notes with monthly principal payments of $16 and $10 through June 2005. 2,134 2,803
------ -------
9,150 13,088
Less current maturities ..................................................... 487 527
------ -------
$8,663 $12,561
====== =======
</TABLE>
Substantially all of the Company's debt bears interest at variable rates
which range between prime plus .5% and prime plus 1% (8.25% and 8.75% at
December 31, 1998).
Under terms of a revolving credit agreement with a bank, the Company may
borrow up to $12,500, limited by levels of accounts receivable and inventory.
The unused credit line totaled approximately $2,311 at December 31, 1998.
Interest on the line is based on prime plus .5% or LIBOR plus 2.75% (8.25% at
December 31, 1998). The weighted average borrowing rate on the credit lines was
9.91% and 9.26% at December 31, 1997 and 1998, respectively. During the year
ended December 31, 1996, 1997 and 1998, the highest outstanding balance on the
credit line was $12,283, $10,787 and $11,782, respectively, and the average
outstanding balance was $10,344, $8,338 and $8,701, respectively. The credit
line is subject to renewal in 2001 and has been classified as long-term.
On June 19, 1998, the Company refinanced certain mortgage, equipment and
term loans with principal balances of $2,134 at December 31, 1997. The
refinanced loans are payable over 5 and 7 years with interest ranging from prime
plus 1% to prime plus .75%.
The Company's borrowing arrangements include certain restrictive covenants
which limit, among other things, additional indebtedness, capital expenditures
and dividends, and require that the Company maintain specified levels of working
capital, tangible net worth, debt-to-equity, debt service coverage and net
income. Amounts outstanding under these arrangements, including the working
capital facility, are secured by substantially all of the Company's assets.
Aggregate principal payments on long-term debt for each of the next five
years and thereafter are as follows as of December 31, 1998:
1999 ............... $ 527
2000 ............... 539
2001 ............... 9,987
2002 ............... 497
2003 ............... 660
Thereafter ......... 878
-------
$13,088
=======
F-10
<PAGE>
THE PIETRAFESA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
3. BORROWING ARRANGEMENTS -- (CONTINUED)
As further discussed in Note 9, certain subordinated indebtedness were
forgiven in June 1996.
Interest paid for the years ended December 31, 1996, 1997 and 1998
amounted to $1,630, $1,205 and $1,156, respectively.
The Company acquired $109 and $169 in assets under capital lease
obligations in 1997 and 1998, respectively.
4. SHAREHOLDER'S EQUITY
The Company is authorized to issue two classes of common stock designated
Class A and Class B. The Class B elects 75% of the Board of Directors, has
voting rights on all corporate matters and is convertible, at any time, at the
option of the holder, into an equal number of Class A shares. The shares of
Class B common stock are also subject to mandatory conversion into an equal
number of Class A common stock at the option of the majority of the holder or
holders of Class B common stock. In connection with the incorporation of the
Company, 3,775,667 Class B shares were issued to the Partnership. Except in
limited instances, Class A shares will be non-voting except as to the election
of 25% of the Board of Directors. No Class A shares have been issued.
The Company is also authorized to issue up to, in one or more series,
5,000,000 shares of preferred stock upon the consent of the holders of a
majority of the outstanding shares of Class B common stock. The Board is
authorized to fix the rights, preferences, privileges and restrictions of each
series, without further vote or action by the stockholders. The preferred stock
may be granted voting powers provided that the Class B common stock will always
have the right to elect a majority of the Board and the preferred stock will be
entitled to vote with the Class A common stock as a class on any matters on
which holders of Class A common stock are entitled to vote.
5. RETIREMENT PLANS
The Company sponsors contributory defined contribution plans for employees
not covered by multi-employer plans. Employer contributions to the plans range
from no contribution to 50% of each participant's elective deferral for the plan
year, subject to certain restrictions as defined in the Plan documents.
Contributions for the years ended December 31, 1996, 1997 and 1998 were $97,
$125 and $141, respectively. The Company also contributes to two multi-employer
pension funds which cover certain union employees under a collective bargaining
agreement. Contributions for the years ended December 31, 1996, 1997, and 1998
were approximately $323, $173 and $156, respectively. Provisions of the
Multi-Employer Pension Plan Amendments Act of 1980 require participating
employers to assume a proportionate share of a multi-employer plan's unfunded
vested benefit in the event of withdrawal from or termination of the Plan.
6. RELATED PARTY TRANSACTIONS
The Company leases a retail store facility from a related party under a
ten-year lease ending June 30, 2000 requiring rental payments totaling $146 per
year. A portion of this facility is subleased and provides minimum rental income
of $30 per year.
Beginning in 1998, the Company sources certain customer orders through
SourceOne, L.L.C, an affiliate of the General Partner of the Partnership.
SourceOne has no significant assets or liabilities and neither the Company nor
its employees receive any compensation from SourceOne. The Company purchased
approximately $10,614 of services from SourceOne during 1998 and has a net
payable to SourceOne of $591 at December 31, 1998.
F-11
<PAGE>
THE PIETRAFESA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
6. RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Company has an agreement with an affiliate of the Partnership whereby
the affiliate would provide financial advisory and strategic consulting
services. The agreement contains a monthly retainer fee of $25 per month. This
agreement may be terminated annually by either party upon 30 days' notice. The
affiliate provided certain investment banking and financial analyst services to
the Company during 1998. Total expenses for these services were $192. Since no
other services were provided to the Company during 1996, 1997 and 1998, the
affiliate agreed to amend the agreement to eliminate the monthly retainer
payment in 1996, 1997 and 1998. Accordingly, no expense has been recognized in
the financial statements related to the monthly retainer payments.
The Company reimburses on a per-flight basis certain operating expenses of
an aircraft owned by a corporation owned by the Company's President and Chief
Executive Officer. Payments amounted to $225, $223 and $454 for the years ended
December 31, 1996, 1997 and 1998, respectively.
7. REVENUE AND SUPPLIER CONCENTRATIONS
The Company grants credit without collateral to customers and performs
periodic credit evaluations of their financial condition. The Company's products
are primarily sold to specialty retail stores. The Company makes substantial
sales to a relatively few, large customers. The following table presents the
percentage of net sales concentrated with certain customers:
FOR THE
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
Customer A ......... 27% 22% 26%
Customer B ......... 24 24 16
Customer C ......... 15 22 9
Customer D ......... -- -- 25
-- -- --
66% 68% 76%
== == ==
In April 1998, the Company entered into a five-year sourcing agreement
with a domestic clothing retailer and became the retailer's primary source for
tailored clothing. The Company's affiliate, SourceOne, manages the retailer's
manufacturing operations. The Company will receive an annual management fee for
the first three years of the agreement and purchased certain inventory owned by
the retailer at market value ($2,140), payable in installments. The agreement
requires the retailer to purchase a minimum number of units during the 5-year
term of the agreement.
The Company purchases a significant volume of fabric from two suppliers.
In 1996, 1997 and 1998, 51%, 54% and 62% of total purchases were purchased from
these two suppliers, respectively.
8. INCOME TAXES
On October 1, 1998, the Company recorded deferred income taxes due to its
incorporation. The recording of the deferred tax liability at October 1, 1998
resulted in additional tax expense of $516 in 1998.
F-12
<PAGE>
THE PIETRAFESA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
8. INCOME TAXES -- (CONTINUED)
The provision for income taxes is as follows:
FOR THE
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
------ ------ -----
Current
Federal .............................................. $-- $-- $ 8
State ................................................ -- -- 3
--- --- ---
Total current ......................................... -- -- 11
=== === ===
FOR THE
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
------ ------ -------
Balance brought forward ............................. $ -- $ -- $ 11
Deferred:
Federal ............................................ -- -- 428
State .............................................. -- -- 75
---- ---- ----
Total deferred ...................................... -- -- 503
---- ---- ----
Total tax expense ................................... $ -- $ -- $514
==== ==== ====
The difference between the United States federal statutory income tax rate
and the Company's effective tax rate were as follows:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
U.S. federal statutory rate ...................................... 34.0% 34.0% 34.0%
Income attributed to period the Company was a partnership
that is not subject to federal or state corporate income tax (34.0%) (34.0%) (34.0%)
Deferred taxes related to the change to a taxable entity ......... 27.0%
----- ----- -----
Effective tax rate ............................................... 0.0% 0.0% 27.0%
===== ===== =====
</TABLE>
Deferred tax assets and liabilities are comprised of the following:
AS OF
DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ --------
Deferred tax assets: ......................
Bad debt and chargeback reserves ......... $-- $-- $ 131
Inventory related reserves ............... -- -- 292
Employee benefits ........................ -- -- 236
Other .................................... -- -- 279
--- --- ------
Total deferred tax assets ................. -- -- 938
Deferred tax liability:
Depreciation ............................. -- -- 1,441
--- --- ------
Net deferred tax liability ............... $-- $-- $ 503
=== === ======
F-13
<PAGE>
THE PIETRAFESA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
9. FORGIVENESS OF DEBT
In June 1996, the Company completed a transaction under which subordinated
notes with an outstanding principal and interest balance of $3,350 were forgiven
in exchange for a greater partnership interest in MSJP, L.P., a limited partner
of the Partnership. The value of the partnership interest exchanged, $200, has
been treated as a capital contribution, with the remainder recorded as an
extraordinary item in the statement of operations.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's short-term borrowings and variable
rate long-term debt approximate their fair value. The difference between
carrying value and fair value on fixed rate long-term debt is not material.
11. PUBLIC OFFERING COSTS
In 1998 the Company incurred costs related to a public offering that was
delayed due to adverse market conditions. Costs amounting to $823 related to
this offering have been charged off due to the extended delay of the offering.
12. ACQUISITIONS, PUBLIC OFFERING AND STOCK OPTION PLAN
On April 15, 1999, the Company acquired the assets and assumed certain
liabilities of Diversified Apparel Group, Ltd. for $3,500 in a transaction to be
accounted for as a purchase. Diversified Apparel merchandises and sources
apparel, including lower to mid-priced suits and dress shirts, to value-priced
apparel retailers. On April 15, 1999, the Company acquired all of the common
stock of Global Sourcing Network, Ltd. for $3,700 in a transaction to be
accounted for as purchase. Global Sourcing Network designs and imports men's
suits. Concurrent with the public offering, the Company will also acquire the
assets and assume certain liabilities of Components by John McCoy, Inc. for
$11,100 in a transaction to be accounted for as a purchase. Components
merchandises and sources tailored clothing, as well as sportswear, dress shirts,
neckwear, topcoats and casual slacks in Italy.
The Company has entered an agreement to acquire the assets and assume
certain liabilities of Windsong, Inc. for $43,300 in a transaction to be
accounted for as a purchase. Windsong is a supplier of designer and private
label sportswear to department store, specialty store and mass merchandising
chains.
The total purchase price of the acquired businesses is based upon an
estimate of the liabilities to be assumed of $1,955, $1,121, $6,021 and $16,862
for Diversified Apparel, Global Sourcing Network, Components and Windsong,
respectively. The Company does not believe the actual amount of liabilities
assumed will be materially different from the estimated amount. The portion of
the consideration assigned to goodwill in each transaction will represent the
excess of the cost over the estimated fair value of the net assets acquired. The
Company will amortize goodwill using the straight line method over a period
ranging from 10 to 20 years.
In each of the purchase agreements, there are specific contingent payments
based upon achieving specified earning levels. These payments will be recognized
as an adjustment to the purchase price when made.
In connection with the offering, on July 15, 1999 the Company issued
3,775,567 additional shares of Class B common stock for the nominal
consideration of the stock's par value. Shareholder's equity, earnings per share
and other share information has been restated to reflect the additional shares
of Class B Common Stock. Immediately prior to the closing of the offering, the
Company may adjust
F-14
<PAGE>
THE PIETRAFESA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
through redemption or additional issuance of shares, the number of shares of
Class B common stock outstanding to represent the percentage of the Company that
will be owned by the Company's sole shareholder after the offering.
12. ACQUISITIONS, PUBLIC OFFERING AND STOCK OPTION PLAN - (CONTINUED)
On July 15, 1999, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of Class A Common Stock from 5,000,000
to 12,000,000 shares and to change the par value of the Class B Common Stock to
$.0002, each of which has been reflected on the December 31, 1998 balance sheet.
The Company intends to establish a Stock Option Plan for key employees and
directors prior to the closing of the offering. Under the Stock Option Plan,
awards of options to purchase shares of Class A Common Stock may be made to the
Company's key employees and directors, including employees who are also the
Company's officers or directors. The Company may award options to purchase a
number of shares equal to 10% of our outstanding capital stock immediately
following the offering. Options awarded under the Stock Option Plan may be
either "incentive stock options," as that term is defined in Section 422 of the
Internal Revenue Code of 1986, as amended, or nonqualified stock options.
The Stock Option Plan will be administered by the Company's Compensation
Committee. The Compensation Committee will have the authority to establish the
terms and conditions of the options in any manner not inconsistent with the
terms of the Stock Option Plan, adopt any rules it considers appropriate for the
administration of the Stock Option Plan, make interpretations of the Stock
Option Plan that it deems consistent with its provisions, and take any other
action it considers appropriate in connection with the Stock Option Plan. Each
option granted under the Stock Option Plan will be evidenced by an agreement
between the Company and the employee and/or director to whom the option is
granted.
Prior to the adoption of the Stock Option Plan, the Company has made no
provision for the grant of options to purchase equity interests in the Company.
At the time of the offering, no options will have been granted by the
Company to their executive officers, employees or directors under the Stock
Option Plan.
F-15
<PAGE>
THE PIETRAFESA CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
1999 1998
------------ -------------
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets
Cash .............................................................. $ 13 $ 14
Accounts receivable, net .......................................... 8,488 7,967
Inventories:
Finished goods .................................................. 4,862 4,273
Work-in-process ................................................. 3,224 3,865
Raw materials ................................................... 4,596 4,979
------- --------
12,682 13,117
Prepaid expenses .................................................. 375 193
Deferred Taxes .................................................... 938 938
------- --------
Total current assets ............................................... 22,496 22,229
Property, plant, and equipment, at cost:
Land .............................................................. 297 297
Buildings and improvements ........................................ 3,216 3,215
Machinery and equipment ........................................... 6,883 6,485
Furniture and fixtures ............................................ 709 708
Construction in progress .......................................... -- 290
------- --------
11,105 10,995
Accumulated depreciation .......................................... 4,582 4,409
------- --------
6,523 6,586
Other assets ....................................................... 925 560
------- --------
$29,944 $ 29,375
======= ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable .................................................. $ 7,166 $ 7,893
Other current liabilities ......................................... 2,767 3,054
Tax distribution payable .......................................... 1,516 1,516
Current maturities of long-term debt .............................. 527 527
------- --------
Total current liabilities .......................................... 11,976 12,990
Deferred tax liability ............................................. 1,441 1,441
Long-term debt, net of current maturities .......................... 13,054 12,561
Shareholder's equity:
Preferred stock, $.001 par value:
Authorized shares -- 5,000,000 ..................................
Issued shares -- none ...........................................
Common stock ......................................................
Authorized shares -- 12,000,000 Class A, $.001 par value.........
-- 10,000,000 Class B, $.0002 par value........
Issued shares -- 3,775,667 Class B ..............................
Additional paid-in capital ........................................ 3,191 2,941
Retained earnings (accumulated deficit) ........................... 282 (558)
------- --------
Total shareholder's equity ..................................... 3,473 2,383
------- --------
$29,944 $ 29,375
======= ========
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
THE PIETRAFESA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
------------ -------------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C>
Net revenues ....................................................... $ 17,803 $ 9,503
---------- ----------
Cost of sales ...................................................... 14,833 7,028
---------- ----------
Gross profit ....................................................... 2,970 2,475
---------- ----------
Operating expenses:
Selling, general, and administrative expenses ..................... 1,201 1,305
Depreciation and amortization expense ............................. 68 64
---------- ----------
1,269 1,369
---------- ----------
Operating income ................................................... 1,701 1,106
---------- ----------
Interest expense ................................................... 296 253
---------- ----------
Income before taxes ................................................ 1,405 853
---------- ----------
Provision for income taxes ......................................... 565 --
========== ==========
Net income ......................................................... $ 840 $ 853
========== ==========
Basic and diluted earnings per share ............................... $ 0.22
==========
Weighted average number of common shares outstanding ............... 3,775,667
==========
Pro forma net income data:
Income before income taxes, as reported above ..................... $ 853
----------
Pro forma provision for income taxes .............................. 341
----------
Pro forma net income ............................................... $ 512
==========
Pro forma basic and diluted earnings per share ..................... $ 0.14
==========
Pro forma basic and diluted weighted average number of common shares
outstanding ....................................................... 3,775,667
==========
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE>
THE PIETRAFESA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
-------------- -----------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income ....................................................... $ 840 $ 853
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization .................................. 185 202
Loss on sale of fixed assets ................................... -- 12
Changes in operating assets and liabilities:
Accounts receivable ........................................... (521) (269)
Inventories, prepaid expenses and other assets ................ (103) (2,018)
Accounts payable and accrued expenses ......................... (1,014) 1,248
-------- ---------
Net cash (used in) provided by operating activities ............ (613) 28
INVESTING ACTIVITIES
Purchases of property, plant, and equipment ...................... (109) (90)
-------- ---------
Net cash used in investing activities ............................ (109) (90)
FINANCING ACTIVITIES
Borrowings under credit line ..................................... 19,302 10,496
Repayments of credit line ........................................ (18,679) (10,329)
Principal payments on long-term debt ............................. (117) (105)
Payment of debt issuance costs ................................... (20) --
Principal payments under capital lease obligations ............... (15) --
Capital contribution ............................................. 250 --
-------- ---------
Net cash provided by financing activities ........................ 721 62
-------- ---------
(Decrease) increase in cash ...................................... (1) --
Cash at beginning of period ...................................... 14 3
-------- ---------
Cash at end of period ............................................ $ 13 $ 3
======== =========
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
THE PIETRAFESA CORPORATION
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company
and its consolidated subsidiary. All significant intercompany transactions and
balances have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results of
operations for the periods presented have been included.
The consolidated financial data at December 31, 1998 is derived from
audited financial statements at that date but does not include all of the
information and footnotes required by GAAP for complete financial statements and
should be read in conjunction with the audited financial statements and notes
thereto. Interim results are not necessarily indicative of results to be
expected for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statement and
accompanying notes. Actual results could differ from those estimates.
Pro forma net income and earnings per share reflect adjustments for
federal and state income taxes as if the Company were subject to these taxes for
the entire period.
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.
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
F-19
<PAGE>
THE PIETRAFESA CORPORATION
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
MARCH 31, 1999
3. SUBSEQUENT EVENTS -- (CONTINUED)
borrowing under the revolving credit line at any given time is determined
pursuant to a formula based upon the levels of qualifying accounts receivable
and eligible inventory and the credit balance owed to us under our factoring
agreement, subject to the $18.0 million maximum. The term note is payable in 33
monthly payments of $116,667 commencing on May 1, 1999, with a final payment of
all unpaid principal on April 15, 2002. The new credit facility was used to
repay amounts due under the Company's former credit facility which had a balance
of $12.8 million at March 31, 1999. Amounts outstanding under the credit
facility are secured by a senior lien on substantially all of our assets. We
have also pledged all of the stock of our subsidiaries as collateral. Borrowings
under the PNC Bank credit facility bear interest, at our option, based upon
either domestic interest rates or Euro interest rates. Under the revolving
credit line, the domestic interest rate is 0.5% per annum above the higher of
(a) PNC Bank's base commercial lending rate and (b) 0.5% per annum above the Fed
Funds rate. Under the revolving credit line, the Euro interest rate is a
multiple of 2.75% above LIBOR, where the multiple is equal to 1.00 minus the
Federal Reserve's reserve requirement percentage. Under the term note, the
domestic interest rate is 1.00% higher than the domestic interest rate
calculated under the revolving credit line, and the Euro interest rate is 0.75%
higher than the Euro interest rate calculated under the revolving credit line.
Upon consummation of the offering, all of the foregoing domestic and Euro
interest rates shall decrease by 0.25%, provided that we receive net proceeds of
at least $20 million from the offering. The PNC Bank credit facility includes
significant financial and operating covenants, including requirements that we
maintain a minimum fixed charge coverage ratio, prohibitions on our ability to
incur additional indebtedness or to pay dividends and restrictions on our
ability to make capital expenditures and acquisitions. We are currently in
compliance with all covenants under the PNC Bank credit facility. The PNC Bank
credit facility contains customary events of default, including a cross-default
to our obligations under the Diversified Apparel and Global Sourcing Network
acquisition agreements.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND SHAREHOLDER
GLOBAL SOURCING NETWORK, LTD.
We have audited the accompanying balance sheets of GLOBAL SOURCING
NETWORK, LTD. as of December 31, 1998 and 1997, and the related statements of
operations and accumulated deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GLOBAL SOURCING NETWORK,
LTD. as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Pasquale & Bowers LLP
-----------------------------------
Syracuse, New York
February 2, 1999
F-21
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................ $ 153,598 $ 84,348
Accounts receivable .................................. 19,148 338,304
Note receivable, net of allowance of $90,000 ......... 0 0
Due from related party (Note 7) ...................... 0 55,000
Inventories .......................................... 907,500 0
Deferred taxes (Note 5) .............................. 57,600 0
---------- ---------
TOTAL CURRENT ASSETS .............................. 1,137,846 477,652
---------- ---------
PROPERTY AND EQUIPMENT-NET (Note 3) .................. 10,204 10,161
---------- ---------
OTHER ASSETS
Due from shareholder (Note 7) ....................... 0 116,397
Deferred taxes (Note 5) ............................. 0 10,700
Other ............................................... 0 5,142
---------- ---------
0 132,239
---------- ---------
$1,148,050 $ 620,052
========== =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES
Accounts payable .................................... $1,026,265 $ 275,828
Royalty fees payable (Note 4) ....................... 229,085 397,215
---------- ---------
TOTAL CURRENT LIABILITIES ......................... 1,255,350 673,043
---------- ---------
SHAREHOLDER'S DEFICIT
Common stock
No par value
Authorized -- 200 Shares
Issued and outstanding - 50 Shares ................ 1,000 1,000
Accumulated deficit ................................. (108,300) (53,991)
---------- ---------
(107,300) (52,991)
---------- ---------
$1,148,050 $ 620,052
========== =========
</TABLE>
See accompanying notes to the financial statements.
F-22
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
-------------- --------------
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)
=========== ===========
See accompanying notes to the financial statements.
F-23
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ......................................................... $ (54,309) $ (11,834)
---------- ----------
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation ................................................... 4,421 3,574
Bad debts ...................................................... 149,017 102,000
Deferred tax benefit ........................................... (46,900) (10,700)
Offset of amounts due from shareholder ......................... 116,397 0
Changes in assets and liabilities affecting cash flows from
operating activities:
Accounts receivable ......................................... 260,139 (225,022)
Inventories ................................................. (907,500) 0
Other assets ................................................ 5,142 2,134
Accounts payable ............................................ 750,437 267,909
Royalty fees payable ........................................ (168,130) 5,772
Accrued expenses ............................................ 0 (7,474)
---------- ----------
Total adjustments ........................................... 163,023 138,193
---------- ----------
Net cash provided by operating activities ................... 108,714 126,359
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment .............................. (4,464) (6,004)
Advances on note receivable ...................................... (90,000) 0
Repayments on notes receivable ................................... 0 144,000
---------- ----------
Net cash provided by (used in) investing activities ......... (94,464) 137,996
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party ...................................... 55,000 0
Payments to related party ........................................ 0 (313,200)
---------- ----------
Net cash provided by (used in) financing activities ......... 55,000 (313,200)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................ 69,250 (48,845)
CASH AND CASH EQUIVALENTS -- BEGINNING
OF YEAR .................................................... 84,348 133,193
---------- ----------
CASH AND CASH EQUIVALENTS -- END OF YEAR..................... $ 153,598 $ 84,348
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Income taxes: ................................................... $ 680 $ 2,957
========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-24
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. ORGANIZATION
Global Sourcing Network, Ltd. (the "Company") imports men's apparel for
distribution to retail apparel companies located principally throughout the
United States. Substantially all of the Company's sales in 1997 and 1998 are to
one customer.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized when products are received by the customer. The
Company estimates accounts receivable to be fully collectible; accordingly, no
allowance for doubtful accounts is recorded.
Inventories
Inventories are valued at the lower of cost, determined on the specific
identification method, or market.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is provided using
accelerated methods over the estimated useful lives of the related assets.
Income Taxes
Income taxes have been provided using the liability method in accordance
with SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets are the
result primarily of net operating loss carryforwards the Company has available
to offset future taxable income and reserves for bad debts.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
Business Concentrations
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and trade accounts receivable. At times,
balances may be in excess of the FDIC insurance limit. Substantially all of the
Company's sales are to one customer. Essentially all accounts receivable at
December 31, 1998 and 1997 are from this customer.
3. PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated depreciation as of December 31,
1998 and 1997, consists of the following:
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
========= =========
F-25
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
4. ROYALTY FEES PAYABLE
The Company has a license agreement with Emerald Rise Trading, Ltd. (ERT),
for technical knowledge and expertise in association with the sourcing,
production and delivery of apparel. The Company pays royalties equal to 3% of
gross sales. Royalty fees, included in general and administrative expenses, for
the years ended December 31, 1998 and 1997, were approximately $542,000 and
$571,000, respectively.
5. PROVISION FOR INCOME TAXES
Income taxes for the years ended December 31, 1998 and 1997 are summarized
as follows:
1998 1997
------------ -----------
Current:
State and city ............... $ 980 $ 2,681
--------- ---------
Deferred:
Federal ...................... (39,900) (7,400)
State ........................ (7,000) (3,300)
--------- ---------
(46,900) (10,700)
--------- ---------
$ (45,920) $ (8,019)
========= =========
The Company has unused net operating loss carryforwards available to
offset against future taxable income of approximately $54,000 at December 31,
1998, which expire from 2010 through 2018.
The components of the deferred tax asset as of December 31, 1998 and 1997
are as follows:
1998 1997
----------- ----------
Current deferred tax asset:
Net operating losses ............ $ 21,600 $ 0
Allowance for bad debts ......... 36,000 0
-------- -------
$ 57,600 $ 0
======== =======
Noncurrent deferred tax asset:
Net operating losses ............ $ 0 $10,700
======== =======
The reconciliation of the effective income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Federal income tax rate ................................. (34)% (34)%
State taxes, net of federal income tax benefit .......... (6) (6)
Adjustment to deferred tax rate ......................... (6) (0)
---- ----
(46)% (40)%
==== ====
</TABLE>
6. COMMITMENTS
The Company leases office space under an agreement accounted for as an
operating lease expiring July 31, 1999. The Company sublet a portion of its
office to a related entity. Rent expense for the years ended December 31, 1998
and 1997, net of sublease income was approximately $22,000 and $38,000,
respectively.
F-26
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
7. RELATED PARTIES
Due from Related Party
The Company provides management services and subleases office space to
Global Sourcing International (GSI), which is related through family
attribution. Management fees, sublease income and amounts due from GSI are
summarized as follows:
1998 1997
---------- ----------
Management fees ................. $ 36,000 $24,000
Sublease income ................. $ 26,700 $ 4,700
Due from related party .......... $ 0 $55,000
Due from Shareholder
The Company periodically makes advances to its president and sole
shareholder. Approximately $116,000 in advances outstanding at December 31, 1997
has been written off as commission expense in 1998. No interest has been imputed
on outstanding advances.
8. FINANCIAL STATEMENT PRESENTATION
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
F-27
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................ $ 200 $ 153,598
Accounts receivable .................................. 588,962 19,148
Note receivable, net of allowance of $90,000 ......... 0 0
Inventories .......................................... 433,918 907,500
Prepaid expenses ..................................... 81,385 0
Deferred taxes ....................................... 57,600 57,600
---------- ----------
TOTAL CURRENT ASSETS .............................. 1,162,065 1,137,846
---------- ----------
PROPERTY AND EQUIPMENT-NET .............................. 8,859 10,204
---------- ----------
$1,170,924 $1,148,050
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable ..................................... $ 898,573 $1,026,265
Royalty fees payable ................................. 222,660 229,085
---------- ----------
TOTAL CURRENT LIABILITIES ......................... 1,121,233 1,255,350
---------- ----------
SHAREHOLDER'S EQUITY (DEFICIT)
Common stock
No par value
Authorized -- 200 Shares
Issued and outstanding -- 50 Shares .................. 1,000 1,000
RETAINED EARNINGS (ACCUMULATED DEFICIT) ................. 48,691 (108,300)
---------- ----------
49,691 (107,300)
---------- ----------
$1,170,924 $1,148,050
========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-28
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
-------------- -------------
<S> <C> <C>
SALES .............................................. $6,039,754 $5,831,482
COST OF SALES ...................................... 5,622,094 5,371,979
---------- ----------
GROSS PROFIT ....................................... 417,660 459,503
GENERAL AND ADMINISTRATIVE EXPENSES ................ 54,119 45,882
ROYALTIES AND COMMISSIONS .......................... 206,550 277,944
---------- ----------
INCOME FROM OPERATIONS ............................. 156,991 135,677
PROVISION FOR INCOME TAXES ......................... 0 2,288
---------- ----------
NET INCOME ......................................... 156,991 133,389
ACCUMULATED DEFICIT -- BEGINNING OF PERIOD ......... (108,300) (53,792)
---------- ----------
RETAINED EARNINGS -- END OF PERIOD ................. $ 48,691 $ 79,597
---------- ----------
</TABLE>
See accompanying notes to the financial statements.
F-29
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ................................................................. $ 156,991 $ 133,389
---------- ----------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation ............................................................ 1,345 199
Changes in assets and liabilities affecting cash flows from operating
activities:
Accounts receivable .................................................. (569,814) 261
Inventories .......................................................... 473,582 0
Prepaid expenses ..................................................... (81,385) (8,500)
Other assets ......................................................... 0 594
Accounts payable ..................................................... (127,692) (31,298)
Royalty fees payable ................................................. (6,425) (100,000)
---------- ----------
Total adjustments ................................................. (310,389) (138,744)
---------- ----------
Net cash used in operating activities ............................. (153,398) (5,355)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ........................................ 0 (1,758)
Advances to related party .................................................. 0 (18,000)
---------- ----------
Net cash used in investing activities ............................. 0 (19,758)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances to shareholder .................................................... 0 (46,451)
---------- ----------
Net cash used in financing activities ............................. 0 (46,451)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... (153,398) (71,564)
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD .............................. 153,598 84,348
---------- ----------
CASH AND CASH EQUIVALENTS -- END OF PERIOD .................................... $ 200 $ 12,784
========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-30
<PAGE>
GLOBAL SOURCING NETWORK, LTD.
NOTES TO QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results of
operations for the periods presented have been included.
The financial data at December 31, 1998 is derived from audited financial
statements for the year ended December 31, 1998, and should be read in
conjunction with the audited financial statements and notes thereto. Interim
results are not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. SUBSEQUENT EVENTS
On April 15, 1999, the Company was acquired by The Pietrafesa Corporation,
as more fully set forth in the prospectus.
F-31
<PAGE>
To the Board of Directors of
Components by John McCoy, Inc.
6040 Boulevard East -- Apt. 2G
West New York, New Jersey 07093
We have audited the accompanying balance sheets of Components by John
McCoy, Inc., a New Jersey corporation, as of December 31, 1998 and 1997, and the
related statements of income, retained earnings, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Components by John McCoy,
Inc., as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Lawrence B. Goodman & Co., P.A.
Certified Public Accountants
Fair Lawn, New Jersey
March 4, 1999
F-32
<PAGE>
COMPONENTS BY JOHN MCCOY, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
-------------- --------------
CURRENT ASSETS
Cash ................................... $ 45,358 $ 10,335
Accounts Receivable -- net ............. 4,462,931 3,711,586
Inventory .............................. 2,311,177 829,833
Employee Loan .......................... -- 1,600
---------- ----------
Total current assets ................. 6,819,466 4,553,354
---------- ----------
PROPERTY & EQUIPMENT
Furniture and fixtures ................. 3,616 3,616
Leasehold improvements ................. 178,167 --
---------- ----------
181,783 3,616
Less: Accumulated depreciation ......... (1,086) (362)
---------- ----------
Net property and equipment .......... 180,697 3,254
---------- ----------
OTHER ASSETS
Security deposit ....................... 28,032 28,032
---------- ----------
Total Assets ........................ $7,028,195 $4,584,640
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses ...................... $2,459,127 $1,671,965
Loan payable ............................................... 2,462,451 2,070,731
Taxes payable .............................................. 48,868 66,890
---------- ----------
Total current liabilities ................................ 4,970,446 3,809,586
---------- ----------
STOCKHOLDERS' EQUITY
Common Stock, no par value (authorized 200 shares,issued and
outstanding 100 shares) .................................. 300,000 300,000
Retained earnings .......................................... 1,757,749 475,054
Total stockholders' equity ............................... 2,057,749 775,054
---------- ----------
Total Liabilities and Stockholders' Equity .............. $7,028,195 $4,584,640
========== ==========
</TABLE>
See notes to financial statements and auditor's report.
F-33
<PAGE>
COMPONENTS BY JOHN MCCOY, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
REVENUES
Net Sales ............................................ $ 19,993,484 $ 14,916,695
------------ ------------
COST OF SALES
Beginning inventory .................................. 829,833 740,408
Purchases ............................................ 13,854,070 9,733,368
Freight-in ........................................... 681,339 505,506
Customs charges ...................................... 1,953,422 1,606,554
------------ ------------
17,318,664 12,585,836
Less: Ending inventory ............................... 2,311,177 829,833
------------ ------------
Total cost of sales ................................ 15,007,487 11,756,003
------------ ------------
Gross Profit ...................................... 4,985,997 3,160,692
GENERAL AND ADMINISTRATIVE EXPENSES
Advertising .......................................... 177,635 28,740
Bad debt expense ..................................... 253,565 113,856
Commissions .......................................... 588,879 675,204
Insurance ............................................ 27,881 34,130
Interest ............................................. 292,676 241,225
Professional services ................................ 66,404 24,729
Office supplies ...................................... 166,449 155,159
Outside services ..................................... 212,392 131,951
Payroll taxes ........................................ 41,983 24,106
Postage .............................................. 102,386 95,383
Profit sharing ....................................... 45,030 38,517
Rent ................................................. 166,951 110,792
Repairs and maintenance .............................. 521 11,615
Salaries -- Officer .................................. 606,154 180,000
Salaries and wages -- other .......................... 287,532 185,138
Storage .............................................. 108,694 64,092
Telephone and utilities .............................. 50,674 43,077
Travel and entertainment ............................. 134,910 161,884
Miscellaneous ........................................ 69,865 25,141
------------ ------------
Total general and administrative expenses .......... 3,400,581 2,344,739
------------ ------------
Income from operations ................................ 1,585,416 815,953
OTHER INCOME AND (EXPENSES)
State and local income taxes ......................... (157,711) (81,595)
------------ ------------
Net income ............................................ 1,427,705 734,358
Retained earnings -- beginning ........................ 475,054 118,854
Distributions of undistributed taxable income ......... (145,010) (378,158)
------------ ------------
Retained earnings -- ending ........................... $ 1,757,749 $ 475,054
============ ============
</TABLE>
See notes to financial statements and auditor's report.
F-34
<PAGE>
COMPONENTS BY JOHN MCCOY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 1,427,705 $ 734,358
------------- ------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ............................................. 724 362
Changes in assets and liabilities:
Increase in accounts receivable .......................... (751,345) (1,264,338)
Increase in inventory .................................... (1,481,344) (89,425)
Increase in employee loan ................................ -- (1,600)
Increase in security deposit ............................. -- (28,032)
Increase in accounts payable ............................. 787,162 179,879
Increase/(Decrease) in taxes payable ..................... (18,022) 54,923
------------- ------------
Total adjustments ...................................... (1,462,825) (1,148,231)
------------- ------------
Net cash used by operating activities ..................... (35,120) (413,873)
------------- ------------
Cash flows from investing activities:
Purchase of furniture and fixtures ....................... (178,167) (3,616)
------------- ------------
Cash flows from financing activities:
Borrowing on loan payable ................................ 19,494,135 10,120,000
Repayments on loan payable ............................... (19,102,415) (9,359,340)
Distributions to shareholder ............................. (143,410) (382,468)
------------- ------------
Net cash provided by financing activities ................. 248,310 378,192
------------- ------------
Net increase (decrease) in cash ........................... 35,023 (39,297)
Cash -- beginning of year ................................. 10,335 49,632
------------- ------------
Cash -- end of year ....................................... $ 45,358 $ 10,335
============= ============
SUPPLEMENTAL INFORMATION
Interest paid ............................................ $ 292,676 $ 241,225
Taxes paid ............................................... $ 176,133 $ 29,889
</TABLE>
See notes to financial statements and auditor's report.
F-35
<PAGE>
COMPONENTS BY JOHN MCCOY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
DESCRIPTION OF BUSINESS
Components by John McCoy, Inc. is a distributor of men's clothing. The
Company was incorporated and commenced business on January 6, 1995. Its
principal place of business is located at 20 West 55th Street, New York, New
York.
NOTE 1: ACCOUNTING POLICIES
A) ACCOUNTS RECEIVABLE
In the normal course of business, the Company discounts or sells trade
accounts receivable without recourse to Heller Financial, Inc. At December 31,
1998 and 1997, the amount of such receivables was $3,239,184 and $3,162,716,
respectively.
B) UNCOLLECTIBLE ACCOUNTS
Uncollectible accounts receivable are estimated to be 4% for 1998 and 10%
for 1997 of non-factored receivables, based upon management's evaluation of
outstanding accounts receivable. At December 31, 1998 and 1997, uncollectible
accounts are estimated to be $56,779 and $60,986, respectively.
C) INVENTORY
Inventory is stated at the lower of cost determined by the first-in,
first-out method, or market.
D) INCOME TAXES
The shareholders have elected to be treated as a small business
corporation (Sub-Chapter "S" of the Internal Revenue Code) for Federal income
tax purposes as of January 6, 1995. Similarly, the shareholders have elected to
be treated as a small business corporation for New York and New Jersey State
income tax purposes. Accordingly, no provision has been made for Federal income
taxes, a provision has been made for the State income taxes for New York and for
New Jersey at the prevailing rates for 1998. Income will be reported by the
shareholder in his individual income tax returns.
New York City does not recognize Sub-Chapter "S" status, therefore, a tax
provision has been made based upon the income tax rates in effect for 1998.
There are no material differences in the calculation of net income for
book and income tax purposes, therefore, deferred income taxes have not been
recorded.
E) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F) REVENUE RECOGNITION
Revenue is recognized when products are shipped or services have been
provided and is net of returns and allowances.
NOTE 2: LOAN PAYABLE
Loan payable represents a Collection Factoring Agreement with Heller
Financial, Inc., in which they "purchase" the receivables. However, the
transaction is accounted for as a secured loan facility because the underlying
structure is actually that of an asset-based loan. Specifically, the accounts
receivable
F-36
<PAGE>
COMPONENTS BY JOHN MCCOY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
purchase price is funded at a predetermined advance rate, Heller requires a
security interest in all the assets of the Company and pays interest in all of
the assets of the Company and pays interest on the amount advanced and final
risk of collection lies with the Company.
Under the Heller Factoring Agreement, the Company generates accounts
receivable in the ordinary course of business and Heller purchases these
accounts. The net purchase price is the face value of the receivable less
factoring commissions, credits, returns, allowances, chargebacks and other
allowances whose appropriateness is decided solely by Heller. Heller advances
the Company 80% of the gross purchase price and pays the remaining net purchase
price on the due date of each individual account.
In practice, Heller only purchases and advances on approved accounts,
determined by Heller in its sole discretion. Advances are wired to a non-Heller
bank account. Heller provides collection services on approved accounts and
collections on approved accounts are netted against amounts advanced by Heller.
Heller does not advance against, pay when due or otherwise compensate the
Company for the non-approved accounts. Non-approved do not appear on Heller's
ledger. The Company, not Heller, collects receipts for non-approved accounts
into a non-Heller bank account.
Therefore, all of the Company's accounts receivable remain on the balance
sheet and a loan payable equal to the amounts advanced by Heller also appears on
the balance sheet. The Company records and pays monthly an interest expense
computed daily at the rate of 2% over the current prime rate and factor fee
expense. Collection on approved accounts is applied to the open account
receivable and the Heller loan account.
Rates in effect were as follows:
01/01/96 through 03/26/97 ......... 10.25%
03/27/97 through 01/01/98 ......... 10.25%
02/02/98 through 09/29/98 ......... 10.00%
09/30/98 through 10/16/98 ......... 9.75%
10/17/98 through 11/17/98 ......... 9.50%
11/18/98 through 12/31/98 ......... 9.25%
Average outstanding loan balances for the years ended December 31, 1998
and 1997 were approximately $2.6 million and $1.9 million, respectively. The
high outstanding balances for those years were $4.0 million and $3.2 million,
respectively.
NOTE 3: STATE AND LOCAL INCOME TAXES
Taxes consist of the following:
1998 1997
----------- ----------
New York State income taxes ............ $ 15,841 $ 8,183
New Jersey State income taxes .......... 3,182 2,735
New York City income taxes ............. 138,688 70,677
--------- --------
$ 157,711 $ 81,595
========= ========
F-37
<PAGE>
COMPONENTS BY JOHN MCCOY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 4: NET SALES
Net sales consists of the following:
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.
NOTE 6: RENT
The Company leases office space under a five-year operating lease which
expires January 31, 2007. Future minimum rentals are as follows:
1999 ............... $ 126,000
2000 ............... 126,000
2001 ............... 126,000
2002 ............... 132,417
2003 ............... 133,000
Thereafter ......... 410,083
----------
$1,053,500
==========
NOTE 7: PROFIT SHARING PLAN
The Company has a defined contribution Profit-Sharing Plan beginning
January 1, 1997, covering substantially all of its employees. Employees qualify
based on age and hours of service. The amount of the contribution is determined
by the Board of Directors. The profit sharing plan contributions for 1998 and
1997 were $45,030 and $38,517, respectively.
F-38
<PAGE>
COMPONENTS BY JOHN MCCOY, INC.
BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ........................................................ $ 187 $ 45
Accounts Receivable -- net .................................. 5,199 4,463
Inventory ................................................... 2,454 2,311
------ ------
Total current assets ...................................... 7,840 6,819
------ ------
Net property and equipment .................................. 312 181
Other assets ................................................ 508 28
------ ------
TOTAL ASSETS ............................................. $8,660 $7,028
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................ $2,494 $2,459
Loan payable ................................................ 3,369 2,462
Other current liabilities ................................... 158 49
------ ------
Total current liabilities ................................. 6,021 4,970
------ ------
STOCKHOLDERS' EQUITY
Common Stock, no par value (authorized 200 shares, issued and
outstanding 100 shares) ................................... 300 300
Retained earnings ........................................... 2,339 1,758
------ ------
Total stockholders' equity ................................ 2,639 2,058
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............... $8,660 $7,028
====== ======
</TABLE>
See notes to financial statements.
F-39
<PAGE>
COMPONENTS BY JOHN MCCOY, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
-------------- -------------
<S> <C> <C>
Net Sales ............................................ $5,384 $4,868
Cost of Sales ........................................ 4,123 3,596
------ ------
Gross Profit ........................................ 1,261 1,272
Selling, general and administrative expenses ......... 604 509
------ ------
Income from operations .............................. 657 763
Interest expense ..................................... 76 67
------ ------
Income before provision for income taxes ............ 581 696
Provision for income taxes ........................... -- 16
------ ------
Net income .......................................... 581 680
Retained earnings
Beginning of period ................................. 1,758 475
Shareholders distributions .......................... -- (50)
------ ------
Retained earnings -- end of period .................. $2,339 $1,105
====== ======
</TABLE>
See notes to financial statements.
F-40
<PAGE>
COMPONENTS BY JOHN MCCOY, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 581 $ 680
Adjustments to reconcile net income to net cash provided by
operating activities:
Accounts receivable ..................................... (736) (228)
Inventory and prepaid assets ............................ (143) (579)
Accounts payable and accrued expenses ................... 144 15
-------- --------
Net cash used by operating activities .................. (154) (112)
Cash flows from investing activities:
Purchases of furniture and fixtures ....................... (131) --
Cash flows from financing activities:
Borrowing on loan payable ................................. 5,330 4,000
Repayments on loan payable ................................ (4,423) (3,809)
Distributions to shareholder .............................. (480) (50)
-------- --------
Net cash provided by financing activities .................. 427 141
Net increase in cash ....................................... 142 29
Cash -- beginning of period ................................ 45 10
-------- --------
Cash -- end of period ...................................... $ 187 $ 39
======== ========
</TABLE>
See notes to financial statements.
F-41
<PAGE>
COMPONENTS BY JOHN MCCOY, INC.
NOTES TO QUARTERLY FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
1. ORGANIZATION AND BASIS OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its consolidated subsidiary. All significant inter-company transactions and
balance have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results of
operations for the periods presented have been included.
The financial data at December 31, 1998 is derived from audited financial
statements for the year ended December 31, 1998, and should be read in
conjunction with the audited financial statements and notes thereto. Interim
results are not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. SUBSEQUENT EVENTS
The Company has entered a definitive agreement to be purchased by The
Pietrafesa Corporation as more fully described in this prospectus.
F-42
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Stockholders
Windsong, Inc.
We have audited the accompanying balance sheets of Windsong, Inc. as of
December 31, 1998 and 1997, and the related statements of income and retained
earnings (accumulated deficit) and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Windsong, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Weissbarth, Altman & Michaelson LLP
New York, New York
May 7, 1999
F-43
<PAGE>
WINDSONG, INC.
BALANCE SHEETS DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Current assets
Cash (Note 2) ................................................. $ 126,179 $ 700
Accounts receivable (Note 1,2,3) .............................. 5,643,217 5,573,629
Insurance claim receivable .................................... -- 37,229
Inventories (Note 1,2,3,5,14) ................................. 6,584,546 5,308,870
Other (Note 6) ................................................ 729,941 223,748
------------ ------------
Total current assets ........................................ 13,083,883 11,144,176
------------ ------------
Property and equipment, net (Note 2,7,10) ...................... 565,902 256,621
------------ ------------
Other assets
Note receivable-officer/stockholder (Note 4,6,15) ............. -- 1,036,436
Loan receivable-affiliated company (Note 8) ................... 437,429 --
Organization costs, net of accumulated amortization of $-0- and
$814 (Note 2)................................................ -- 623
Security deposits and other ................................... 71,268 82,329
------------ ------------
Total other assets .......................................... 508,697 1,119,388
------------ ------------
$ 14,158,482 $ 12,520,185
============ ============
</TABLE>
See accompanying notes to financial statements
F-44
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Current liabilities
Current portion of obligations under capital leases (Note 2,7,10,15) $ 124,685 $ --
Accounts payable and accrued expenses (Note 1,2,9,11,13,14,15) . 4,143,299 7,517,193
Advances from factor (Note 3,15) ................................... 7,301,274 3,082,608
Due to affiliated company .......................................... -- 118,043
State income taxes payable (Note 2) ................................ 25,341 32,090
------------ ------------
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 1,3,10,11,12,13,14,16)
Stockholders' equity
Common stock-no par value --
- Class A (voting) -- 1,000 shares authorized,200 shares issued and
outstanding ...................................................... 200 200
- Class B (non-voting) -- 1,000 shares authorized, 800 shares issued
and outstanding .................................................. 800 800
Additional paid-in capital .......................................... 6,000 6,000
Retained earnings ................................................... 941,462 369,782
------------ ------------
Total stockholders' equity ....................................... 948,462 376,782
============ ============
$ 14,158,482 $ 12,520,185
============ ============
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
WINDSONG, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Net sales ......................................... $ 63,630,094 $ 30,330,207 $ 6,202,405
Cost of goods sold ................................ 49,884,050 23,861,570 5,444,006
------------ ------------ -----------
Gross profit ...................................... 13,746,044 6,468,637 758,399
Selling and distribution expenses ................. 4,527,731 1,858,492 400,253
General and administrative expenses ............... 6,546,268 3,883,081 340,978
------------ ------------ -----------
Income from operations ............................ 2,672,045 727,064 17,168
Interest expense, net ............................. 1,661,405 317,214 13,937
Income before provision for income taxes .......... 1,010,640 409,850 3,231
Provision for income taxes ........................ 46,000 35,000 2,500
------------ ------------ -----------
Net income ........................................ 964,640 374,850 731
Retained earning (accumulated deficit) -- beginning
of year .......................................... 369,782 (5,068) (5,799)
Distributions to stockholders ..................... (392,960) -- --
------------ ------------ -----------
Retained earnings -- end of year .................. $ 941,462 $ 369,782 $ (5,068)
============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
WINDSONG, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income ....................................... $ 964,640 $ 374,850 $ 731
------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities ...............
Depreciation and amortization .................. 156,882 45,629 24,895
Effect of straight-lining minimum lease
payments ...................................... (5,676) 13,901 --
Loss on disposal of property and equipment...... -- 15,294 --
Net basis adjustment of property and
equipment ..................................... (3,831) -- --
Provision for doubtful accounts ................ 20,000 -- --
Computer training expense incurred in
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) (1,352,757)
Insurance claim receivable ....................... 37,229 10,667 (47,796)
Inventories ...................................... (1,275,676) (3,122,119) (1,202,185)
Other current assets ............................. (506,193) (138,274) (84,674)
Security deposits and other ...................... 11,061 (70,244) (10,067)
Accounts payable and accrued expenses ............ (3,373,894) 5,011,137 2,905,955
Advances from factor ............................. 4,218,666 2,640,551 442,057
State income taxes payable ....................... (6,749) 32,090 --
------------ ------------ ------------
Total adjustments .............................. 286,507 217,760 675,428
------------ ------------ ------------
Net cash provided by operating activities, carried
forward ........................................ $ 1,251,147 $ 592,610 $ 676,159
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
WINDSONG, INC.
STATEMENTS OF CASH FLOWS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------ ------------
<S> <C> <C> <C>
Net cash provided by operating activities, brought forward .......... $ 1,251,147 $ 592,610 $ 676,159
Cash flows from investing activities
Increase in note receivable officer/stockholder, net ............... -- (74,321) --
Payments to affiliated company ..................................... (555,472) (284,904) (686,127)
Payments for property and equipment ................................ (101,416) (232,785) (54,293)
Payments for organization costs .................................... -- -- (1,000)
----------- ---------- ----------
Net cash used in investing activities ........................... (656,888) (592,010) (741,420)
Cash flows from financing activities
Distributions to shareholders ...................................... (392,960) -- --
Payments on obligations under capital lease,net of certain
adjustments by lessor ............................................ (75,820) -- --
----------- ---------- ----------
Net cash used in financing activities ........................... (468,780) -- --
----------- ---------- ----------
Net increase in cash (decrease in cash) ............................. 125,479 600 (65,261)
Cash -- beginning of year ........................................... 700 100 65,361
----------- ---------- ----------
Cash -- end of year ................................................. $ 126,179 $ 700 $ 100
=========== ========== ==========
Supplemental disclosure of cash flow information:
Cash was paid for
Income taxes ..................................................... $ 64,745 $ 4,901 $ 750
=========== ========== ==========
Interest, net of interest received from factor ................... $ 1,638,830 $ 381,530 $ 15,810
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
WINDSONG, INC.
STATEMENT OF CASH FLOWS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ -------------- ------------
<S> <C> <C> <C>
Supplemental schedules of non-cash operating,
investing and financing activities:
Acquisition of property and equipment and
$67,840 in training under capital leases, net of
certain adjustments by lessor .................... $ 428,133 $ -- $ --
========= =========== =========
Reclassification of amount from property
andequipment, 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 $ --
========= =========== =========
Inventories acquired for accounts payable --
subordinated ..................................... $ -- $ -- $ 979,669
Property and equipment acquired for decrease in
due from affiliated company ...................... $ -- $ -- $ 2,777
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
Windsong, Inc. (the Company) was incorporated on August 3, 1995 and
commenced substantive operations as of January 1, 1996 and approximately $3.3
million of the Company's sales occurred in the fourth quarter of 1996.
Windsong, Inc. is engaged in developing, designing and sourcing
private-label knit and woven shirts for distribution to a relatively small
number of retail customers located throughout the United States. Additionally,
the Company has entered into a long-term licensing agreement with a certain
designer to source and distribute knit and woven shirts and sweaters throughout
the United States (Note 13).
During 1996, the Company's stockholder and another individual who
controlled the Company's major supplier had an agreement to provide financing to
the Company (Note 9). During 1996, in connection with that agreement, (a) 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 were 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 purchase shares of the Company's common stock and, accordingly,
was previously identified as a Company stockholder; however, that subscription
expired prior to December 31, 1996, whereupon those subscribed shares were
issued, instead, to the Company's sole stockholder.
During the last quarter of 1996 the affiliated company substantially
terminated its operations. The Company assumed none of its affiliates customers
and did not import/distribute the same products as the affiliate.
During 1997, the Company:
a. assumed (1) sponsorship of a defined benefit pension plan that was
previously sponsored by the affiliated company (Note 11) and (2) the
affiliated company's remaining obligation under non-cancellable
leases for office and warehouse space (Note 10)
b. became totally responsible for certain expenses that had been
previously allocated between the Company and the affiliated company.
c. exchanged its intercompany receivable for assets of the affiliate,
at their net book value including property and equipment consisting
of approximately $50,000 and $2,000 for automobiles and furniture
and equipment, respectively.
During 1998 and 1997, a substantial portion of the Company's inventories
was acquired from a relatively small number of suppliers.
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.
F-50
<PAGE>
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 1 -- DESCRIPTION OF BUSINESS - (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.
The Company entered into non-cancellable capital leases for computer
software and equipment, as well as office and warehouse equipment. Under the
terms of the leases, (a) the lessors retain a security interest in the leased
assets and (b) the Company is obligated for the payment of taxes, insurance and
maintenance costs, which are included in the results of operations.
The asset values related to capital leases are included in property and
equipment at the present value of the minimum lease payments at inception plus
any additional costs incurred or fair value, if lower. The capital lease
obligations are reflected as part of current and non-current liabilities, and
the associated interest is charged to expense over the related lease terms.
e) Organization costs and amortization
Organization costs were originally stated at cost and amortized over five
years, utilizing the straight-line method. At December 31, 1998, these costs
have been fully amortized. Amortization, included in the results of operations,
amounted to $743, $407 and $407 for 1998, 1997 and 1996, respectively.
f) Deferred rent expense
Deferred rent expense represents the cumulative effect of straight-lining
minimum lease payments which, for financial statement purposes, are required to
be recognized as rent expense on a straight-line basis over the lease term.
g) Advertising costs
The costs of cooperative advertising are charged to expense when related
sales are recognized. All other costs of advertising are charged to expense as
incurred. Total advertising costs amounted to approximately $372,000, $126,000
and $37,500 for 1998, 1997 and 1996, respectively, of which approximately
$238,000, $62,000 and $0 respectively, related to cooperative advertising.
h) Income taxes
The Company is treated as an S Corporation for federal income tax
purposes. As an S Corporation, the taxable income or loss and tax credits of the
Company are allocated to its stockholder. State income taxes are provided to the
extent that S Corporation status is not recognized for such purposes.
i) Reclassifications
Certain items included in the 1997 and 1996 financial statements, as
originally issued, have been reclassified to conform to the 1998 presentation.
F-51
<PAGE>
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED )
NOTE 3 -- ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
1998 1997
-------------- --------------
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
=========== ===========
(a) The Company has an arrangement with a commercial factor that includes
the terms and conditions discussed below.
o The Company receives advances from the factor in accordance
with a formula that is based upon --
(1) the "net face amount", as defined, of assigned
receivables (less a factoring commission) plus
(2) eligible inventories, as defined, less
(3) certain amounts held by the factor for letters of credit
opened and liabilities owed to the factor.
o The aforementioned advances are repaid as the assigned
receivables are collected.
o Interest is charged or credited on outstanding balances due to
or from the factor at a specified percentage (the percentage)
above the prime rate of a certain bank, as quoted from time to
time. The percentage was 2% through September 30, 1997.
Effective October 1, 1997, the percentage was 1.5% (decreased
to .5% as of October 1, 1998), except for "overadvances", in
which case the percentage was 4.5% (decreased to 1% as of
October 1, 1998). The "overadvances" percentage was 5% above
the prime rate of a certain bank through September 30, 1997.
o Factor commissions are charged in an amount equal to a
specified percentage of assigned receivables. That percentage
was 1% through September 30, 1997. Effective October 1, 1997,
that percentage was .75% (decreased to .5% for the period from
October 1, 1998 until September 30, 1999, then .6%
thereafter).
o Customary charges are made by the factor in connection with
(a) letters of credit that are issued for the Company's
account to its suppliers and (b) the servicing of assigned
receivables.
o Amounts due to the factor, as well as any outstanding letters
of credit, are secured by the Company's trade receivables and
inventories.
o Amounts due to the factor are also guaranteed by a Company
officer/ stockholder.
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
============= ===========
F-52
<PAGE>
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 3 -- ACCOUNTS RECEIVABLE - (CONTINUED)
Factor commissions and interest expense, net, included in the results of
operations, amounted to $484,757 and $1,298,176, respectively, for 1998,
$322,155 and $367,884, respectively, for 1997 and $35,670 and $14,908,
respectively, for 1996.
NOTE 4 -- NOTE RECEIVABLE-OFFICER/STOCKHOLDER
A note receivable-officer/stockholder, which bore interest at the
short-term federal rate, as published by the Internal Revenue Service from time
to time, was converted into salary during 1998. Interest income, included in the
results of operations, amounted to $62,573 and $64,316, for 1998 and 1997,
respectively.
NOTE 5 -- INVENTORIES
Inventories consist of the following:
1998 1997
-------------- --------------
Raw materials ............ $ 85,904 $ 367,122
Work-in-process .......... -- 278,336
----------- -----------
Finished goods ........... 6,498,642 4,663,412
----------- -----------
$ 6,584,546 $ 5,308,870
=========== ===========
NOTE 6 -- OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Prepaid/unearned 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
========= =========
</TABLE>
NOTE 7 -- PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Furniture and equipment ....................................... 5 -- 7 $ 254,724 $ 232,522
Automobiles ................................................... 5 146,881 202,195
Computer software ............................................. 3 70,981 51,036
Property and equipment under capital leases (Note 10) ......... 3 -- 5 360,293 --
--------- ---------
832,879 485,753
Less accumulated depreciation and amortization ................ 266,977 229,132
--------- ---------
$ 565,902 $ 256,621
========= =========
</TABLE>
F-53
<PAGE>
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 7 -- PROPERTY AND EQUIPMENT, NET - (CONTINUED)
Included in property and equipment are assets acquired from an affiliated
company during 1997. As of January 1, 1998, the cost basis and related
accumulated depreciation of certain of those assets were adjusted to better
reflect net book value at the time of acquisition. The foregoing resulted in the
recognition of a net basis adjustment credit of $3,831, which is included in
other income.
Property and equipment under capital leases consist of the following:
1998
------------
Computer software ...................... $ 128,790
Computer and office equipment .......... 180,210
Warehouse equipment .................... 51,293
---------
$ 360,293
=========
Depreciation and amortization on property and equipment, included in the
results of operations, amounted to $156,139, $45,222, and $24,488 for 1998, 1997
and 1996, respectively.
Included in accumulated depreciation and amortization is accumulated
depreciation related to capital leases in the amount of $68,060 as of December
31, 1998.
NOTE 8 -- LOAN RECEIVABLE-AFFILIATED COMPANY
The loan receivable-affiliated company is due on demand and bears interest
at the short-term federal rate, as published by the Internal Revenue Service
from time to time, commencing January 1, 1999 (extended from October 1, 1998).
The Company has expressed its intent not to demand payment on this loan prior to
January 1, 2000 (extended from October 1, 1999).
NOTE 9 -- ACCOUNTS PAYABLE
One of the Company's largest suppliers has agreed that approximately $1.4
million of its accounts payable shall be subordinated to all other liabilities
of the Company.
During 1998, the Company and the supplier agreed that, effective January
1, 1998, accounts payable to that supplier will bear interest as follows:
o for the subordinated portion, 8-1/2% per annum, retroactive to
May 15, 1996.
o for the remaining portion, a rate equal to the prime rate of
the supplier's bank, as quoted from time to time.
Interest expense, included in the results of operations, amounted to
$405,595 for 1998.
NOTE 10 -- LEASES
a) Capital leases
As of December 31, 1998, the future minimum payments under capital leases
are as follows:
TOTAL NET
PAYMENTS INTEREST PORTION (1) PAYMENTS
------------ ---------------------- ------------
1999 ......... $ 159,332 $ 34,647 $ 124,685
2000 ......... 155,082 19,774 135,308
2001 ......... 96,584 4,264 92,320
--------- -------- ---------
$ 410,998 $ 58,685 $ 352,313
========= ======== =========
- ----------
(1) Interest rates range from approximately 9% to approximately 17% per annum.
Interest expense, included in the results of operations, amounted to
$19,907.
F-54
<PAGE>
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 10 -- LEASES - (CONTINUED)
b) Operating leases
The Company is obligated under non-cancellable operating leases for
office, showroom and warehouse space. The leases, which expire on various dates
through November, 2002 provide for minimum annual payments. Additional
information about the leases is as follows:
o The lease for office space was assumed from an affiliated company as
of January 1, 1997 (Note 1). Payments under the lease for office
space were guaranteed by an officer/ stockholder of the Company. The
lease contained a two-year renewal option which was not exercised.
The Company's lease obligation was terminated effective April 19,
1999 (Note 16).
o The lease for showroom space provides for contingent rental
payments, consisting of a proportionate share of any increases in
real estate taxes and operating expenses.
o One of the Company's two leases for warehouse space expired during
August 1998. The remaining lease contains a five-year renewal option
and provides for contingent rentals consisting of a proportionate
share of real estate taxes, insurance and operating expenses.
b) Operating leases-continued Future minimum lease payments are as
follows:
OFFICE AND
SHOWROOM WAREHOUSE
TOTAL SPACE SPACE
-------------- ----------- ------------
1999 ......... $ 327,713 $ 80,616 $ 247,097
2000 ......... 288,897 41,800 247,097
2001 ......... 247,097 -- 247,097
2002 ......... 226,503 -- 226,503
----------- --------- ---------
$ 1,090,210 $ 122,416 $ 967,794
=========== ========= =========
Rent expense, included in the results of operations, amounted to $419,036
and $134,283 for 1998 and 1997, respectively, of which $38,794 and $7,209,
respectively consisted of contingent rentals.
During 1996, the Company rented office space from an affiliated company
(Note 1) on a month-to-month basis and reimbursed the affiliated company for
other expenses necessary for the Company's operations.
A summary of the reimbursed expenses follows:
<TABLE>
<CAPTION>
RENT OTHER TOTAL
---------- ------------ -------------
<S> <C> <C> <C>
For the eight months ended August 31, 1996, as
previously reported ............................... $ 9,059 $ 146,214 $ 155,273
For the period from September 1 through
December 31, 1996 (a) ............................. 4,055 (134,792) (130,737)
-------- ---------- ----------
Total for the year ended December 31, 1996 ......... $ 13,114 $ 11,422 $ 24,536
======== ========== ==========
</TABLE>
- ----------
(a) After giving effect to a credit resulting from a refinement in the way in
which expenses are allocated between the Company and the affiliated company.
Additionally, the Company makes payments under various short-term leases
for equipment. Such payments are not significant to the Company's operations.
F-55
<PAGE>
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 - EMPLOYEE BENEFIT PLAN
Effective January 1, 1997, the Company assumed the sponsorship, from the
affiliated company, of a defined benefit pension plan for all eligible
employees. The plan provides for retirement benefits based on employees' length
of service and earnings. Pension cost is actuarially determined and annual
contributions to the plan are made in amounts that meet the minimum funding
standards of the Employee Retirement Income Security Act (ERISA) and the
Internal Revenue Code.
<TABLE>
<CAPTION>
PENSION BENEFITS
--------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year ................ $ 2,290,708 $ 967,290
Service cost ........................................... 429,801 402,653
Interest cost .......................................... 160,350 118,447
Amendments ............................................. -- 1,006,833
Actuarial gain/(loss) .................................. 73,718 (127,377)
Benefits paid .......................................... -- (77,138)
Benefit obligation at end of year ...................... 2,954,577 2,290,708
Changes in plan assets:
Fair value of plan assets at beginning of year ......... 1,229,381 1,227,394
Actual return on plan assets ........................... 13,614 79,125
Employer contributions ................................. 871,000 --
Benefits paid .......................................... -- (77,138)
Fair value of plan assets at end of year ............... 2,113,995 1,229,381
Funded status .......................................... (840,582) (1,061,327)
Unrecognized actuarial gain ............................ (185,877) (356,793)
Unrecognized prior service cost ........................ 469,335 488,891
Unrecognized net obligation ............................ 71,761 75,178
Unrecognized intangible asset .......................... (15,908) (17,066)
Net amount recognized .................................. $ (501,271) $ (871,117)
=========== ============
</TABLE>
The decrease in the pension liability and net periodic cost result from
(1) 1997 plan amendments to the benefit formula and (2) a change in plan
actuarial assumptions for recognizing the effect of the amendments in 1997.
F-56
<PAGE>
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 11 - EMPLOYEE BENEFIT PLAN - (CONTINUED)
Amount recognized in the statement of financial position consist of:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Accrued benefit liability ..................... $ (501,271) $ (871,117)
Weighted-average assumptions as of December 31:
Discount rate ................................ 7.00% 7.00%
Expected return on plan assets ............... 7.00 7.00
Rate of compensation increase ................ 4.00 4.00
Components of net periodic cost consist of:
Service cost ................................. $ 429,801 $ 402,653
Interest cost ................................ 160,350 118,447
Expected return on plan assets ............... (105,006) (83,481)
Amortization of prior service cost ........... 19,556 517,942
Amortization of net obligation ............... 3,417 3,417
Amortization of actuarial gain ............... (5,806) (4,828)
Underaccrual of prior service cost ........... (1,041) (83,033)
Net periodic cost ............................ $ 501,271 $ 871,117
=========== ===========
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets were $2,955,000, $ 2,615,000, and $2,114,000 respectively,
as of December 31, 1998 and $2,291,000, $2,100,000 and $1,229,000 respectively,
as of December 31, 1997.
As of December 31, 1998, plan assets consisted primarily of investments in
money market and mutual funds and common stocks under discretionary management
in accordance with ERISA.
NOTE 12 -- PURCHASE ORDERS
As of December 31, 1998, the Company is contingently liable on outstanding
letters of credit of approximately $4.5 million, against open purchase orders of
approximately $13.7 million.
NOTE 13 -- LICENSING AGREEMENT
The Company's licensing agreement with a certain designer (a) expires on
December 31, 2001, or sooner if the Company is unable to achieve certain sales
volumes before that date, (b) contains an option that allows the Company to
renew the licensing agreement for an additional five years under substantially
the same terms, except for varying minimum annual payments as set forth in the
licensing agreement, and (c) provides for the payment of the following:
a) Specified percentages of annual net sales (as defined in the
agreement, as amended) of the designer's products, with minimum
annual payments totalling 75% of the prior year's percentage
payments, for each of the calendar years from January 1, 1998
through December 31, 2001. Percentage payments, included in the
results of operations, amounted to approximately $1,747,000,
$778,000 and $37,500 for 1998, 1997 and 1996, respectively, and
exceed the minimum annual payments for 1998, 1997 and 1996,
respectively. The foregoing includes amounts accrued, but unpaid as
of December 31, 1998, 1997, and 1996.
b) A specified percentage of annual net sales of the designer's
products or an agreed upon amount, to be used for advertising,
commencing January 1, 1998. (The amount of such advertising expense,
included in the results of operations, amounted to approximately
$132,000, $50,000 and $37,500 for 1998, 1997 and 1996,
respectively.)
c) Reimbursements for certain travel and other expenses incurred by the
designer.
F-57
<PAGE>
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- OTHER AGREEMENTS
The Company has agreements with (a) an independent sales representative
for the payment of commissions on licensed products sold to certain significant
customers and (b) a purchasing agent for the payment of commissions on certain
products acquired by the Company for resale.
Additionally, the Company provides members of management with bonuses that
are payable if certain Company goals are attained. The total of such bonuses,
included in the results of operations, amounted to approximately $1,578,000,
$612,000 and $0 for 1998, 1997 and 1996, respectively.
NOTE 15 -- INTEREST EXPENSE, NET
Interest expense, net, consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------ -----------
<S> <C> <C> <C>
Interest on --
Advances from factor, net (Note 3) ..................... $ 1,298,176 $ 367,884 $ 14,908
Accounts payable (Note 9) .............................. 405,595 12,814 --
Obligations under capital lease (Note 10) .............. 19,907 -- --
Other, net ............................................. 300 832 --
1,723,978 .............................................. 381,530 14,908
Interest income from note receivable officer/stockholder
(Note 4) ............................................. (62,573) (64,316) --
Other .................................................. -- -- (971)
$ 1,661,405 $ 317,214 $ 13,937
=========== ========= ========
</TABLE>
NOTE 16 -- SUBSEQUENT EVENT
On April 1, 1999, the Company entered into a non-cancellable lease for
office space from a new affiliated company. The lease which expires on April 1,
2009, provides for initial fixed annual gross rental payments of approximately
$195,000 per annum, and increases at the rate of 6% per annum during the lease
term. The lease payments include the Company's proportionate share of operating
expenses and real estate taxes.
F-58
<PAGE>
WINDSONG, INC.
BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
--------------- ---------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 20,717 $ 126,179
Accounts receivable, net .................................... 8,527,200 5,643,217
Due from affiliates ......................................... 720,136 --
Due from officers ........................................... 166,139 232,162
Inventory ................................................... 9,472,703 6,584,546
Prepaid expenses and other current assets ................... 422,279 497,779
------------ ------------
Total current assets ..................................... 19,329,174 13,083,883
------------ ------------
Due from affiliates ............................................ -- 437,429
Property and equipment, net .................................... 597,791 565,902
Other assets ................................................... 71,268 71,268
------------ ------------
Total assets ............................................. $ 19,998,233 $ 14,158,482
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases ......... $ 125,000 $ 124,685
Advances from factor ........................................ 10,707,226 7,301,274
Accounts payable ............................................ 4,985,354 1,873,078
Accounts payable -- subordinated ............................ 1,379,568 --
Accrued expenses ............................................ 854,032 2,270,221
State income taxes payable .................................. 4,551 25,341
------------ ------------
Total current liabilities ................................ 18,055,731 11,594,599
------------ ------------
Obligations under capital leases ............................... 186,621 227,628
Deferred rent expense .......................................... -- 8,225
Accounts payable -- subordinated ............................... -- 1,379,568
------------ ------------
Total liabilities ........................................ 18,242,352 13,210,020
------------ ------------
Shareholders' equity:
Common stock -- no par value
--Class A (voting)
1,000 shares authorized
200 shares issued and outstanding .......................... 200 200
--Class B (non-voting)
1,000 shares authorized
800 shares issued and outstanding .......................... 800 800
Contributed capital ......................................... 6,000 6,000
Retained earnings ........................................... 1,748,881 941,462
------------ ------------
Total shareholders' equity ............................... 1,755,881 948,462
------------ ------------
Total liabilities and shareholders' equity ............... $ 19,998,233 $ 14,158,482
============ ============
</TABLE>
See accompanying notes.
F-59
<PAGE>
WINDSONG, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
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-60
<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 cashprovided by (used
in) operating activities:
Depreciation and amortization ................................. 40,000 41,152
Changes in operating assets and liabilities:
Accounts receivable ........................................ (2,883,983) (7,701,394)
Due from affiliates and officers ........................... (343,573) (126,575)
Inventory .................................................. (2,888,157) (439,109)
Prepaid expenses ........................................... 202,389 (319,892)
Accounts payable ........................................... 2,011,409 (805,644)
Accrued expenses ........................................... (344,337) (398,718)
Advances from factor ....................................... 3,405,952 8,846,243
Other assets ............................................... (9,146)
------------ ------------
Net cash provided by operating activities ................... 134,009 89,223
------------ ------------
INVESTING ACTIVITIES
Purchase of fixed assets ....................................... (71,889) (88,425)
Distributions to shareholders .................................. (126,890)
------------
Net cash used in investing activities ....................... (198,779) (88,425)
------------ ------------
FINANCING ACTIVITIES
Payments on obligations under capital lease .................... (40,692)
------------ ------------
Net cash used in financing activities ....................... (40,692) --
------------ ------------
(Decrease) increase in cash and cash equivalents ............... (105,462) 798
Cash and cash equivalents at beginning of period ............... 126,179 700
------------ ------------
Cash and cash equivalents at end of period ..................... $ 20,717 $ 1,498
============ ============
</TABLE>
See accompanying notes.
F-61
<PAGE>
WINDSONG, INC.
NOTES TO QUARTERLY FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
1. ORGANIZATION
Windsong, Inc. ("Windsong") is engaged in developing, designing and
sourcing private-label knit and woven shirts for distribution to a relatively
small number of retail customers located throughout the United States.
Additionally, Windsong has entered into a long-term licensing agreement with a
certain designer to source and distribute knit and woven shirts and sweaters
throughout the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of Windsong's management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the results of operations for the periods presented have been included.
The financial data at December 31, 1998 is derived from audited financial
statements and should be read in conjunction with the audited financial
statements and notes thereto. Interim results are not necessarily indicative of
results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires Windsong's management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
MARCH 31, DECEMBER 31,
1999 1998
--------------- ---------------
(UNAUDITED) (AUDITED)
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
=========== ===========
Windsong has entered into a factoring arrangement on its accounts
receivable. Amounts due (owed) to the factor are $8.5 million and $5.6 million
of unmatured accounts receivable assigned to the factor, less $10.7 million and
$7.3 million of advances received from the factor, at March 31, 1999 and
December 31, 1998 respectively.
4. INVENTORY
Inventory consists of the following:
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED) (AUDITED)
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
=========== ===========
F-62
<PAGE>
4,000,000 SHARES
[LOGO]
CLASS A COMMON STOCK
JANNEY MONTGOMERY SCOTT INC.
FIRST SECURITY VAN KASPER
MORGAN SCHIFF & CO., INC.
Until , 1999, all dealers that effect transactions in these securities, whether
or not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
, 1999
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 15, 1999
58,333 SHARES
CLASS A COMMON STOCK
[LOGO]
This prospectus relates to the offer and sale, from time to time, of up to
58,333 shares of The Pietrafesa Corporation's Class A Common Stock by a
stockholder of The Pietrafesa Corporation. We will not receive any portion of
the proceeds from the sale of shares of Class A Common Stock by the selling
stockholder. Prior to this offering, there has been no public market for our
Class A Common Stock. 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.
The selling stockholder advised us that it may sell, directly or through
brokers, all or part of the Class A Common Stock offered by this prospectus in
negotiated transactions at the market price at the time of the sale. In
connection with these sales, the selling stockholder and any participating
broker may be deemed to be "underwriters" of the Class A Common Stock within the
meaning of the Securities Act of 1933. We expect that usual and customary
brokerage fees will be paid by the selling stockholder in all open market
transactions.
We have informed the selling stockholder that the anti-manipulation
provisions of Regulation M under the Securities Exchange Act of 1934 may apply
to the sales of its shares offered by this prospectus. We also have advised the
selling stockholder that it must deliver a prospectus to the purchaser in
connection with any sale of the shares offered by this prospectus.
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 14.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated , 1999
ALT-COVER
<PAGE>
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary ..................................................... 5
Risk Factors ........................................................... 14
Forward Looking Statements ............................................. 21
Capitalization ......................................................... 23
Dividend Policy ........................................................ 24
Selected Historical Consolidated Financial Data ........................ 26
Pro Forma Combined Financial Data ...................................... 29
Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 38
Business ............................................................... 52
Management ............................................................. 63
Certain Relationships and Related Transactions ......................... 67
Principal Stockholders ................................................. 69
Selling Stockholder .................................................... 70
Description of Capital Stock ........................................... 71
Shares Eligible for Future Sale ........................................ 74
Plan of Distribution by Selling Stockholder ............................ 75
Legal Matters .......................................................... 75
Experts ................................................................ 75
Additional Information ................................................. 76
Index to Financial Statements .......................................... F-1
------------------------------
You should rely only on the information contained in this prospectus. No dealer,
salesperson or other person is authorized to give information that is not
contained in this prospectus. This prospectus is not an offer to sell nor is it
seeking an offer to buy these securities in any jurisdiction where the offer or
sale is not permitted. The information contained in this prospectus is correct
only as of the date of this prospectus, regardless of the time of the delivery
of this prospectus or any sale of these securities.
Our logo and name are trademarks of The Pietrafesa Corporation. Other
trademarks, trade names or service marks appearing in this prospectus are the
property of their respective owners.
ALT-T/C
<PAGE>
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ALT-8
<PAGE>
the right to elect 25% of our directors, until all shares of Class B Common
Stock are converted into shares of Class A Common Stock or otherwise cease to be
outstanding. As a result, Mr. Cohen will control the outcome of substantially
all matters submitted to a vote of our stockholders. See "Description of Capital
Stock."
THE INTERESTS OF OUR CONTROLLING STOCKHOLDER MAY CONFLICT WITH THE
INTERESTS OF THE HOLDERS OF OUR CLASS A COMMON STOCK
The interests of Mr. Cohen may conflict with the interests of holders of
Class A Common Stock. The concentration of voting power described above may make
us an unattractive takeover target and may discourage acquisition proposals,
even if such proposals are supported by holders of Class A Common Stock. In
addition, Mr. Cohen's voting power permits him to implement policies not favored
by, or in the best interests of, the holders of the Class A Common Stock. In
addition, as long as any Class B Common Stock is outstanding, Mr. Cohen will be
able to transfer voting control to a third party at a premium that will not be
enjoyed by holders of the Class A Common Stock. Voting power will, in all
likelihood, continue to be concentrated following conversion of all of the
outstanding shares of Class B Common Stock, since MS Pietrafesa, L.P. would own
approximately 46.6% of the outstanding shares of Class A Common Stock following
the full conversion.
FAILURE TO COMPLY WITH SIGNIFICANT COVENANT RESTRICTIONS IN OUR AGREEMENTS
WITH OUR LENDERS COULD RESULT IN ACCELERATION OF OUR REPAYMENT OBLIGATIONS
We may incur substantial additional indebtedness to fund our growth
strategy. Incurring substantial additional indebtedness would reduce our
financial flexibility and expose us to additional risks, including greater
vulnerability to economic downturns and competitive pressures.
Our agreements with our lenders contain significant operating and
financial restrictions. Our current credit agreements and other loan documents
contain restrictive covenants, including restrictions on incurrence of debt,
dividend payments, sales of assets, acquisitions and other business
combinations, transactions with affiliates, liens and investments. If we fail to
comply with existing or future debt covenants, we could default under these
agreements. If a default were to occur, the lender under such agreement could
accelerate our repayment of the indebtedness evidenced by that agreement.
Acceleration of our repayment obligations may also be required under any other
agreements then in effect containing cross-acceleration or cross-default
provisions. Any acceleration of our outstanding indebtedness could result in
foreclosure against our operating and working capital assets, the termination of
our license or other agreements and our bankruptcy. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
THE MARKET PRICE OF OUR CLASS A COMMON STOCK COULD BE ADVERSELY AFFECTED
BY FUTURE SALES OF SUBSTANTIAL AMOUNTS OF SHARES IN THE PUBLIC MARKET
There will be an aggregate of 4,333,333 shares of Class A Common Stock
outstanding immediately after the offering, which amount could increase by up to
600,000 shares if our underwriters exercise their over-allotment option. Of
these shares, the shares of Class A Common Stock sold in our initial public
offering and the 58,333 shares of Class A Common Stock sold in this offering
will be freely tradable under the Securities Act of 1933.
The balance of the shares of Class A Common Stock issued to Windsong, Inc.
in connection with the Windsong acquisition and the up to 3,775,667 shares of
Class A Common Stock to be issued upon conversion of the 3,775,667 outstanding
shares of Class B Common Stock will be "restricted securities" and may, in the
future, be sold in compliance with Rule 144 under the Securities Act, subject,
in the case of the shares issued to Windsong, Inc., to the resale restrictions
in the Windsong acquisition agreement. See "Shares Eligible for Future Sale."
The sale or availability for sale of a large number of shares in the
market after the offering could cause a decline in the market price of the Class
A Common Stock. This could make it more difficult for us to raise funds through
future offerings of our stock.
ALT-20
<PAGE>
ABSENCE OF CURRENT PUBLIC MARKET, DETERMINATION OF PUBLIC OFFERING PRICE
AND MARKET UNCERTAINTY MAY CAUSE THE MARKET PRICE OF THE CLASS A COMMON STOCK TO
FLUCTUATE
There has not been a public market for the Class A Common Stock. We have
applied for listing of the Class A Common Stock on the Nasdaq National Market.
We do not know the extent to which investor interest in our stock will cause an
active trading market to develop or be sustained, or how liquid that market
might be. The market price for the Class A Common Stock could also fluctuate in
response to various factors and events, including liquidity of the market for
our shares, quarter-to-quarter variations in our results of operations and our
significant developments and of other industry participants, pricing and
competition in our industry, broad market fluctuations and economic and
political conditions not directly related to our business. The initial public
offering price of the Class A Common Stock will be determined by negotiation
between us and representatives of the underwriters. Investors may not be able to
resell their shares at or above the price that they pay in the initial public
offering.
PURCHASERS WILL BE SUBJECT TO POTENTIAL FUTURE DILUTION
Issuances of Class A Common Stock pursuant to the exercise of stock
options or warrants that we may issue from time to time, or as payment of the
deferred purchase price in connection with the Diversified Apparel, Global
Sourcing Network, Components and Windsong acquisitions, could cause further
dilution in the net tangible book value per share of the Class A Common Stock.
FORWARD-LOOKING STATEMENTS
An investment in the Class A Common Stock offered hereby is speculative in
nature and involves a high degree of risk. Some statements made in this
prospectus under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements. Forward-looking statements are identified by use of terms such as
"may," "will," "expect," "anticipate," "believe," "estimate," "intend," "plan"
and similar expressions, although some forward-looking statements are expressed
differently. Although we believe these statements are reasonable, there are
important risks and uncertainties, including those discussed in the "Risk
Factors" section above, that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements, including
changes in general economic and business conditions, actions of competitors,
changes in our business strategies and the factors set forth under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
ALT-21
<PAGE>
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ALT-22
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1999:
(1) our actual capitalization, giving retroactive effect to the
issuances of Class B Common Stock to our sole stockholder which have
occurred or will occur prior to the completion of the offering;
(2) our pro forma combined capitalization after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions, including the issuance of 333,333 shares of
Class A Common Stock to Windsong, based on an assumed initial
offering price of $12.00 per share, as part of our acquisition of
Windsong; and
(3) our pro forma combined capitalization, as adjusted to give effect to
the Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions, our sale of 4,000,000 shares of Class A
Common Stock pursuant to our initial public offering, assuming an
initial public offering price of $12.00 per share, and the
application of the net proceeds of such offering. Our pro forma
combined capitalization, as adjusted, set forth below, excludes
shares of Class A Common Stock which may be issued as deferred
purchase price under the terms of the Diversified Apparel, Global
Sourcing Network, Components and Windsong acquisitions.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Pro Forma Combined
Financial Data" and the audited financial statements and the notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
------------------------------------------------
PRO FORMA
COMBINED,
ACTUAL PRO FORMA COMBINED AS ADJUSTED
---------- -------------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Long term debt, net of current maturities .............. $13,054 $16,969 $ 5,914
Stockholders' equity:
Class A Common Stock, par value $.001 per share;
12,000,000 shares authorized, no shares issued and
outstanding, 333,333 shares issued and outstanding
pro forma combined and 4,333,333 shares issued and
outstanding pro forma combined, as adjusted ......... -- -- 4
Class B Common Stock, par value $.0002 per share;
10,000,000 shares authorized, 3,775,667 shares issued
and outstanding actual, pro forma combined and pro
forma combined, as adjusted ......................... -- -- --
Additional paid-in capital ............................. 3,191 7,191 50,387
Retained earnings ...................................... 282 282 282
------- ------- -------
Total stockholders' equity ........................... 3,473 7,473 50,673
------- ------- -------
Total capitalization ................................... $16,527 $24,442 $56,587
======= ======= =======
</TABLE>
ALT-23
<PAGE>
DIVIDEND POLICY
We have not declared or paid any cash or other dividends on our capital
stock and we do not expect to pay dividends for the foreseeable future. We
anticipate that all of our earnings in the foreseeable future will be used for
the operation of our business, to support our growth strategy and to reduce our
indebtedness. Any future determination to pay dividends will be at the
discretion of our Board of Directors and will depend upon, among other factors,
our results of operations, financial condition and capital requirements. In
addition, our existing credit facility with PNC Bank, National Association, and
other loan agreements contain, and any successor facility will likely contain,
prohibitions on our ability to pay dividends. Please refer to the "Certain
Relationships and Related Transactions" section of this prospectus, however, for
a description of tax-related distributions required to be made by MS Pietrafesa,
L.P. to its partners under its partnership agreement. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
ALT-24
<PAGE>
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ALT-25
<PAGE>
PRO FORMA COMBINED FINANCIAL DATA
Our pro forma combined financial data includes our statement of operations
data which reflects our historical results after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions as if they occurred on January 1, 1998, and also includes our
balance sheet data, which reflects our balance sheet and the balance sheets of
Diversified Apparel, Global Sourcing Network, Components and Windsong as if the
acquisitions of such businesses had occurred on March 31, 1999. The acquisitions
of Diversified Apparel and Global Sourcing Network were consummated on April 15,
1999. We have entered into definitive agreements to purchase the Components and
Windsong businesses. Our acquisition of Components and Windsong occurred
simultaneously with our initial public offering. The pro forma combined, as
adjusted financial data includes our pro forma combined information as adjusted
for our initial public offering and the application of the proceeds of that
offering. The pro forma combined financial data are based upon preliminary
estimates, available information and assumptions that management deems
appropriate, but are not necessarily indicative of the results that would have
been obtained had such events occurred at the times assumed or our future
results. The pro forma combined financial statements should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this prospectus.
The acquisitions have been recorded in the pro forma financial statements
as a purchase in accordance with Accounting Principle Board Opinion No. 16.
Accordingly, the purchase price of each acquisition has been allocated to the
fair value of the assets acquired and the amount of the liabilities assumed,
with the remainder allocated to goodwill. No other intangible assets were
acquired as part of the acquisitions. The initial purchase price of Components
will be paid entirely in cash. The initial purchase prices of Global Sourcing
Network and Diversified Apparel were paid in cash and by the issuance of notes.
The initial purchase price of Windsong will be paid in cash and $4.0 million
worth of Class A Common Stock valued at the initial public offering price,
assumed to be $12.00 per share, or 333,333 shares. A summary of the purchase
price of the acquisitions and allocation of each such price to the fair value of
assets acquired and liabilities assumed is shown below:
SCHEDULE OF ALLOCATION OF PURCHASE PRICE OF ACQUISITIONS
<TABLE>
<CAPTION>
GLOBAL
DIVERSIFIED SOURCING TOTAL
APPAREL NETWORK COMPONENTS WINDSONG COMBINED
------------- ------------ ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PURCHASE PRICE:
Cash portion ............................... $ 800 $ 1,400 $ 4,695 $ 22,000 $ 28,895
Equity portion ............................. -- -- -- 4,000 4,000
Sellers' notes ............................. 400 800 -- -- 1,200
Costs directly associated with the
acquisition ............................... 350 350 350 400 1,450
--------- -------- -------- --------- ---------
Total purchase price ....................... $ 1,550 $ 2,550 $ 5,045 $ 26,400 $ 35,545
ALLOCATION OF PURCHASE PRICE:
Fair value of assets acquired .............. $ (2,457) $ (1,171) $ (8,660) $ (19,998) $ (32,286)
Assumption of liabilities .................. $ 1,955 $ 1,121 $ 6,021 $ 16,862 $ 25,959
--------- -------- -------- --------- ---------
Goodwill acquired .......................... $ 1,048 $ 2,500 $ 2,406 $ 23,264 $ 29,218
========= ======== ======== ========= =========
Pro forma amortization expense ............. $ 105 $ 167 $ 160 $ 1,163 $ 1,595
========= ======== ======== ========= =========
Pro forma amortization for quarter ......... $ 26 $ 42 $ 40 $ 291 $ 399
========= ======== ======== ========= =========
</TABLE>
ALT-29
<PAGE>
and the initial portion of the Windsong acquisition price, 3,775,667
shares of Class B Common Stock owned by our sole stockholder as of
the date of the offering.
The balance sheet data reflects the following pro forma adjustments:
o Goodwill as a result of the Diversified Apparel, Global Sourcing
Network, Components and Windsong acquisitions as calculated in the
table above entitled, "Schedule of Allocation of Purchase Price of
Acquisitions";
o Deposit of $4.25 million cash in escrow which will be paid to the
sellers of Windsong if Windsong achieves specified earnings targets
during 1999;
o Elimination of certain liabilities that are not being assumed as
part of the acquisition of Windsong;
o For purposes of the acquisition pro forma adjustments, we have
assumed an acquisitions payable amount, which represents the initial
purchase price owed for the Components and Windsong acquisitions and
the Windsong escrow amount. No interest expense has been provided
for the Windsong and Components acquisitions as those acquisitions
will be funded by the proceeds of our initial public offering;
o Elimination of common stock and retained earnings of the
acquisitions;
o Elimination of the additional paid-in capital of the acquisitions;
o Issuance of $4.0 million worth of Class A Common Stock associated
with the acquisition of Windsong at an assumed price of $12.00 per
share;
o Assumed net proceeds of approximately $43.2 million from our initial
public offering; and
o Our use of the net proceeds of our initial public offering.
In addition to the adjustments included in the pro forma combined
financial data, our acquisition and integration of the acquired businesses may
affect their operations in other ways. We expect the acquired businesses to be
able to use our existing merchandising, sourcing, sales and accounting staff to
perform certain functions performed for the acquired businesses historically by
third party consultants. For example, as a condition to our acquisition of
Global Sourcing Network, it agreed to stop paying royalties and commissions to
third party consultants who assisted in the development, merchandising and
international sourcing of apparel programs for S&K Famous Brands. These
terminated commissions and royalties totaled $870,000 in 1998. We expect that
our existing staff will perform these services for Global Sourcing Network at no
additional cost to us and without any loss of revenues. We also expect to incur
additional costs associated with being a public company which are estimated to
be $300,000 per year.
ALT-31
<PAGE>
We lease a retail store facility in Syracuse, New York from Robert D.
Pietrafesa and Richard C. Pietrafesa, uncle and father, respectively, of our
President and Chief Executive Officer, under a 10-year lease expiring in 2007
requiring rental payments totaling $145,000 per year. A portion of this retail
store facility is subleased to a third party. The sublease will expire in 2000
and provides minimum rental income of $30,000 per year.
We source customer orders, including a substantial volume of the aggregate
orders for Jos.A.Bank, with an affiliate, SourceOne. SourceOne is owned by the
General Partner. SourceOne operates two manufacturing facilities in Baltimore,
Maryland of 54,000 and 125,000 square feet. SourceOne leases, directly and
through a sublease, these facilities from Jos.A.Bank. All production performed
for us by SourceOne is performed on a "cost" basis, without mark-up. None of our
employees receive compensation from SourceOne.
Morgan Schiff, an affiliate of the General Partner, provides financial
advisory and strategic consulting services to us under an agreement requiring
monthly retainer payments of $25,000. The agreement also requires us to pay
specified fees to Morgan Schiff when we consummate various acquisitions, capital
raising and financing transactions. The agreement may be terminated annually by
either party upon 30 days notice. Morgan Schiff has waived all retainer payments
otherwise payable to it for financial advisory services for 1996, 1997, 1998 and
1999, as well as all fees associated with the Diversified Apparel, Global
Sourcing Network, Components and Windsong acquisitions, the PNC Bank credit
facility and this offering. No such services were provided to us by Morgan
Schiff during those periods and in respect of those transactions, other than
investment banking and financial analyst services for which Morgan Schiff was
paid, and we received no benefit under the agreement during those periods.
Our agreement with Morgan Schiff does not compel Morgan Schiff to provide
any actual services in return for the $25,000 monthly retainer payment. However,
it was in our interest to enter into the agreement at the time of our
acquisition by MS Pietrafesa, L.P., an affiliate of Morgan Schiff, because it
was anticipated that we would be financially successful and that Morgan Schiff
would provide meaningful services in the form of merger and acquisition advice
and assistance in private capital raising activities and that the cost of those
services would be less than or equal to the cost of procuring those services
from an unaffiliated third party. However, after we were acquired in the early
1990s, our revenues increased rapidly, but our profitability declined. As a
result, during the period from 1995 through 1997, we divested our non-core
manufacturing assets, refinanced our secured lending arrangements and negotiated
the forgiveness of our subordinated indebtedness. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
Financial analysis related to these transactions was provided by our financial
management and consultants and not by Morgan Schiff.
In April 1998, MS Pietrafesa, L.P. made a distribution of $207,000 to its
partners in accordance with its Amended and Restated Agreement of Limited
Partnership dated January 1, 1996, for the payment of income taxes incurred by
such partners on the portion of partnership income attributable to their
respective interests during 1997. In May 1999, we paid $1.5 million to MS
Pietrafesa, L.P. from amounts borrowed under the PNC Bank credit facility to
cover the tax distribution to be made by MS Pietrafesa, L.P. to its partners in
accordance with its Partnership Agreement for the payment of income taxes
incurred by such partners on the portion of partnership income attributable to
their respective interests during the period from January 1, 1998 through
September 30, 1998. A portion of the net proceeds of the offering will be
applied toward the repayment of the PNC Bank credit facility.
We reimburse, on a per-flight basis, operating expenses of an aircraft
owned by Twins Aviation, Inc., a corporation owned by our President and Chief
Executive Officer. We use this aircraft on a regularly scheduled, weekly basis
to fly staff to production meetings in New York City, as well as for customer
and contractor visits. Such reimbursements amounted to $225,000 for the year
ended December 31, 1996, $223,000 for the year ended December 31, 1997 and
$454,000 for the year ended December 31, 1998.
We believe that each of the affiliate transactions described above are on
terms no less favorable than would be generally available to us from
unaffiliated third parties. After the closing of the offering, all related party
transactions will be approved by our independent, disinterested directors. See
also "Management" and "Principal Stockholders."
ALT-68
<PAGE>
PRINCIPAL STOCKHOLDERS
The table below sets forth information as of June 30, 1999 regarding the
beneficial ownership of Class A Common Stock and Class B Common Stock, as well
as the percentage ownership of our Class A Common Stock and Class B Common
Stock. Shares of Class B Common Stock are convertible into Class A Common Stock
on a one-for-one basis, as described under "Description of Capital Stock."
Percentage ownership numbers are based on shares of Class A Common Stock and
shares of Class B Common Stock outstanding immediately following our initial
public offering and, in the case of Class B Common Stock, immediately prior to
that offering. Although shares of Class B Common Stock may be converted into
shares of Class A Common Stock at any time, the table below does not reflect the
shares of Class A Common Stock issuable to holders of Class B Common Stock upon
conversion as being beneficially owned by those holders.
Information is provided as to each of our directors, the executive
officers named in the Summary Compensation Table under "Management --
Compensation of Executive Officers," each person we know to own beneficially
more than 5% of the outstanding shares of Class A Common Stock or Class B Common
Stock and all of our directors and executive officers as a group. Except as
described below, the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned by
them.
MS Pietrafesa Acquisition Corporation is the general partner of MS
Pietrafesa, L.P. and has the sole right to vote the shares of Class B Common
Stock owned by MS Pietrafesa, L.P. and to direct the disposition of such shares.
Philip Ean Cohen is the sole stockholder of MS Pietrafesa Acquisition
Corporation. See "Risk Factors -- The Interests of our Controlling Stockholder
may Conflict with the Interests of the Holders of our Class A Common Stock."
MSJP, L.P. and RJP Investments Assoc., L.P. indirectly own shares of Class
B Common Stock through their respective ownership of limited partnership
interests in MS Pietrafesa, L.P. Neither MSJP nor RJP has any right to vote or
to direct the disposition of their respective shares. Shares of Class B Common
Stock indicated below as beneficially owned by MSJP and RJP exclude additional
shares of Class B Common Stock that MSJP and RJP are entitled to receive
pursuant to MS Pietrafesa, L.P.'s Partnership Agreement. See "Certain
Relationship and Related Transactions."
Shares of Class B Common Stock indicated below as beneficially owned by
Sterling B. Brinkley, Jr. and Thomas A. Minkstein are owned indirectly through
their ownership of limited partnership interests in MSJP, L.P. Such individuals
have no right to vote or to direct the disposition of these shares. Shares of
Class B Common Stock indicated below as beneficially owned by Richard C.
Pietrafesa, Jr. and Joseph J. Pietrafesa II are owned indirectly through their
ownership of limited partnership interests in MSJP, L.P. and RJP Investments
Assoc., L.P. Such individuals have no right to vote or to direct the disposition
of these shares.
<TABLE>
<CAPTION>
SHARES OF CLASS A SHARES OF CLASS B PERCENTAGE OF
COMMON STOCK COMMON STOCK CLASS A AND
----------------------- -------------------------- CLASS B
BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE COMMON STOCK
- ----------------------------------------------- -------- ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
MS Pietrafesa, L.P. ........................... -- -- 3,775,667 100.0% 46.6%
MSJP, L.P. .................................... -- -- 3,151,549 83.5% 38.9%
MS Pietrafesa Acquisition Corporation ......... -- -- 3,775,667 100.0% 46.6%
Phillip Ean Cohen ............................. -- -- 3,775,667 100.0% 46.6%
350 Park Avenue, 8th Floor
New York, NY 10022
Richard C. Pietrafesa, Jr. .................... -- -- 504,683 13.4% 6.2%
Thomas A. Minkstein ........................... -- -- 94,231 2.5% 1.2%
David McDonough ............................... -- -- -- -- --
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SHARES OF CLASS A SHARES OF CLASS B PERCENTAGE OF
COMMON STOCK COMMON STOCK CLASS A AND
------------------------- ------------------------ CLASS B
BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE COMMON STOCK
- ----------------------------------------- ---------- ------------ --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
RJP Investments Assoc., L.P. ............ -- -- 586,361 15.5% 7.2%
7400 Morgan Road
Liverpool, NY 13090
Sterling B. Brinkley, Jr. ............... -- -- 245,077 6.5% 3.0%
350 Park Avenue, 8th Floor
New York, NY 10022
Mark C. Pickup .......................... -- -- -- -- --
6734 Corte Segunda
Martinez, CA 94553
Robert J. Bennett ....................... -- -- -- -- --
M&T Bank Corp.
101 South Salina Street
Syracuse, NY 13202
Paul M. McNicol ......................... -- -- 47,131 1.3% *
305 Oakley Court
Mill Neck, NY 11765
Ross W. Stefano ......................... -- -- -- -- --
30 The Orchard
Fayetteville, NY 13066
Windsong, Inc. .......................... 333,333 7.7% -- -- 4.1%
1599 Post Road East
Westport, CT 06880
All executive officers and directors as a
group (eight persons) .................. -- -- 891,122 23.6% 11.0%
</TABLE>
- ----------
* Represents less than 1.0%.
SELLING STOCKHOLDER
The following table contains information concerning Windsong, Inc., on
behalf of which shares of Class A Common Stock are being registered for sale on
a continuous basis.
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS A
AND CLASS B
SHARES OWNED AMOUNT TO SHARES OWNED PERCENTAGE OF CLASS A OWNED AFTER
PRIOR TO OFFERING BE OFFERED AFTER OFFERING OWNED AFTER OFFERING OFFERING
- ------------------- ------------ ---------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
333,333 58,333 275,000 6.3% 3.4%
</TABLE>
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<PAGE>
o approving conflict of interest transactions involving our affiliates
which are approved by our disinterested directors.
The holders of the outstanding shares of Class A Common Stock will be
entitled, however, to vote as a class upon any proposed amendment to our
Certificate of Incorporation which would increase or decrease the par value of
the shares of Class A Common Stock, or alter or change the powers, preferences
or special rights of the shares of the Class A Common Stock so as to affect them
adversely. See "Risk Factors -- The Interests of our Controlling Stockholder may
Conflict with the Interests of the Holders of our Class A Common Stock."
All of the shares of the Class B Common Stock are owned by MS Pietrafesa,
L.P. and can be voted by the General Partner, which is wholly-owned by Mr.
Cohen. See "Principal Stockholders."
CONVERSION RIGHTS. At the option of any holder of shares of Class B Common
Stock, such holder may, at any time and from time to time, convert all or part
of such holder's shares of Class B Common Stock into an equal number of shares
of Class A Common Stock. The shares of Class B Common Stock are also subject to
mandatory conversion into an equal number of shares of Class A Common Stock, in
whole or in part, at any time and from time to time, at the option of the holder
or holders of a majority of the outstanding shares of Class B Common Stock. If,
and only if, all the outstanding shares of Class B Common Stock converted into
Class A Common Stock or are otherwise no longer outstanding, the holders of the
Class A Common Stock will have general voting power in the election of all
members of the Board and in all other matters upon which our stockholders are
entitled to vote. Holders of shares of Class A Common Stock have no right to
convert Class A Common Stock into any of our other securities.
PREFERRED STOCK
Our Certificate of Incorporation authorizes 5,000,000 shares of Preferred
Stock. Upon the affirmative vote or the written consent of the holders of a
majority of the outstanding shares of Class B Common Stock, shares of Preferred
Stock may be issued in one or more series. Each such series will have such
distinctive designation as stated in resolutions adopted by the Board. Authority
is expressly vested in the Board to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series of the designation of such series,
without further vote or action by the stockholders. The Preferred Stock may be
granted voting powers provided, however that (1) so long as any Class B Common
Stock is outstanding, the holders of the Class B Common Stock will always have
the absolute right to elect a majority of the Board and (2) if voting powers are
granted, the holders of shares of Preferred Stock will be entitled to vote
together with the holders of the Class A Common Stock as a class on all matters
on which holders of Class A Common Stock are entitled to vote. At present, we
have no plans to issue any shares of the Preferred Stock.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law as currently or hereafter in effect.
Delaware law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duty as a director,
except for liability
(1) for breach of their duty of loyalty to the corporation or its
stockholders;
(2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the General Corporation
Law of the State of Delaware (the "DGCL"); or
(4) for any transaction from which the director derives an improper
personal benefit.
Our Certificate of Incorporation provides for the mandatory
indemnification of, and advancement of expenses to our directors and officers.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of our initial public offering, we will have a total of
4,333,333 shares of Class A Common Stock, 4,933,333 if the Underwriters'
over-allotment option is exercised in full, and 3,775,667 shares of Class B
Common Stock outstanding. All shares of Class A Common Stock sold in the
offering and, after the expiration of the 180 day lock-up period, described
below, the 58,333 shares of Class A Common Stock sold in this offering will be
freely tradable under the Securities Act unless they are purchased or held by
"affiliates" of ours as defined in Rule 144. The balance of the shares of Class
A Common Stock issued to Windsong, Inc. in connection with the Windsong
acquisition will be "restricted securities" within the meaning of Rule 144 under
the Securities Act and may, after the expiration of the 180 day lock-up period,
be sold in compliance with Rule 144 under the Securities Act, subject to
additional resale restrictions under the Windsong acquisition agreement. In
addition, all shares of Class B Common Stock and the 3,775,667 shares of Class A
Common Stock issuable upon conversion thereof, all of which are subject to the
180 day lock-up period, will be "restricted" securities within the meaning of
Rule 144 under the Securities Act and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemption provided by Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned "restricted" shares for at least one year, including
a person who may be deemed our affiliate, is entitled to sell within any
three-month period a number of shares of Class A Common Stock that does not
exceed the greater of 1% of the then-outstanding shares of our Class A Common
Stock or the average weekly trading volume of the Class A Common Stock on the
Nasdaq National Market during the four calendar weeks preceding such sale. Sales
under Rule 144 are subject to restrictions relating to manner of sale, notice
and the availability of current public information about us. A person who is not
our affiliate and has not been such at any time during the 90 days preceding a
sale, and who has beneficially owned "restricted" shares for at least two years,
would be entitled to sell such shares immediately following the offering without
regard to the volume limitations, manner of sale provisions or notice or other
requirements of Rule 144 of the Securities Act. However, the transfer agent,
American Stock Transfer & Trust Company, may require an opinion of counsel that
a proposed sale of "restricted" shares comes within the terms of Rule 144 of the
Securities Act prior to effecting a transfer of such shares. Such opinion would
be provided by and at the cost of the transferor.
Our officers and directors and certain other stockholders, including the
principal officers of Diversified Apparel, Global Sourcing Network, Components
and Windsong, have agreed, pursuant to the underwriting agreement and lock-up
agreement, that they will not sell any shares of our capital stock owned by
them, either publicly or privately, without the prior consent of Janney
Montgomery Scott Inc., as representative of the underwriters, for a period of
180 days from the date of this prospectus.
MS Pietrafesa, L.P. has offered its limited partners the right to withdraw
from the partnership under its Partnership Agreement and receive a distribution
of Class A Common Stock. Such right to withdraw may be exercised by a limited
partner at any time between the consummation of the offering and 14 days before
the expiration of the lock-up period. The withdrawal will be effective at the
end of the month in which the lock-up period expires. The shares acquired
through a limited partner's withdrawal will be subject to the resale limitations
under Rule 144.
Limited partners electing to withdraw from MS Pietrafesa, L.P. will
generally be deemed to have held the shares of Class A Common Stock distributed
to them from the date they acquired their partnership interest. Accordingly,
original investors in MS Pietrafesa, L.P. will be entitled to sell such shares
pursuant to Rule 144 immediately upon distribution of such shares from MS
Pietrafesa, L.P., subject to volume, manner of sale and other limitations.
Prior to the offering, there has been no public market for either class of
our Common Stock and no predictions can be made of the effect, if any, that the
sale or availability for sale of additional shares of our Common Stock or our
other securities, or the development of a public trading market for the Class B
Common Stock, will have on the market price of the Class A Common Stock.
Nevertheless, sales of substantial amounts of shares of Class A Common Stock in
the public market, the perception that such sales could occur, the
ALT-74
<PAGE>
development of a public trading market for the Class B Common Stock or the
issuance of other securities, could adversely affect the market price of the
Class A Common Stock and could impair our future ability to raise capital
through an offering of our equity securities.
PLAN OF DISTRIBUTION OF SELLING STOCKHOLDER
The selling stockholder may, but is not required to, sell, directly or
through brokers, its shares of Class A Common Stock in negotiated transactions
or in one or more transactions in the market at the price prevailing at the time
of sale, subject to lock-up provisions contained in the Windsong acquisition
agreement and subject to a lock-up agreement with the underwriters. Under the
Windsong acquisition agreement the selling stockholder is subject to a staggered
lock-up for a period of 30 months following the closing of the Windsong
acquisition. The selling stockholder and any broker-dealers that participate in
the sale of the Class A Common Stock may be deemed to be "underwriters" of the
selling stockholder's shares of Class A Common Stock within the meaning of the
Securities Act. It is anticipated that usual and customary brokerage fees will
be paid by the selling stockholder in all open market transactions. We will not
receive any of the proceeds from the sale of any Class A Common Stock sold by
the selling stockholder. We will bear all costs and expenses of the registration
under the Securities Act of the Class A Common Stock exclusive of any discounts
or commissions payable with respect to sales of such securities. The selling
stockholder may agree to indemnify any agent, dealer or broker-dealer that
participates in transactions involving sales of the selling stockholder's Class
A Common Stock against certain liabilities, including liabilities arising under
the Securities Act.
At the time an offer for Class A Common Stock owned by the selling
stockholder is made by or on behalf of the selling stockholder, to the extent
required, a prospectus will be distributed by the selling stockholder which will
set forth the number of shares of Class A Common Stock being offered by the
selling stockholder and the terms on which shares of Class A Common Stock are
offered by the selling stockholder.
Except for its entry into the Windsong acquisition agreement, the selling
stockholder has not had any material relationship with us or any of our
affiliates within the past three years.
We will inform the selling stockholder that the anti-manipulation
provisions of Regulation M under the Exchange Act may apply to the sales of the
shares of Class A Common Stock being registered by the selling stockholder. We
will advise the selling stockholder of the requirement for delivery of this
prospectus in connection with any sale of the Class A Common Stock offered by
the selling stockholder.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed
upon by Roberts, Sheridan & Kotel, a Professional Corporation, which firm
provides legal services from time to time for Morgan Schiff and its affiliates.
EXPERTS
The Consolidated Financial Statements and schedule of The Pietrafesa
Corporation at December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998, appearing in this prospectus and the
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The Financial Statements of Components at December 31, 1997 and 1998, and
for each of the two years in the period ended December 31, 1998 included
elsewhere in this prospectus and the related financial statement schedules
included elsewhere in the registration statement have been audited by Lawrence
B. Goodman & Co., P.A., independent auditors, as stated in their reports
appearing herein and elsewhere in the Registration Statement, and are included
in reliance upon such report given upon their authority of such firm as experts
in accounting and auditing.
ALT-75
<PAGE>
The Financial Statements of Global Sourcing Network at December 31, 1997
and 1998, and for each of the two years in the period ended December 31, 1998
included elsewhere in this prospectus and the related financial statement
schedules included elsewhere in the registration statement have been audited by
Pasquale & Bowers, LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the Registration Statement, and are included
in reliance upon the reports of such firm, given upon their authority as experts
in accounting and auditing.
The Financial Statements of Windsong at December 31, 1997 and 1998, and
for each of the three years in the period ended December 31, 1998 included
elsewhere in this prospectus and the related financial statement schedules
included elsewhere in the registration statement have been audited by
Weissbarth, Altman & Michaelson LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the Registration Statement, and are
included in reliance upon the reports of such firm, given upon their authority
as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Commission a Registration Statement on Form S-1,
including all amendments, exhibits, annexes and schedules thereto, pursuant to
the Securities Act, and the rules and regulations promulgated thereunder, with
respect to the Class A Common Stock being offered in the offering. This
Prospectus does not contain all the information set forth in the Registration
Statement. For further information with respect to The Pietrafesa Corporation
and the securities offered hereby, reference is made to the Registration
Statement. Statements made in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the document or matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement, may be inspected, without charge, and copies may be
obtained, at prescribed rates, at the public reference facilities of the
Commission maintained at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Copies of the Registration Statement may also be
inspected, without charge, at the Commission's regional office at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661. In addition, copies of the Registration
Statement may be obtained by mail at prescribed rates, from the Commission's
Public Reference Section at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The Commission maintains a Web site
at www.sec.gov that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
Upon completion of the offering, we will become subject to the
informational requirements of the Exchange Act, and in accordance therewith will
be required to file periodic reports and other information with the Commission.
Such periodic reports, proxy statements and other information will be available
for inspection and copying at the public reference facilities, regional offices
and Web site referred to above.
We intend to furnish our stockholders with annual reports containing
consolidated financial statements audited by independent certified public
accountants.
ALT-76
<PAGE>
58,333 SHARES
[LOGO]
CLASS A COMMON STOCK
, 1999
ALT-B/C
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all estimated expenses incurred or
expected to be incurred by the Registrant in connection with the issuance and
distribution of the securities being registered hereby, other than underwriting
discounts and commissions. All amounts are estimated except for the SEC
registration fee and the NASD filing fee.
ITEM AMOUNT
- ---- ----------
SEC registration fee ............................................... $ 16,847
NASD filing fee .................................................... 5,500
Nasdaq National Market listing fee ................................. 55,000
Blue sky fees and expenses ......................................... 10,000
Printing and engraving costs ....................................... 140,000
Transfer agent fees ................................................ 3,500
Legal fees and expenses ............................................ 395,000
Accounting fees and expenses ....................................... 340,000
Miscellaneous ...................................................... 474,153
----------
Total .............................................................. $1,440,000
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
We are incorporated under the laws of the State of Delaware. Section 145
of the General Corporation Law of the State of Delaware provides that a Delaware
corporation may indemnify any person who is, or is threatened to be made, a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of such corporation), by reason of the fact that such person
was an officer, director, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise. The indemnity may include expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was illegal. A Delaware corporation may indemnify
any person who is, or is threatened to be made, a party to any threatened,
pending or completed action or suit by or in the right of the corporation by
reason of the fact that such person was a director, officer, employee or agent
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses, including attorneys' fees, actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the corporation's best
interests except that no indemnification is permitted without judicial approval
if the officer or director is adjudged to be liable to the corporation. Where an
officer or director is successful on the merits or otherwise in the defense of
any action referred to above, the corporation must indemnify him against the
expenses which such officer or director has actually and reasonably incurred.
Our Certificate of Incorporation provides for the indemnification of our
directors and officers to the fullest extent permitted by Section 145. In that
regard, our Certificate of Incorporation provides that we shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director or
officer of such corporation, or is or was serving at the request of such
corporation as a director, officer or member of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with
II-1
<PAGE>
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of such
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Indemnification in
connection with an action or suit by or in the right of such corporation to
procure a judgment in its favor is limited to payment of settlement of such an
action or suit except that no such indemnification may be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
indemnifying corporation unless and only to the extent that the Court of
Chancery of Delaware or the court in which such action or suit was brought shall
determine that, despite the adjudication of liability but in consideration of
all the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the court shall deem proper.
In addition, our By-laws provide that we shall indemnify to the full
extent authorized by law any person made or threatened to be made a party to an
action, suit or proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he, his testator or intestate is or
was our director, officer, employee or agent or is or was serving, at our
request, as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise.
We have purchased an insurance policy effective upon consummation of the
offering covering indemnification of directors and officers of the Registrant
against liabilities arising under the Securities Act that might be incurred by
them in such capacities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
We have issued the following securities:
<TABLE>
<CAPTION>
NUMBER OF
PURCHASER SHARES/UNITS DATE CLASS/TYPE PAR VALUE
- ----------------------------- ------------------- --------------------- -------------------------- -----------------
<S> <C> <C> <C> <C>
MS Pietrafesa, L.P. ......... 100 shares October 1, 1998 Class B Common Stock $.0002 per share
3,775,567 shares Issued prior to the Class B Common Stock $.0002 per share
offering through
additional
issuance for
nominal
consideration
Thomas M. Minkstein ......... 2.5 Units January 27, 1999 Partnership Units of Not applicable
MSJP, L.P. valued at
$100,000 per Unit,
representing an indirect
2.9% beneficial interest
in the shares of Class B
Common Stock owned
by MS Pietrafesa, L.P.
Windsong, Inc. .............. 333,333 shares(1) , 1999 Class A Common Stock $.001 per share
</TABLE>
- ----------
(1) Shares of Class A Common Stock issued to Windsong, Inc. as part of our
acquisition of Windsong, based on an assumed offering price of $12.00 per
share.
Each of the issuances cited above was exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act because the
issuances did not involve a public offering. In addition, each recipient
represented its intention to acquire the securities for investment only and not
with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the certificates issued in such
transactions. Such recipients had adequate access to information about The
Pietrafesa Corporation and were sophisticated and expert in financial matters.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
NUMBER DESCRIPTION
------ -----------
1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant, as amended
**3.2 By-Laws of Registrant
4 Form of Common Stock Certificate
5 Opinion of Roberts, Sheridan & Kotel, a Professional Corporation
**10.1 Asset Purchase Agreement dated March 11, 1999, among Registrant,
Components Acquisition Corp., John McCoy and Components by John
McCoy, Inc.
**10.2 Asset Purchase Agreement dated March 11, 1999, among Registrant, DAG
Acquisition Corp., Jarrod Nadel and Diversified Apparel Group, Ltd.
**10.3 Stock Purchase Agreement dated March 11, 1999, among Registrant,
Peter Lister and Global Sourcing Network, Ltd.
**10.4 Credit Agreement dated June 19, 1998, between National Bank of
Canada and MS Pietrafesa, L.P.
**10.5 Lease Agreement dated October 1, 1994, between MS Pietrafesa, L.P.
and Onondaga County Industrial Development Agency
**10.6 Payment in Lieu of Tax Agreement dated as of October, 1, 1994
between Onondaga County Industrial Development Agency and MS
Pietrafesa, L.P.
**10.7 Loan Agreement dated November 22, 1995, with New York State Urban
Development Corporation and MS Pietrafesa, L.P.
**10.8 Transfer of Assets and Assignment and Assumption of Contracts and
Leases dated as of October 1, 1998, between MS Pietrafesa, L.P. and
The Pietrafesa Corporation.
**10.9 Revolving Credit, Term Loan and Security Agreement dated April 15,
1999, between Registrant and PNC Bank, National Association.
**+10.10 License Agreement, as amended, dated as of January 1, 1996, between
Alexander Julian, Inc. and Windsong, Inc.
10.11 Factoring Agreement dated November 4, 1996, between Windsong, Inc.
and FINOVA Capital Corporation, as amended.
10.12 Asset Purchase Agreement dated as of July 12, 1999, between Windsong
Acquisition Corp. and Windsong, Inc.
21 List of Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Lawrence B. Goodman & Co., P.A.
23.3 Consent of Pasquale & Bowers, LLP
23.4 Consent of Weissbarth, Altman & Michaelson LLP
23.5 Consent of Roberts, Sheridan & Kotel, a Professional Corporation
(included in its opinion filed as Exhibit 5 hereto)
**24 Power of Attorney (reference is made to the signature pages to the
Registration Statement)
27 Financial Data Schedule
- ----------
* 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.
(d) The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which offers or sales of securities
are being made, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in the volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Syracuse, New York on
this 14th day of July, 1999.
THE PIETRAFESA CORPORATION
BY: /S/ RICHARD C. PIETRAFESA, JR.
------------------------------------
Name: Richard C. Pietrafesa, Jr.
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- --------------
<S> <C> <C>
/s/ Richard C. Pietrafesa, Jr. * President, Chief Executive Officer and July 14, 1999
- -------------------------------- Director (Principal Executive Officer)
/s/ Thomas A. Minkstein * Chief Operating Officer and Director July 14, 1999
- --------------------------------
/s/ Eugene R. Sunderhaft * Vice President -- Finance, Chief Financial July 14, 1999
- -------------------------------- Officer, Secretary and Treasurer (Principal
Financial and Accounting Officer)
/s/ Sterling B. Brinkley, Jr. * Chairman of the Board July 14, 1999
- --------------------------------
/s/ Mark C. Pickup * Director July 14, 1999
- --------------------------------
/s/ Robert J. Bennett * Director July 14, 1999
- --------------------------------
/s/ Paul M. McNicol * Director July 14, 1999
- --------------------------------
</TABLE>
- ----------
*By: /S/ RICHARD C. PIETRAFESA, JR.
---------------------------------
Richard C. Pietrafesa, Jr.
Attorney-in-Fact
II-5
<PAGE>
We have audited the Consolidated Financial Statements of The Pietrafesa
Corporation as of December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998, and have issued our report thereon dated
February 12, 1999 (except for Note 12 as to which the date is July 15, 1999);
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedule pertaining to Pietrafesa listed in Item 16(b)
of this Registration Statement. This schedule is the responsibility of
Pietrafesa's management. Our responsibility is to express an opinion based on
our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Syracuse, New York
February 12, 1999
S-1
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
THE PIETRAFESA CORPORATION
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE AT
DESCRIPTION BEGINNING OF YEAR TO EXPENSE DEDUCTIONS END OF YEAR
- ------------------------------- ------------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996:
Reserve for bad debts ......... $187 $ (179)(1) (27)(2) $ 35
Inventory reserve ............. 435 -- 100(3) 335
Year Ended December 31, 1997:
Reserve for bad debts ......... 35 -- -- 35
Inventory reserve ............. 335 -- -- 335
Year Ended December 31, 1998:
Reserve for bad debts ......... 35 10(1) 10(3) 35
Inventory reserve ............. 335 459(1) 39(3) 755
</TABLE>
- ----------
(1) Reduction/Addition of reserve based on analysis of related assets.
(2) Write-off of accounts receivable, net of recoveries. Writes-offs totaled
$27 in 1996 and recoveries totaled $54 in 1996.
(3) Write-off of accounts receivable or inventory.
S-2
<PAGE>
We have audited the Financial Statements of Components by John McCoy, Inc.
("Components") as of December 31, 1997 and 1998, and for the years then ended,
and have issued our report thereon dated March 4, 1999 (included elsewhere in
this Registration Statement). Our audits also included the financial statement
schedule pertaining to Components listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of Components management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Lawrence B. Goodman & Co., P.A.
Certified Public Accountants
Fair Lawn, New Jersey
March 7, 1999
S-3
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
COMPONENTS BY JOHN MCCOY, INC.
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE AT
DESCRIPTION BEGINNING OF YEAR TO EXPENSE DEDUCTIONS (1) END OF YEAR
- ------------------------------- ------------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Reserve for bad debts ......... $11 $ 51 $ -- $62
Year Ended December 31, 1998:
Reserve for bad debts ......... $62 $114 $115 $61
</TABLE>
- ----------
(1) Represents write-offs of account receivables.
S-4
<PAGE>
We have audited the Financial Statements of Global Sourcing Network, Ltd.
(GSN) as of December 31, 1997 and 1998 and for the years then ended, and have
issued our reports thereon dated February 2, 1999 (included elsewhere in this
Registration Statement). Our audits also included the financial statement
schedule pertaining to GSN listed in Item 16(b) of this Registration Statement.
This schedule is the responsibility of GSN's management. Our responsibility is
to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Pasquale & Bowers, LLP
Certified Public Accountants
Syracuse, New York
May 28, 1999
S-5
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
GLOBAL SOURCING NETWORK, LTD.
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE AT
DESCRIPTION BEGINNING OF YEAR TO EXPENSE DEDUCTIONS END OF YEAR
- ------------------------------- ------------------- ------------ ------------------ ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Reserve for bad debts ......... $0 $ 102 $ (102) (1) $ 0
Year Ended December 31, 1998:
Reserve for bad debts ......... $0 $ 149 $ (59) (1) $90
</TABLE>
- ----------
(1) Represents write-off of accounts receivable.
S-6
<PAGE>
We have audited the Financial Statements of Windsong, Inc. as of December
31, 1998 and 1997 and the related statements of income and retained earnings
(accumulated deficit) and cash flows for each of the three years in the period
ended December 31, 1998, and have issued our report thereon dated May 7, 1999
(included elsewhere in this Registration Statement).
Our audits also included the financial statement schedule pertaining to
Windsong, Inc. listed in item 16(b) of this Registration Statement. This
schedule is the responsibility of Windsong's management. Our responsibility is
to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
/s/ Weissbarth, Altman & Michaelson LLP
New York, New York
May 7, 1999
S-7
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
WINDSONG, INC.
YEAR ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE AT
DESCRIPTION BEGINNING OF YEAR TO EXPENSE DESCRIPTION END OF YEAR
- ------------------------------- ------------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996:
Reserve for bad debts ......... $ -- $-- $ -- $--
Inventory reserve ............. 35 -- -- 35
Year Ended December 31, 1997:
Reserve for bad debts ......... -- -- -- --
Inventory reserve ............. 35 -- 35 (1) --
Year Ended December 31, 1998:
Reserve for bad debts ......... -- 20 -- 20
Inventory reserve ............. -- -- -- --
</TABLE>
- ----------
(1) Reduction/Addition of reserve based on analysis of related assets.
S-8
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
THE PIETRAFESA CORPORATION
================================================================================
<PAGE>
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant, as amended
**3.2 By-Laws of Registrant
4 Form of Common Stock Certificate
5 Opinion of Roberts, Sheridan & Kotel, a Professional Corporation
**10.1 Asset Purchase Agreement dated March 11, 1999, among Registrant,
Components Acquisition Corp., John McCoy and Components by John
McCoy, Inc.
**10.2 Asset Purchase Agreement dated March 11, 1999, among Registrant, DAG
Acquisition Corp., Jarrod Nadel and Diversified Apparel Group, Ltd.
**10.3 Stock Purchase Agreement dated March 11, 1999, among Registrant,
Peter Lister and Global Sourcing Network, Ltd.
**10.4 Credit Agreement dated June 19, 1998, between National Bank of
Canada and MS Pietrafesa, L.P.
**10.5 Lease Agreement dated October 1, 1994, between MS Pietrafesa, L.P.
and Onondaga County Industrial Development Agency
**10.6 Payment in Lieu of Tax Agreement dated as of October, 1, 1994
between Onondaga County Industrial Development Agency and MS
Pietrafesa, L.P.
**10.7 Loan Agreement dated November 22, 1995, with New York State Urban
Development Corporation and MS Pietrafesa, L.P.
**10.8 Transfer of Assets and Assignment and Assumption of Contracts and
Leases dated as of October 1, 1998, between MS Pietrafesa, L.P. and
The Pietrafesa Corporation.
**10.9 Revolving Credit, Term Loan and Security Agreement dated April 15,
1999, between Registrant and PNC Bank, National Association.
**+10.10 License Agreement, as amended, dated as of January 1, 1996, between
Alexander Julian, Inc. and Windsong, Inc.
10.11 Factoring Agreement dated November 4, 1996, between Windsong, Inc.
and FINOVA Capital Corporation, as amended.
10.12 Asset Purchase Agreement dated as of July 12, 1999, between Windsong
Acquisition Corp. and Windsong, Inc.
21 List of Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Lawrence B. Goodman & Co., P.A.
23.3 Consent of Pasquale & Bowers, LLP
23.4 Consent of Weissbarth, Altman & Michaelson LLP
23.5 Consent of Roberts, Sheridan & Kotel, a Professional Corporation
(included in its opinion filed as Exhibit 5 hereto)
**24 Power of Attorney (reference is made to the signature pages to the
Registration Statement)
27 Financial Data Schedule
- ----------
* 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.
<PAGE>
Exhibit 1
[______________] Shares
THE PIETRAFESA CORPORATION
Class A Common Stock
UNDERWRITING AGREEMENT
Philadelphia, Pennsylvania
[___________ ___, 1999]
JANNEY MONTGOMERY SCOTT INC.
FIRST SECURITY VAN KASPER
MORGAN SCHIFF & CO., INC.
As Representatives of the Several
Underwriters Named in Schedule I Hereto
c/o Janney Montgomery Scott Inc.
1801 Market Street
Philadelphia, Pennsylvania 19103
Dear Ladies and Gentlemen:
The Pietrafesa Corporation, a Delaware corporation (the "Company"),
proposes to sell to Janney Montgomery Scott Inc., First Security Van Kasper and
Morgan Schiff & Co., Inc. (the "Representatives") and the several other
underwriters named in Schedule I hereto (collectively with the Representatives,
the "Underwriters") _____________ shares of the Company's Class A common stock
("Class A Shares"). The Class A Shares to be sold to the Underwriters by the
Company are hereinafter referred to as the "Firm Shares." The respective amounts
of the Firm Shares to be so purchased by the several Underwriters are set forth
opposite their names in Schedule I hereto. The Firm Shares shall be offered to
the public at an initial public offering price of $______ per Firm Share (the
"Offering Price").
In addition, in order to cover over-allotments in the sale of the Firm
Shares, the Underwriters may purchase for the Underwriters' own accounts,
ratably in proportion to the amounts set forth opposite their respective names
in Schedule I hereto, up to __________ additional Class A Shares from the
Company (such additional Class A Shares are referred to herein as the "Optional
Shares"). If any Optional Shares are purchased, the Optional Shares shall be
purchased for offering to the
<PAGE>
public at the Offering Price and in accordance with the terms and conditions set
forth herein. The Firm Shares and the Optional Shares are referred to
collectively herein as the "Shares."
In October 1998, MS Pietrafesa, L.P. (the "Partnership") transferred all
of its assets and liabilities to the Company in exchange for 100 shares of the
Company's Class B common stock ("Class B Shares"). Immediately prior to the
completion of the sale of the Firm Shares, the Company will issue an additional
_____ Class B Shares to the Partnership for nominal consideration. The
transactions described in this paragraph (collectively, the "Reorganization")
have been or will be made pursuant to the terms of certain contribution,
transfer, assignment, assumption and exchange agreements (collectively, the
"Reorganization Agreements") between the Company and the Partnership.
The Company has entered into the Asset Purchase Agreements and Stock
Purchase Agreement identified on Exhibit A hereto (the "Acquisition Agreements")
with each of Diversified Apparel Group, Ltd. ("DAG"), Global Sourcing Network,
Ltd. ("Global"), Components by John McCoy, Inc. ("Components"), Windsong, Inc.
("Windsong") and each of their stockholders (collectively, with Components, DAG,
Global and Windsong, the "Sellers") to purchase substantially all of the assets
of DAG, Components and Windsong and all of the outstanding shares of capital
stock of Global prior to or simultaneous with the closing of the sale of the
Firm Shares (the "Acquisitions"). Global and the business and operations of each
of DAG, Components and Windsong are hereinafter collectively referred to as the
"Acquired Businesses." For the purposes of this Agreement, unless indicated
otherwise, references to the Subsidiaries (as defined below) shall include the
Acquired Businesses.
The Company, intending to be legally bound, hereby confirms its agreement
with the Underwriters as follows:
1. Representations and Warranties.
(a) Representations and Warranties of the Company. The Company, and
each of its subsidiaries (the "Subsidiaries") jointly and severally represent
and warrant to, and agree with, the several Underwriters that:
(i) The Company has prepared, in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Regulations") of the Securities and Exchange
Commission (the "SEC") under the Act, and has filed with the SEC a registration
statement on Form S-1 (File No. 333-74439) and one or more amendments thereto
for the primary purpose of registering the Shares under the Act. Copies of such
registration statement and any amendments thereto, and all forms of the related
prospectus contained therein, have been delivered to the Representatives; any
preliminary prospectus included in a Registration Statement or filed with the
SEC pursuant to Rule 424(a) of the Regulations is hereinafter called a
"Preliminary Prospectus." The various parts of such registration statement,
including all exhibits thereto and the information (if any) contained in the
form of final prospectus filed with the SEC pursuant to Rule 424(b) of the
Regulations in accordance with Section 5(a) of this Agreement and deemed by
virtue
2
<PAGE>
of Rule 424 of the Regulations to be part of the registration statement at the
time it was declared effective, each as amended at the time the registration
statement became effective, are hereinafter collectively called the "Original
Registration Statement." Any registration statement filed with the Commission
pursuant to Rule 462(b) under the Act (including the Registration Statement and
any Preliminary Prospectus or Prospectus incorporated therein at the time such
Registration Statement becomes effective) is hereinafter referred to as a "Rule
462(b) Registration Statement." The term "Registration Statement" includes both
the Original Registration Statement and any Rule 462(b) Registration Statement.
The final prospectus in the form included in the Registration Statement or first
filed with the SEC pursuant to Rule 424(b) of the Regulations and any amendments
or supplements thereto are hereinafter called the "Prospectus."
(ii) The Registration Statement has become effective under the
Act and the SEC has not issued any stop order suspending the effectiveness of
the Registration Statement or preventing or suspending the use of the
Preliminary Prospectus, nor has the SEC instituted or threatened to institute
proceedings with respect to such an order. No stop order suspending the sale of
the Shares in any jurisdiction designated by the Representatives as provided for
in Section 5(f) hereof has been issued, and no proceedings for that purpose have
been instituted or threatened. The Company has complied in all material respects
with all requests of the SEC, or requests of which the Company has been advised
of any state securities commission in a state designated by the Representatives
as provided for in Section 5(f) hereof, for additional information to be
included in the Registration Statement, any Preliminary Prospectus or the
Prospectus unless such request has been waived. Each Preliminary Prospectus
conformed to all the requirements of the Act and the Regulations as of its date
in all material respects and did not as of its date contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except the foregoing
shall not apply to statements in or omissions from any Preliminary Prospectus in
reliance upon and in conformity with information supplied to the Company in
writing by or on behalf of any Underwriter through the Representatives expressly
for use therein. The Registration Statement, on the date on which it is declared
effective by the SEC (the "Effective Date") and when any post-effective
amendment thereof shall become effective, and the Prospectus, at the time it is
filed with the SEC pursuant to Rule 424(b) and on the Closing Date (as defined
in Section 3 hereof) and any Option Closing Date (as defined in Section 4(b)
hereof), will conform in all material respects to all the requirements of the
Act and the Regulations, and will not, on any of such dates, include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading,
except that this representation and warranty does not apply to statements in or
omissions from the Registration Statement or the Prospectus made in reliance
upon and in conformity with information furnished to the Company in writing by
or on behalf of any Underwriter through the Representatives expressly for use
therein.
(iii) If the Company has elected to rely on Rule 462(b) and
the Rule 462(b) Registration Statement has not been declared effective (a) the
Company has filed a Rule 462(b) Registration Statement in compliance with and
that is effective upon filing pursuant to Rule 462(b) and has received
confirmation of its receipt and (b) the Company has given irrevocable
3
<PAGE>
instructions for transmission of the applicable filing fee in connection with
the filing of the Rule 462(b) Registration Statement, in compliance with Rule
111 promulgated under the Act or the Commission has received payment of such
filing fee.
(iv) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, with all
necessary corporate power and authority, and all required licenses, permits,
clearances, certifications, registrations, approvals, consents and franchises,
to own or lease and operate its properties and to conduct its business as
described in the Prospectus, and to execute, deliver and perform this Agreement.
Each of the Subsidiaries has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with all necessary corporate power and authority, and all
required licenses, permits, clearances, certifications, registrations,
approvals, consents and franchises, to own or lease and operate its properties
and to conduct its business as described in the Prospectus.
(v) The outstanding shares of capital stock or other evidence
of ownership of the Subsidiaries have been duly authorized and validly issued
and are 100% owned by the Company, in all cases free and clear of all liens,
encumbrances and security interests. There are no outstanding options,
obligations to issue or other rights to convert or exchange any obligations into
shares of capital stock or ownership interests in the Subsidiaries. Except as
provided in the corporation law of the respective jurisdictions of incorporation
of the Subsidiaries or as set forth in the Prospectus, there are no restrictions
of any kind which prevent the payment of dividends by any of the Subsidiaries.
(vi) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes its legal, valid and binding
obligation, enforceable against the Company in accordance with its terms, except
as such enforceability may be limited by equitable principles or by the
application of bankruptcy, insolvency or other similar laws, now or hereafter in
effect, relating to or affecting creditors' rights generally, and except as
rights to indemnity and contribution hereunder may be limited by applicable
securities laws.
(vii) The Reorganization Agreements have been duly authorized,
executed and delivered by the Company and the Partnership and are the valid and
binding obligations of the Company and the Partnership, enforceable against the
Company and the Partnership in accordance with their respective terms, except as
such enforceability may be limited by equitable principles or by the application
of bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally. The Reorganization has been consummated
on the terms and conditions set forth in the Prospectus and in accordance with
the terms and provisions of the Reorganization Agreements.
(viii) Each Acquisition Agreement has been duly authorized,
executed and delivered by the Company and the applicable Sellers and are the
valid and binding obligations of the Company and such Sellers, enforceable
against the Company and such Sellers in accordance with its terms, except as
such enforceability may be limited by equitable principles or by the application
of bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights
4
<PAGE>
generally. Each Acquisition has been consummated on the terms and conditions set
forth in the Prospectus and in accordance with the terms and provisions of the
applicable Acquisition Agreement.
(ix) The execution, delivery and performance of this Agreement
by the Company does not and will not, with or without the giving of notice or
the lapse of time, or both, (a) conflict with any term or provision of the
Company's and each of the Subsidiaries' Certificates of Incorporation or Bylaws,
or similar governing instruments, (b) result in a breach of, constitute a
default under, result in the termination or modification of, result in the
creation or imposition of any lien, security interest, charge or encumbrance
upon any of the assets of the Company or any of the Subsidiaries, or require any
payment by the Company or any of the Subsidiaries, or impose any liability on
the Company or any of the Subsidiaries pursuant to, any contract, indenture,
mortgage, deed of trust, commitment or other agreement or instrument to which
the Company or any of the Subsidiaries is a party or by which any of the
Company's or any of the Subsidiaries' assets are bound or affected, (c) assuming
compliance with Blue Sky laws and regulations applicable to the offer and sale
of the Shares, violate any law, rule, regulation, judgment, order or decree of
any government or governmental agency, instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any of its Subsidiaries or any
of the Company's or any of its Subsidiaries' properties or business or (d)
result in a breach, termination or lapse of the Company's or any of its
Subsidiaries' power and authority to own or lease and operate its assets and
properties and conduct its business as described in the Prospectus.
(x) At the date or dates indicated in the Prospectus, the
Company had the duly authorized and outstanding capital stock set forth in the
Prospectus; and on the Effective Date, the Closing Date and any Option Closing
Date, there were and will be no options or warrants for the purchase of, other
outstanding rights to purchase, agreements or obligations to issue or agreements
or other rights to convert or exchange any obligation or security into, capital
stock of the Company or securities convertible into or exchangeable for capital
stock of the Company, except as described in the Prospectus.
(xi) The capital stock of the Company conforms with the
description thereof contained in the Prospectus.
(xii) The currently outstanding shares of the Company's and
the Subsidiaries' capital stock have been duly authorized and are validly
issued, fully paid and non-assessable, and none of such outstanding shares of
the Company's or Subsidiaries' capital stock has been issued in violation of any
preemptive rights of any security holder of the Company or the Subsidiaries. The
holders of the outstanding shares of the Company's and the Subsidiaries' capital
stock are not subject to personal liability solely by reason of being such
holders. The offers and sales of the outstanding shares of the Company's and the
Subsidiaries' capital stock, whether described in the Registration Statement or
otherwise, were made in conformity with applicable federal, state and foreign
securities laws.
5
<PAGE>
(xiii) When the Shares have been duly delivered against
payment therefor as contemplated by this Agreement, the Shares will be validly
issued, fully paid and non-assessable, and the holders thereof will not be
subject to personal liability solely by reason of being such holders. The
certificates representing the Shares are in proper legal form under, and conform
in all respects to the requirements of, the Delaware General Corporation Law, as
amended. Neither the filing of the Registration Statement nor the offering or
sale of Shares as contemplated by this Agreement gives any security holder of
the Company any rights for or relating to the registration of any Class A Shares
or any other capital stock of the Company, except such as have been satisfied or
waived.
(xiv) No consent, approval, authorization, order,
registration, license or permit of, or filing or registration with, any court,
government, governmental agency, instrumentality or other regulatory body or
official is required for the valid and legal execution, delivery and performance
by the Company of this Agreement and the consummation of the transactions
contemplated hereby and described in the Prospectus, except such as may be
required for the registration of the Shares under the Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and for compliance with
the applicable state securities or Blue Sky laws.
(xv) The Class A Shares (including the Shares) have been
approved for inclusion, subject only to official notice of issuance, in the
Nasdaq National Market.
(xvi) The statements in the Registration Statement and
Prospectus, insofar as they are descriptions of or references to contracts,
agreements or other documents, are accurate in all material respects and present
or summarize fairly, in all material respects, the information required to be
disclosed under the Act and/or the Regulations, and there are no contracts,
agreements or other documents required to be described or referred to in the
Registration Statement or Prospectus or to be filed as exhibits to the
Registration Statement under the Act or the Regulations that have not been so
described, referred to or filed, as required.
(xvii) No relationship, direct or indirect, exists between or
among the Company or any of the Subsidiaries on the one hand, and the directors,
officers, stockholders, customers or suppliers of the Company or any of the
Subsidiaries on the other hand, which is required by the Act to be described in
the Registration Statement and the Prospectus and which is not so described.
(xviii) The pro forma combined financial statements of the
Company and the historical financial statements of the Company, the Partnership
and each Seller (including, in each case, the notes thereto) filed as part of
any Preliminary Prospectus, the Prospectus and the Registration Statement
present fairly, in all material respects, the pro forma combined or historical
financial position, as the case may be, of the Company, the Partnership and such
Sellers, as the case may be, as of the respective dates thereof, and the results
of their operations, their stockholders' equity and their cash flows for the
periods indicated therein, all in conformity with generally accepted accounting
principles consistently applied. The supporting notes and schedules included in
the Registration Statement fairly state in all material respects the information
required to be stated therein in relation to the financial statements taken as a
whole. The financial information included
6
<PAGE>
in the Prospectus under the caption "Prospectus Summary" and "Selected
Historical Consolidated Financial Data" presents fairly the information shown
therein and has been compiled on a basis consistent with that of the audited
financial statements included in the Registration Statement. The unaudited pro
forma financial information included in the Registration Statement complies as
to form in all material respects with the applicable accounting requirements of
Rule 11-02 of Regulation S-X under the Act and the pro forma adjustments have
been properly applied to the historical amounts in the compilation of this
information.
(xix) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as otherwise
expressly stated therein or expressly contemplated thereby, there has not been
(a) any material adverse change (including, whether or not insured against, any
material loss or damage to any material assets), or development which could
reasonably be expected to involve a prospective material adverse change, in the
general affairs, properties, assets, management, condition (financial or
otherwise), results of operations, stockholders' equity, business or prospects
of either the Company or the Subsidiaries taken as a whole, (b) any material
adverse change, loss, reduction, termination or non-renewal of any contract to
which the Company or any Subsidiary is a party, (c) any transaction entered into
by the Company or any Subsidiary not in the ordinary course of its business that
is material to the Company and the Subsidiaries taken as a whole, (d) any
dividend or distribution of any kind declared, paid or made by the Company or
any Subsidiary on its capital stock, (e) any liabilities or obligations, direct
or indirect, incurred by the Company or any Subsidiary that are material to the
Company and the Subsidiaries taken as a whole, (f) any change in the
capitalization or stock ownership of the Company or any Subsidiary or (g) any
change in the indebtedness of the Company or any Subsidiary that is material to
the Company and the Subsidiaries taken as a whole. Neither the Company nor any
Subsidiary has any contingent liabilities or obligations that are material to
the Company and the Subsidiaries taken as a whole and that are not disclosed in
the Prospectus.
(xx) The Company has not distributed and will not distribute
any offering material in connection with the offering and sale of the Shares
other than the Registration Statement, a Preliminary Prospectus, the Prospectus
and other material, if any, permitted by the Act and the Regulations. Neither
the Company nor any of its officers, directors or affiliates has taken nor shall
the Company take any action designed to, or that might be reasonably expected to
cause or result in, stabilization or manipulation of the price of the Shares.
(xxi) The Company, the Partnership and each Subsidiary have
filed with the appropriate federal, state and local governmental agencies, and
all foreign countries and political subdivisions thereof, all tax returns that
are required to be filed or have duly obtained extensions of time for the filing
thereof and have paid all taxes shown on such returns or otherwise due and all
material assessments received by it to the extent that the same have become due.
Neither the Company, the Partnership nor any Subsidiary has executed or filed
with any taxing authority, foreign or domestic, any agreement extending the
period for assessment or collection of any income or other tax or is a party to
any pending action or proceeding by any foreign or domestic governmental
agencies for the assessment or collection of taxes, and no claims for assessment
or collection of taxes have been asserted against the Company, the Partnership
or any Subsidiary that might materially
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adversely affect the general affairs, assets, properties, condition (financial
or otherwise), results of operations, stockholders' equity, business or
prospects of the Company and the Subsidiaries, taken as a whole.
(xxii) To the best knowledge of the Company, Ernst & Young
LLP, Lawrence B. Goodman & Co., P.A., Pasquale & Bowers, LLP and Weissbarth,
Altman & Michaelson LLP, each of which has given its reports on certain
financial statements included as part of the Registration Statement, are firms
of independent certified public accountants as required by the Act and the
Regulations.
(xxiii) Neither the Company nor any Subsidiary is in violation
of or in default under any of the terms or provisions of (a) its Certificate of
Incorporation or Bylaws or similar governing instruments, or (b) any indenture,
mortgage, deed of trust, contract, commitment or other agreement or instrument
to which it is a party or by which it or any of its properties is bound or
affected, (c) any law, rule, regulation, judgment, order or decree of any
government or governmental agency, instrumentality or court, domestic or
foreign, having jurisdiction over it or any of its properties or business or (d)
any license, permit, clearance, certification, registration, approval, consent
or franchise referred to in Section 1(a)(iii) hereof, where, with respect to
clauses (b), (c) and (d) of this Section 1(a)(xxi), such violation or default
could reasonably be expected to have a material adverse effect on the general
affairs, properties, condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects of the Company and the Subsidiaries
taken as a whole.
(xxiv) There are no claims, actions, suits, protests,
proceedings, arbitrations, investigations or inquiries pending before, or
threatened or to the Company's knowledge contemplated by, any governmental
agency, instrumentality, court or tribunal, domestic or foreign, or before any
private arbitration tribunal to which the Company, the Partnership or any
Subsidiary is a party, that could reasonably be expected to affect the validity
of any of the outstanding Class A Shares, or that, if determined adversely to
the Company, the Partnership or any Subsidiary, would, in any case or in the
aggregate, result in any material adverse change in the general affairs,
properties, condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects of the Company and the Subsidiaries
taken as a whole; nor, to the Company's knowledge, is there any reasonable basis
for any such claim, action, suit, protest, proceeding, arbitration,
investigation or inquiry. There are no outstanding orders, judgments or decrees
of any court, governmental agency, instrumentality or other tribunal enjoining
the Company or any Subsidiary from, or requiring the Company or any Subsidiary
to take or refrain from taking, any action, or to which the Company or any
Subsidiary, their properties, assets or business are bound or subject.
(xxv) The Company and the Subsidiaries own, or possess
adequate rights to use, all patents, patent applications, trademarks, trade
names, service marks, licenses, inventions, copyrights, know-how, trade secrets,
confidential information, processes and formulations and other proprietary
information necessary for, used in or proposed to be used in the conduct of
their business as described in the Prospectus. The Company and the Subsidiaries
have not infringed upon, are not
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infringing upon and have not received any notice of conflict with, the asserted
intellectual property or other rights of others and the Company knows of no
reasonable basis for any notice or claim of such infringement or conflict.
(xxvi) The Company and each Subsidiary have good and
marketable title to all property described in the Prospectus as being owned by
them, free and clear of all liens, security interests, charges or encumbrances,
except such as are described or referred to in the Prospectus or such as do not
materially affect the value of such property and do not interfere in any
material respect with the use made, or proposed to be made, of such property by
the Company or the Subsidiary. The Company and each Subsidiary have adequately
insured their property against loss or damage by fire or other casualty and
maintain, in amounts reasonably believed by them to be adequate, insurance
against such other risks as they deem appropriate. All real and personal
property leased by the Company or any Subsidiary, as described or referred to in
the Prospectus, is held by the Company or such Subsidiary under valid leases.
All of the facilities of the Company and each Subsidiary (the "Premises"), and
all operations conducted thereon, are now and, since the Company or any
Subsidiary began to use such Premises, always have been and, to the knowledge of
the Company, prior to when the Company or any Subsidiary began to use such
Premises, always had been, in compliance with all, foreign or domestic, federal,
state and local statutes or ordinances, regulations and rules concerning or
relating to industrial hygiene and the protection of health and the environment
(collectively, "the Governmental Laws"), except to the extent that any failure
to be in such compliance would not materially adversely affect the general
affairs, properties, condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects of the Company and the Subsidiaries
taken as a whole. There are no conditions on, about, beneath or arising from the
Premises that might give rise to liability, the imposition of a statutory lien
or require a "Response," "Removal" or "Remedial Action," as defined herein,
under any of the Governmental Laws, and that would materially adversely affect
the general affairs, properties, condition (financial or otherwise), results of
operations, stockholders' equity, business or prospects of the Company and the
Subsidiaries taken as a whole. Neither the Company nor any Subsidiary has
received notice, and the Company does not have knowledge, of any claim, demand,
investigation, regulatory action, suit or other action instituted or threatened
against the Company or any Subsidiary or any portion of the Premises relating to
any of the Governmental Laws. Neither the Company nor any Subsidiary has
received any notice of material violation, citation, complaint, order,
directive, request for information or response thereto, notice letter, demand
letter or compliance schedule to or from any governmental or regulatory agency,
foreign or domestic, arising out of or in connection with "hazardous substances"
(as defined by applicable Governmental Laws) on, about, beneath, arising from or
generated at the Premises. As used in this subsection, the terms "Response,"
"Removal" and "Remedial Action" shall have the respective meanings assigned to
such terms under Sections 101(23)-101(25) of the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund Amendments
and Reauthorization Act, 42 U.S.C. 9601(23)-9601(25).
(xxvii) The Company and each Subsidiary maintain a system of
internal accounting controls sufficient to provide reasonable assurances that:
(a) transactions are executed in accordance with management's general or
specific authorization; (b) transactions are recorded as necessary in order to
permit preparation of financial statements in accordance with generally
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accepted accounting principles and statutory accounting practices and to
maintain accountability for assets; (c) access to assets is permitted only in
accordance with management's general or specific authorization and (d) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxviii) Each contract or other instrument (however
characterized or described) to which the Company or any Subsidiary is a party or
by which any of their properties or business is bound or affected and which is
material to the conduct of the Company's business as described in the Prospectus
has been duly and validly executed by the Company or such Subsidiary, and, to
the knowledge of the Company, by the other parties thereto. Each such contract
or other instrument is in full force and effect and is enforceable against the
parties thereto in accordance with its terms, and the Company and the
Subsidiaries are not, and to the knowledge of the Company, no other party is, in
material default thereunder, and no event has occurred that, with the lapse of
time or the giving of notice, or both, would constitute a material default under
any such contract or other instrument. All necessary consents under such
contracts or other instruments to disclosure in the Prospectus with respect
thereto have been obtained.
(xxix) Except for such plans that are expressly disclosed in
the Prospectus, the Company and the Subsidiaries do not have any employee
benefit plan, profit sharing plan, employee pension benefit plan or employee
welfare benefit plan or deferred compensation arrangements ("Plans") that are
subject to the provisions of the Employee Retirement Income Security Act of
1974, as amended, or the rules and regulations thereunder ("ERISA"). All Plans
that are subject to ERISA are in compliance with ERISA, in all material
respects, and, to the extent required by the Internal Revenue Code of 1986, as
amended (the "Code"), in compliance with the Code in all material respects.
Neither the Company nor any Subsidiary has or ever had any employee pension
benefit plan that is subject to Part 3 of Subtitle B of Title I of ERISA or any
defined benefit plan or multi-employer plan. The Company has not maintained
retired life and retired health insurance plans that are employee welfare
benefit plans providing for continuing benefit or coverage for any employee or
any beneficiary of any employee after such employee's termination of employment,
except as required by Section 4980B of the Code. No fiduciary or other party in
interest with respect to any of the Plans has caused any of such Plans to engage
in a prohibited transaction as defined in Section 406 of ERISA. As used in this
subsection, the terms "defined benefit plan," "employee benefit plan," "employee
pension benefit plan," "employee welfare benefit plan," "fiduciary" and
"multi-employer plan" shall have the respective meanings assigned to such terms
in Section 3 of ERISA.
(xxx) Neither the Company, the Partnership nor any Subsidiary
has experienced any work stoppages or labor disputes in the past. No labor
dispute presently exists with the employees of the Company or any Subsidiary,
and no such labor dispute is threatened. The Company has no knowledge of any
existing or threatened labor disturbance by the employees of any of the
principal suppliers, contractors or customers of the Company or its Subsidiaries
that would materially adversely affect the general affairs, properties,
condition (financial or otherwise), results of operations, stockholders' equity,
business or prospects of the Company and the Subsidiaries taken as a whole.
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(xxxi) The Company, the Partnership and the Subsidiaries have
complied with all provisions of Section 517.075, Florida Statutes (Chapter
92-198, Laws of Florida) relating to doing business with the Government of Cuba
or with any person or affiliate located in Cuba;
(xxxii) Neither the Company, the Partnership nor any
Subsidiary has incurred any liability for any finder's fees or similar payments
in connection with the transactions contemplated herein.
(xxxiii) Each of the Company and the Subsidiaries currently
intends to conduct its affairs in such a manner as to ensure that it will not be
an "investment company" within the meaning of the Investment Company Act of
1940, as amended (the "1940 Act"), and the rules and regulations thereunder.
(xxxiv) There is no document or contract of a character
required to be described in the Prospectus or to be filed as an exhibit to the
Registration Statement which is not described or filed as required; no
statement, representation, warranty or covenant made by the Company or any
Subsidiary in this Agreement or in any certificate or document required by this
Agreement to be delivered to the Representatives is, was when made, or as of the
Closing Date or any Option Closing Date will be, inaccurate, untrue or incorrect
in any material respect. No transaction has occurred or is proposed between or
among the Company and any of its officers, directors or stockholders or any
affiliate of any such officer, director or stockholder that is required to be
described in and is not described in the Registration Statement and the
Prospectus.
(xxxv) None of the Company, the Partnership any Subsidiary or
any officer, director, employee, agent or other person acting on behalf of the
Company, the Partnership or such Subsidiary has, directly or indirectly, given
or agreed to give any money, property or similar benefit or consideration to any
customer or supplier (including any employee or agent of any customer or
supplier) or official or employee of any agency or instrumentality of any
government (foreign or domestic) or political party or candidate for office
(foreign or domestic) or any other person who was, is or in the future may be in
a position to affect the general affairs, properties, condition (financial or
otherwise), results of operations, stockholders' equity, business or prospects
of the Company and the Subsidiaries taken as a whole or any actual or proposed
business transaction of the Company or the Subsidiaries that (a) could subject
the Company, the Partnership, such Subsidiary or an executive officer of any of
them to any liability (including, but not limited to, the payment of monetary
damages) or penalty in any civil, criminal or governmental action or proceeding,
foreign or domestic, which would have a material adverse effect on the general
affairs, properties, condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects of the Company or the Subsidiaries
taken as a whole or (b) violates any law, rule or regulation, foreign or
domestic, to which the Company, the Partnership or the Subsidiaries are subject,
which violation if proven would have a material adverse effect on the general
affairs, properties, condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects of the Company and the Subsidiaries
taken as a whole.
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(xxxvi) Neither the Company nor the Partnership has declared,
paid or accrued any dividends or distributions to stockholders or partners since
its inception, except as described or referred to in the Prospectus and will not
hereafter declare, pay or, except as described in the Prospectus, accrue any
such dividends or distributions prior to the Closing Date.
(xxxvii) Except as described on Schedule II attached hereto,
none of the stockholders of the Company is affiliated with any member of the
National Association of Securities Dealers, Inc. (the "NASD").
Any certificate signed by any officer of the Company or any Subsidiary in
such capacity and delivered to the Representatives or to counsel for the
Underwriters pursuant to this Agreement shall be deemed a representation and
warranty by the Company or such Subsidiary to the several Underwriters as to the
matters covered thereby.
2. Purchase and Sale of Firm Shares. On the basis of the representations,
warranties, covenants and agreements contained herein, but subject to the terms
and conditions set forth herein, the Company shall sell to the several
Underwriters at the Offering Price, less the Underwriting Discounts and
Commissions in the amount of $_____ per Share, the respective amounts of the
Firm Shares set forth opposite their names on Schedule I hereto, and the
Underwriters, severally and not jointly, shall purchase from the Company on a
firm commitment basis, at the Offering Price, less the Underwriting Discounts
and Commissions in the amount of $____ per Share, the respective amounts of the
Firm Shares set forth opposite their names on Schedule I hereto. In making this
Agreement, each Underwriter is contracting severally, and not jointly, and
except as provided in Sections 4 and 11 hereof, the agreement of each
Underwriter is to purchase only that number of shares specified with respect to
that Underwriter in Schedule I hereto. The Underwriters shall offer the Shares
to the public as set forth in the Prospectus.
3. Payment and Delivery. Payment for the Firm Shares shall be made
by certified or official bank check payable to the order of the Company, in New
York Clearing House funds at the offices of Janney Montgomery Scott Inc., 1801
Market Street, Philadelphia, Pennsylvania, or such other place as shall be
agreed upon by the Company and the Representatives, or in immediately available
funds wired to such accounts as the Company may specify (with all costs and
expenses incurred by the Underwriters in connection with such settlement in
immediately available funds, including, but not limited to, interest or cost of
funds and expenses, to be borne by the Company), against delivery of the Firm
Shares to the Representatives at the offices of Janney Montgomery Scott Inc.,
1801 Market Street, Philadelphia, Pennsylvania, or such other place as shall be
agreed upon by the Company and the Representatives, for the respective accounts
of the Underwriters. Such payment and delivery will be made at 10:00 AM.,
Philadelphia, Pennsylvania time, on ________, 1999. Such time and date are
referred to herein as the "Closing Date." The certificates representing the Firm
Shares to be sold and delivered will be in such denominations and registered in
such names as the Representatives request not less than two full business days
prior to the Closing Date, and will be made available to the Representatives for
inspection, checking and packaging at the New York correspondent office of the
Company's transfer agent not less than one full business day prior to the
Closing Date.
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4. Option to Purchase Optional Shares.
(a) For the purposes of covering any over-allotments in connection
with the distribution and sale of the Firm Shares as contemplated by the
Prospectus, subject to the terms and conditions herein set forth, the several
Underwriters are hereby granted an option by the Company to purchase all or any
part of the Optional Shares from the Company (the "Over-allotment Option"). The
purchase price to be paid for the Optional Shares shall be the Offering Price
less the Underwriting Discounts and Commissions shown on the cover page of the
Prospectus. The Over- allotment Option granted hereby may be exercised by the
Representatives on behalf of the several Underwriters as to all or any part of
the Optional Shares at any time and from time to time within 30 days after the
date of the Prospectus. No Underwriter shall be under any obligation to purchase
any Optional Shares prior to an exercise of the Over-allotment Option.
(b) The Over-allotment Option granted hereby may be exercised by the
Representatives on behalf of the several Underwriters by giving notice to the
Company by a letter sent by registered or certified mail, postage prepaid,
telex, telegraph, telegram or facsimile (such notice to be effective when
received), addressed as provided in Section 13 hereof, setting forth the number
of Optional Shares to be purchased, the date and time for delivery of and
payment for the Optional Shares and stating that the Optional Shares referred to
therein are to be used for the purpose of covering over-allotments in connection
with the distribution and sale of the Firm Shares. If such notice is given prior
to the Closing Date, the date set forth therein for such delivery and payment
shall be the Closing Date. If such notice is given on or after the Closing Date,
the date set forth therein for such delivery and payment shall be a date
selected by the Representatives that is within three full business days after
the exercise of the Over-allotment Option. The date and time set forth in such a
notice is referred to herein as an "Option Closing Date," and a closing held
pursuant to such a notice is referred to herein as an "Option Closing." Upon
each exercise of the Over-allotment Option, and on the basis of the
representations, warranties, covenants and agreements herein contained, and
subject to the terms and conditions herein set forth, the several Underwriters
shall become severally, but not jointly, obligated to purchase from the Company
the number of Optional Shares specified in each notice of exercise of the
Over-allotment Option.
(c) The number of Optional Shares to be sold to each Underwriter
pursuant to each exercise of the Over-allotment Option shall be the number that
bears the same ratio to the aggregate number of Optional Shares being purchased
through such Over-allotment Option exercise as the number of Firm Shares
opposite the name of such Underwriter in Schedule I hereto bears to the total
number of all Firm Shares. Notwithstanding the foregoing, the number of Optional
Shares purchased and sold pursuant to each exercise of the Over-allotment Option
shall be subject to such adjustment as the Representatives may approve to
eliminate fractional shares and subject to the provisions for the allocation of
Optional Shares purchased for the purpose of covering over-allotments set forth
in the agreement entered into by and among the Underwriters in connection
herewith (the "Agreement Among Underwriters").
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(d) Payment for the Optional Shares shall be made to the Company by
certified or official bank check payable to the order of the Company in New York
Clearing House funds, at the offices of Janney Montgomery Scott Inc., 1801
Market Street, Philadelphia, Pennsylvania, or such other place as shall be
agreed upon by the Company and the Representatives, or in immediately available
funds wired to such account as the Company may specify (with all costs and
expenses incurred by the Underwriters in connection with such settlement in
immediately available funds, including, but not limited to, interest or cost of
funds and expenses, to be borne by the Company), against delivery of the
Optional Shares to the Representatives at the offices of Janney Montgomery Scott
Inc., 1801 Market Street, Philadelphia, Pennsylvania, or such other place as
shall be agreed upon by the Company and the Representatives, for the respective
accounts of the Underwriters. The certificates representing the Optional Shares
to be issued and delivered will be in such denominations and registered in such
names as the Representatives request not less than two full business days prior
to the Option Closing Date, and will be made available to the Representatives
for inspection, checking and packaging at the New York correspondent office of
the Company's transfer agent not less than one full business day prior to the
Option Closing Date.
5. Certain Covenants and Agreements of the Company. The Company covenants
and agrees with the several Underwriters as follows:
(a) If Rule 430A of the Regulations is employed, the Company will
timely file the Prospectus pursuant to and in compliance with Rule 424(b) of the
Regulations and will advise the Representatives of the time and manner of such
filing.
(b) The Company will not file or publish any amendment or supplement
to the Registration Statement, Preliminary Prospectus or Prospectus, including a
Rule 462(b) Registration Statement, at any time before the completion of the
distribution of the Shares by the Underwriters that is not (i) in compliance
with the Regulations and (ii) approved by the Representatives (such approval not
to be unreasonably withheld or delayed).
(c) The Company will advise the Representatives immediately, and
confirm such advice in writing, (i) when any post-effective amendment to the
Registration Statement, including a Rule 462(b) Registration Statement, is filed
with the SEC, (ii) of the receipt of any comments from the SEC concerning the
Registration Statement (and provide copies of any such comments to the
Representatives), (iii) when any post-effective amendment to the Registration
Statement becomes effective, or when any supplement to the Prospectus, any
amended Prospectus or a Rule 462(b) Registration Statement has been filed, (iv)
of any request of the SEC for amendment or supplementation of the Registration
Statement or Prospectus or for additional information, (v) during the period
when the Prospectus is required to be delivered under the Act and Regulations,
of the happening of any event as a result of which the Registration Statement or
the Prospectus would include an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein not misleading,
(vi) during the period noted in (v) above, of the need to amend the Registration
Statement or supplement the Prospectus to comply with the Act, (vii) of the
issuance by the SEC of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, and (viii)
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of the suspension of the qualification of any of the Shares for offering or sale
in any jurisdiction in which the Underwriters intend to make such offers or
sales, or of the initiation or threatening of any proceedings for any of such
purposes known to the Company. The Company will use its best efforts to prevent
the issuance of any such stop order or of any order preventing or suspending
such use and, if any such order is issued, to obtain as soon as possible the
lifting thereof.
(d) The Company has delivered to the Representatives, without
charge, copies of each Preliminary Prospectus. The Company will deliver to the
Representatives, without charge, from time to time during the period when
delivery of the Prospectus is required under the Act, such number of copies of
the Prospectus (as supplemented or amended) as the Representatives may
reasonably request. The Company hereby consents to the use of such copies of the
Preliminary Prospectus and the Prospectus for purposes permitted by the Act, the
Regulations and the securities or Blue Sky laws of the states in which the
Shares are offered by the several Underwriters and by all dealers to whom Shares
may be sold, both in connection with the offering and sale of the Shares and for
such period of time thereafter as the Prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer. The Company has
furnished or will furnish to the Representatives (i) five original signed copies
of the Registration Statement as originally filed and of all amendments and
supplements thereto (including any Rule 462(b) Registration Statement), whether
filed before or after the Effective Date, (ii) five copies of all exhibits filed
therewith and (iii) five signed copies of all consents and certificates of
experts, and will deliver to the Representatives such number of conformed copies
of the Registration Statement, including financial statements and exhibits, and
all amendments and supplements thereto, as the Representatives may reasonably
request.
(e) The Company will comply with the Act, the Regulations, the
Exchange Act and the rules and regulations thereunder so as to permit the
continuance of sales of and dealings in the Shares for as long as may be
necessary to complete the distribution of the Shares as contemplated hereby.
(f) The Company will furnish such information as may be required and
otherwise cooperate in the registration or qualification of the Shares, or
exemption therefrom, for offering and sale by the several Underwriters and by
dealers under the securities or Blue Sky laws of such jurisdictions in which the
Representatives determine to offer the Shares, after consultation with the
Company, and will file such consents to service of process or other documents
necessary or appropriate in order to effect such registration or qualification;
provided, however, that no such qualification shall be required in any
jurisdiction where, solely as a result thereof, the Company would be subject to
taxation or qualification as a foreign corporation doing business in such
jurisdiction where it is not now so qualified or to take any action which would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Shares, in any jurisdiction where it is not now so
subject. The Company will, from time to time, prepare and file such statements
and reports as are or may be required to continue such qualification in effect
for so long a period as is required under the laws of such jurisdictions for
such offering and sale.
(g) Subject to subsection 5(b) hereof, in case of any event, at any
time within the period during which, in the opinion of counsel for the
Underwriters, a prospectus is required to be
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delivered under the Act and Regulations, as a result of which any Preliminary
Prospectus or the Prospectus, as then amended or supplemented, would contain an
untrue statement of a material fact, or omit to state any material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, or, if it is necessary at any time
to amend any Preliminary Prospectus or the Prospectus to comply with the Act and
Regulations or any applicable securities or Blue Sky laws, the Company promptly
will prepare and file with the SEC, and any applicable state securities
commission, an amendment, supplement or document that will correct such
statement or omission or effect such compliance and will furnish to the several
Underwriters such number of copies of such amendment(s), supplement(s) or
document(s) (in form and substance satisfactory to the Representatives and
counsel for the Underwriters) as the Representatives may reasonably request. For
purposes of this subsection (g), the Company will provide such information to
the Representatives, the Underwriters' counsel and counsel to the Company as
shall be necessary to enable such persons to consult with the Company with
respect to the need to amend or supplement the Registration Statement,
Preliminary Prospectus or Prospectus or file any document, and shall furnish to
the Representatives and the Underwriters' counsel such further information as
each may from time to time reasonably request.
(h) The Company will make generally available to its security
holders not later than 45 days after the end of the period covered thereby, an
earnings statement of the Company (which need not be audited) that shall comply
with Section 11(a) of the Act and cover a period of at least 12 consecutive
months beginning not later than the first day of the Company's fiscal quarter
next following the Effective Date.
(i) For a period of five years following the Effective Date, the
Company will furnish to the Representatives copies of all materials furnished by
the Company to its Stockholders and all public reports and all reports and
financial statements furnished by the Company to the SEC pursuant to the
Exchange Act or any rule or regulation of the SEC thereunder.
(j) During the course of the distribution of the Shares, the Company
will not take, directly or indirectly, any action designed to or that could
reasonably be expected to cause or result in stabilization or manipulation of
the price of the Class A Shares.
(k) The Company has caused each person listed on Schedule III hereto
to execute an agreement (a "Lock-up Agreement"). The Company has delivered such
Lock-up Agreements to Janney Montgomery Scott Inc. prior to the date of this
Agreement. Appropriate stop transfer instructions will be issued by the Company
to the Company's transfer agent for the Class A Shares.
(l) The Company will not engage in any transaction with affiliates
(as defined in the Regulations) without the prior approval of a majority of the
members of its Board of Directors who do not have an interest in such
transaction other than in their capacity as directors of the Company.
(m) For a period of ___ days after the Effective Date, the Company
will not, without the prior written consent of Janney Montgomery Scott Inc.
offer, sell, contract to sell or otherwise dispose of any Class A Shares or any
securities convertible into or exercisable for any
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Class A Shares or, except for up to ___________ Class A Shares pursuant to the
Company's 1999 Stock Option Plan (subject to the agreement of each holder
thereof that, until after the ___ day after the Effective Date, such holder will
not, without the prior written consent of Janney Montgomery Scott Inc., directly
or indirectly offer to sell, sell, contract to sell or otherwise transfer or
dispose of any of such Class A Shares), grant options to purchase any Class A
Shares.
(n) The Company will use all reasonable efforts to maintain the
qualification or listing of the Class A Shares (including, without limitation,
the Shares) on the Nasdaq National Market.
(o) The Company will maintain Directors and Officers liability
insurance in amounts, and key man life insurance covering such individuals and
in amounts, reasonably determined by the Company's Board of Directors to be
appropriate to the Company's circumstances and consistent with the amounts set
forth in the Prospectus.
(p) If the Company elects to rely on Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) and pay, or give irrevocable instructions for the payment of,
the applicable fees in accordance with Rule 111 promulgated under the Act by the
earlier of (A) 10:00 p.m. Philadelphia time on the date of this Agreement and
(B) the time confirmations are sent or given, as specified by Rule 462(b)(2).
6. Payment of Fees and Expenses.
(a) Whether or not the transactions contemplated by this Agreement
are consummated and regardless of the reason this Agreement is terminated, the
Company will pay or cause to be paid, and bear or cause to be borne, all costs
and expenses incident to the performance of the obligations of the Company under
this Agreement, including: (i) the fees and expenses of the accountants and
counsel for the Company incurred in the preparation of the Registration
Statement and any post-effective amendments (including any Rule 462(b)
Registration Statement) thereto (including financial statements and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments or supplements
thereto, (ii) printing and mailing expenses associated with the Registration
Statement and any post-effective amendments thereto, Preliminary Prospectus, the
Prospectus, this Agreement, the Agreement Among Underwriters, the Underwriters'
Questionnaire submitted to each of the Underwriters by Janney Montgomery Scott
Inc. in connection herewith, the power of attorney executed by each of the
Underwriters in favor of Janney Montgomery Scott Inc. in connection herewith,
the Selected Dealer Agreement and related documents and the preliminary Blue Sky
memorandum relating to the offering prepared by Klehr, Harrison, Harvey,
Branzburg & Ellers LLP, counsel to the Underwriters (collectively with any
supplement thereto, the "Preliminary Blue Sky Memorandum"), (iii) the costs
incident to the authentication, issuance, sale and delivery of the Shares to the
Underwriters, (iv) the fees, expenses and all other costs of qualifying the
Shares for sale under the securities or Blue Sky laws of those states in which
the Shares are to be offered or sold, including, without limitation, the
reasonable fees and expenses of Underwriters' counsel and such local counsel as
may have been reasonably required and retained for such purpose, (v) the fees,
expenses and other costs of, or incident to, securing any review or approvals by
or from the NASD,
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including the reasonable fees and expenses of the Underwriters' counsel, (vi)
the filing fees of the SEC, (vii) the cost of furnishing to the Underwriters
copies of the Registration Statement, Preliminary Prospectuses and Prospectuses
as herein provided, (viii) the Company's travel expenses in connection with
meetings with the brokerage community and institutional investors, (ix) the
costs and expenses associated with settlement in same day funds (including, but
not limited to, interest or cost of funds expenses), if desired by the Company,
(x) any fees or costs payable to the Nasdaq Stock Market, Inc. as a result of
the offering, (xi) the cost of printing certificates for the Shares; (xii) the
cost and charges of the Company's transfer agents, (xiii) the costs of
advertising the offering, including, without limitation, with respect to the
placement of "tombstone" advertisements in publications selected by the
Representatives, and (xiv) all other costs and expenses reasonably incident to
the performance of the Company's obligations hereunder that are not otherwise
specifically provided for in this Section 6(a); provided, however, that the
Underwriters shall be responsible for their out-of-pocket expenses, including
those associated with meetings with the brokerage community and institutional
investors, other than the Company's travel expenses, and the fees and expenses
of their counsel for other than Blue Sky and NASD representation.
(b) The Company shall pay as due any state registration,
qualification and filing fees and any accountable out-of-pocket disbursements in
connection with such registration, qualification or filing in the states in
which the Representatives determine to offer or sell the Shares.
(c) At the Closing, the Company will pay to Janney Montgomery Scott
Inc. a financial advisory fee in the amount of $100,000.
7. Conditions to Underwriters' Obligations. The obligation of each
Underwriter to purchase and pay for the Firm Shares that it has agreed to
purchase hereunder on the Closing Date, and to purchase and pay for any Optional
Shares as to which it exercises its right to purchase under Section 4 on an
Option Closing Date, is subject at the date hereof, the Closing Date and any
Option Closing Date to the continuing accuracy and fulfillment of the
representations and warranties of the Company, to the performance by the Company
of its covenants and obligations hereunder, and to the following additional
conditions:
(a) If required by Rule 430A of the Regulations, the Prospectus
shall have been filed with the SEC pursuant to Rule 424(b) of the Regulations
within the applicable time period prescribed for such filing by the Regulations;
on or prior to the Closing Date or any Option Closing Date, as the case may be,
no stop order or other order preventing or suspending the effectiveness of the
Registration Statement or the sale of any of the Shares shall have been issued
under the Act or any state securities law and no proceedings for that purpose
shall have been initiated or shall be pending or, to the Representatives'
knowledge or the knowledge of the Company, shall be contemplated by the SEC or
by any authority in any jurisdiction designated by the Representatives pursuant
to Section 5(f) hereof; and any request on the part of the SEC for additional
information shall have been complied with to the reasonable satisfaction of
counsel for the Underwriters.
(b) If the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have been declared effective not later than
the earlier of (i) 11:00 a.m.,
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Philadelphia time, on the date on which the Rule 462(b) Registration Statement
has been filed with the Commission and (ii) the time confirmations are sent or
given as specified by Rule 462(b)(2).
(c) All corporate proceedings and other matters incident to the
authorization, form and validity of this Agreement, the Shares and the form of
the Registration Statement and the Prospectus, and all other legal matters
relating to this Agreement and the transactions contemplated hereby, shall be
satisfactory in all material respects to counsel to the Underwriters. The
Reorganization and each Acquisition shall have been consummated as described in
the Registration Statement and in accordance with the provisions of the
Reorganization Agreements and applicable Acquisition Agreement, respectively.
The Company shall have furnished to such counsel all documents and information
that they may reasonably request to enable them to pass upon such matters. The
Representatives shall have received from the Underwriters' counsel, Klehr,
Harrison, Harvey, Branzburg & Ellers LLP, an opinion, dated as of the Closing
Date and any Option Closing Date, as the case may be, and addressed to the
Representatives individually and as the Representatives of the several
Underwriters, which opinion shall be satisfactory in all respects to the
Representatives.
(d) The NASD shall have indicated that it has no objection to the
underwriting arrangements pertaining to the sale of any of the Shares.
(e) The Representatives shall have received a copy of an executed
Lock-up Agreement from each person listed on Schedule III hereto.
(f) The Representatives shall have received at or prior to the
Closing Date from the Underwriters' counsel a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the qualification
for offering and sale by the Underwriters of the Shares under the securities or
Blue Sky laws of such jurisdictions designated by the Representatives pursuant
to Section 5(f) hereof.
(g) On the Closing Date and any Option Closing Date, there shall
have been delivered to the Representatives signed opinions of Roberts, Sheridan
& Kotel, a Professional Corporation, counsel for the Company, dated as of each
such date and addressed to the Representatives individually and as the
Representatives of the several Underwriters to the effect set forth in Exhibit B
hereto or as is otherwise reasonably satisfactory to the Representatives.
(h) At the Closing Date and any Option Closing Date: (i) the
Registration Statement and any post-effective amendment thereto and the
Prospectus and any amendments or supplements thereto shall contain all
statements that are required to be stated therein in accordance with the Act and
the Regulations and in all material respects shall conform to the requirements
of the Act and the Regulations, and neither the Registration Statement nor any
post-effective amendment thereto nor the Prospectus and any amendments or
supplements thereto shall contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, (ii) since the respective dates as
of which information is given in the Registration Statement and any
post-effective amendment thereto and the Prospectus and any amendments or
supplements thereto, except as otherwise stated therein, there
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shall have been no material adverse change in the properties, condition
(financial or otherwise), results of operations, stockholders' equity, business,
prospects or management of the Company and the Subsidiaries, taken as a whole,
from that set forth therein, whether or not arising in the ordinary course of
business, other than as referred to in the Registration Statement or Prospectus
(iii) since the respective dates as of which information is given in the
Registration Statement and the Prospectus or any amendment or supplement
thereto, there shall have been no event or transaction, contract or agreement
entered into by the Company or any of the Subsidiaries, other than in the
ordinary course of business and as set forth in the Registration Statement or
Prospectus, that has not been, but would be required to be, set forth in the
Registration Statement or Prospectus, (iv) since the respective dates as of
which information is given in the Registration Statement and any post-effective
amendment thereto and the Prospectus and any amendments or supplements thereto,
there shall have been no material adverse change, loss, reduction, termination
or non-renewal of any contract to which the Company or any Subsidiary is a party
and (v) no action, suit or proceeding at law or in equity, domestic or foreign,
shall be pending or threatened against the Company or any Subsidiary that would
be required to be set forth in the Prospectus, other than as set forth therein,
and no proceedings shall be pending or threatened against or directly affecting
the Company or any Subsidiary before or by any federal, state or other
commission, board or administrative agency, domestic or foreign, wherein an
unfavorable decision, ruling or finding would materially adversely affect the
properties, condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects of the Company or the Subsidiaries
other than as set forth in the Prospectus.
(i) The Representatives shall have received at the Closing Date and
any Option Closing Date certificates of the Company executed by the Chief
Executive Officer and the Chief Financial Officer of the Company in their
capacities as such dated as of the date of the Closing Date or Option Closing
Date, as the case may be, and addressed to the Representatives, individually and
as the Representatives of the several Underwriters, to the effect that (i) the
signers of the certificate have read this Agreement and the representations and
warranties of the Company in this Agreement are true and correct in all material
respects, as if made at and as of the Closing Date or the Option Closing Date,
as the case may be, and the Company has complied in all material respects with
all the agreements, fulfilled in all material respects all the covenants and
satisfied all the conditions on its part to be performed, fulfilled or satisfied
at or prior to the Closing Date or the Option Closing Date, as the case may be,
and (ii) the signers of the certificate have examined the Registration Statement
and the Prospectus and any amendments or supplements thereto and that the
conditions set forth in Section 7(g) of this Agreement have been satisfied.
(j) At the time this Agreement is executed and at the Closing Date
and any Option Closing Date the Representatives shall have received letters
addressed to the Representatives individually and as the Representatives of the
several Underwriters, and in form and substance satisfactory to the
Representatives in all respects (including the non-material nature of the
changes or decreases, if any, referred to in clause (iii) below) from each of
Ernst & Young LLP, Lawrence B. Goodman & Co. P.A., Pasquale & Bowers, LLP and
Weissbarth, Altman & Michaelson LLP, dated as of the date of this Agreement, the
Closing Date or the Option Closing Date, as the case may be:
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(i) confirming that they are independent certified public
accountants within the meaning of the Act and the Regulations;
(ii) stating that, in their opinion, the consolidated
financial statements, schedules and notes of the entities audited by them and
included in the Registration Statement comply in form in all material respects
with the applicable accounting requirements of the Act and the Regulations;
(iii) stating that, on the basis of specified procedures,
which included, to the extent applicable, the procedures specified by the
American Institute of Certified Public Accountants for a review of interim
financial information, as described in SAS No. 71, Interim Financial Information
(with respect to the latest unaudited consolidated financial statements of the
entity audited by them), a reading of the latest available unaudited interim
consolidated financial statements of the entity audited by them (with an
indication of the date of the latest available unaudited interim financial
statements), a reading of the minutes of the meetings of the stockholders and
the Board of Directors of such entity and its subsidiaries, and audit and
compensation committees of such Boards, if any, and inquiries to certain
officers and other employees of such entities and their subsidiaries responsible
for operational, financial and accounting matters and other specified procedures
and inquiries, nothing has come to their attention that would cause them to
believe that (A) the unaudited consolidated financial statements of such entity
included in the Registration Statement, (1) do not comply in form in all
material respects with the applicable accounting requirements of the Act and the
Regulations, or (2) any material modifications should be made to such unaudited
financial statements for them to be in conformity with generally accepted
accounting principles; (B) at the date of the latest available unaudited interim
consolidated financial statements of such entity and a specified date not more
than five business days prior to the date of such letter, there was any change
in the capital stock or debt of such entity or any decrease in net current
assets, total assets or stockholders' equity of such entity as compared with the
amounts shown in the December 31, 1998 balance sheet of such entity included in
the Registration Statement, or that for the periods from January 1, 1999 to the
date of the latest available unaudited financial statements of such entity and
to a specified date not more than five days prior to the date of the letter,
there were any decreases, as compared to the corresponding periods in the prior
year, in revenues, gross profit, operating income or total or per share amounts
of net earnings, except in all instances for changes, decreases or increases
which the Registration Statement discloses have occurred or may occur and except
for such other changes, decreases or increases which the Representatives shall
in their sole discretion accept; or (C) the unaudited pro forma combined
financial statements included in the Registration Statement do not comply as to
form in all material respects with the applicable accounting requirements of
Rule 11-02 of Regulation S-X under the Act and that the pro forma adjustments
have not been properly applied to the historical amounts in the compilation of
those statements; and
(iv) stating that they have compared specific dollar amounts,
numbers of shares and other numerical data and financial information set forth
in the Registration Statement that have been specified by the Representatives
prior to the date of this Agreement, to the extent that such information is
derived from the accounting records subject to the internal control structure,
policies
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and procedures of the accounting systems of the entities audited by them, or has
been derived directly from such accounting records by analysis or comparison or
has been derived from other records and analysis maintained or prepared by such
entity with the results obtained from the application of readings, inquiries and
other appropriate procedures (which procedures do not constitute an audit in
accordance with generally accepted auditing standards) set forth in the letter,
and found them to be in agreement.
(k) There shall have been duly tendered to the Representatives for
the respective accounts of the Underwriters certificates representing all of the
Shares to be purchased by the Underwriters on the Closing Date or any Option
Closing Date, as the case may be.
(l) At the Closing Date and any Option Closing Date, the
Representatives shall have been furnished such additional documents, information
and certificates as they shall have reasonably requested.
(m) The issuance and sale of the Shares shall be legally permitted
under applicable Blue Sky or state securities laws so long as such sales are
made in accordance with the Preliminary Blue Sky Memorandum.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to the Representatives and Underwriters' counsel. The Company shall
furnish the Representatives with such conformed copies of such opinions,
certificates, letters and other documents as they shall reasonably request. If
any condition to the Underwriters' obligations hereunder to be fulfilled prior
to or at the Closing Date or any Option Closing Date, as the case may be, is not
fulfilled, the Representatives may, on behalf of the several Underwriters,
terminate this Agreement with respect to the Closing Date or such Option Closing
Date, as applicable, or, if they so elect, waive any such conditions which have
not been fulfilled or extend the time for their fulfillment. Any such
termination shall be without liability of the Underwriters to the Company.
8. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each Underwriter,
and each person, if any, who controls each Underwriter within the meaning of the
Act, against any and all loss, liability, claim, damage and expense whatsoever,
including, but not limited to, any and all reasonable expenses whatsoever
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever or in connection with any
investigation or inquiry of, or action or proceeding that may be brought
against, the respective indemnified parties, arising out of or based upon any
breach of the Company's representations and warranties made in this Agreement
and any untrue statements or alleged untrue statements of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, any application or other document (in this Section 8 collectively
called "application") executed by the Company and based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify all or any part of the Shares under the securities laws thereof or filed
with the SEC or the
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NASD, or the omission or alleged omission therefrom of a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the foregoing indemnity:
(x) shall not apply to statements in or omissions from any
Preliminary Prospectus, the Registration Statement or the Prospectus, or in any
application or in any communication to the SEC, as the case may be, made in
reliance upon and in conformity with information supplied to the Company in
writing by or on behalf of any Underwriter through the Representatives expressly
for use therein; and
(y) with respect to any Preliminary Prospectus, shall not
inure to the benefit of any Underwriter from whom the person asserting any such
losses, claims, damages, liabilities or expenses purchased the Shares if, at or
prior to the written confirmation of the sale of such Shares, a copy of an
amended Preliminary Prospectus or the Prospectus (or the Prospectus as amended
or supplemented) was delivered to such Underwriter but was not sent, or
delivered to such person and the untrue statement or omission of a material fact
contained in such Preliminary Prospectus was corrected in the amended
Preliminary Prospectus or Prospectus (or the Prospectus as amended or
supplemented). This indemnity agreement will be in addition to any liability the
Company may otherwise have.
(b) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of the
Act to the same extent as the foregoing indemnities from the Company to the
several Underwriters as set forth in Section 8(a) hereof, but only with respect
to any loss, liability, claim, damage or expense resulting from statements or
omissions, or alleged statements or omissions, if any, made in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any application
or in any communication to the SEC, as the case may be, made in reliance upon
and in conformity with information supplied to the Company in writing by or on
behalf of any Underwriter through the Representatives expressly for use therein.
This indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.
(c) If any action, inquiry, investigation or proceeding is brought
against any person in respect of which indemnity may be sought pursuant to any
of the two preceding paragraphs, such person (hereinafter called the
"indemnified party") shall, promptly after notification of, or receipt of
service of process for, such action, inquiry, investigation or proceeding,
notify in writing the party or parties against whom indemnification is to be
sought (hereinafter called the "indemnifying party") of the institution of such
action, inquiry, investigation or proceeding and the indemnifying party, upon
the request of the indemnified party, shall assume the defense of such action,
inquiry, investigation or proceeding, including the employment of counsel
(reasonably satisfactory to such indemnified party) and payment of expenses. No
indemnification provided for in this Section 8 shall be available to any
indemnified party who shall fail to give such notice if the indemnifying party
does not otherwise have knowledge of such action, inquiry, investigation or
proceeding, to the extent that such indemnifying party has been materially
prejudiced by the failure
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to give such notice, but the omission to so notify the indemnifying party shall
not relieve the indemnifying party otherwise than under this Section 8. Such
indemnified party or controlling person shall have the right to employ its or
their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such indemnified party unless the employment of such
counsel shall have been authorized in writing by the indemnifying party in
connection with the defense of such action. If such indemnified party or parties
shall have been advised by counsel that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties or that there may be legal defenses available to such indemnified party
or parties different from or in addition to those available to the indemnifying
party or parties, the indemnified party or parties shall be entitled to select
counsel (such counsel, "Separate Counsel") to conduct the defense to the extent
determined by such counsel to be necessary to protect the interests of the
indemnified party or parties and the reasonable fees and expenses of such
Separate Counsel shall be borne by the indemnifying party; provided, however,
that if the indemnified parties engage more than one Separate Counsel, then the
indemnifying party's liability with respect to such Separate Counsel shall be
limited, in the aggregate, to an amount equal to the highest amount of
reasonable fees and expenses charged or incurred by a single Separate Counsel,
which amount shall be divided among the indemnified parties on a pro rata basis
in accordance with the relative amounts of reasonable fees and expenses of their
respective Separate Counsel. Expenses covered by the indemnification in this
Section 8 shall be paid by the indemnifying party as they are incurred by the
indemnified party. Anything in this Section 8 to the contrary notwithstanding,
the indemnifying party shall not be liable for any settlement of any such claim
effected without its prior written consent.
(d) If the indemnification provided for in this Section 8 is
unavailable to, or insufficient to hold harmless an indemnified party under
Sections 8(a) or (b) hereof in respect of any losses, liabilities, claims,
damages or expenses (or actions, inquiries, investigations or proceedings in
respect thereof) referred to therein, except by reason of the provisos set forth
in Section 8(a) hereof or the failure to give notice as required in Section 8(c)
hereof (provided that the indemnifying party does not have knowledge of the
action, inquiry, investigation or proceeding and to the extent such party has
been materially prejudiced by the failure to give such notice), then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, liabilities, claims, damages or
expenses (or actions, inquiries, investigations or proceedings in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, liabilities, claims or reasonable expenses (or
actions, inquiries, investigations or proceedings in respect thereof), as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bears to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
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forth in the table on the cover page of the Prospectus. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to above in this Section 8(d). The amount paid
or payable by an indemnified party as a result of the losses, liabilities,
claims, damages or reasonable expenses (or actions, inquiries, investigations or
proceedings in respect thereof) referred to above in this Section 8(d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 8(d), (i) the
provisions of the Agreement Among Underwriters shall govern contribution among
Underwriters, (ii) no Underwriter (except as provided in the Agreement Among
Underwriters) shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased by
such Underwriter, and (iii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this Section 8(d) to
contribute are several in proportion to their individual underwriting
obligations and not joint.
9. Representations and Agreements to Survive Delivery. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Date and any Option Closing Date; and such
representations, warranties and agreements of the Underwriters and the Company,
including, without limitation, the indemnity and contribution agreements
contained in Section 8 hereof and the agreements contained in Sections 6, 9, 10
and 13 hereof, shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any Underwriter or any controlling
person, and shall survive delivery of the Shares and termination of this
Agreement, whether before or after the Closing Date or any Option Closing Date.
10. Effective Date of This Agreement and Termination Hereof.
(a) This Agreement shall become effective at 10:00 a.m.,
Philadelphia, Pennsylvania time, on the first business day following the
Effective Date or at the time of the public offering by the Underwriters of the
Shares, whichever is earlier, except that the provisions of Sections 6, 8, 9, 10
and 13 hereof shall be effective upon execution hereof. The time of the public
offering, for the purpose of this Section 10, shall mean the time when any of
the Shares are first released by the Underwriters for offering by dealers. The
Representatives may prevent the provisions of this Agreement (other than those
contained in Sections 6, 8, 9, 10 and 13) hereof from becoming effective without
liability of any party to any other party, except as noted below, by giving
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the notice indicated in Section 10(c) hereof before the time the other
provisions of this Agreement become effective.
(b) The Representatives shall have the right to terminate this
Agreement at any time prior to the Closing Date as provided in Sections 7 and 11
hereof or if any of the following have occurred:
(i) since the respective dates as of which information is
given in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, of the Company or its
Subsidiaries, or the earnings, business affairs, management or business
prospects of the Company or its Subsidiaries, whether or not arising in the
ordinary course of business, that would, in the Representatives' sole judgment,
make the offering or delivery of the Shares impractical or inadvisable;
(ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic, political or financial
market conditions if the effect on the financial markets of the United States of
such outbreak, calamity, crisis or change would, in the Representatives' sole
judgment, make the offering or delivery of the Shares impractical or
inadvisable;
(iii) suspension of trading generally in securities on the New
York Stock Exchange, the American Stock Exchange, the Nasdaq Stock Market or the
over-the-counter market or limitation on prices (other than limitations on hours
or numbers of days of trading) for securities or the promulgation of any federal
or state statute, regulation, rule or order of any court or other governmental
authority that in the Representatives' sole opinion materially and adversely
affects trading on such exchange or the over-the-counter market;
(iv) declaration of a banking moratorium by either federal or
Pennsylvania state authorities;
(v) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs that in the
Representatives' sole opinion has a material adverse effect on the securities
markets in the United States; or
(vi) trading in any securities of the Company shall have been
suspended or halted by the Nasdaq Stock Market or the Commission.
(c) If the Representatives elect to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this Section
10, the Representatives shall notify the Company thereof promptly by telephone,
telex, telegraph, telegram or facsimile, confirmed by letter.
11. Default by an Underwriter.
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<PAGE>
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Optional Shares hereunder, and if the Firm
Shares or Optional Shares with respect to which such default relates do not
exceed the aggregate of 10% of the number of Firm Shares or Optional Shares, as
the case may be, that all Underwriters have agreed to purchase hereunder, then
such Firm Shares or Optional Shares to which the default relates shall be
purchased severally by the non-defaulting Underwriters in proportion to their
respective commitments hereunder.
(b) If such default relates to more than 10% of the Firm Shares or
Optional Shares, as the case may be, the Representatives may, in their
discretion, arrange for another party or parties (including a non-defaulting
Underwriter) to purchase such Firm Shares or Optional Shares to which such
default relates, on the terms contained herein. In the event that the
Representatives do not arrange for the purchase of the Firm Shares or Optional
Shares to which a default relates as provided in this Section 11, this Agreement
may be terminated by the Representatives or by the Company without liability on
the part of the several Underwriters (except as provided in Section 8 hereof) or
the Company (except as provided in Sections 6 and 8 hereof), but nothing herein
shall relieve a defaulting Underwriter of its liability, if any, to the other
several Underwriters and to the Company for damages occasioned by its default
hereunder.
(c) If the Firm Shares or Optional Shares to which the default
relates are to be purchased by the non-defaulting Underwriters, or are to be
purchased by another party or parties as aforesaid, the Representatives or the
Company shall have the right to postpone the Closing Date or any Option Closing
Date, as the case may be, for a reasonable period but not in any event exceeding
seven days, in order to effect whatever changes may thereby be made necessary in
the Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment to the
Registration Statement or supplement to the Prospectus that in the opinion of
counsel for the Underwriters may thereby be made necessary. The terms
"Underwriters" and "Underwriter" as used in this Agreement shall include any
party substituted under this Section 11 with like effect as if it had originally
been a party to this Agreement with respect to such Firm Shares and/or Optional
Shares.
12. Information Furnished by Underwriters. The statements under the
caption "Underwriting" (except for the second, third and fourth to last
paragraphs thereunder) in any Preliminary Prospectus and the Prospectus
constitute the only written information furnished by or on behalf of any
Underwriter referred to in Sections 1(a)(ii) and 8 hereof.
13. Notice. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and, if sent to any Underwriter,
shall be mailed, delivered, telexed, telegrammed, telegraphed or telecopied and
confirmed to such Underwriter, c/o Janney Montgomery Scott Inc., 1801 Market
Street, Philadelphia, Pennsylvania 19103, Attention: Mr. Michael J. Mufson, with
a copy to Klehr, Harrison, Harvey, Branzburg & Ellers LLP, 1401 Walnut Street,
Philadelphia, Pennsylvania 19102, Attention: Stephen T. Burdumy, Esquire; and if
sent to the Company, shall be mailed, delivered, telexed, telegrammed,
telegraphed or telecopied and confirmed
27
<PAGE>
to The Pietrafesa Corporation, 7400 Morgan Road, Liverpool, New York 13090,
Attention: Richard C. Pietrafesa, Jr., with a copy to Roberts, Sheridan & Kotel,
a Professional Corporation, 12 East 49th Street, 30th Floor, New York, New York
10017, Attention: L. Kevin Sheridan, Jr., Esquire.
14. Parties. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the several Underwriters, the Company and the controlling
persons, directors and officers thereof, and their respective successors,
assigns, heirs and legal representatives, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained. The
terms "successors" and "assigns" shall not include any purchaser of the Shares
merely because of such purchase.
In all dealings with the Company under this Agreement, the Representatives
shall act on behalf of each of the several Underwriters, and the Company shall
be entitled to act and rely upon any statement, request, notice or agreement
made or given by the Representatives jointly or by Janney Montgomery Scott Inc.
on behalf of the Representatives.
15. Definition of Business Day. For purposes of this Agreement, "business
day" means any day on which the Nasdaq National Market is opened for trading.
16. Counterparts. This Agreement may be executed in one or more
counterparts and by facsimile signatures and all such counterparts and facsimile
signatures will constitute one and the same instrument.
17. Construction. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania applicable to
agreements made and performed entirely within such Commonwealth. All references
herein to the knowledge of the Company shall be deemed to include the knowledge
of each of the Subsidiaries.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
28
<PAGE>
If the foregoing correctly sets forth your understanding of our agreement,
please sign and return to the Company the enclosed duplicate hereof, whereupon
it will become a binding agreement in accordance with its terms.
Very truly yours,
THE PIETRAFESA CORPORATION
By:
----------------------------
Richard C. Pietrafesa, Jr.
President and Chief
Executive Officer
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
JANNEY MONTGOMERY SCOTT INC.
FIRST SECURITY VAN KASPER
MORGAN SCHIFF & CO., INC.
As Representatives of the Several
Underwriters named in Schedule I hereto
By: JANNEY MONTGOMERY SCOTT INC.
By:
------------------------------------
Authorized Representative
<PAGE>
SCHEDULE I
Schedule of Underwriters
- --------------------------------------------------------------------------------
Number of Firm Number of Optional
Underwriter Shares to be Purchased Shares to be Purchased
----------- ---------------------- ----------------------
- --------------------------------------------------------------------------------
Janney Montgomery Scott Inc.
- --------------------------------------------------------------------------------
First Security Van Kasper
- --------------------------------------------------------------------------------
Morgan Schiff & Co., Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
--------------------- ----------------------
- --------------------------------------------------------------------------------
Total ====================== ======================
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE II
Stockholder NASD Affiliations
M.S. Pietrafesa, L.P. is an affiliate of Morgan Schiff & Co., Inc., a member of
the National Association of Securites Dealers, Inc.
<PAGE>
SCHEDULE III
List of Persons Who Are to Deliver Lock-Up
Agreements Called for Under Sections 5(k) and 7(e)
<PAGE>
EXHIBIT A
Acquisition Agreements
1. Asset Purchase Agreement, among Components Acquisition Corp., John McCoy
and Components by John McCoy, Inc., dated as of March 11, 1999.
2. Asset Purchase Agreement, among the Company, DAG Acquisition Corp., Jarrod
Nadel and Diversified Apparel Group, Ltd., dated as of March 11, 1999.
3. Stock Purchase Agreement, among the Company, Peter Lister and Global
Sourcing Network, Ltd., dated as of March 11, 1999.
4. [Windsong Agreement]
A-1
<PAGE>
EXHIBIT B
Matters to be Covered in the Opinion of
Roberts, Sheridan & Kotel,
Counsel for the Company
1. The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, with corporate power
and authority to conduct all of the activities conducted by it, own or lease all
of the assets owned or leased by it, and conduct its business all as described
in the Registration Statement and the Prospectus; and the Company is duly
licensed or qualified to do business and in good standing as a foreign
corporation in all jurisdictions, domestic or foreign, in which failure to be so
licensed or qualified would have a material adverse effect on the Company and
the Subsidiaries considered as a whole.
2. Each of the Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, with corporate power and authority to conduct its business all as
described in the Registration Statement and Prospectus and own or lease all of
the assets owned or leased by it, and each Subsidiary is duly licensed or
qualified to do business and is in good standing as a foreign corporation in all
jurisdictions, domestic and foreign, in which failure to be so licensed or
qualified would have a material adverse effect on the Company and the
Subsidiaries considered as a whole.
3. No authorization, approval, consent or license of any
governmental or regulatory body, domestic or foreign, except as may be required
under the securities (blue sky) laws of the various jurisdictions, is required
in connection with the (i) authorization, issuance, transfer, sale or delivery
of the Shares to be sold by the Company; (ii) execution, delivery and
performance of the Underwriting Agreement by the Company or (iii) taking of any
action contemplated in the Underwriting Agreement or in the Registration
Statement or the Prospectus, or, if so required, all such authorizations,
approvals, consents and licenses have been obtained and are in full force and
effect.
4. The Company has authorized and outstanding capital stock, stock
options and other derivative securities as set forth in the Registration
Statement and the Prospectus. The outstanding shares of the Class A Stock and
the Class B Stock, have been, and all of the Shares will be, upon issuance and
payment therefor, duly authorized, validly issued, fully paid and nonassessable,
are not subject to preemptive rights and have not been issued in violation of
any statutory preemptive rights or, to our knowledge, similar contractual
rights. The holders of Shares are not and will not be subject to personal
liability solely by reason of being such holders. The issue and sale of the
Shares by the Company have been duly and validly authorized and the Shares have
been duly listed for trading on the Nasdaq National Market. The transactions
consummated pursuant to the Reorganization Agreements were exempt from, or
complied in all material respects with, the provisions of all applicable,
federal, state and foreign securities and corporate laws.
B-1
<PAGE>
5. To such counsel's knowledge, no holder of any securities of the
Company has the right to require registration of shares of the Class A Stock or
other securities of the Company. The description of the Class A Stock, the Class
B Stock and the Shares contained in the Registration Statement and the
Prospectus conforms to the rights set forth in the instruments or certificates
defining the same and is in conformity with the requirements of the Act and the
Regulations.
6. The Company is not an "investment company" as defined in Section
3(a) of the Investment Company Act; the Company has not, prior to the date of
the Prospectus, been required to make any filings pursuant to the Exchange Act.
7. The Company has the corporate power and authority to enter into
the Underwriting Agreement, and the Underwriting Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid and
binding obligation of the Company enforceable in accordance with its terms,
except as such enforceablility may be limited by applicable bankruptcy,
insolvency, reorganization, fraudulent transfer, moratorium or similar laws
affecting creditors' rights generally and to equitable principles (including,
without limitation, concepts of materiality, reasonableness, good faith and fair
dealing), regardless of whether considered in a proceeding in equity or at law,
and except insofar as rights to indemnity or contribution may be limited by
applicable securities laws.
8. The statements in the Prospectus under "Properties," "Legal
Proceedings," "Certain Relationships and Related Transactions," and "Description
of Capital Stock," and in the Registration Statement in Items 14 and 15, insofar
as such statements constitute a summary of the terms of the capital stock, legal
matters, documents or proceedings referred to therein, accurately reflect the
information called for with respect to such terms, legal matters, documents or
proceedings.
9. The Registration Statement and the Prospectus, and each amendment
thereof or supplement thereto (including any Rule 462(b) Registration
Statement), comply as to form with the requirements of the Act and the Rules and
Regulations. Such counsel expresses no opinion as to matters concerning
financial statements and other financial data and related notes, schedules and
financial or statistical data contained in the Registration Statement or the
Prospectus.
10. In connection with the Registration Statement, such counsel has
participated in discussions and conferences with certain of the officers and
representatives of the Company, representatives of the Underwriters, counsel to
the Underwriters, and the independent accountants for the Company and the
Acquired Businesses at which the contents of the Registration Statement and the
Prospectus were discussed. While such counsel does not assume any responsibility
for the accuracy, completeness or fairness of the statements made in the
Registration Statement and the Prospectus, nothing has come to such counsel's
attention which lead them to believe that either the Registration Statement or
the Prospectus, or any amendment or supplement thereto, as of their respective
effective or issue dates, or as of the date hereof, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
B-2
<PAGE>
[The preceding text will be removed after review of 10b-5 letter.] The
descriptions in the Registration Statement and Prospectus of statutes and legal
and governmental proceedings are accurate and fairly present the information
required to be shown. There are no legal proceedings pending or, to such
counsel's knowledge, threatened against the Company which are required to be
disclosed in the Registration Statement and Prospectus, except as described
therein. Such counsel expresses no opinion as to the financial statements or
other financial or statistical data contained in the Registration Statement or
the Prospectus.
11. Such counsel has read all contracts and other documents
specifically enumerated in the Registration Statement and the Prospectus, and
such contracts and other documents are fairly summarized or described therein,
fairly present the information required to be shown, conform in all material
respects to the descriptions thereof contained therein, and are filed as
exhibits thereto, if required, and to such counsel's knowledge, there are no
contracts or documents required to be so summarized or disclosed or so filed
which have not been so summarized or disclosed or so filed.
12. The Registration Statement has become effective under the Act,
and, to our knowledge, (i) no stop order suspending the effectiveness of the
Registration Statement has been issued, and (ii) no proceedings for that purpose
have been instituted or are threatened, pending or contemplated.
13. The Reorganization Agreements have been duly authorized,
executed and delivered by the Company and the Partnership and are the valid and
binding obligations of the Company and the Partnership, enforceable against the
Company and the Partnership in accordance with their respective terms, except as
such enforceability may be limited by equitable principles or by the application
of bankruptcy, insolvency or other similar laws affecting creditors' rights
generally. The Reorganization has been consummated on the terms and conditions
set forth in the Prospectus and in accordance with the terms and provisions of
the Reorganization Agreements.
14. Each Acquisition Agreement has been duly authorized, executed
and delivered by the Company and the applicable Sellers and are the valid and
binding obligations of the Company and such Sellers, enforceable against the
Company and such Sellers in accordance with its terms, except as such
enforceability may be limited by equitable principles or by the application of
bankruptcy, insolvency or other similar laws affecting creditors' rights
generally. Each Acquisition has been consummated on the terms and conditions set
forth in the Prospectus and in accordance with the terms and provisions of the
applicable Acquisition Agreement.
15. The execution and delivery of the Underwriting Agreement by the
Company and the consummation by the Company of the transactions therein
contemplated, and the compliance with the terms of the Underwriting Agreement do
not and will not conflict with or result in a breach of any of the terms or
provisions of or violate or constitute a default under the Certificate of
Incorporation or Bylaws or other constituent documents of the Company or the
Subsidiaries or, (i) any indenture, mortgage or other agreement or instrument to
which the Company or any of the Subsidiaries is a party or by which the Company
or any of the Subsidiaries or any material portion
B-3
<PAGE>
of its properties is bound, or (ii) to such counsel's knowledge, after due
inquiry, any judgment, order or decree of any government, governmental
instrumentality or court having jurisdiction over the Company or any of the
Subsidiaries or any material portion of its properties, or (iii) any existing
statute, rule or regulation applicable to the Company or the where, with respect
to clauses (i), (ii) and (iii) of this paragraph, such violation or default
could reasonably be expected to have a material adverse effect on the general
affairs, properties, condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects of the Company and the Subsidiaries
taken as a whole.
16. To such counsel's knowledge, except as described in the
Prospectus, neither the Company nor any of the Subsidiaries owns any interest in
any corporation, partnership, joint venture, trust or other business entity.
In rendering such opinions, counsel for the Company may set forth
that as to certain matters of fact, where appropriate, such counsel is relying
on one or more certificates of public officials, governmental agencies or
officers of the Company. In addition, as to matters of law, counsel for the
Company may rely as to matters involving the application of laws other than the
laws of the United States (except for laws dealing with matters within the
jurisdiction of the United States Federal Trade Commission), the laws of
Delaware and jurisdictions in which they are admitted, to the extent such
counsel deems proper and to the extent specified in such opinion, if at all,
upon an opinion or opinions (in form and substance satisfactory to the
Underwriters' counsel) of other counsel reasonably acceptable to the
Underwriters' counsel, familiar with the applicable laws.
Unless the context clearly indicates otherwise, the term "Company"
as used in this Exhibit, shall include the Subsidiaries and the Acquired
Businesses. The opinion of counsel for the Company shall include a statement to
the effect that it may be relied upon by counsel for the Underwriters in their
opinion delivered to the Underwriters.
B-4
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
THE PIETRAFESA CORPORATION
FIRST: The name of the corporation is The Pietrafesa Corporation (the
"Company").
SECOND: The address of the registered office of the Company in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of the registered agent of the
Company at such address is The Corporation Trust Company.
THIRD: The nature of the business of the Company and the objects and
purposes to be transacted, promoted or carried on by it are to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: (a) The total number of shares of all classes of stock which the
Company shall have authority to issue is 20,000,000, consisting of 5,000,000
shares of Class A Common Stock, par value $.001 per share (the "Class A Stock"),
10,000,000 shares of Class B Common Stock, par value $.001 per share (the "Class
B Stock," and together with the Class A Stock, the "Common Stock"), and
5,000,000 shares of Preferred Stock, par value $.001 per share (the "Preferred
Stock").
(b) The designations and preferences and relative participating,
optional and other special rights and qualifications, limitations and
restrictions thereof, of each class of stock of the Company which are fixed by
this Certificate of Incorporation, are as follows:
A. Preferred Stock
(1) Upon the affirmative vote or the written consent of the holders of a
majority of the outstanding shares of Class B Stock, shares of Preferred
Stock may be issued from time to time in one or more series, each such
series to have such distinctive designation as shall be stated and
expressed in the resolution or resolutions adopted by the Board of
Directors providing for the initial issuance of shares of such series, and
authority is expressly vested in the Board of Directors, by such
resolution or resolutions providing for the initial issuance of shares of
each series:
(a) To fix the distinctive designation of such series and the number
of shares which shall constitute such series, which number may be
increased or decreased (but not below the number of shares thereof
then outstanding) from time to time by action of the Board of
Directors;
(b) To fix (i) the dividend rate of such series, (ii) any
limitations, restrictions or conditions on the payment of dividends,
including whether dividends shall be
<PAGE>
2
cumulative and, if so, from which date or dates, (iii) the relative
rights of priority, if any, of payment of dividends on shares of
that series and (iv) the form of dividends, which shall be payable
either (A) in cash only, or (B) in stock only, or (C) partly in cash
and partly in stock, or (D) in stock or, at the option of the
holder, in cash (and in such case to prescribe the terms and
conditions of exercising such option), and to make provision in case
of dividends payable in stock for adjustment of the dividend rate in
such events as the Board of Directors shall determine;
(c) To fix the price or prices at which, and the terms and
conditions on which, the shares of such series may be redeemed by
the Company;
(d) To fix the amount or amounts payable upon the shares of such
series in the event of any liquidation, dissolution or winding up of
the Company and the relative rights of priority, if any, of payment
upon shares of such series;
(e) To determine whether or not the shares of such series shall be
entitled to the benefit of a sinking fund to be applied to the
purchase or redemption of such series and, if so entitled, the
amount of such fund and the manner of its application;
(f) To determine whether or not the shares of such series shall be
made convertible into, or exchangeable for, shares of any other
class or classes of stock of the Company or shares of any other
series of Preferred Stock, and, if made so convertible or
exchangeable, the conversion price or prices, or the rate or rates
of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and
conditions of such conversion or exchange;
(g) To determine whether or not the shares of such series shall have
any voting powers and, if voting powers are so granted, the extent
of such voting powers; provided, however, that (i) so long as any
Class B Stock shall be outstanding the holders of the Class B Stock
shall always have the absolute right under all conditions and
circumstances to elect a majority of the directors; and (ii) if
voting powers are so granted, the holders of shares of Preferred
Stock shall be entitled to vote together with the holders of the
Class A Stock as a class on all matters upon which holders of shares
of Class A Stock are entitled to vote. Subject to the foregoing and
except as otherwise provided by statute, the holders of shares of
Preferred Stock, as such holders, shall not have any right to vote
in the election of directors or for any other purpose; and such
holders shall not be entitled to notice of any meeting of
stockholders at which they are not entitled to vote;
(h) To determine whether or not the issue of any additional shares
of such series or of any other series in addition to such series
shall be subject to restrictions in addition to the restrictions, if
any, on the issue of additional shares imposed in the resolution or
resolutions fixing the terms of any outstanding series of Preferred
<PAGE>
3
Stock theretofore issued pursuant to this Section A and, if subject
to additional restrictions, the extent of such additional
restrictions; and
(i) Generally to fix the other rights, and any qualifications,
limitations or restrictions of such rights, of such series;
provided, however, that no such rights, qualifications, limitations
or restrictions shall be in conflict with this Certificate of
Incorporation or any amendment hereof.
(2) Before any dividends shall be declared or paid or any distribution
ordered or made upon the Common Stock (other than a dividend payable in
Common Stock), the Company shall comply with the dividend and sinking fund
provisions, if any, of any resolution or resolutions providing for the
issue of any series of Preferred Stock any shares of which shall at the
time be outstanding. Subject to the foregoing sentence, the holders of
Common Stock shall be entitled, to the exclusion of the holders of
Preferred Stock of any and all series, to receive such dividends as from
time to time may be declared by the Board of Directors.
(3) Upon any liquidation, dissolution or winding up of the Company, the
holders of Preferred Stock of each series shall be entitled to receive the
amounts to which such holders are entitled as fixed with respect to such
series, including all dividends accumulated to the date of final
distribution, before any payment or distribution of assets of the Company
shall be made to or set apart for the holders of Common Stock; and after
such payments shall have been made in full to the holders of Preferred
Stock, the holders of Common Stock shall be entitled to receive any and
all assets remaining to be paid or distributed to stockholders and the
holders of Preferred Stock shall not be entitled to share therein. For the
purposes of this paragraph, the voluntary sale, conveyance, lease,
exchange or transfer of all or substantially all the property or assets of
the Company or a consolidation or merger of the Company with one or more
other corporations (whether or not the Company is the corporation
surviving such consolidation or merger) shall not be deemed to be a
liquidation, dissolution or winding up, voluntary or involuntary.
(4) Subject to such limitations (if any) as may be fixed by the Board of
Directors with respect to such series of Preferred Stock in accordance
with paragraph (1) of this Section A, Preferred Stock of each series may
be redeemed at any time in whole or from time to time in part, at the
option of the Company, by vote of the Board of Directors, at the
redemption price thereof fixed in accordance with said paragraph (1). If
less than all the outstanding shares of Preferred Stock of such series are
to be redeemed, the shares to be redeemed shall be determined in such
manner as the Board of Directors shall prescribe. At such time or times
prior to the date fixed for redemption as the Board of Directors shall
determine, written notice shall be mailed to each holder of record of
shares to be redeemed, in a postage prepaid envelope addressed to such
holder at his address as shown by the records of the Company, notifying
such holder of the election of the Company to redeem such shares and
stating the date fixed for the redemption thereof and calling upon such
holder to surrender to the Company on or after said date, at a place
designated in such notice, his certificate or certificates representing
the number of shares specified in such notice of redemption. On and after
the date fixed in such notice of redemption, each
<PAGE>
4
holder of shares of Preferred Stock to be redeemed shall present and
surrender his certificate or certificates for such shares to the Company
at the place designated in such notice and thereupon the redemption price
of such shares shall be paid to or on the order of the person whose name
appears on the records of the Company as the holder of the shares
designated for redemption. In case less than all the shares represented by
any such certificate are redeemed a new certificate shall be issued
representing the unredeemed shares. From and after the date fixed in any
such notice as the date of redemption (unless default shall be made by the
Company in payment of the redemption price) all dividends on the shares of
Preferred Stock designated for redemption in such notice shall cease to
accrue and all rights of the holders thereof as stockholders of the
Company, other than to receive the redemption price, shall terminate and
such shares shall not thereafter be transferred (except with the consent
of the Company) on the books of the Company and such shares shall not be
deemed to be outstanding for any purpose whatsoever. At any time after the
mailing of any such notice of redemption the Company may deposit the
redemption price of the shares designated therein for redemption with a
bank or trust company in the Borough of Manhattan, City and State of New
York, or in the City of Atlanta, Georgia, having capital and surplus of at
least $25,000,000, in trust for the benefit of the respective holders of
the shares designated for redemption but not yet redeemed. From and after
the making of such deposit the sole right of the holders of such shares
shall be the right either to receive the redemption price of such shares
on and after such redemption date, or, in the case of shares having
conversion rights, the right to convert the same at any time at or before
the earlier of the close of business on such redemption date or such prior
date and time at which the right to convert shall have expired; and except
for these rights, the shares of Preferred Stock so designated for
redemption shall not be deemed to be outstanding for any purpose
whatsoever.
(5) Shares of any series of Preferred Stock which have been redeemed
(whether through the operation of a sinking fund or otherwise) or
purchased by the Company, or which, if convertible, have been converted
into shares of stock of the Company of any other class or classes, may,
upon appropriate filing and recording to the extent required by law, have
the status of authorized and unissued shares of Preferred Stock and may be
reissued as a part of such series or of any other series of Preferred
Stock, subject to such limitations (if any) as may be fixed by the Board
of Directors with respect to such series of Preferred Stock in accordance
with paragraph (1) of this Section A.
B. Common Stock
(1) Except as otherwise provided by (a) the Board of Directors in fixing
the voting rights of any series of Preferred Stock in accordance with
Section A of this Article Fourth, (b) this Section B, or (c) statute,
voting power in the election of directors and for all other purposes shall
be vested exclusively in the holders of Class B Stock. The number of
authorized shares of Preferred Stock, Class A Stock, Class B Stock or any
other capital stock of the Company may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative
vote or the written consent of the holders of a majority of the
outstanding shares of Class B Stock. Any director elected by the holders
of Class B Stock (and any successor to such director) shall be subject to
removal without
<PAGE>
5
cause and to replacement from time to time by the affirmative vote or
written consent of the holders of a majority of the outstanding shares of
Class B Stock. Every holder of stock of a class entitled to vote upon a
matter shall be entitled to one vote for each share of stock of such class
standing in his name upon the books of the Company. Except as otherwise
provided by this Section B and by Section C of this Article Fourth, there
shall be no distinction whatever between the rights accorded to the
holders of Class A Stock and Class B Stock.
(2) With regard to the election of directors, holders of Class A Stock
shall be entitled, voting separately as a class, to elect 25 percent of
the directors (rounding the number of such directors to the next highest
whole number if such percentage is not equal to a whole number of
directors) and no less, to remove any director elected by the holders of
Class A Stock (and any successor to such director) and, in the manner
provided in the Bylaws of the Company, to replace any director so removed.
If at any time there shall not be any Class B Stock outstanding, the
provisions of this Certificate of Incorporation which provide limited and
separate voting rights for the holders of the Class A Stock shall cease to
be of any effect, and such holders shall thereafter have general voting
power in the election of directors and in all other matters upon which
stockholders of the Company are entitled to vote pursuant to this
Certificate of Incorporation, the Bylaws of the Company or statute. 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 the
Certificate of Incorporation which would increase or decrease the par
value of the shares of Class A Stock, or alter or change the powers,
preferences or special rights of the shares of Class A Stock so as to
affect them adversely.
(3) A holder of shares of Class B Stock shall be entitled at any time and
from time to time to convert any or all such shares held by him into
shares of Class A Stock in the ratio of one share of Class A Stock for one
share of Class B Stock. Each conversion of shares of Class B Stock into
shares of Class A Stock made pursuant to the provisions of this paragraph
(3) shall be effected by the surrender of the certificate representing the
shares to be converted at the office of the Secretary of the Company (or
at such additional place or places as may from time to time be designated
by the Secretary or any Assistant Secretary of the Company) in such form
and accompanied by all stock transfer tax stamps, if any, as shall be
requisite for such transfer, and upon such surrender the holder of such
shares shall be entitled to become, and shall be registered on the books
of the Company as, the holder of the number of shares of Class A Stock
issuable upon such conversion, and each such share of Class B Stock shall
be converted into one share of Class A Stock, as the Class A Stock shall
then be constituted, and thereupon there shall be issued and delivered to
such holder or other named person, as the case may be, promptly at such
office or other designated place, a certificate or certificates for such
number of shares of Class A Stock.
(4) Upon the affirmative vote or the written consent of the holders of a
majority of the outstanding shares of Class B Stock, all or any part of
the entire class of outstanding Class B Stock shall be converted,
effective upon the date specified in such vote or consent, into shares of
Class A Stock in the ratio of one share of Class A Stock for one
<PAGE>
6
share of Class B Stock. Any conversion pursuant to this paragraph (4) of
less than all the outstanding shares of Class B Stock shall be effected
through the conversion of an equal percentage of such shares held by each
holder of Class B Stock (including any holder who shall not have given his
affirmative vote or written consent). Any fractional share of Class B
Stock resulting from the application of such percentage shall not be
eliminated and shall exist as a fractional share of Class B Stock and the
holder thereof shall be entitled to exercise voting rights, to receive
dividends thereon, to participate in any of the assets of the Company in
the event of liquidation and to all other rights in respect of Class B
Stock to the extent of such fractional share; but any fractional share of
Class A Stock shall be eliminated and in lieu thereof the Company shall
issue scrip or pay cash as provided in paragraph (5) of this Section B.
Upon the effective date of any conversion pursuant to this paragraph (4),
certificates representing the shares of Class B Stock so converted shall
thereafter represent a like number of shares of Class A Stock, and each
holder thereof shall be registered on the books of the Company as the
record holder of such number of shares of Class A Stock. Upon presentation
and surrender of said certificates at the office of the Secretary of the
Company (or at such additional place or places as may from time to time be
designated by the Secretary or any Assistant Secretary of the Company) the
Company shall issue or cause to be issued certificates representing the
whole number of shares of Class A Stock resulting from such conversion,
and shall issue scrip or pay cash in lieu of any fractional share
eliminated upon such conversion, and shall issue or cause to be issued
certificates representing the number of whole shares and any fractional
shares of Class B Stock remaining after such conversion.
(5) Fractional shares of Class B Stock shall be issued upon and in
connection with any conversion, split-up, merger, consolidation,
reclassification, stock dividend or other change in so far as the same
shall affect Class B Stock. A certificate for a fractional share of Class
B Stock so issued shall entitle the holder to exercise voting rights, to
receive dividends thereon, to participate in any of the assets of the
Company in the event of liquidation and to all other rights in respect of
Class B Stock to the extent of such fractional share. No fractional share
of stock of any other class of the Company now or hereafter authorized
shall be issuable upon or in connection with any other conversion,
split-up, merger, consolidation, reclassification, stock dividend or
change involving stock of such other class; in lieu of any such fractional
share, the person entitled to an interest in respect of such a fractional
share shall be entitled, as determined from time to time by the Board of
Directors, to either (i) a scrip certificate for such fractional share
with such terms and conditions as the Board of Directors shall prescribe
or (ii) the cash equivalent of any such fractional share based upon the
market value of shares of such class at the date on which rights in
respect of any such fractional share shall accrue, as determined in good
faith by the Board of Directors.
(6) Subject to the prior rights of the holders of the Preferred Stock
contained in this Article Fourth, when and as dividends are declared,
whether payable in cash, in property or in shares of stock of the Company
(except as hereinafter provided in this paragraph (6)), the holders of
Class A Stock and the holders of Class B Stock shall be entitled to share
equally, share for share, in such dividends. A dividend payable in shares
of Class
<PAGE>
7
A Stock to the holders of Class A Stock and in shares of Class B Stock to
the holders of Class B Stock shall be deemed to be shared equally among
both classes. No dividends shall be declared or paid in shares of Class B
Stock except to holders of Class B Stock, but dividends may be declared
and paid, as determined by the Board of Directors, in shares of Class A
Stock to all holders of Common Stock.
(7) In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, after payment shall have been
made to the holders of the Preferred Stock of the full amount to which
they shall be entitled pursuant to paragraph (3) of Section A of this
Article Fourth, the holders of Common Stock shall be entitled, to the
exclusion of the holders of the Preferred Stock of any and all series, to
share, ratably according to the number of shares of Common Stock held by
them, in all remaining assets of the Company available for distribution to
its stockholders.
B. Issuance of Stock; Negation of Preemptive Rights
Without the affirmative vote or written consent of the holders of a
majority of the outstanding shares of Class B Stock, the Company shall not
issue or sell any shares of Class B Stock or any obligation or security
that shall be convertible into, or exchangeable for, or entitle the holder
thereof to subscribe for or purchase, any shares of Class B Stock. Except
as expressly provided in this Section C or as the Board of Directors in
its discretion may by resolution determine, no holder of stock of the
Company of any class shall have any right to subscribe for or purchase any
shares of stock of the Company of any class now or hereafter authorized or
any obligations or securities which the Company may hereafter issue or
sell that shall be convertible into, or exchangeable for, or entitle the
holders thereof to subscribe for or purchase, any shares of any such class
of stock of the Company.
C. Rights or Options
Subject to Section C of this Article Fourth, the Company shall have the
power to create and issue, whether or not in connection with the issue and
sale of any shares of stock or other securities of the Company, rights or
options entitling the holders thereof to purchase from the Company any
shares of its capital stock of any class or classes at the time
authorized, such rights or options to be evidenced by or in such
instrument or instruments as shall be approved by the Board of Directors.
The terms upon which, the time or times, which may be limited or unlimited
in duration, at or within which, and the price or prices at which any such
rights or options may be issued and any such shares may be purchased from
the Company upon the exercise of any such right or option shall be such as
shall be fixed and stated in a resolution or resolutions adopted by the
Board of Directors providing for the creation and issue of such rights or
options and, in every case, set forth or incorporated by reference in the
instrument or instruments evidencing such rights or options. In the
absence of actual fraud in the transaction, the judgment of the Board of
Directors as to the consideration for the issuance of such rights or
options and the sufficiency thereof shall be conclusive.
<PAGE>
8
D. Unclaimed Dividends
Any and all right, title, interest and claim in or to any dividends
declared, or other distributions made, by the Company, whether in cash,
stock or otherwise, which are unclaimed by the stockholder entitled
thereto for a period of three years after the close of business on the
payment date, shall be and be deemed to be extinguished and abandoned; and
such unclaimed dividends or other distributions in the possession of the
Company, its transfer agents or other agents or depositaries shall at such
time become the absolute property of the Company, free and clear of any
and all claims of any persons or other entities whatsoever.
FIFTH: The private property of the stockholders of the Company shall not
be subject to the payment of corporate debts to any extent whatsoever.
SIXTH: Whenever a compromise or arrangement is proposed between the
Company and its creditors or any class of them and/or between the Company and
its stockholders or any class of them, any court of equitable jurisdiction
within the State of Delaware may, on the application in a summary way of the
Company or of any creditor or stockholder of the Company or on the application
of any receiver or receivers appointed for the Company under the provisions of
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Company under the
provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the
creditors or class of creditors and/or of the stockholders or class of
stockholders of the Company, as the case may be, to be summoned in such manner
as the said court directs. If a majority in number representing three-fourths in
value of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of the Company, as the case may be, agree to any
compromise or arrangement and to any reorganization of the Company as a
consequence of such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or class of stockholders, of
the Company, as the case may be, and also on the Company.
SEVENTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors, subject to the
provisions of this Certificate of Incorporation, is expressly authorized and
empowered:
(a) To make, alter, amend or repeal the Bylaws of the Company in any
manner not inconsistent with the laws of the State of Delaware or this
Certificate of Incorporation, subject to the power of the stockholders to amend,
alter or repeal the Bylaws made by the Board of Directors or to limit or
restrict the power of the Board of Directors so to make, alter, amend or repeal
the Bylaws; provided, however, that so long as any Class B Stock shall remain
outstanding the minimum number of directors shall be the lowest number required
for the holders of Class B Stock to have the absolute power under all conditions
and circumstances to elect a majority of the directors.
<PAGE>
9
(b) Subject to the applicable provisions of the Bylaws, to determine
from time to time, whether and to what extent and at what times and places and
under what conditions and regulations the accounts and books and documents of
the Company, or any of them, shall be open to the inspection of the
stockholders, and no stockholder shall have any right to inspect any account or
book or document of the Company, except as conferred by the laws of the State of
Delaware, unless and until authorized so to do by resolution adopted by the
Board of Directors or the stockholders of the Company entitled to vote in
respect thereof.
(c) Without the assent or vote of the stockholders, to authorize and
issue obligations of the Company, secured or unsecured, to include therein such
provisions as to redeemability, convertibility or otherwise, as the Board of
Directors in its sole discretion may determine, and to authorize the mortgaging
or pledging, as security therefor, of any property of the Company, real or
personal, including after-acquired property.
(d) To fix and determine, and to vary the amount of, the working
capital of the Company; to determine whether any, and if any, what part of any,
accumulated profits shall be declared in dividends and paid to the stockholders;
to determine the time or times for the declaration and payment of dividends; to
direct and to determine the use and disposition of any surplus or net profits
over and above the capital stock paid in; and in its discretion the Board of
Directors may use or apply any such surplus or accumulate profits in the
purchase or acquiring of bonds or other pecuniary obligations of the Company to
such extent, in such manner and upon such terms as the Board of Directors may
deem expedient.
(e) To sell, lease or otherwise dispose of, from time to time, any
part or parts of the properties of the Company and to cease to conduct the
business connected therewith or again to resume the same, as it may deem best.
In addition to the powers and authorities hereinbefore or by statute expressly
conferred upon it, the Board of Directors may exercise all such powers and do
all such acts and things as may be exercised or done by the Company, subject,
nevertheless, to the provisions of the laws of the State of Delaware, of this
Certificate of Incorporation and of the Bylaws of the Company.
EIGHTH: No contract or transaction between the Company and one or more of
its directors or officers, or between the Company and any other corporation,
partnership, association or other organization in which one or more of its
directors or officers are directors or officers or have a financial interest,
shall be void or voidable solely for such reason, or solely because such
director or officer is present at or participates in the meeting of the Board of
Directors or committee thereof which authorizes such contract or transaction, or
solely because such director is counted in determining the presence of a quorum
at such meeting and votes upon the authorization of such contract or
transaction, if (a) the material facts as to such director's or officer's
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or the committee in good faith authorizes the contract or transaction by the
affirmative vote of a majority of the disinterested members thereof, even though
such disinterested members be less than a quorum, or (b) the material facts as
to such director's or officer's relationship or interest and as to the contract
or transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by such stockholders, or (c)
<PAGE>
10
the contract or transaction is fair as to the Company as of the time it is
authorized, approved or ratified by the Board of Directors, a committee thereof,
or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
NINTH: Limitation of Liability; Indemnification
A. Limitation of Directors' Liability
To the fullest extent that the General Corporation Law of the State
of Delaware, as it exists on the date hereof or as it may hereafter be
amended, permits the limitation or elimination of the liability of
directors, no director of the Company shall be liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director. No amendment to or repeal of this Section A of this Article
shall apply to or have any effect on the liability or alleged liability of
any director of the Company for or with respect to any acts or omissions
of such director occurring prior to such amendment or repeal.
B. Indemnification
1. Right to Indemnification. The Company shall to the fullest extent
permitted by applicable law as then in effect indemnify any person (the
"Indemnitee") who was or is involved in any manner (including, without
limitation, as a party or witness) or is threatened to be made so involved
in any threatened, pending or completed investigation, claim, action, suit
or proceeding, whether civil, criminal, administrative or investigative
(including, without limitation, any action, suit or proceeding by or in
the right of the Company to procure a judgment in its favor) (a
"Proceeding") by reason of the fact that he is or was a director or
officer of the Company, or is or was serving at the request of the Company
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise (including, without
limitation, any employee benefit plan) against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such Proceeding. Such
indemnification shall be a contract right and shall include the right to
receive payment in advance of any expenses incurred by the Indemnitee in
connection with such Proceeding, consistent with the provisions of
applicable law as then in effect.
2. Insurance, Contracts and Funding. The Company may purchase and
maintain insurance to protect itself and any Indemnitee against any
expenses, judgments, fines and amounts paid in settlement as specified in
Section B-1 of this Article or incurred by any Indemnitee in connection
with any Proceeding referred to in Section B-1 of this Article, to the
fullest extent permitted by applicable law as then in effect. The Company
may enter into contracts with any director or officer of the Company in
furtherance of the provisions of this Article and may create a trust fund,
grant a security interest or use other means (including, without
limitation, a letter of credit) to ensure the payment of such amounts as
may be necessary to effect indemnification as provided in this Article.
<PAGE>
11
3. Indemnification Not Exclusive Right. The right of indemnification
provided in this Article shall not be exclusive of any other rights to
which those seeking indemnification may otherwise be entitled, and the
provisions of this Article shall inure to the benefit of the heirs and
legal representatives of any person entitled to indemnity under this
Article and shall be applicable to proceedings commenced or continuing
after the adoption of this Article, whether arising from acts or omissions
occurring before or after such adoption.
4. Advancement of Expenses; Procedures; Presumptions and Effects of
Certain Proceedings; Remedies. In furtherance but not in limitation of the
foregoing provisions, the following procedures, presumptions and remedies
shall apply with respect to the advancement of expenses and the right to
indemnification under this Article:
(a) Advancement of Expenses. All reasonable expenses incurred by or
on behalf of an Indemnitee in connection with any Proceeding shall
be advanced to the Indemnitee by the Company within 20 days after
the receipt by the Company of a statement or statements from the
Indemnitee requesting such advance or advances from time to time,
whether prior to or after final disposition of such Proceeding. Such
statement or statements shall reasonably evidence the expenses
incurred by the Indemnitee and, if required by law at the time of
such advance, shall include or be accompanied by an undertaking by
or on behalf of the Indemnitee to repay the amounts advanced if it
should ultimately be determined that the Indemnitee is not entitled
to be indemnified against such expenses pursuant to this Article.
(b) Procedure for Determination of Entitlement to Indemnification.
(i) To obtain indemnification under this Article, an Indemnitee
shall submit to the Secretary of the Company a written request,
including such documentation as is reasonably available to the
Indemnitee and reasonably necessary to determine whether and to what
extent the Indemnitee is entitled to indemnification (the
"Supporting Documentation"). The determination of the Indemnitee's
entitlement to indemnification shall be made not later than 60 days
after receipt by the Company of the written request for
indemnification together with the Supporting Documentation. The
Secretary of the Company shall, promptly upon receipt of such a
request for indemnification, advise the Board of Directors in
writing that the Indemnitee has requested indemnification.
(ii) The Indemnitee's entitlement to indemnification under this
Article shall be determined in one of the following ways: (A)
by a majority vote of the Disinterested Directors (as
hereinafter defined), if they constitute a quorum of the Board
of Directors; (B) by a written opinion of Independent Counsel
(as hereinafter defined) if a quorum of the Board of Directors
consisting of Disinterested Directors is not obtainable or,
even if obtainable, a majority of such Disinterested Directors
so directs; (C) by the stockholders of the Company entitled to
vote; or (D) as provided in Section B-4(c) of this Article.
<PAGE>
12
(iii) In the event the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant
to Section B-4(b)(ii) of this Article, a majority of the
Disinterested Directors shall select the Independent Counsel,
but only an Independent Counsel to which the Indemnitee does
not reasonably object.
(c) Presumptions and Effect of Certain Proceedings. Except as
otherwise expressly provided in this Article, the Indemnitee shall
be presumed to be entitled to indemnification under this Article
upon submission of a request for indemnification together with the
Supporting Documentation in accordance with Section B-4(b)(i), and
thereafter the Company shall have the burden of proof to overcome
that presumption in reaching a contrary determination. In any event,
if the person or persons empowered under Section B-4(b) of this
Article to determine entitlement to indemnification shall not have
been appointed or shall not have made a determination within 60 days
after the receipt by the Company of the request therefor together
with the Supporting Documentation, the Indemnitee shall be entitled
to indemnification unless (A) the Indemnitee misrepresented or
failed to disclose a material fact in making the request for
indemnification or in the Supporting Documentation or (B) such
indemnification is prohibited by law. The termination of any
Proceeding described in Section B-1, or of any claim, issue or
matter therein, by judgment, order, settlement or conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of
itself, adversely affect the right of the Indemnitee to
indemnification or create a presumption that the Indemnitee did not
act in good faith and in a manner which he reasonably believed to be
in or not opposed to the best interests of the Company or, with
respect to any criminal Proceeding, that the Indemnitee had
reasonable cause to believe that his conduct was unlawful.
(d) Remedies of Indemnitee. (i) In the event that a determination is
made pursuant to Section B-4(b) of this Article that the Indemnitee
is not entitled to indemnification under this Article, (A) the
Indemnitee shall be entitled to seek an adjudication of his
entitlement to such indemnification either, at the Indemnitee's sole
option, in (x) an appropriate court of the State of Delaware or any
other court of competent jurisdiction or (y) an arbitration to be
conducted by a single arbitrator pursuant to the rules of the
American Arbitration Association; (B) any such judicial proceeding
or arbitration shall be de novo and the Indemnitee shall not be
prejudiced by reason of such adverse determination; and (C) in any
such judicial proceeding or arbitration the Company shall have the
burden of proving that the Indemnitee is not entitled to
indemnification under this Article.
(ii) If a determination shall have been made or deemed to have been
made, pursuant to Section B-4(b) or (c), that the Indemnitee
is entitled to indemnification, the Company shall be obligated
to pay the amounts constituting such indemnification within
five days after such determination has been made or deemed to
have been made and shall be
<PAGE>
13
conclusively bound by such determination unless (A) the
Indemnitee misrepresented or failed to disclose a material
fact in making the request for indemnification or in the
Supporting Documentation or (B) such indemnification is
prohibited by law. In the event that (C) advancement of
expenses is not timely made pursuant to Section B-4(a) or (D)
payment of indemnification is not made within five days after
a determination of entitlement to indemnification has been
made or deemed to have been made pursuant to Section B-4(b) or
(c), the Indemnitee shall be entitled to seek judicial
enforcement of the Company's obligation to pay to the
Indemnitee such advancement of expenses or indemnification.
Notwithstanding the foregoing, the Company may bring an
action, in an appropriate court of the State of Delaware or
any other court of competent jurisdiction, contesting the
right of the Indemnitee to receive indemnification hereunder
due to the occurrence of an event described in subclause (A)
or (B) of this clause (ii) (a "Disqualifying Event");
provided, however, that in any such action the Company shall
have the burden of proving the occurrence of such
Disqualifying Event.
(iii) The Company shall be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to this Section
B-4(d) that the procedures and presumptions of this Article
are not valid, binding and enforceable and shall stipulate in
any such court or before any such arbitrator that the Company
is bound by all the provisions of this Article.
(iv) In the event that the Indemnitee, pursuant to this Section
B-4(d), seeks a judicial adjudication of or an award in
arbitration to enforce his rights under, or to recover damages
for breach of, this Article, the Indemnitee shall be entitled
to recover from the Company, and shall be indemnified by the
Company against, any expenses actually and reasonably incurred
by him if the Indemnitee prevails in such judicial
adjudication. If it shall be determined in such judicial
adjudication or arbitration that the Indemnitee is entitled to
receive part but not all of the indemnification or advancement
of expenses sought, the expenses incurred by the Indemnitee in
connection with such judicial adjudication or arbitration
shall be prorated accordingly.
(e) Definitions. For purposes of this Section B-4:
(i) "Disinterested Director" means a director of the Company who
is not or was not a party to the Proceeding in respect of
which indemnification is sought by the Indemnitee.
(ii) "Independent Counsel" means a law firm or a member of a law
firm that neither presently is, nor in the past five years has
been, retained to represent (A) the Company or the Indemnitee
in any matter material to either such party or (B) any other
party to the Proceeding giving rise to a
<PAGE>
14
claim for indemnification under this Article. Notwithstanding
the foregoing, the term "Independent Counsel" shall not
include any person who, under the applicable standards of
professional conduct then prevailing under the law of the
State of Delaware, would have a conflict of interest in
representing either the Company or the Indemnitee in an action
to determine the Indemnitee's rights under this Article.
(5) Severability. If any provisions of this Article shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (a) the
validity, legality and enforceability of the remaining provisions of this
Article (including, without limitation, all portions of any paragraph of
this Article containing any such provision held to be invalid, illegal or
unenforceable that are not themselves invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby; and (b) to the
fullest extent possible, the provisions of this Article (including,
without limitation, all portions of any paragraph of this Article
containing any such provision held to be invalid, illegal or unenforceable
that are not themselves invalid, illegal or unenforceable) shall be
construed so as to give effect to the intent manifested by the provision
held invalid, illegal or unenforceable.
TENTH: To the extent deemed necessary or appropriate by the Board of
Directors to enable the Company to engage in any business or activity directly
or indirectly conducted by it in compliance with the laws of the United States
of America as now in effect or as they may hereafter from time to time be
amended, the Company may adopt such Bylaws as may be necessary or advisable to
comply with the provisions and avoid the prohibitions of any such law.
ELEVENTH: Elections of directors need not be by written ballot unless the
Bylaws of the Company shall so provide.
TWELFTH: The Company reserves the right at any time and from time to time
to amend, alter, change or repeal any provision contained in this Certificate of
Incorporation in the manner now or hereafter prescribed by law, and all rights,
preferences and privileges of whatsoever nature conferred upon stockholders,
directors, or any other persons whomsoever by and pursuant to this Certificate
of Incorporation in its present form or as hereinafter amended are granted
subject to the right reserved in this Article Twelfth.
<PAGE>
15
The name and mailing address of the Incorporator is Eli Curi, Jr.,
12 East 49th Street, 30th Floor, New York, NY 10017.
IN WITNESS WHEREOF, the undersigned being the sole incorporator
executes, signs and acknowledges this Certificate of Incorporation, this 21st
day of September, 1998 and affirms the statements contained herein as true under
penalty of perjury.
/s/ Eli Curi, Jr.
-------------------------------
Eli Curi, Jr.
Sole Incorporator
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
THE PIETRAFESA CORPORATION
The Pietrafesa Corporation (the "Corporation"), a corporation
organized and existing under the laws of the State of Delaware, hereby certifies
as follows:
FIRST: That the name of the Corporation is The Pietrafesa
Corporation. The date of the filing of the Certificate of Incorporation of the
Corporation with the Secretary of State of the State of Delaware is September
21, 1998.
SECOND: That the Board of Directors of said Corporation, at a vote
duly conducted, adopted a resolution to amend Article FOURTH(a) of the
Corporation's Certificate of Incorporation to read in its entirety as follows:
"FOURTH: (a) The total number of shares of all classes of stock
which the Company shall have authority to issue is 27,000,000,
consisting of 12,000,000 shares of Class A Common Stock, par value
$.001 per share (the "Class A Stock"), 10,000,000 shares of Class B
Common Stock, par value $.0002 per share (the "Class B Stock," and
together with the Class A Stock, the "Common Stock"), and 5,000,000
shares of Preferred Stock, par value $.001 per share (the "Preferred
Stock")."
THIRD: That in lieu of a meeting and vote of stockholders, the sole
stockholder of the Corporation has given written consent to said amendment in
accordance with the provisions of Section 228 of the General Corporation Law of
the State of Delaware.
FOURTH: That the aforesaid amendment was duly adopted in accordance
with the applicable provisions of Sections 228 and 242 of the General
Corporation law of the State of Delaware.
FIFTH: That this Certificate of Amendment to the Certificate of
Incorporation shall be effective immediately upon filing with the Secretary of
State of the State of Delaware.
IN WITNESS WHEREOF, The Pietrafesa Corporation has caused this
Certificate of Amendment to be signed this 12th day of July, 1999.
By: /s/ Richard C. Pietrafesa, Jr.
--------------------------------------
Name: Richard C. Pietrafesa, Jr.
Title: President and Chief Executive Officer
<PAGE>
Exhibit 4
Form of
Common Stock Certificate
<PAGE>
Common Stock Common Stock
Number Shares
Incorporated under the laws of the State of Delaware
THE PIETRAFESA CORPORATION
CLASS A COMMON STOCK, PAR VALUE $.001 PER SHARE
CUSIP 720887 108
THIS CERTIFIES THAT
is the owner of
fully paid and non-assessable shares of Class A Common Stock, par value $.001
per share, of THE PIETRAFESA CORPORATION, transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate is not valid
unless duly countersigned by the Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
- ------------------------------ ------------------------------
President Secretary
Countersigned and Registered:
American Stock Transfer & Trust Company
(Brooklyn, NY)
Transfer Agent and Registrar
By
---------------------------
Authorized Officer
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EXHIBIT 5
[Letterhead of Roberts, Sheridan & Kotel, P.C.]
July 12, 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 Pre-Effective
Amendment No. 2 to the Registration Statement on Form S-1 (the "Registration
Statement") filed with the Securities and Exchange Commission (the "Commission")
on July 12, 1999, Registration Number 333-74439, under the Securities Act of
1933 (the "Act") for the registration under the Act of 4,058,333 shares of Class
A Common Stock, par value $.001 per share, of the Issuer. Such registered shares
of Class A Common Stock consist of 4,000,000 shares being offered by the Issuer
and up to 58,333 shares being offering for resale, from time to time, by a
stockholder 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
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2
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.
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 4,058,333 shares of Class A Common Stock, when sold in
accordance with the provisions of the Registration Statement, shall have been
legally issued and are 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,
Delaware corporate law 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.
<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.
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Windsong shall make no changes in the design of the Products unless such changes
are consented to by the Company by prior written approval. In the event that the
Company does not respond within fifteen days, then its approval shall be deemed
to have been given. The finished design Products produced by Windsong shall be
submitted to the Company for approval in a timely, formal, unified and cohesive
presentation.
2.2 Windsong agrees to produce, and manufacture and diligently
promote the Products for each selling season during the term of this Agreement.
2.3 All designs and product information, including without
limitation, sketches and swatches, whether final or rough, for the Products are
and shall be the sole and exclusive property of the Company, shall be returned
to the Company, shall not be disclosed or furnished by Windsong to any other
person, firm or corporation (except in accordance with this Agreement). Windsong
shall not manufacture or sell any Product bearing designs copied from the
Products of the Company or using trademark, copyrights or designs which are
confusingly similar to the Trademark used in conjunction with the Products, or
any other property proprietary to the Company, without the prior written consent
of the Company.
2.4 The Products shall at all times be manufactured, packaged, sold,
marketed, distributed, advertised or otherwise promoted in a manner appropriate
for and consistent with the "Approved Quality" products. For purposes hereof, a
Product shall be deemed to be of "Approved Quality" if the quality of such
Product is equal or superior to the quality of a sample of such Product
previously approved by the Company.
2.5 All of the Products shall be manufactured, labeled, packaged,
sold, marketed, distributed, advertised or otherwise promoted in accordance with
all applicable federal, state and local laws and regulations.
2.6 The styles, designs, packaging, labels, contents, fabric, color,
workmanship and quality of all of the Products shall require the approval of the
Company pursuant to the terms of this Agreement to insure that the Products
manufactured, sold or distributed hereunder are of Approved Quality.
2.7 Windsong acknowledges that the Trademark has established
prestige and goodwill and is well-recognized in the mind of the trade and the
public, that it is of great importance and value to the Company, and that in the
sale of the various lines of the Company's products, including the Products, the
high standards and reputation that the Company and the Trademark have
established be maintained. Accordingly, all Products produced by Windsong
hereunder shall be of first quality and uniform workmanship, with strict
adherence to all details, colors and other characteristics which have been
approved by the Company. Windsong shall make no changes in any of the Company's
2
<PAGE>
designs, its Products or samples approved by the Company without the prior
written approval of the Company as to the changes. From time to time during
production, Windsong shall, at reasonable times and upon reasonable notice
during the term hereof, upon the Company's request, make its facilities
available to the Company for inspection by its representative during usual
working hours. Off-quality, irregular or damaged Products, or otherwise
defective merchandise shall be clearly marked as such, and shall not bear the
Trademark or trade name unless consented to in writing by the Company or unless
the removal of such mark or name would destroy the Product. Windsong shall
provide, and be financially responsible for, samples and related materials.
2.8 All the Products shall be manufactured in the Territory or in
countries outside the Territory which have received prior written approval by
the Company. Windsong will submit to the Company a list of countries and
factories in which it intends to manufacture Products.
3. Marketing of the Products.
3.1 Windsong shall use its best efforts to exploit the rights herein
granted, maximize sales and obtain as broad a distribution of the Products in
the Territory as is reasonably possible consistent with the Company's high
prestige and the maintenance of the Company's good will; provided, however, that
none of the Products sold hereunder shall be sold to accounts which are not
approved by the Company. Windsong shall provide the Company with a complete
account list on an annual basis. Windsong acknowledges that the Products sold
hereunder shall be sold in a manner so not to injure or in any manner diminish
the substantial good will and prestige associated with items sold under the
Trademark or that would otherwise injure the prestige and good will of the
Company or the Trademark.
3.2 Windsong shall be responsible for the sale of the Products
through its sales force and, unless otherwise specifically provided for herein,
for all matters relating to such sales, including without limitation, credit
determination, billing and shipping.
3.3 Windsong shall establish, maintain and operate a full time
showroom for the display of the Products in New York, NY. In addition, Windsong
shall display Products semi-annually at the Magic Trade Show in Las Vegas,
Nevada. All matters involving the display shall have the prior written approval
of the Company.
3.4 Windsong shall cause appropriate copyright, trademark, service
mark or other notice desired by the Company relative to the Trademark to appear
on or with all labels, cartons, containers, packing or wrapping material,
advertising, art work, designs, promotional or display material bearing the
Trademark. Copies of each and every tag, label, imprint, or other device
containing any such notice, trademark or otherwise relating to the Products and
3
<PAGE>
all advertising, art work, designs, packaging, promotional, display or publicity
material bearing the Trademark including press releases, annual reports and
promotional brochures (with respect to material pertaining to the Company or
Trademark only) and promotional brochures shall be submitted by Windsong to the
Company for its written approval prior to use by Windsong, which approval or
rejection shall be given within five (5) working days of receipt thereof.
Failure to respond within such time shall be deemed approval. None of such
material shall bear the name of any other firm or person, except that certain
advertising may bear the name of retail establishments with which Windsong is
doing cooperative advertising. All such material shall be of a taste level
consistent with the Company's reputation and image and shall be delivered to the
Company in a timely manner so as to allow for due consideration and modification
by the Company. Approval by the Company shall not constitute waiver of the
Company's rights or Windsong's duties under any provision hereof. Windsong shall
not vary the Trademark.
3.5 Windsong and the Company shall jointly prepare prior to year end
a written annual marketing plan detailing their strategies for the ensuing
period, with respect to sales, marketing, advertising and sales support.
4. Use of Trademark.
4.1 Windsong acknowledges that the Company has the sole and
exclusive ownership of the Trademark in connection with the Products in the
Territory. The Company agrees to maintain the Trademark for the term of this
Agreement and in connection with the protection and defense thereof will
consider all information from Windsong with regard to the potential infringement
of the Trademark with respect to the Products, it being understood that all
action or inaction with regard to protection of the Trademark shall be in the
sole discretion of the Company.
4.2 Windsong shall cause to appear on everything which uses, bears
or displays the Trademark, including without limitation, all labels, packaging,
tags, advertising, annual reports, art work, designs, and promotional or display
material therefor, a notice proclaiming and identifying the Trademark appearing
therein as proprietary to the Company, as the Company may deem appropriate or as
may be required by law or governmental regulation. No name and no product other
than the Products shall be used in connection with the Trademark in any
advertising, publicity, labeling, wrapping or packaging under the control of
Windsong in connection with the Products, except as to which the Company may
consent in writing or as otherwise provided herein with respect to trade or coop
advertising or as may be required by law.
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<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.
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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.
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5.3 Windsong does hereby indemnify and hold the Company harmless
during and after the Term from and against any and all claims, liabilities,
damages, causes of action, suits, losses, expenses or other injury (including
reasonable attorney's fees and expenses) arising in any way out of Windsong's
activities hereunder, including without limitation any actual or alleged: (i)
Windsong violation of this Agreement; (ii) violation by any subcontractor of the
terms of this Agreement; (iii) claim by any employee or subcontractor permitted
by Windsong to produce or participate in the production of the Products; or (iv)
other act or omission of such employee or subcontractor in connection with this
Agreement. Windsong's indemnity obligation includes without limitation claims
for alleged improper reproduction or use of the Trademark, or except as may be
limited by paragraph 5.3 of actual or alleged violation of any copyright,
trademark, service mark, certification mark, patent, confidential information,
privacy, publicity or other rights, and claims for injury or damage related to
any alleged defect in any Product, or the failure of any product to conform to
applicable law. In the case of a legal or other proceeding by a third person
against Windsong, relating to this provision, the Company shall assist and fully
cooperate with Windsong in connection with such proceeding. Windsong shall
provide Company with copies of all court pleadings, correspondence and any other
relevant documentation relating to any such action.
6. Compensation and Certain Definitions.
6.1 "Net Sales" shall mean the invoice price charged by Windsong,
for the sale or other exploitation of the Products in the Territory, as well as
the fair market value of any other compensation received by Windsong with regard
thereto. No set-offs or deductions of any kind may be taken in the determination
of Net Sales or the royalties due the Company hereunder, except that Windsong
may deduct standard trade, advertising and promotional discounts actually given,
actual returns, bad debts, tariffs, import/export duties, freight and sales
taxes.
6.2 "Annual Period" shall mean the twelve (12) month period
commencing on January 1, and ending on December 31, for the term of this
Agreement, except that the first Annual Period shall commence on [***] and end
on [***].
6.3 Annual Minimum Payments. During the initial term of this
Agreement Windsong shall pay the Company a Minimum Annual Payment. Annual
Minimum shall be paid in quarterly payments on January 1, April 1, July 1, and
October 1 of each Annual Period. The Annual Minimum for the First Annual Period
shall be [***] and thereafter shall be [***]. Thereafter the Annual Minimum
payment shall be [***].
[***] Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
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6.4 Percentage Payments. During the term of this Agreement, Windsong
shall pay the Company a percentage payment of [***] Net Sales (the "Percentage
Payment"). Any Percentage Payment due the Company for any calendar quarter
during the Annual Period shall be paid by Windsong within thirty (30) days
following the end of such calendar quarter. Additionally, if certain products
designed by the Company (which shall be approved by the Company) but which do
not bear the Trademark are sold by Windsong or off-price or irregular sales then
the Company shall receive a percentage payment of [***].
6.5 Payments of Annual Minimums for each Annual Period shall at all
times be credited against the Percentage Payment due for the same Annual Period.
6.6 In no event shall the Percentage Payment for any Annual Period
in excess of the Minimum Payment for the same Annual Period be credited against
any payment due for any other Annual Period.
6.7 All amounts payable hereunder shall be paid in United States
Dollars.
6.8 All payments hereunder which are overdue fifteen (l5) business
days or more shall bear interest at [***]% above the prime rate from the due
date.
6.9 Windsong shall promptly reimburse the Company upon presentation
of an appropriate invoice for any travel or related expenses incurred by the
Company and its employees in connection with this Agreement, including without
limitation, sourcing travel, personal appearances, headquarters or sales visits
which shall be discussed with Windsong. It is understood that travel for its
principal designer shall be first class and for others business class whether
domestic or foreign.
7. Advertising and Marketing Assistance.
7.1 During the term hereof in each Annual Period commencing January
1, 1996, Windsong shall set aside and pay over to the Company for advertising of
the Trademark and the Products, [***]. All matters pertaining to such
advertising shall be determined by the Company, including without limitation
conception, development, content and placement. The Company shall consult
periodically with Windsong regarding such program through the annual plan.
Windsong and the Company shall account in writing to each other for all
expenditures made hereunder. For purposes hereof, expenditures on advertising
shall consist of the out-of-pocket cost of space and time in any media as well
as direct production costs related thereto, direct out-of-pocket expenditures
relating to public relations or in store
[***] Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
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seminars, promotions, displays, exhibits or joint showrooms may also constitute
expenditures on advertising as well as fashion shows, press kits and videos.
Windsong shall have annual audit rights with regard to advertising expenditures.
7.2 Any and all advertising undertaken by Windsong shall have the
prior written approval of the Company.
7.3 All advertising (except cooperative advertising), art work,
involving the Trademark, or any reproduction thereof, shall, notwithstanding
their creation, invention or use by Windsong, be and remain the property of the
Company and the Company shall be entitled to use the same. Upon the termination
of this Agreement, all art work shall be delivered to the Company.
8. Accounting.
8.1 Windsong shall deliver to the Company, at the time each
Percentage Payment is due, a full and complete statement (a form of which has
been submitted to and approved by the Company and which is attached as Exhibit
C) indicating the amount of the Net Sales for the period covered by the
Percentage Payment. Each statement shall show the category, style number,
description, invoice price and gross sales of all of the Products by categories
and styles during the period covered by the Percentage Payment, as well as the
amount of authorized deductions therefrom as permitted under this Agreement,
including actual trade discounts and returns, and computation of the amount of
Percentage Payment due hereunder in respect of such Net Sales for such period.
Such statement shall in each instance be certified by the Chief Financial
Officer of Windsong. Such statement shall be furnished irrespective of the
quantity of the Products sold during the period for which such statement is due;
provided, however, no statement shall be delivered until actual sales of the
Products have occurred. The Company shall have the right to inspect return
reports.
8.2 Windsong shall prepare and maintain, in accordance with
generally accepted accounting principles as consistently applied by Windsong,
complete and accurate books of account and records covering all transactions
relating to the rights hereby granted. The Company and its duly authorized
representatives shall have the right upon reasonable advance notice to examine
said books of account and records and other documents and material in the
possession or under the control of Windsong to the extent reasonably required to
verify the amount of Net Sales of the Products, deductions, and compensation
payable with respect to such sales, and to make extracts therefrom. All such
books of account, records and documents shall be kept available by Windsong for
the Company's inspection during the term of this Agreement. In the event that
Windsong shall not deliver or make available in a timely manner the reports
referred to herein, then the Company or its representative shall have the right
to audit the books and records of
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Windsong to determine the information contained in such reports and the expense
of any such audit shall be borne by Windsong. This remedy shall be in addition
to and without limitation to any other which the Company may have under this
Agreement or otherwise.
8.3 The Company may, in its sole discretion and at its sole expense,
cause an independent public accountant of its choice, upon reasonable advance
notice to Windsong, to examine Windsong's books and records to verify the
accuracy of the statements submitted by Windsong and to determine the amounts
due the Company hereunder. Such examination and audit shall be at the Company's
own expanse and shall be limited to no more than one such audit during any
Annual Period; provided, however, that if such examination or audit discloses an
underpayment of the total compensation due to the Company of [***] for the
Annual Periods covered by such audit, then reasonable expenses incurred by the
Company in connection with the examination and audit shall be borne by Windsong.
9. Term.
9.1 The initial term of this Agreement shall be from [***] and
continuing through December 31, 2001; provided, however, that unless sooner
terminated in accordance with its terms. Windsong shall have the right to renew
this agreement for one additional period of five years, which renewal period
shall end on December 31, 2006, if at least [***] prior to the conclusion of
such term, written notice of such renewal is delivered to the Company by
Windsong. The foregoing rights of extension shall only be exercisable for
Windsong if Windsong shall have achieved Net Sales for the Products of [***] for
the twelve months ending December 31, 2000.
9.2 It is understood that in the event that this Agreement is not
renewed or extended on [***] or [***], as the case may be, then, the Company
shall thereafter be free to negotiate with any other party in respect of the
rights contained in this Agreement and to manufacture, distribute and sell the
Products under the Trademark (either alone or in concert with a third party),
provided that none of the Products is delivered for sale prior to the
termination date of this Agreement.
9.3 In the event that the following sales volume is not achieved,
the Company shall have the right to terminate the contract:
Year ending Volume
December 31, [***] [***]
December 31, [***] [***]
December 31, [***] [***]
10. Default.
[***] Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
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10.1 The following shall constitute events of default on the part of
Windsong: (a) If any Advance Payment or Percentage Payment or other payment
shall not be paid when due and such default continues for more than five (5)
days after written notice thereof, or (b) if Windsong attacks the title or any
rights of the Company in and to the Trademark or otherwise attacks the validity
of this Agreement, or (c) if Windsong, except for reasons of force majuer, (i)
ceases to manufacture, sell or distribute the Products unless otherwise provided
for herein for a period of fifteen (15) days, or (ii) defaults in performing any
of the other material terms of this Agreement, including but not limited to its
obligations to use the Trademark and to not misuse the Trademark, and in each
instance continues in default for a period of thirty (30) days after written
notice thereof, or (d) if a receiver is appointed for it, or (e) if Windsong is
adjudicated bankrupt or insolvent or makes application for relief as a debtor
under any federal or state bankruptcy law, or (f) if Windsong defaults on any
obligation which is secured by a security interest in any of the Products
covered by this Agreement, then, in any such event, the Company shall have the
right, exercisable in its sole discretion, to terminate this Agreement upon ten
(10) days' written notice to Windsong of its intention to do so, and upon the
expiration of such 10 day period, this Agreement shall automatically terminate
and be of no further force and effect without prejudice to any remedy of the
Company for the recovery of monies then due it under this Agreement or in
respect of antecedent breach of this Agreement, and without prejudice to any
other rights of the Company, including without limitation, damages for breach to
the extent that the same may be recoverable. No assignee for the benefit of
creditors, receiver, trustee in bankruptcy, sheriff, or any other officer of the
court or official charged with taking over custody of Windsong's assets or
business shall have the right to continue the performance of this Agreement.
10.2 Windsong shall have the right to terminate this Agreement (a)
if the Company defaults in performing any of the material terms of this
Agreement and continues in default for a period of thirty (30) days after notice
thereof, or (b) if the Company is adjudicated bankrupt or insolvent, or makes
application for relief as a debtor under any federal or state bankruptcy act, or
(c) if a receiver is appointed for it. Windsong's right of termination shall
take effect upon ten (10) days written notice thereof to the Company.
11. Disposal of Stock Upon Termination or Expiration.
11.1 Upon termination or expiration of this Agreement, Windsong
shall provide the Company with an accurate inventory of Windsong's Products as
of the termination date. Additionally, the Company or its agent shall have the
right within ten (10) days of submission of the inventory to make an audit of
Windsong's inventory of the Products. After termination of this Agreement,
provided that Windsong is not in default hereunder, Windsong may
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dispose of the Products which are on hand or in process at the time notice of
termination is received for a period of one hundred eighty (180) days, on a
non-exclusive basis, after date of termination, provided Windsong fully complies
with all provisions of this Agreement hereof in connection with such disposal
(including, but not limited to, payment of Percentage Payments pursuant to
Paragraph 6 hereof).
12. Effect of Termination.
12.1 It is understood and agreed that except for the right to use
the Trademark as specifically provided for in this Agreement, Windsong shall
have no right, title or interest in or to the Trademark. Upon and after the
termination of this Agreement and except as granted in Paragraph 11 hereof, all
rights granted to Windsong hereunder, together with any interest in and to the
Trademark and corresponding goodwill that Windsong may acquire, shall forthwith
and without further act or instrument be assigned to and revert back to the
Company. In addition, Windsong will execute any instruments reasonably requested
by the Company to accomplish or confirm the foregoing. Any such assignment,
transfer or conveyance shall be without further consideration other than the
mutual agreements contained herein. The Company shall thereafter be free to
assign or license to others the use of the Trademark in connection with the
manufacture and sale of the Products covered hereby, and Windsong will refrain
from further use of the Trademark or any further reference to it, direct or
indirect, or anything deemed by the Company, in its sole opinion, to be similar
to the Trademark in connection with the manufacture, sale or distribution of
Windsong's products, except as specifically set forth in Paragraph 11 hereof.
13. Insurance.
13.1 Windsong shall procure and maintain at its own expense in full
force and effect at all times during which the Products are being sold, a
comprehensive liability insurance policy (including contractual and product
liability) from a reputable insurance company with respect to all of the
Products with a limit of liability of not less than $5,000,000 per occurrence
and $2,000,000 per person. Such insurance may be obtained by Windsong in
conjunction with a policy of products liability insurance which covers products
other than the Products. Windsong shall deliver a certificate evidencing said
insurance policy, and such policy shall name the Company as an additional
insured to the extent of its interests, and shall provide that it may not be
canceled or changed without thirty (30) days prior written notice to the
Company.
14. Certain Representations and Warranties.
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14.1 Windsong represents and warrants that it has full right, power
and authority to enter into this Agreement and to perform all of its obligations
hereunder and that it has sufficient financial capability to fulfill all of its
obligations hereunder.
14.2 The Company hereby represents and warrants that it is the owner
of the Trademark, and has the full right, power and authority to enter into this
Agreement and to perform all of its obligations hereunder. The Company shall
have the right to change the Trademark to resolve any actual or potential
conflict with the rights of third parties.
14.3 Windsong represents and warrants that it will assign any and
all design patents, copyrights, invention or other items of intellectual
property that may have been developed or produced relating to the Products
produced under this Agreement to the Company notwithstanding the invention or
use by Windsong.
15. Samples.
15.1 Windsong shall provide the Company with samples from time to
time as needed for marketing purposes, as may be reasonably requested by the
Company.
16. Arbitration.
16.1 Except as specifically set forth in this Agreement, any and all
disputes, controversies and claims arising out of or relating to this Agreement,
or with respect to the construction of this Agreement, or concerning the
respective rights or obligations hereunder of the parties hereto and their
respective permitted successors and assigns (except disputes, controversies and
claims relating to or affecting in any way the Company's ownership of, or rights
to, or the validity of the Trademark or any registration thereof or infringement
thereof, as set forth in Paragraph 6) shall be determined by arbitration of a
panel of three (3) arbitrators in New York, New York, in accordance with and
pursuant to the then existing rules of the American Arbitration Association.
Windsong acknowledges that any unauthorized reproduction or use of the
Trademark, during or after the Term, which violates this Agreement or is
otherwise improper, will be an infringement of, and will immediately and
irreparably damage the Company, and the Company's rights and interests in and
to, and the value to the Company of, the Trademark, within and outside the
Territory. Windsong agrees that the Company, provided it is not in breach of any
of the terms in this Agreement, is entitled to preliminary and permanent
injunctive relief and any and all other remedies for enforcement of rights to
stop such reproduction or use. This Paragraph will in no way limit the Company
from obtaining any and all other relief to which it may be entitled. Any
arbitration award shall be final and binding upon the parties and judgment
thereon may be entered in any court
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having jurisdiction thereof. Jurisdiction in the state and federal courts of New
York is hereby consented to by the parties for such purposes. The service of any
notice, process, motion or other document in connection with an arbitration
award hereunder may be effectuated either by personal service upon a party or by
certified or registered mail to the respective addresses herein provided. The
arbitrators shall have no right to amend or supplement this Agreement.
17. Notices, etc.
17.1 All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been properly given or
sent on the date when such notice, request, consent or communication is (a)
personally delivered and acknowledged, or (b) if mailed, when received by
certified or registered mail, at the address of the parties set forth below, or
at such other address or addresses as any of the parties hereto shall have
heretofore designated by notice hereunder.
If to the Company:
Alexander Julian Inc.
63 Copps Hill Road
Ridgefield, Connecticut 06877
Attention: Alexander Julian
If to Windsong:
Windsong
224 Riverside Avenue
Westport, CT 06880
Attention: Joseph Sweedler
18. Relationship Between the Parties.
18.1 Nothing herein contained shall be construed to place the
parties in the relationship of partners or joint venturers. Neither party shall
represent itself as the agent or legal representative of the other party for any
purpose whatsoever and shall have no power to obligate or bind the other party
in any manner whatsoever.
19. Waiver.
19.1 None of the terms hereof can be waived or modified except by an
express agreement in writing signed both parties hereto. The failure of either
party hereto to enforce, or the delay by either party in enforcing, any of its
rights hereunder shall not be deemed a continuing waiver or a modification
thereof and either party may, within the time provided by applicable law,
commence appropriate legal proceedings to enforce any and all such rights. All
rights and remedies provided for herein shall be cumulative and in addition to
any other rights or remedies such
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parties may have at law or in equity. No person, firm or corporation, other than
the parties hereto, shall be deemed to have acquired any rights by reason of
anything contained in this Agreement.
20. Assignment.
20.1 This Agreement may not be assigned by Windsong without prior
written consent of the Company. Windsong may not grant sublicenses. Subject to
the foregoing, this Agreement shall bind and inure to the benefit of the
parties, their successors and assigns.
21. Brokerage.
21.1 The parties in their negotiations relative to this Agreement
have not utilized the services of any finder, broker or agent. Each party agrees
to indemnify the other party against and hold it harmless from any and all
liabilities (including without limitation, reasonable attorney's fees) to any
person, firm or corporation claiming commissions or fees in connection with this
Agreement or the transactions contemplated hereby as a result of an agreement
with or services rendered to such party.
22. Paragraph Headings.
22.1 The captions of paragraphs have been inserted for convenience
only and shall not be given any legal effect.
23. Applicable Law.
23.1 This Agreement shall be construed and interpreted in accordance
with the internal laws of the State of New York applicable to contracts made and
performed therein (without applying New York conflict of laws rules). If any
applicable mandatory law prevents application of New York law to a provision of
this Agreement, all other provisions will remain subject to New York law.
24. Severability.
24.1 In the event that any one or more provisions of this Agreement
shall at any time be found to be invalid or otherwise rendered unenforceable,
including with respect to all or part of the Territory, then such provision or
provisions shall be severable from this Agreement (but only with respect to that
part of the Territory) and the validity or enforceability of the remaining
provisions of this Agreement shall not be affected thereby.
25. Entire Agreement.
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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.
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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
--------------------------------
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Alexander Julian, Inc.
63 Copps Hill Road
Ridgefield, Connecticut 06877
As of July 9, 1999
Windsong, Inc.
1599 Post Road East
Westport, Connecticut 06880
Re: License Agreement (the "License Agreement"), dated as of January 1,
1996, Between Alexander Julian, Inc. (the "Licensor") and Windsong,
Inc. (the "Licensee")
Gentlemen:
In connection with the proposed sale of substantially all of the
assets of the Licensee (including, without limitation, all of the Licensee's
right, title and interest in, to and under the License Agreement) to Windsong
Acquisition Corp. (the "Purchaser" pursuant to an Asset Purchase Agreement (the
"Asset Purchase Agreement") to be entered into between the Licensee and the
Purchaser, you have requested that the Licensor consent to the assignment of the
License Agreement from the Licensee to the Purchaser.
Effective upon [***] delivery of an executed guaranty by Pietrafesa
Corporation as set forth in the last paragraph of this Letter Agreement, (i) the
Licensor hereby consents to the assignment of the License Agreement from the
Licensee to the Purchaser [***] (ii) the Licensor and the Licensee hereby amend
and restate the last sentence in Article 6.3 of the License Agreement by
deleting such sentence in its entirety and inserting in lieu thereof the
following: "Thereafter the Annual Minimum payment shall be [***]," and (iii) the
Licensor and Licensee reaffirm all other terms and conditions of the License
Agreement except to the extent modified by this Letter Agreement and the
Coloursport Alexander Julian Agreement entered into simultaneously herewith.
The Licensor and the Licensee both represent to the best of their
knowledge that (i) the License Agreement is in full force and effect, and (ii)
there is no dispute or disagreement between the Licensor and the Licensee with
respect to the License Agreement and to the best of their knowledge there is no
basis for terminating the License Agreement or asserting any indemnity claim
thereunder.
The Licensor agrees and acknowledges that in connection with the
assignment of the License Agreement, Licensee may continue to sell the Products
(as defined by the License Agreement, Exhibit A) to Licensee's existing
customers to the extent identified on Schedule A annexed hereto and made a part
hereof.
The Licensee agrees and acknowledges that notwithstanding the
Licensor's approval of the customers identified on Schedule A, Licensee will not
sell the Products (without Licensor's prior written approval), to any customer
who: (i) applies for, or consents to the appointment of a receiver, trustee, or
liquidator for all, or a substantial part of its assets; (ii) admits in writing
its inability to pay its debts as they mature; (iii) makes a general assignment
or trust mortgage for the benefit of its creditors; (iv) is adjudged bankrupt or
insolvent; (v) files a petition initiating any proceeding under any insolvency
or other similar law; (vi) files an answer admitting the material allegations of
a petition filed in any proceeding under any provision of the Bankruptcy Act or
under any insolvency or other similar law, or permits any such petition to
remain undismissed for a period of thirty (30) days; or (vii) permits an order,
judgment or decree to be entered with or without its application, approval or
consent, by any court
[***] Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
<PAGE>
of competent jurisdiction approving a petition seeking its reorganization, or
the appointment of a receiver, trustee, liquidator, or any similar officer of
all, or a substantial part, of its assets and, if such order, judgment or decree
is entered without its application, approval or consent, such order, judgment or
decree shall continue unstayed and in effect for a period of thirty (30) days;
or (viii) takes any corporate action for the purpose of effecting any of the
foregoing.
The Licensor's prior written approval will be required relative to
any publicity utilizing Licensor's corporate name, the name Alexander Julian.
Licensor's trademarks, the License Agreement, and/or any modification of
Pietrafesa Corporation's S-1 to the extent such modification concerns or relates
to any of the above.
Licensee agrees and acknowledges that there will not be any further
assignment of the License Agreement without Licensor's prior written approval
and that (i) any merger or acquisition of Purchaser or its parent, the result of
which is that Purchaser or its parent is not the surviving entity, or (ii) any
other corporate transaction whereby Philip E. Cohen is no longer in direct or
indirect control of Pietrafesa Corporation, other than by death or total and
permanent disability shall be considered an assignment requiring Licensor's
prior written approval for the purposes of License Agreement Article 20.
The Licensor will be timely provided with all further drafts and
execution copies of (i) the "more definitive agreements" referenced in the
Letter of Intent, (ii) the assignment of the License Agreement to Purchaser, and
(iii) Pietrafesa Corporation's guaranty of Purchaser's assumption of the
obligations of the License Agreement.
In the event that the License Agreement has not been assigned to the
Purchaser on or before the earlier of October 31, 1999 or the date on which the
Asset Purchase Agreement terminates (or, if the Asset Purchase Agreement is not
entered into by the Licensee and the Purchaser, the date on which the Letter of
Intent, between the Licensee and The Pietrafesa Corporation is terminated), this
Letter Agreement shall automatically terminate and be of no further force or
effect, after which, the parties hereto shall not have any rights or obligations
under this Letter Agreement.
This Letter Agreement represents the entire agreement of the parties
hereto with respect to the subject matter expressed in this Letter Agreement,
and any previous agreement or understanding between the parties hereto with
respect to the subject matter of this Letter Agreement is superseded by this
Letter Agreement. This Letter Agreement is governed by the laws of the State of
New York.
This Letter Agreement and the assignment of the License Agreement to
Purchaser shall not become effective unless and until the obligations of the
Licensee are assumed by the Purchaser and unconditionally guaranteed by the
Pietrafesa Corporation in form and substance acceptable to each of the
undersigned.
Very truly yours,
ALEXANDER JULIAN, INC., Licensor
By: /s/ Alexander Julian
----------------------------
Alexander Julian
President
Acknowledged and Agreed:
WINDSONG, INC., Licensee
By: /s/ Joseph Sweedler
------------------------------
Joseph Sweedler
President
2
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EXHIBIT 10.11
FINOVA CAPITAL CORPORATION
FACTORING AGREEMENT
(Retail Inventory)
New York, New York
November 4, 1996
Windsong, Inc.
64 Post Road West
Westport, CT 06880
Gentlemen:
Upon your written acceptance, to be noted at the foot of this
instrument, the following shall constitute the entire agreement and
understanding between us pursuant to which you hereby appoint us your sole
factor on the following basis:
1. You agree to, and do hereby, sell and assign to us all of your
right, title and interest in and to all of your accounts receivable, notes,
bills, acceptances, contract rights and other forms of obligation (as
hereinafter defined) and all security and guarantees therefore (herein
collectively termed "Receivables") arising out of all of your sales of goods or
rendition of services, whether now existing or hereafter created, together with
title to any merchandise represented by such Receivables which may be rejected
or returned by your customers for any reason whatsoever. You hereby grant us a
continuing security interest in and to all of your present and hereafter
acquired Inventory and the products and proceeds thereof. The term "Inventory"
includes: (a) your raw materials, components, work in process, finished
merchandise, and packing and shipping materials, wherever located; (b) all such
chattels hereafter acquired by you by way of substitution, replacement, return,
repossession or otherwise; (c) all additions and accessions thereto and the
resulting product or mass; and (d) any documents of title representing any of
the foregoing (herein collectively term "Inventory"). During the term of this
Agreement you shall not sell, negotiate, pledge, assign or grant any security
interest in any Receivables or inventory of yours to anyone other than us.
2. Except as hereinafter set forth, we agree to purchase your
Receivables without recourse to you, provided that the sale of the merchandise
represented by the Receivables and the terms thereof have first been approved by
us in writing (such approval being sometimes referred to herein as "Credit
Approval"), and provided further that the merchandise represented by the
Receivables is duly delivered to and finally accepted and retained by your
customer with out dispute, whether bona fide or not, as to price, terms of sale,
delivery, quantity, quality or otherwise. We reserve the right to revoke our
Credit Approval at any time prior to delivery to and acceptance by your
customer. We shall be entitled to collect and receive all proceeds of your sales
and shall enjoy all the rights and remedies of the seller of goods, including
the right of stoppage in transit, reclamation, replevin and any similar rights
or remedies as may be available to you. Our Credit Approval numbers shall be
valid for a period of 30 days from the date of such Credit Approval number or
until 30 days after the delivery date set forth in our approval sheet unless
revoked by us. We shall not be liable in any manner for refusing to give or for
withdrawing Credit Approval or for exercising our rights and remedies as set
forth herein. No modifications or extensions may be granted by you with respect
to any Receivable which has our Credit Approval without our prior written
consent. In the event we shall give our written consent
<PAGE>
as aforesaid, upon each and every such consent to your requested modification or
extension, whether as to terms, dates or otherwise, you shall pay us a service
fee in the amount of $10.00 which fee shall be due and payable upon the issuance
of our consent to your proposed modifications or extension. Receivables as to
which we have not given our written Credit Approval, either in whole or in part,
shall nevertheless be deemed to have been sold and assigned to us with full
recourse to you to the extent and in the respects and amounts not so approved.
The credit risk on sales not approved by us is assumed by you. Such sales shall
be known as Department Risk (D.R.) Receivables. All invoices in an amount less
than $200.00 shall be deemed samples and shall automatically be considered as
D.R. Receivables. Each and every assignment of D.R. Receivables hereunder shall
be deemed to be a grant of a security interest in our favor in and to any such
D.R. Receivable.
3. (a) All of your sales shall be billed or invoiced by you at your
expense upon forms of bills or invoices acceptable to us and shall constitute
assignments to us of the Receivables represented thereby, irrespective of
whether you execute any other specific instrument of assignment in our favor or
otherwise. Each bill or invoice shall have imprinted thereon the following:
"THIS ACCOUNT HAS BEEN SOLD AND ASSIGNED TO, IS OWNED BY AND IS PAYABLE IN U.S.
DOLLARS ONLY TO FINOVA CAPITAL CORPORATION, P.O. BOX 12082, NEWARK, N.J.
07193-0282, TO WHOM PROMPT NOTICE MUST BE GIVEN OF ANY OBJECTIONS TO PAYMENT OF
THIS INVOICE AS RENDERED. GOODS RETURNABLE FOR ANY REASON SHALL BE RETURNED ONLY
UPON WRITTEN NOTICE TO FINOVA." We may request shipping and/or delivery receipts
covering any of your Receivables to be promptly delivered to us. You shall not
be entitled to any credit with respect to any Receivable until the relevant
shipping and/or delivery receipts have been delivered to us where requested. You
will supply us with as many duplicate bills or invoices as we may from time to
time require. At our request, invoices to your customers shall be mailed by us
at your expense.
(b) At the time of each sale you shall execute and deliver to
us, in form satisfactory to us, a written schedule and assignment of the
Receivables arising out of such sales, together with proof of delivery to your
customer. Notwithstanding your failure to execute and deliver any such written
assignment as aforesaid, each Receivable created by you shall be deemed assigned
to us and shall become our property immediately upon shipment of the
merchandise. Billing on your invoices, whether done by you or by us, shall
constitute assignments to us of the Receivables represented thereby, whether or
not you execute any other specific instrument of assignment in our favor, or
otherwise.
(c) Copies of all credit memoranda as may be issued by you to
any of your account debtors shall be furnished to us for the sole purpose of
notifying us of the transmission of such credit memoranda to each such account
debtor, it being understood and agreed that only the account debtor to whom such
credit or allowance is issued shall be entitled thereto.
4. (a) The purchase price ("Purchase Price") which we shall pay to
you for Receivables accepted by us, as aforesaid, shall be the "Net Face Amount"
thereof, calculated at our option on any terms offered by you, less our
factoring commission, as set forth below. "Net Face Amount" shall be deemed to
mean the gross amount of the Receivable less all discounts. The Purchase Price
(less (a) any reserves which may in our sole discretion determine to hold; (b)
any monies remitted, paid, or otherwise advanced by us to you or for your
account including any amounts which we may be obligated to pay in the future;
and (c) any other of our charges to your account as provided for in this
Agreement) shall be payable by us to you on the
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monthly average due date of the Receivables so purchased, as calculated by us on
the terms given to your customer plus five (5) working days for collection. We
may, in our sole discretion, advance to you from time to time sums up to seventy
(70%) percent of the Purchase Price on Receivables purchased by us; and (ii)
fifty (50%) percent of Eligible Inventory as determined by us, in our sole and
absolute discretion. "Eligible Inventory" shall be valued, in our discretion, at
the lower of cost or market.
(b) Notwithstanding the foregoing, we shall withhold a reserve
of sums otherwise due you and, in our discretion, may revise the amount of such
reserve from time to time. We shall be entitled to hold all sums to your credit
as security for D.R. Receivables, outstanding claims and any and all Obligations
owing to us, our subsidiaries and affiliates by you, however arising. Further,
at our request you shall maintain a credit balance with us in such amount as
will, in our sole discretion, be commensurate with the volume and character of
the business conducted by you so as to protect us against all possible returns,
claims of your customers, indebtedness owing by you to us or any other
contingencies (your "Obligations"). Except in our sole discretion, the aggregate
amount of your Obligations at any time shall not exceed $5,000,000 inclusive of
Letters of Credit opened for your account. You shall repay to us on demand any
Obligations and debit balance then in your account.
(c) In addition to our factoring commissions and to any other
fees provided for herein or otherwise, you shall pay us a closing fee for
establishing the factoring arrangements provided for herein, in the amount of
$N/A, which fee is payable on and shall be fully earned as of the date hereof,
and shall be included as part of the Obligations.
(d) If any taxes are imposed against you, or if we shall
withhold or pay any tax or penalty as a result of or in connection with any
transaction or transactions between us, you hereby indemnify us and hold us
harmless from and against all claims of every kind and nature whatsoever in
respect thereof. In addition, you agree that any such payments made by us shall
be charged to your account and shall be included as part of your Obligations.
(e) We shall have the right and are hereby irrevocably
authorized by you to charge your account or accounts in the amount or amounts of
any and all of your Obligations. We shall have the right (but not the
obligation) to pay and to charge as an advance to your account any dyeing
finishing, processing or warehousing charges, landlord's bills, or other claims
against or liens upon the Inventory. Notwithstanding the foregoing, we shall not
be required at any time, or to any extent, to have recourse to any collateral
security given by you to us to secure your Obligations and the exercise of our
rights to look to any such collateral shall be and remain in our sole and
absolute discretion. Accordingly, you shall at all times remain liable for the
repayment, upon our demand, of all of your Obligations owing to us.
5. We shall be entitled to hold and your hereby grant to us and to
our subsidiaries and affiliates, a continuing general lien and security interest
in and to all accounts, contract rights, documents, instruments, chattel paper,
general intangibles, returns, reserves, credit balances, sums, Inventory and all
of your property at any time in our possession, or in the possession of any of
our subsidiaries or affiliates, or upon or in which we may otherwise have a lien
or security interest as collateral security for any and all your Obligations at
any time owing to us, our subsidiaries and affiliates, whether fixed or
contingent, no matter how or when arising, whether under this Agreement or
otherwise, and including all obligations incurred by you for purchases from any
other person, firm or corporation factored or financed by us, all of which shall
be included as part of your Obligations. In addition to the foregoing you hereby
grant us a general lien and security interest in and to all security and
guarantees in your favor and to all of
3
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your books and records. You agree to execute and deliver financing statements
and any and all instruments and documents that we may request to perfect,
protect, establish or enforce the security interests granted hereunder and any
other provisions hereof. You hereby authorize us to file such financing
statements in your name signed by us, or a reproduction of this agreement to
reflect the security interest granted hereunder. We shall have the right at any
time to immediate possession of all Inventory and its products and proceeds, we
shall not be liable or responsible in any way for the safekeeping of any
Inventory, the same shall be at your sole risk at all times.
6. (a) All disputes, claims or controversies relating to any
Receivable must be settled by you at your sole cost and expense. We shall have
no responsibility or liability of any kind or nature whatsoever with respect to
any Receivable, payment of which is refused or withheld by reason of any
dispute, bona fide or not, and whether before or after maturity date, as to
price, terms, delivery, quantity, quality or otherwise, nor where the customer
claims release from liability or inability to pay because of any act of God or a
public enemy or war or because or the requirements of law or of rules, orders or
regulations having the force of law (each, a "Dispute"). Upon our receipt of
notice of the existence of a Dispute, we shall have the right to immediately
charge your account for the entire amount of any Receivable subject to such
Dispute whether such Dispute regards that Receivable or any other Receivable and
whether due or not due, and you agree to immediately pay the entire amount of
all such disputed Receivables to us upon our demand. You shall promptly advise
us in writing of the existence of each Dispute with your customers upon your
receipt of notice thereof and you shall forthwith transmit to us copies of any
and all chargeback notices, allowance requests, claims, correspondence and the
like received by you from your customer evidencing the existence of a Dispute.
(b) Notwithstanding anything to the contrary contained in
subparagraph (a) above and regardless of the date or dates upon which we charge
back to you the full amount of any Receivable where there is a Dispute, claim,
offset, defense or counterclaim, it is understood, agreed and acknowledged that
immediately upon the occurrence of any such Dispute, claim, offset, defense or
counterclaim we shall no longer bear or be responsible for the credit risk
and/or loss, if any, with respect to any such Receivables due to the financial
inability of your customer to pay. Such risk and/or loss, if any, shall
immediately revert to and be deemed to have been assumed by you without any
further or other act upon our part. A chargeback shall not be deemed a
reassignment.
(c) All fees and expenses of any attorney or collection agency
employed by us or on our behalf to collect or sue upon any D.R. Receivables or
upon any Receivable with respect to which we have notice of a Dispute, claim,
offset, defense or counterclaim shall be charged to your account and shall be
paid by you and made a part of your Obligations.
(d) Immediately upon our request, you shall pay to us, or
reimburse to us for, all sums, costs and expenses (which shall be and hereby are
included as part of the Obligations) which we may pay or incur in connection
with or related to this Agreement. In addition to those items set forth
hereinabove and hereafter, Obligations shall include: the negotiation,
preparation, consummation, administration and enforcement of this Agreement and
all other documents and instruments regarding this factoring arrangement and/or
its related financial accommodations, and the transactions contemplated
hereunder; any future proposed amendments, supplements, consents or
modifications to this Agreement (whether or not executed); all efforts made to
advance, expand, defend, protect or enforce the security interests or other
rights granted to us hereunder; enforcing payment of the Obligations; filing
fees and taxes, expenses for searches incurred by us from time to time, periodic
field examinations of our
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collateral or your operations (plus a charge of $600 per day for our examiners
in addition to the reimbursement for their expenses); wire transfer fees, check
dishonor fees, the fees and disbursements of our counsel, all fees and expenses
for the service and/or filing of papers, premiums on bonds and undertakings,
fees of marshals, sheriffs, custodians or auctioneers and others, travel
expenses and all court costs and collection charges. All Obligations shall
accrue interest after demand thereof at the Interest Rate. A "demand" as used
herein shall be deemed to have been made upon posting any Obligation to your
account. At our option, all principal, interest, fees, commissions, costs,
expenses or other charges with respect to this Agreement may be charged directly
to your account maintained by us.
7. You represent and warrant: (a) that you are solvent; (b) that you
have paid and shall pay all taxes which have become or shall hereafter due and
payable; (c) that there shall not be any judgments, assessments or liens filed
against you or against any of your property, real or personal during the term of
this Agreement and that there are no judgments, assessments, purchase money or
other liens filed against you or against any of your property, real or personal,
at the time of the execution of this Agreement except as may have been disclosed
by you to us in writing, the receipt of which has been confirmed by us to you in
writing; (d) that each Receivable is based upon your bona fide sale and actual
delivery to the customer of merchandise or rendition of services invoiced in the
regular course of your business; (e) that the customer, without qualification or
limitation, has made himself liable to pay by the maturity date of the invoice
the full amount of the Receivable indicated thereon without deduction, claim,
offset, defense or counterclaim; (f) that you have full title of all Inventory
and all merchandise sold; and (g) that your transfers and assignments to us are
free and clear of all encumbrances, liens and security interests and that you
have full title in and to all Receivables and Inventory; you shall insure and
keep insured all Inventory for full value, with such coverage as we may
reasonably approve, at your expense, and the policies shall be duly endorsed in
our favor and delivered to us. If you default in this regard, we shall have the
right to insure and charge the cost to you. We assume no risk or responsibility
in connection with the payment or non-payment of losses, our only responsibility
being to credit you with any insurance payments received on account of losses.
8. In the event of the rejection, return or recovery of any
merchandise on any Receivable you shall pay us the amount of such Receivable,
either in cash or by the assignment of new Receivables acceptable to us
hereunder. We shall have the right to immediate possession of such merchandise
which you shall hold in trust for our benefit, segregated and identified by you
as our property, and we shall have a lien upon it, as well as the ownership of
any Receivables arising from the subsequent sale of such merchandise as security
for the payment of your Obligations. Upon our request, at your expense, you
shall deliver such merchandise, upon five (5) days written notice to you, at
such places and upon such terms as we may deem proper. In the event you fail to
deliver such merchandise as aforesaid, we shall have the right and are hereby
authorized to enter your premises to take immediate possession thereof and to
sell such merchandise, upon notice to you, at public or private sale, at which
sale we may be the purchaser, and at such price or prices and upon such terms as
we, in our sole discretion, may deem acceptable. Only the net proceeds of such
sale; after deduction for all costs and expenses thereof, shall be credited to
your account.
9. We reserve the right to limit the amount of D.R. Receivables, as
well as the amount of any advance thereon. Upon the insolvency of any of your
D.R. customers (as determined in our absolute discretion) or default in payment
by such D.R. customers at maturity, we shall have the right to immediately
charge such sale or sales to D.R. customers to your account, and you agree to
pay the amount thereof to us on demand.
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10. All checks, notes, remittances, acceptances, proceeds, other
instruments, or cash received by you with respect to any Receivable shall be our
property and if received by you shall be held in trust for us and immediately
turned over to us in kind without deduction. You hereby authorize and
irrevocably appoint us as your attorney-in-fact to endorse your name upon checks
or other instruments or documents received by you or us pertaining to
Receivables, and to make, execute and deliver in your name such further
instrument or instruments of assignment of Receivables to us in furtherance of
this Agreement and its purpose as we may from time to time deem necessary. It is
understood and agreed that we shall have the absolute right, but not the
obligation, to deposit all checks or other remittances received by us in payment
of Receivables irrespective of any deductions shown or taken by your customers
or any notifications or conditions as may appear thereon. We may charge back to
you or to your account any deductions or deficiencies therein, other than
deficiencies in the payment of Receivables which have heretofore received our
Credit Approval and which deductions or deficiencies result solely form your
customer's financial inability to pay. Any charge back of your D.R. Receivables
or Disputed Receivables or any of them, shall not be deemed a reassignment
thereof, and title thereto and to the merchandise represented thereby shall
remain with and in us as security for your obligations until we shall have been
fully reimbursed.
11. You shall at all times maintain, at your sole cost and expense,
books and records showing all sales and all claims, allowances, Disputes and
similar information with respect to the Receivables and the goods and services
relating thereto. We, or our representative, shall have the right at any time
during normal business hours to inspect Inventory and examine all of your books
which may pertain to merchandise or Receivables. You agree that you will furnish
to us, as soon as available, but in any event not later than one hundred and
twenty days (120) after the close of each fiscal year, your audited financial
statements for such fiscal year (including balance sheets, statements of income
and loss, statements of cash flow and statements of shareholders' equity), and
the accompanying notes thereto, setting forth in each case, in comparative form,
figures for the previous fiscal year, all in reasonable detail, fairly
representing the financial position and the results of your operations as at the
date thereof and for the fiscal year then ended and prepared in accordance with
generally accepted accounting principles consistently applied. Such audited
statements shall be examined in accordance with generally accepted auditing
practices by (and accompanied by a report thereon unqualified as to scope of)
independent certified public accountants selected by you and acceptable to us.
In addition, at such time or times as we may request, you will furnish to us
such quarterly or monthly unaudited financial statements (including balance
sheets, statements of income as loss, statements of cash flows and statements of
shareholders' equity), and the accompanying notes thereto, all in reasonable
detail, fairly presenting the financial position and results of your operation
as at the date thereof and for such period prepared in accordance with generally
accepted accounting principles consistently applied and such other information
with respect to your business, operations and condition (financial and
otherwise) as we may from time to time reasonably request.
12. (a) Each of your Receivables shall be calculated as of the first
of the month following the date of the invoice to your customer at the net
amount thereof, less discounts, allowances or any other deductions. Interest
shall be charged at the Prime Rate plus 2% (the "Interest Rate") on Receivables
computed as follows: from the first day of the month to and including the
weighted average due date of such invoices plus five (5) business days for
collection and clearance of remittances. As used herein the term "Prime Rate"
shall be deemed to mean the prime commercial rate charged by Citibank, N.A. in
effect on the date hereof and as same may be adjusted upwards or downwards from
time to time. The Interest Rate shall never be less than six (6%) percent per
annum nor greater than the highest rate permitted by law. Any
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change in the Interest Rate shall become effective the first day of the month
following the month in which the Prime Rate shall have been increased or
decreased, as the case may be. The Interest Rate shall be calculated based on a
three hundred sixty (360) day year for the actual number of days elapsed and
shall be charged to you on all Obligations including, but not limited to, any
debits due us and upon all monies remitted, paid or otherwise advanced by us to
you or for your account prior to the average due date as above described and
shall be payable at the close of each month. All interest charged or chargeable
to your account shall be deemed as an additional advance and shall become part
of the Obligations. You will be charged with interest on all sums advanced or
charged under this Agreement and upon all other sums owed by you to us of every
kind and nature at the Interest Rate (as such term is defined below) then in
effect. In the event the amount of the sums advanced or charged to you under
this Agreement together with any other agreement between us (collectively, "This
Agreement"), exceeds the amount available to you pursuant to any percentage or
sublimit set forth in this Agreement (hereinafter sometimes referred to as an
"Overadvance") on each of ten (10) or more days in any month the Interest Rate
charged to you for that month shall be at a rate which is three (3%) percent
above the Interest Rate otherwise applicable herein without regard as to whether
any such Overadvance is made with or without our knowledge or consent. On the
first day of the following month, we will credit you with interest on any net
credit in your favor during such month at the Interest Rate in effect hereunder
for advances during such month except that no credits shall bear interest
subsequent to the weighted average due date of the Receivables creating such
credits. In addition, interest on advances shall be charged from the date of the
advance up to and including the last day of the month.
(b) In no event shall the Interest Rate and any other charges
hereunder exceed the highest rate permissible under any law which a court of
competent jurisdiction shall, in a final determination, deem applicable hereto.
In the event that a court determines that we have received interest and other
charges hereunder in excess of the highest rate permissible under law, such
excess shall be deemed received on account of, and shall automatically be
applied to reduce, the Obligations arising under or in connection with this
Agreement other than interest, and the provisions hereof shall be deemed amended
to provide for the highest permissible rate allowable under the law. If there
are no such Obligations outstanding, we shall refund any such excess to you.
13. On or about the 15th day of each month we shall render a
statement to you covering the activity in your account over the previous month.
Each such account as shall be rendered by us shall be deemed correct in all
respects and shall be deemed conclusive and binding upon you and shall be
admissible and conclusive in evidence in any action unless we are notified by
you and confirmed by us in writing to the contrary within thirty (30) days after
the date of the rendering of such statement. In the event of timely objection to
any such statement, only the items expressly objected to in your notice of
objection shall be deemed to be disputed by you. In the event that we provide to
you or on your behalf copies of additional statements, reports or accountings
with respect to the Receivables or otherwise in connection herewith, you shall
pay to us an additional fee in the amount of $50.00 for each such additional
statement, report or accounting, which fee is due and payable on the date of the
issuance by us of such additional statement, report or accounting, and which fee
shall be included as part of the Obligations.
14. You shall pay us a factoring commission for our services
hereunder which commission shall be and become due and payable to us on the 15th
day of each month in which we purchase your Receivables, such factoring
commission to be in an amount equal to one (1%) percent of the amount of your
gross sales. The minimum factoring commission on each invoice in respect of any
Receivable shall be $5.00. The minimum aggregate factoring
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commissions payable under this Agreement for each contract year hereof shall be
$50,000 which to the extent of any deficiency shall be chargeable to your
account with us. Factoring commissions payable to us hereunder are based upon
your usual and regular terms of sales which do not exceed sixty (60) days. On
all Receivables for which there is a change of terms, in addition to any service
fee for such change, our commission thereon shall be increased at the rate of
twenty-five (25%) percent of the basic commission rate for each additional
thirty (30) days or fraction thereof by which your regular terms are increased.
No Credit Approval for such change in terms, however, shall be granted without
our prior written approval.
15. (a) We shall have the right to terminate this Agreement at any
time upon not less than thirty (30) days' prior written notice or immediately
upon any Default, as defined hereinbelow. This Agreement shall continue in
effect until one year from the date hereof and shall automatically be renewed
from year to year thereafter unless you notify us of your termination to be
effective on any anniversary of this Agreement by giving us not less than sixty
(60) days' prior written notice. Notice of termination, whether by you or by us,
shall be sent by certified mail, return receipt requested with postage prepaid.
All of our rights and your Obligations arising out of transactions having their
inception prior to termination shall not be affected thereby. Upon any
termination of this Agreement all Obligations shall be deemed to be immediately
due and payable to us, and after such termination any credit balance in your
favor shall continue to be held by us, without interest, until a final
accounting is rendered unless you shall furnish us with an undertaking
satisfactory to us against any items chargeable to you hereunder.
(b) In the event of your early termination of this Agreement,
whether by virtue of a default hereunder or at your election as set forth
hereinabove, you agree to pay us in cash or other immediately available funds,
and in addition to all other Obligations, an early termination fee as and for
our liquidated damages resulting from such early termination in an amount equal
to the greater of the minimum commission as set forth in paragraph "14" hereof
reduced by any commissions already paid during that contract year or an amount
equal to (i) the percentage for our factoring commission as set forth in
paragraph "14" herein multiplied by the aggregate amount of your Receivables for
the twelve (12) month period immediately preceding the date of notice of such
early termination, as determined by us in our sole and absolute discretion; (ii)
divided by twelve (12); and (iii) multiplied by the number of months (or any
part thereof) remaining in the then current term. Such early termination fee
shall be conclusively presumed to be the amount of our damages sustained by the
early termination which fee you agree is reasonable and proper. The early
termination fee shall be and is included in the Obligations.
16. The occurrence of any one or more of the following shall
constitute an Event of Default hereunder and under any supplement hereto or
other agreement by you with, to, or in favor of us or of any of our subsidiaries
or affiliates: (a) you fail to pay or perform when due any of the Obligations;
(b) you breach any of the terms, covenants, conditions or provisions contained
in this Agreement or any other agreement between us; (c) any present or future
representation, warranty or statement of fact made by you or on your behalf
(including any representation, warranty or statement by any guarantor of your
Obligations) to us in this Agreement or any other agreement, schedule or
instrument referred to herein or therein or related hereto or thereto is false
or misleading at any time; (d) we in good faith believe that because of a change
in the conditions or affairs (financial or otherwise) of you or any guarantor of
any of the Obligations, either (i) the prospect of payment or performance of the
Obligations is impaired or (ii) the collateral is not sufficient to fully secure
the Obligations; and (e) the occurrence of any of the following with respect to
you or any guarantor of any of the Obligations; dissolution; a
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termination of existence; insolvency; business cessations or suspension; calling
of a meeting of creditors; appointment of a receiver for any property;
assignment for the benefit of creditors; commencement of any voluntary or
involuntary proceeding under any bankruptcy or any other insolvency law; entry
of any court order which enjoins or restrains the conduct of business in the
ordinary course. Upon the occurrence of any Event of Default hereunder we shall
have all the rights and remedies of a secured party under the Uniform Commercial
Code and other applicable laws with respect to all collateral in which we have a
security interest. We may but are not obligated to sell or cause to be sold any
or all such collateral, in one or more sales or parcels, at such prices and upon
such terms as we may deem best, and for cash or on credit or for future delivery
and whether by public or private sales as we may deem appropriate. We may
require you to assemble all or any part of the Inventory and make it available
to us at any place designated by us and reasonably convenient to both parties.
Unless the collateral is perishable or threatens to decline speedily in value or
is of a type customarily sold on a recognized market, we shall give you
reasonable notice of the time and place of any public sale of collateral owned
by you or of the time after which any private sale or any other intended
disposition thereof is to be made. The requirements of reasonable notice shall
be met if any such notice is mailed, postage prepaid, to your address shown
herein, at least five (5) days before the time of the sale or disposition
thereof. We may be the purchaser at any such public sale. The proceeds of sale
of such collateral shall be applied first to all costs and expenses of and
incident to any such sale, including our attorneys' fees and then to the
payment, in such order as we may elect, of all sums owing to us hereunder. We
shall return any excess to you, subject to the rights of third parties or as
otherwise required by applicable law, and you shall remain liable for any
deficiency. In addition, upon any default interest shall be charged on all
Obligations at the "Default Rate" which Default Rate shall be in the amount of
2% in excess of the Overadvance Rate.
17. Any delay or failure on our part to enforce any right or
privilege hereunder, or our waiver of any default by you as to any term of this
Agreement, shall not constitute a waiver of our rights or privileges with regard
to any subsequent or continuing default and no waiver whatsoever shall be valid
unless in writing and signed by us and then only to the extent therein set
forth.
18. You shall not be entitled to pledge our credit upon or in
connection with any of your purchases, or for any other purpose whatsoever.
19. Each of the parties expressly submits and consents to the
exclusive jurisdiction of the Supreme Court of the State of New York with
respect to any controversy arising out of or relating to this Agreement or any
supplement hereto or to any transactions in connection herewith and hereby agree
that service of such summons and complaint or process may be made by Registered
or Certified Mail addressed to the other party at the address appearing herein.
Failure on the part of either party to appear or answer within thirty (30) days
after the mailing of such summons, complaint or process shall constitute a
default entitling the other party to enter a judgement or order as demanded or
prayed for therein.
20. All interest for slow payments by your customers will be charged
directly to your account.
21. You hereby indemnify us and hold us harmless from and against
any loss, liability, claim and expense of every kind and nature, including our
attorneys' fees and disbursements, arising from any claim, dispute, action and
proceeding by or against you or against any of your customers or any other party
with regard to any Receivable or this Agreement.
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22. From time to time we may designate certain account debtors as
SPECIAL RISK. We may notify you in writing at any time and from time to time of
account debtors as to which we have so designated. Receivables arising out of
sales to account debtors which we have notified you as being SPECIAL RISK shall
be subject to a surcharge of 2% in addition to the other charges set forth in
this Agreement.
23. This Agreement cannot be modified orally and can only be
modified or amended by a written instrument signed by you and by us. This
Agreement supersedes any prior agreements between us and neither of us shall be
bound by anything not expressed herein or in any other writing entered into
simultaneously herewith or subsequent to the date hereof.
24. This Agreement, made in the State of New York, shall be
construed, interpreted and enforced according to the laws of the State of New
York and shall be binding upon and inure to the benefit of the parties hereto,
their successors, executors, administrators and assigns. If in the event of
litigation between the parties over any matter connected with this Agreement or
resulting from transactions hereunder, the right to a trial by jury is hereby
waived.
ACCEPTED AND AGREED: Very truly yours,
WINDSONG, INC. FINOVA CAPITAL CORPORATION
By: /s/ Joseph Sweedler By: /s/ Salvatore J. Gianino
------------------------------- ------------------------------------
Joseph Sweedler, President Salvatore J. Gianino, Vice President
- ---------------------------------
Factored Client's Tax I.D. Number
CERTIFICATE OF CORPORATE RESOLUTIONS
I, William Sweedler, do hereby certify that I am Secretary of
Windsong, Inc., a corporation organized and existing in good standing under the
laws of the State of Connecticut and that a special meeting of the Board of
Directors thereof, duly held on November 4, 1996, at which a quorum was present,
the following resolution was duly and unanimously adopted:
"RESOLVED: That any officer or officers of this corporation be and
they are authorized and empowered to enter into and execute, on behalf of the
corporation, an agreement with FINOVA CAPITAL CORPORATION, relating to the sale,
assignment, negotiation and guarantee to said FINOVA CAPITAL CORPORATION of
accounts, chattel mortgages, notes, drafts, acceptances, bills and other
commercial receivables, collectively referred to as "receivables", and/or
relating to the consignment, security interest, pledge, mortgage, factor's lien,
or other hypothecation of merchandise or other property now or hereafter
belonging to or acquired by the corporation to or with FINOVA CAPITAL
CORPORATION, and from time to time to modify or supplement said agreement and to
make and modify or supplement arrangements with said FINOVA CAPITAL CORPORATION
as to the terms or conditions on which receivables are to be sold, assigned or
negotiated, and on which merchandise or other property, now or hereafter
belonging to or acquired by the corporation, may be consigned, pledged,
mortgaged, liened or otherwise hypothecated to or with FINOVA CAPITAL
CORPORATION, and/or with respect to which this corporation may grant FINOVA
CAPITAL
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CORPORATION a security interest; and they or any of them are hereby further
authorized and empowered from time to time to execute and deliver any and all
assignments, schedules, transfers, endorsements, drafts, guarantees, agreements
or other instruments granting a security interest, or of assignment or
receivables or pledge or hypothecation of merchandise and to execute and deliver
any and all instruments and powers of attorney and do and perform all acts and
things necessary, convenient, or proper to carry out, supplement or modify and
such agreement and arrangements made with FINOVA CAPITAL CORPORATION; hereby
ratifying, approving and confirming all that any said officer has done or may do
in the premises".
I further certify that the foregoing resolutions remain in full
force, have not been rescinded or modified, and conform with the charter and
by-laws of the corporation.
IN WITNESS WHEREOF, I have hereunto set my hand as Secretary of said
corporation and affixed its corporate seal by order of its Board of Directors,
this 4th day of November, 1996.
Certificate approved:
/s/ Joseph Sweedler /s/ William Sweedler
- -------------------------------- --------------------------------
Joseph Sweedler, President William Sweedler, Secretary
(Corporate Seal)
GUARANTY
1. In consideration of and in order to induce FINOVA CAPITAL
CORPORATION ("FINOVA"), its successors, endorsees or assigns to grant and
continue to grant such advances, loans or extensions of credit directly or
indirectly to Windsong, Inc. (hereinafter, whether one or more, called "Client")
and to grant to Client such renewals, extensions, forbearances, releases of
collateral or other relinquishment of legal rights as FINOVA may deem advisable,
and for other good and valuable consideration, receipt of which is hereby duly
acknowledged, the undersigned Guarantor(s) (hereinafter, whether one or more,
called "Guarantor", who, if two or more in number, shall be jointly and
severally bound) for the undersigned Guarantor and for their heirs and personal
representatives or successors, and assigns of the undersigned Guarantor, hereby
absolutely and unconditionally guarantees to FINOVA, its successors, endorsees
and assigns, the prompt and unconditional payment when due (whether at maturity,
by acceleration or otherwise) and at all times thereafter of any and all
obligations or liabilities of every kind, nature and character (including all
renewals, extensions and modifications thereof) of Client to FINOVA, its
successors, endorsees or assigns howsoever created or arising, whether or not
represented by negotiable instruments or other writings, whether now existing or
hereafter incurred, whether originally contracted with FINOVA or with another
and assigned or transferred to FINOVA or otherwise acquired by FINOVA, whether
contracted by Client alone or jointly with others, and whether absolute or
contingent, secured or unsecured, matured or unmatured (collectively, the
"Indebtedness"), including but not limited to any and all sums, late charges,
disbursements, expenses, legal fees and any deficiency upon enforcement of
collateral, agreements and contracts in connection with all of such obligations.
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2. Undersigned Guarantor consents that without notice to or further
assent by undersigned Guarantor, the obligation of Client or of any other party
for the liability hereby guaranteed may be renewed, extended, modified,
prematured or released by FINOVA as it may deem advisable in its sole and
absolute discretion, and that any security or securities which FINOVA holds may
be exchanged, sold, released, or surrendered by it, as it may deem advisable in
its sole and absolute discretion, without impairing or affecting the obligation
of undersigned Guarantor hereunder.
3. Undersigned Guarantor waives any and all notice of the acceptance
of this guaranty, or of the creation, renewal or accrual of any obligations or
liability of Client to FINOVA, present or future, or of the reliance of FINOVA
upon this guaranty. Any and every obligation or liability of Client to FINOVA
herein described shall conclusively be presumed to have been created, contracted
or incurred in reliance upon this guaranty, and all dealing between Client and
FINOVA shall likewise be presumed to be in reliance upon this guaranty.
Undersigned Guarantor waives protest, presentment, demand for payment, notice or
default or non-payment and notice of dishonor to or upon undersigned Guarantor,
Client or any other party liable for any of Client's obligations hereby granted.
4. This guaranty shall be construed as an absolute and unconditional
guaranty of payment without regard to the validity, regularity or enforceability
of any obligation or purported obligation of Client. FINOVA shall have all of
its remedies under this guaranty without being obliged to resort first to any
security or to any other remedy or remedies to enforce payment or collection of
the obligations hereby guaranteed and may pursue all or any of its remedies at
one or at different times. FINOVA is hereby given a continuing lien for the
purposes and security of this guaranty as well as for any other obligation or
liability (present or future, absolute or contingent, due or not due) of
undersigned Guarantor to FINOVA upon all property and securities now or
hereafter given unto or left in the possession or custody of FINOVA for any
purpose (including property left in safekeeping or custody), by or for the
account of any undersigned Guarantor, and also upon any deposits with or any
credit or claim of any undersigned Guarantor against FINOVA existing from time
to time. FINOVA is hereby authorized and empowered, upon the occurrence of any
of the events set forth in the next succeeding paragraph, to appropriate and
apply to the payment and extinguishment of the liability of undersigned
Guarantor any and all such monies, property, securities, deposits or credit
balances without demand, advertisement or notice, all of which are hereby
expressly waived.
5. Upon the default of Client or any undersigned Guarantor with
respect to any obligations or liabilities of either of them to FINOVA or in the
event Client or any undersigned Guarantor shall die or become insolvent or make
an assignment for the benefit of creditors, or if a petition in bankruptcy be
filed by or against Client or any undersigned Guarantor, or in the event of the
appointment of a receiver (either at law or in equity) of Client or any
undersigned Guarantor, or in the event that a judgement is obtained or warrant
of attachment issued against Client or any undersigned Guarantor, or in the
event that the financial or business condition of any of them shall so change as
in the opinion of FINOVA will materially impair its security or increase its
risk, all or any part of the obligations and liabilities of Client and/or of
undersigned Guarantor to FINOVA, whether direct or contingent, and of every kind
and description, shall, without notice or demand, become immediately due and
payable insofar as this guaranty is concerned, and shall be taken up forthwith
by undersigned Guarantor, and in any of such events, and whether or not the said
liabilities and obligations are due and payable, FINOVA may (in addition to, and
subject to its rights and remedies under the terms of any special contract with
Client), without demand of performance or advertisement or notice of intention
to sell or of time or place of sale, or to redeem, or other notice whatsoever to
undersigned Guarantor or to
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Client (all and each of which demands, advertisements and notices being hereby
expressly waived), sell any and all collateral which it may hold for said
obligations, or under this guaranty, in one or more parcels, at public or
private sale, at FINOVA's office or elsewhere, at such prices as FINOVA may deem
best, either for cash or credit, with the right of FINOVA at any such sale,
public or private, to purchase the whole or any part of said collateral free
from any right or equity of redemption, which right or equity is hereby
expressly waived. FINOVA may, in its uncontrolled discretion, apply the net
proceeds of such sale or sales to payment on account of the obligations or
liabilities of Client and undersigned Guarantor in such manner and order of
priority as FINOVA may, in its absolute and uncontrolled discretion, elect. If,
in the opinion of FINOVA, any collateral deposited hereunder cannot be freely
sold or disposed of at public or private sale (because of any relationship
between the owner and issuer thereof or otherwise), FINOVA shall have the
unqualified right (in addition to all other rights hereunder) to sell the same,
or any part thereof, to a purchaser or purchasers, under investment letters, for
a negotiated price or prices which, under such circumstances, shall be deemed to
be fair and equitable.
6. Any stocks, bonds or other securities held by FINOVA hereunder
may, whether or not Client or undersigned Guarantor is in default, be registered
and held in the name of FINOVA or its nominee, and FINOVA or said nominee may
exercise all voting and corporate rights relating thereto as if the absolute
owner thereof.
7. The term "Client" as used herein shall include the individual or
individuals, association, partnership or corporation named herein as Client, and
(a) any successor individual or individuals, association, partnership or
corporation to which all or substantially all of the business or assets of said
Client shall have been transferred, (b) in the case of a partnership Client, any
new partnership which shall have been created by reason of the admission of any
new partner or partners therein and/or the dissolution of the existing
partnership by the death, resignation, or other withdrawal of any partner, and
(c) in the case of a corporate Client, any other corporation into or with which
said Client shall have been merged, consolidated, reorganized, purchased or
absorbed. The right of FINOVA to hold, deal with and dispose of the property
deposited by undersigned Guarantor hereunder, as herein provided, shall continue
unimpaired notwithstanding any invalidity or unenforceability of this guaranty
as against undersigned Guarantor personally.
8. FINOVA's books and records showing the account between FINOVA and
Client shall be admissible as evidence in any action or proceeding, shall be
binding upon the undersigned Guarantor for the purpose of establishing the items
therein set forth and shall constitute prima facie proof hereof. FINOVA's
monthly statements rendered to Client shall, to the extent to which no written
objection is made within thirty (30) days after the date thereof, constitute an
account stated between FINOVA and Client and be binding upon the undersigned
Guarantor.
9. The undersigned Guarantor waives any and all rights of
subrogation, reimbursement, indemnity, exoneration, contribution or any other
claim which the undersigned Guarantor may now or hereafter have against Client,
or any person other than a coguarantor directly or contingently liable for the
obligations guaranteed hereunder, or against or with respect to the Client's
property (including without limitation, property collateralizing the undersigned
Guarantor's obligations to FINOVA) arising from the existence or performance of
this guaranty. In furtherance and not in limitation of the preceding waiver, the
undersigned Guarantor agrees that any payment to FINOVA by the undersigned
Guarantor pursuant to this guaranty shall be deemed a contribution to the
capital of the Client or other obligated party, and any such payment shall not
constitute the undersigned Guarantor a creditor of any such party.
13
<PAGE>
10. The undersigned Guarantor represents and warrants that there is
no existing indemnification agreement, whether qualified or unqualified, between
the undersigned and Client. The undersigned waives any right he may otherwise
have to seek a stay from any United States Bankruptcy Court, in which Client may
become a debtor, of any claim or cause of action hereinafter asserted against
the undersigned Guarantor on his guaranty, whether in an action commenced
against the undersigned as a guarantor prior to or instituted following the
filing a Chapter 11 petition by or against Client. The undersigned Guarantor
further acknowledges that this waiver hereinabove, is specifically provided to
FINOVA as an inducement to it to effect the financial accommodations provided by
FINOVA to Client.
11. This guaranty shall, without further reference, pass to, and may
be relied upon and enforced by, any successor or assignee of FINOVA and any
transferee or subsequent holder of any of said liabilities or obligations of
Client. This guaranty may be terminated (but only insofar as it may relate to
obligations of Client arising subsequent to such termination) upon written
notice to that effect delivered by undersigned Guarantor to an officer of
FINOVA, such termination to be effective only upon the execution by such officer
of a written receipt therefor, and in the event of such termination, undersigned
Guarantor and his or their respective executors, administrators or successors
and assigns shall nevertheless remain liable with respect to obligations
incurred or arising theretofore, and with respect to such obligations and any
renewals, extensions or other liabilities arising out of same, this guaranty
shall continue in full force and effect, and FINOVA shall have all the rights
herein provided for as if no such termination had occurred.
12. The undersigned Guarantor does hereby waive any and all right to
a trial by jury in any action or proceeding based hereon. This guaranty and the
rights and obligations of FINOVA and of the undersigned Guarantor shall be
governed and construed in accordance with the laws of the State of New York. The
undersigned Guarantor hereby consents to the exclusive jurisdiction of the
Supreme Court of the State of New York for a determination of any dispute
connected with this guaranty and authorizes the service of process on the
undersigned Guarantor by registered or certified mail sent to the undersigned
Guarantor at the address or addresses of the undersigned Guarantor, as the case
may be as herein set forth or as set forth on any record maintained by FINOVA.
Guarantor irrevocably waives, to the fullest extent Guarantor may effectively do
so, the defense of an inconvenient forum to the maintenance of any such action
or proceeding; agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in any other manner provided by law;
Guarantor agrees not to institute any legal action or proceeding against FINOVA
or any of FINOVA's directors, officers, employees, agents or property concerning
any matter arising out of or relating to this continuing Guaranty in any court
other than one located in New York, New York. Nothing herein shall affect or
impair FINOVA's right to serve legal process in any manner permitted by law or
FINOVA's right to bring any action or proceeding against Guarantor or its
property in the courts of any other jurisdiction. This guaranty cannot be
changed or terminated orally, shall be interpreted according to the laws of the
State of New York, shall be binding upon the heirs, executors, administrators,
successors and assigns of the undersigned Guarantor and shall inure to the
benefit of FINOVA's successors and assigns. Guarantor agrees that any action
brought by it against FINOVA whether regard to this Agreement or otherwise shall
be subject to the exclusive jurisdiction and venue of the Supreme Court of the
State of New York, County of New York or the United States District Court for
the Southern District of New York.
13. Guarantor agrees that, whenever an attorney is used to obtain
payment under or otherwise enforce this guaranty or to enforce, declare or
adjudicate any rights or obligations
14
<PAGE>
under this guaranty or with respect to collateral, whether by legal proceeding
or by any other means whatsoever, FINOVA's reasonable attorney's fee plus costs
and expenses shall be payable by each Guarantor against whom this guaranty or
any obligation or right hereunder is sought to be enforced, declared or
adjudicated. Guarantor, if more than one, shall be jointly and severally bound
and liable hereunder and if any of the undersigned is a partnership, also the
members thereof individually. FINOVA and Guarantor, in any litigation (whether
or not arising our of or relating to obligations, liabilities or collateral
security or any of the matters contained in this guaranty) in which FINOVA an
any of them shall be adverse parties, waive trial by jury. In addition,
Guarantor waives the performance of each and every condition precedent to which
Guarantor might otherwise be entitled by law. FINOVA shall have the right to
fill in any blank spaces left in this guaranty (including the name of "Client"),
to date this guaranty and to correct patent errors therein.
14. Guarantor is fully aware of the financial condition of Client and is
executing and delivering this Guaranty at Client's request and based solely upon
his own independent investigation of all matters pertinent hereto, and Guarantor
is not relying in any manner upon any representation or statement of FINOVA with
respect thereto. Guarantor represents and warrants that he is in a position to
obtain, and Guarantor hereby assumes full responsibility for obtaining, any
additional information concerning Client's financial condition and any other
matter pertinent hereto as Guarantor may desire, and Guarantor is not relying
upon or expecting FINOVA to furnish to him any information now or hereafter in
FINOVA's possession concerning the same or any other matter. By executing this
Guaranty, Guarantor knowingly accepts the full range of risks encompassed within
a contract of continuing Guaranty, which risks Guarantor acknowledges include
without limitation the possibility that Client will incur additional
Indebtedness for which Guarantor will be liable hereunder after Client's
financial condition or ability to pay such Indebtedness has deteriorated and/or
after bankruptcy or insolvency proceedings have been commenced by or against
Client. Guarantor shall have no right to require FINOVA to obtain or disclose
any information with respect to the Indebtedness, the financial condition or
character of Client, the existence of any collateral or security for any or all
of the Indebtedness, the filing by or against Client or any bankruptcy or
insolvency proceeding, the existence of any other guaranties of all or any part
of the Indebtedness, any action or non-action on the part of FINOVA, Client or
any other person, or any other matter, fact or occurrence.
15. The Guarantor acknowledges that this guaranty and the Guarantor's
obligations under this guaranty are and shall at all times continue to be
absolute and unconditional in all respects and shall at all times be valid and
enforceable irrespective of any other agreements or circumstances of any kind or
nature whatsoever which might otherwise constitute a defense to this guaranty
and the obligations of the Guarantor under this guaranty or the obligations of
any other person or party (including, without limitation, the Client) relating
to this guaranty or the obligations of the Guarantor hereunder or otherwise with
respect to any transactions involving the Client and FINOVA. This Guaranty sets
forth the entire agreement and understanding of FINOVA and Guarantor and
Guarantor absolutely, unconditionally and irrevocably waives and any all right
to asset any defense, set-off, counterclaim or cross-claim of any nature
whatsoever (including, but not limited to fraud in the inducement and commercial
disposition of collateral of the guarantor or client) with respect to this
Guaranty or the obligations of the Guarantor under this guaranty or the
obligations of any other person or party (including, without limitation, Client)
relating to this guaranty or the obligations of the Guarantor under this
guaranty or otherwise with respect to any transactions involving the Client and
FINOVA in any action or proceeding brought by its successors and assigns, to
collect the Debt or any portion thereof, or to enforce, the obligations of the
Guarantor under this guaranty. The Guarantor acknowledges that no oral or other
agreements, understandings, representations or warranties exists with respect to
this
15
<PAGE>
guaranty or with respect to the obligations of the Guarantor under this
guaranty, except as specifically set forth in this guaranty.
16. No executory agreement and no course of dealing between undersigned
Guarantor and FINOVA shall be effective to change or modify this guaranty in
whole or in part; nor shall any change, modification or waiver of any rights or
powers of FINOVA be valid or effective unless in writing or signed by an
authorized officer of FINOVA.
17. MUTUAL WAIVER OF RIGHT TO JURY TRIAL, FINOVA, BY ITS ACCEPTANCE
HEREOF, AND GUARANTOR EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION
OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (i) THIS
AGREEMENT; OR (ii) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN
FINOVA AND GUARANTOR; OR (iii) ANY CONDUCT, ACTS OR OMISSIONS OF FINOVA OR
GUARANTOR OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR
ANY OTHER PERSONS AFFILIATED WITH FINOVA OR GUARANTOR; IN EACH OF THE FOREGOING
CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
16
<PAGE>
IN WITNESS WHEREOF, the undersigned Guarantor has hereunto set his
had and seal the day and year first above written.
WITNESS:
/s/ /s/ Joseph Sweedler
- -------------------------- -------------------------------------
Joseph Sweedler
12 Hockanum Road
Westport, CT 06880
Social Security No.: ###-##-####
/s/ Joan Sweedler
-------------------------------------
Joan Sweedler
12 Hockanum Road
Westport, CT 06880
Social Security No.:
17
<PAGE>
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On this 4th day of November, 1996 before me appeared Joseph
Sweedler, to me known, and known to me to be the individuals described in and
who executed the foregoing instrument and they duly and severally acknowledged
to me that they executed the same.
/s/
-----------------------------
NOTARY PUBLIC
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On this 4th day of November, 1996 before me appeared Joan Sweedler, to me known,
and known to me to be the individuals described in and who executed the
foregoing instrument and they duly and severally acknowledged to me that they
executed the same.
/s/
-----------------------------
NOTARY PUBLIC
18
<PAGE>
FINOVA
FINOVA CAPITAL CORPORATION
111 WEST 40th STREET
14TH FLOOR
NEW YORK, NEW YORK 10018
TEL 212 403 0700
FAX 212 403 0913
February 4, 1998
Windsong, Inc.
64 Post Road West
Westport, CT 06880
Ladies and Gentlemen:
We refer you to that certain Factoring Agreement by and between Windsong,
Inc. ("Windsong") and FINOVA Capital Corporation ("FINOVA"), dated November 4,
1996 (the "Agreement"), as amended. All capitalized terms not otherwise defined
herein shall have the meanings ascribed to them in the Agreement.
The following changes to the Agreement are immediately effective:
1. The next to last sentence in Paragraph 2 which states, "All invoices in
an amount less than $200.00 shall be deemed samples and shall automatically be
considered as D.R. Receivables." is hereby deleted.
2. The next to last sentence in Paragraph 4(a) is hereby amended to read:
"We may, in our sole discretion, advance to you from time to time sums up to
eighty percent (80%) of the Purchase Price on Receivables purchased by us;..."
3. The next to last sentence in Paragraph 4(b) is hereby amended to read:
"Except in our sole discretion, the aggregate amount of your Obligations at any
time shall not exceed $13,500,000.00 inclusive of Letters of Credit opened for
your account."
4. Notwithstanding anything to the contrary stated in Paragraph 15(b) of
the Agreement, should FINOVA elect to voluntarily terminate this Agreement, and
provided no Event of Default has occurred, the early termination fee associated
with such voluntary termination shall be prorated and calculated by multiplying
the minimum annual factoring commissions as set forth in Paragraph 14 by the
number of months, or part thereof, that the Agreement has been in effect for the
then current contract year, less any factoring commissions already paid during
said contract year.
Except as hereby or heretofore amended or supplemented, the Agreement
shall remain in full force and effect in accordance with its original terms and
conditions.
<PAGE>
If the foregoing correctly sets forth the understanding between us, kindly
sign the enclosed duplicate original of this letter where indicated and return
to the undersigned as soon as possible.
Very truly yours,
FINOVA CAPITAL CORPORATION
By: /s/ Michael Meehan
--------------------------------
Name: Michael Meehan
Title: VP
AGREED AND ACKNOWLEDGED
this _________ day of February, 1998
WINDSONG, INC.
By: /s/ Joseph Sweedler
--------------------------------
Name: Joseph Sweedler
Title: President
<PAGE>
FINOVA
FINOVA CAPITAL CORPORATION
111 WEST 40th STREET
14TH FLOOR
NEW YORK, NEW YORK 10018
TEL 212 403 0700
FAX 212 403 0913
October 5, 1998
Windsong, Inc.
64 Post Road West
Westport, CT 06880
Ladies and Gentlemen:
Windsong, Inc. ("Client") and FINOVA Capital Corporation ("FINOVA")
are parties to, among other things, a Factoring Agreement (the "Factoring
Agreement") dated November 4, 1996. Capitalized terms used herein and not
otherwise defined shall have the meanings ascribed to them in the Factoring
Agreement.
We hereby propose that, effective as of October 1, 1998, the
Factoring Agreement be amended as follows:
1. The first clause of the second sentence of Section 12(a) of the Factoring
Agreement shall be deleted in its entirety and the following clause shall
be inserted to reflect the reduction of the Interest Rate:
"Interest shall be charged at the Prime Rate plus .5% (the "Interest
Rate") on Receivables computed as follows:"
2. The ninth sentence of Section 12(a) of the Factoring Agreement shall be
deleted in its entirely and the following sentence inserted to reflect the
reduction of the Overadvance rate of Interest:
"In the event the amount of the sums advanced or charged to you
under this Agreement together with any other agreement between us
(collectively "this Agreement"), exceeds the amount available to you
pursuant to any percentage or sublimit set forth in this Agreement
(hereinafter sometimes referred to as an "Overadvance") on each of
ten (10) or more days in any month the Interest Rate charged to you
for that month shall be at a rate which is on half of one percent
(.5%) above the Interest Rate otherwise applicable herein without
regard as to whether any such Overadvance is made with or without
our knowledge or consent."
3. Section 14 of the Factoring Agreement shall be amended and restated as
follows to reflect the reduction of the factoring commission, eliminate
the minimum invoice charge and increase your standard terms of sale.
<PAGE>
"You shall pay us a factoring commission for our services hereunder
which commission shall be and become due and payable to us on the
15th day of each month in which we purchase your Receivables, such
factoring commission to be in an amount equal to (i) one half of one
percent (.5%) of the amount of your gross sales from the period
October 1, 1998 through September 30, 1999 and (ii) six tenths of
one percent (.6%) of the amount of your gross sales thereafter. The
minimum factoring commission on each invoice in respect of any
Receivable shall be $N/A. The minimum aggregate factoring
commissions payable under this Agreement for each contract year
hereof shall be $250,000.00 which to the extent of any deficiency
shall be chargeable to your account with us. Factoring commissions
payable to us hereunder are based upon your usual and regular terms
of sale which do not exceed ninety (90) days. On all Receivables for
which there is a change of terms, in addition to any service fee for
such change, our commission thereon shall be increased at the rate
of twenty-five (25%) per cent of the basic commission rate for each
additional thirty (30) days or fraction thereof by which your
regular terms are increased. No Credit Approval for such change in
terms, however, shall be granted without our prior written
approval."
4. The Second sentence of Section 15(a) shall be deleted in its entirety and
the following shall be inserted to reflect the extension of the Agreement:
"This Agreement shall continue in effect until December 31, 2000 and
shall automatically be renewed for one year periods thereafter
unless you notify us of your termination to be effective on any
anniversary of this Agreement by giving us not less than sixty (60)
days prior written notice."
Except as hereby or heretofore amended or supplemented, the Financing
Agreements shall remain in full force and effect in accordance with their
original terms and conditions.
In the foregoing correctly sets forth your and our understanding, please
execute the enclosed copy of this letter in the spaces provided below and return
such fully executed copy to the undersigned as soon as possible.
Very truly yours,
FINOVA CAPITAL CORPORATION
By: /s/ Michael Meehan
----------------------------------
Name: Michael Meehan
Title: VP
CONSENTED AND AGREED TO
this 6th day of October, 1998
WINDSONG, INC.
By: /s/ Joseph Sweedler
---------------------------
Name: Joseph Sweedler
Title: President
<PAGE>
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
WINDSONG ACQUISITION CORP.
AND
WINDSONG, INC.
DATED AS OF JULY 12, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
Article I
Definitions
1.1 Defined Terms...................................................1
Article II
Sale and Purchase of the Assets
2.1 Closing........................................................10
2.2 Assets To Be Transferred.......................................10
2.3 Payment Of Purchase Price......................................10
2.4 Additional Excluded Assets.....................................20
2.5 Adjustments to the Purchase Price..............................20
2.6 Assumption Of Liabilities......................................21
2.7 Allocation Of Purchase Price...................................22
2.8 Bulk Sales Law Compliance; Transfer Taxes; Franchise Taxes.....22
Article III
Representations And Warranties Of The Seller
3.1 Good Standing..................................................22
3.2 Authorization..................................................23
3.3 Financial Statements...........................................23
3.4 Taxes..........................................................23
3.5 Ownership of Assets............................................24
3.6 Fixed Assets...................................................24
3.7 Real Property..................................................24
3.8 Intellectual Property..........................................25
3.9 Contracts......................................................25
3.10 Customers And Vendors..........................................26
3.11 Legal Proceedings..............................................27
3.12 Orders, Decrees, Etc...........................................27
3.13 Compliance With Law............................................27
3.14 Inventory......................................................27
3.15 Capital Projects And Expenditures..............................27
3.16 Compensation...................................................28
3.17 Environmental Protection.......................................28
3.18 Employee Benefits..............................................28
3.19 Approvals......................................................29
Article III
<PAGE>
Representations And Warranties Of The Seller
3.20 No Brokers.....................................................29
3.21 Absence of Undisclosed Liabilities.............................29
3.22 Accounts Receivable............................................29
3.23 Accounts Payable...............................................29
3.24 Insurance Policies.............................................29
3.25 Labor Relations................................................29
3.26 No Omissions...................................................30
Article IV
Representations And Warranties Of The Purchaser
4.1 Good Standing..................................................30
4.2 Authorization..................................................30
4.3 Capitalization.................................................30
4.4 Legal Proceedings..............................................31
4.5 Contracts......................................................31
4.6 Orders, Decrees................................................31
4.7 Compliance With Law............................................31
4.8 Approvals......................................................31
4.9 No Brokers.....................................................32
4.10 Absence of Liabilities.........................................32
4.11 Business Activities............................................32
4.12 No Omissions...................................................32
Article V
Conduct Prior To The Closing
5.1 Investigation By The Purchaser And The Seller..................32
5.2 Conduct Of Business............................................33
5.3 Other Transactions.............................................35
5.4 Consents.......................................................35
5.5 Public Announcements...........................................36
5.6 Employees......................................................36
5.7 Notification...................................................36
5.8 Supplemental Disclosure........................................36
ii
<PAGE>
Article VI
Conditions Of The Purchaser's Obligations To Close
6.1 Agreement And Conditions.......................................36
6.2 Representations And Warranties.................................37
6.3 Opinion Of Counsel.............................................37
6.4 No Legal Proceeding............................................37
6.5 Officer's Certificate..........................................37
6.6 Secretary's Certificate........................................37
6.7 Employment Agreement...........................................37
6.8 IPO............................................................37
6.9 Consents.......................................................37
6.10 No Change......................................................38
6.11 Pivot Rules....................................................38
6.12 Colours/Alexander Julian.......................................38
6.13 Performance By The Seller......................................38
6.14 Working Capital................................................38
6.15 Stockholder Guarantee..........................................38
6.16 Board Approval.................................................38
6.17 Due Diligence..................................................38
6.18 Loss, Damages, Destruction.....................................38
6.19 Business Plan..................................................38
6.20 Seller Note....................................................39
Article VII
Conditions Of The Seller's Obligations To Close
7.1 Agreements And Conditions......................................39
7.2 Representations And Warranties.................................39
7.3 Opinion Of Counsel.............................................39
7.4 No Legal Proceeding............................................39
7.5 Officer's Certificate..........................................39
7.6 Secretary's Certificate........................................39
7.7 Employment Agreement...........................................39
7.8 Consents.......................................................40
7.9 Escrow Agreement...............................................40
7.10 Working Capital................................................40
7.11 Pivot Rules Trademark..........................................40
7.12 Parent Guarantee...............................................40
7.13 Purchaser Note.................................................40
iii
<PAGE>
Article VIII
Additional Covenants And Agreements
8.1 Cooperation: Access To Books And Records.......................41
8.2 Collection of Records; Delivery of Mail........................41
8.3 Confidentiality................................................42
8.4 Further Assurances.............................................42
8.5 Advisory Board.................................................42
8.6 Strategic Annual Business Plan.................................43
8.7 Additional Working Capital.....................................43
8.8 Discharge of Liabilities.......................................43
8.9 Non-Competition of the Seller..................................44
8.10 Physical Inventory.............................................44
8.11 Name Change....................................................44
Article IX
Indemnification
9.1 Indemnification By The Seller..................................44
9.2 Indemnification By The Purchaser...............................44
9.3 Procedures For Indemnification.................................44
9.4 Indemnification Threshold And Ceilings.........................46
9.5 Survival of Representations: Effect of Certificates............47
Article X
Termination
10.1 Termination....................................................47
10.2 Effect Of Termination..........................................48
Article XI
Miscellaneous
11.1 Fees And Disbursements.........................................48
11.2 Notices........................................................48
11.3 Entire Agreement...............................................49
11.4 Taxes..........................................................50
11.5 Governing Law..................................................50
11.6 Benefit Of Parties' Assignment.................................50
11.7 Pronouns.......................................................50
11.8 Headings.......................................................50
11.9 Knowledge......................................................50
11.10 Consent To Arbitration.........................................50
iv
<PAGE>
EXHIBITS
Exhibit A 1999 Strategic Annual Business Plan
Exhibit B Form of Escrow Agreement
Exhibit C-1 Form of Employment Agreement for Joseph Sweedler
Exhibit C-2 Form of Employment Agreement for William Sweedler
Exhibit C-3 Form of Employment Agreement for David Sweedler
Exhibit C-4 Form of Employment Agreement for Alan Rummelsburg
Exhibit D Form of Stockholder Guarantee
Exhibit E Form of Parent Guarantee
Exhibit F Pivot Rules Assignment and Assumption Agreement
Exhibit G Assignment and Assumption Agreement
Exhibit H Purchaser Note
Exhibit I Seller Note
v
<PAGE>
SCHEDULES
Schedule I Pre-Tax Income (Without Working Capital Facility)
Schedule IA Pre-Tax Income (With Working Capital Facility)
Schedule 1.1(a) Assumed Pension and Retirement Plans
Schedule 1.1(b) Excluded Loans
Schedule 1.1(d) Permitted Liens
Schedule 2.3(j)(ii) Right of First Refusal
Schedule 2.7 Allocation of Purchase Price
Schedule 3.1 Jurisdictions
Schedule 3.3 Accounting Practices
Schedule 3.4 Taxes
Schedule 3.5 Ownership of Assets
Schedule 3.6 Fixed Assets
Schedule 3.7(a)(i) Real Property Leases
Schedule 3.7(a)(ii) Breaches of Real Property Leases
Schedule 3.7(a)(iii) Consents for Real Property Leases
Schedule 3.7(b)(i) Notice of Repairs for Leased Premises
Schedule 3.7(b)(ii) Structural or Mechanical Defects on Leased Premises
Schedule 3.7(b)(iii) Defects of Roof, Basement, Walls of Leased Premises
Schedule 3.7(b) (iv) Notice of Assessments Affecting Leased Premises
Schedule 3.8(a) Owned or Used Intellectual Property
Schedule 3.8(b) Leased Intellectual Property
Schedule 3.8(c) Intellectual Property Infringement
Schedule 3.9(a) Material Contracts
Schedule 3.9(c) Enforceability of Material Contracts
Schedule 3.9(d)(i) Breaches of Material Contracts
Schedule 3.9(d)(ii) Defaults under Material Contracts
Schedule 3.10(a) Customers and Vendors
Schedule 3.10(b) Changes in Relationships with Customers and Vendors
Schedule 3.10(c) Notices from Customers and Vendors
Schedule 3.11(a) Pending Actions
Schedule 3.11(b) Defaults
Schedule 3.12 Orders; Decrees
Schedule 3.13(a) Compliance with Laws
Schedule 3.13(b) Permits
Schedule 3.13(c) Compliance with Permits
Schedule 3.13(d) Revocation of Permits
Schedule 3.15 Capital Projects and Expenditures
Schedule 3.16 Compensation
Schedule 3.17(a)(i) Compliance with Environmental Laws
Schedule 3.17(a)(ii) Environmental Permits
Schedule 3.17(b) Compliance with Environmental Permits
Schedule 3.17(c) Environmental Law Proceedings
vi
<PAGE>
SCHEDULES
Schedule 3.17(d) Conditions that may Cause Environmental Liability
Schedule 3.18 Employee Benefits
Schedule 3.19(a) Required Consents
Schedule 3.19(b) Required Consents not Obtained
Schedule 3.21 Undisclosed Liabilities
Schedule 3.22 Accounts Receivable
Schedule 3.23 Accounts Payable
Schedule 3.24 Insurance Policies
Schedule 4.4(a) Pending Actions
Schedule 4.4(b) Defaults
Schedule 4.6 Orders; Decrees
Schedule 4.7(a) Compliance with Laws
Schedule 4.7(b) Permits
Schedule 4.7(c) Compliance with Permits
Schedule 4.7(d) Revocation of Permits
Schedule 4.8(a) Required Consents
Schedule 4.8(b) Required Consents not Obtained
Schedule 4.9 Brokers
vii
<PAGE>
ASSET PURCHASE AGREEMENT
THIS AGREEMENT, dated as of July 12, 1999 (this "Agreement"), by and
between Windsong Acquisition Corp., a Delaware corporation (the "Purchaser"),
and Windsong, Inc., a Connecticut corporation (the "Seller").
R E C I T A L S
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Purchaser desires to purchase from the Seller, and the Seller
desires to sell to the Purchaser, all of the assets, properties, rights and
business of the Seller other than the Excluded Assets (as defined below) and, in
connection therewith, the Purchaser has agreed to (x) pay the Purchase Price (as
defined below) to the Seller and, (y) assume all of the Assumed Liabilities (as
defined below).
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual covenants contained
in this Agreement, the Seller and the Purchaser hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Defined Terms. For purposes of this Agreement and the
schedules and exhibits attached to this Agreement, the following terms shall
have the meanings set forth below:
"1999 Business Plan" shall mean the 1999 strategic annual business
plan of the Seller, which shall be attached to this Agreement as Exhibit A on or
prior to the Closing Date.
"Acquired Assets" means all of the assets, properties, rights and
business of the Seller of every kind and description, wherever located
(including, without limitation, (i) all of the property, tangible or intangible,
real, personal or mixed, cash, notes and accounts receivable and other rights to
receive amounts payable to the Seller, (ii) all of the claims, causes of action
and rights of recovery or set-off, reserves, prepayments, deferred and other
charges, inventories (including, without limitation, raw materials, finished
goods, work-in-process and goods in transit), supplies, machinery, fixtures,
equipment, tools, dies, jigs and molds, inventions, samples, models, securities,
claims and contract rights of the Seller, (iii) all of the Seller's Intellectual
Property, (iv) the name "Windsong" and "Windsong, Inc.", (v) the Acquired Books
and Records, and (vi) all of the Seller's cash and cash equivalents as of the
Closing Date other than the cash distributed to the Stockholders pursuant to
Section 2.4 of this Agreement; provided, however, that notwithstanding the
foregoing or anything to the contrary in the Acquisition
1
<PAGE>
Documents, the Acquired Assets shall not include (A) any of the Excluded Assets,
or (B) any of the pension or retirement plans of the Seller other than those
identified on Schedule 1.1(a) to this Agreement.
"Acquired Books and Records" means all of the books, records and
documents pertaining to the assets, properties, business, operations, accounts,
financial condition or customers of the Seller, regardless of whether such books
and records are maintained for tax or financial reporting purposes (including,
without limitation, files, customer and vendor lists, marketing literature,
blueprints, plans, specifications and drawings); provided, however, that the
foregoing shall not include any of the Excluded Assets or any of the books,
records and documents that relate to the Excluded Assets; provided further that
the Seller shall be permitted to retain copies of, and have access to, all of
the Acquired Books and Records for tax purposes.
"Acquisition" has the meaning specified in Section 2.2 of this
Agreement.
"Acquisition Documents" means this Agreement and all of the other
documents, agreements and instruments entered into by the Seller, the Purchaser,
the Stockholders and/or the Parent in connection with the Acquisition
(including, without limitation, the Escrow Agreement, the Parent Guarantee, the
Stockholder Guarantee and the Employment Agreements), and all of the exhibits
and schedules to this Agreement.
"Action" means any claim, action, suit, proceeding or investigation,
whether at law or at equity, before any court, arbitrator, arbitration panel or
other Governmental Authority.
"Additional Stock Payment" has the meaning specified in Section
2.3(g) of this Agreement.
"Adjustment Report" has the meaning specified in Section 2.3(l) of
this Agreement.
"Advance Percentage" has the meaning specified in Section 2.3(i) of
this Agreement.
"Advisory Board" has the meaning specified in Section 8.5 of this
Agreement.
"Affiliate" means, when used with respect to any Specified Person (a
"Specified Person"), any other Person that, directly or indirectly, through one
or more intermediaries, controls or is controlled by, or is under common control
with, the Specified Person. As used in this definition, the term "control" means
the power of any Person to direct the affairs of any other Person through the
ownership of voting securities or other equity interests, contract or otherwise.
"Assignment and Assumption Agreement" means the assignment and
assumption agreement in the form of Exhibit G to this Agreement, which agreement
shall be entered into on or prior to the Closing Date by the Seller and the
Purchaser.
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"Assumed Liabilities" has the meaning specified in Section 2.6 of
this Agreement.
"Audited Financial Statements" has the meaning specified in Section
3.3 of this Agreement.
"Balance Sheet" means the audited balance sheet of the Seller as at
December 31, 1998.
"Balance Sheet Date" means December 31, 1998.
"Business" shall mean the business of the Seller as of the date of
this Agreement.
"Business Day" shall mean a day other than a Saturday, Sunday or
other day on which commercial banks in New York, New York or Westport,
Connecticut are authorized or required to close.
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, 42 U.S. C. ss. 9601 et seq.
"Change of Control" has the meaning specified in Section 2.3(d).
"Class A Common Stock" has the meaning specified in Section 2.3(b)
of this Agreement.
"Closing" has the meaning specified in Section 2.1 of this
Agreement.
"Closing Date" has the meaning specified in Section 2.1 of this
Agreement.
"Closing Date Balance Sheet" has the meaning specified in Section
2.5(a).
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidentiality Agreement" has the meaning specified in Section
5.1(a) of this Agreement.
"Consents" means all written consents, approvals, waivers,
authorizations and orders required to consummate the transactions contemplated
by the Acquisition Documents.
"Contracts" means all contracts, agreements, indentures, licenses,
leases, commitments, plans, arrangements, sales orders and purchase orders of
every kind, whether written or oral.
"Damages" means costs, losses, Liabilities, damages, lawsuits,
deficiencies, claims, Taxes and expenses (whether or not arising out of
third-party claims or governmental examinations, inspections or audits),
including, without limitation, interest, penalties, reasonable
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attorneys' fees, costs and expenses and all reasonable amounts paid in
investigation, defense or settlement of any of the foregoing.
"Deferred Payment" has the meaning specified in Section 2.3(e) of
this Agreement.
"Dispute Notice" has the meaning specified in Section 2.5(a) of this
Agreement.
"Disputed Matter" has the meaning specified in Section 9.3(f) of
this Agreement.
"Effective Tax Rate" means forty-five percent (45%).
"Employee Benefit Plans" has meaning specified in Section 3.18 of
this Agreement.
"Employment Agreements" means the employment agreements to be
entered into by the Purchaser and each of the Stockholders in connection with
the Acquisition in the form of Exhibit C-1 through Exhibit C-4 to this
Agreement.
"Environmental Laws" means all federal, state, local and foreign (i)
environmental laws, codes and ordinances and all rules promulgated thereunder,
and (ii) health and safety laws, codes and ordinances and all rules and
regulations promulgated thereunder. The term "Environmental Laws" shall include,
without limitation, all laws relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants, chemicals, or industrial, toxic
or Hazardous Substances or Wastes into the environment (including, without
limitation, air, surface water, ground water, land surface or subsurface strata)
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants, contaminants,
chemicals, or industrial, solid, toxic or Hazardous Substances or Wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, and the rules and regulations promulgated thereunder.
"Escrow Agent" means Fleet Bank, located in New York, New York (or
such other location as is acceptable to the Seller and the Purchaser) or its
successors and assigns or such other financial institution as is acceptable to
the Seller and the Purchaser.
"Escrow Agreement" means the escrow agreement in the form of Exhibit
B to this Agreement (with such changes as may be required by the Escrow Agent
that are reasonably acceptable to the Purchaser and the Seller), which agreement
shall be entered into on or prior to the Closing Date by the Seller, the
Purchaser and the Escrow Agent.
"Escrow Amount" has the meaning specified in Section 2.3(c) of this
Agreement.
"Excluded Assets" means (i) the corporate seal, articles of
incorporation, minute books and stock books, and the tax returns and the related
financial records and working papers of the Seller, (ii) the rights of the
Seller under the Acquisition Documents, (iii) all of the
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automobiles owned by the Seller (including, without limitation, the 1991 Porsche
928 and the 1999 Range Rover, (iv) all of the bank, investment and other
accounts of the Seller (including, without limitation checking account
#0071208155 held at Fleet Bank branch located in Fairfield, Connecticut,
business checking account #43352882 held at Citibank N.A., Inc. branch located
in Stamford, Connecticut, cash reserve account #02132427 held at Citibank N.A.,
Inc. branch located in Stamford, Connecticut), (v) all of the loans made by the
Seller to, and all promissory and other notes to the Seller from, the
Stockholders, their families, friends and affiliates, all of the inter-company
loans of the Seller, and all of the loans by the Seller to its employees
(including, without limitation, the loans set forth on Schedule 1.1(b) to this
Agreement), (vi) all casualty, liability and other insurance policies maintained
by or on behalf of the Seller and rights thereunder, including any insurance
proceeds related to any Excluded Assets or Excluded Liabilities, and (vii) any
cash retained by the Seller or distributed to Stockholders on the Closing Date
pursuant to Section 2.4 of this Agreement.
"Excluded Liabilities" means any and all Liabilities of the Seller
other than the Assumed Liabilities. The Excluded Liabilities shall include,
without limitation, (i) any subordinated debt of the Seller, (ii) any
Liabilities of the Seller relating to any of its pension and retirement plans
that are not being transferred to the Purchaser, (iii) all of the Seller's Tax
Liabilities that are due and payable, or that are attributable to a period,
prior to the Closing Date other than accrued and unpaid employee withholding
taxes and sales taxes that are not past due, (iv) all of the Seller's
Liabilities related to or arising from the Seller not qualifying to do business
in the States of New Jersey and New York; and (v) all of the Seller's legal and
accounting fees incurred in connection with the Acquisition.
"Financial Statements" has the meaning given to it in Section 3.3 of
this Agreement.
"Fixed Assets" means all tools, dies, equipment and furniture
(including office equipment and office furniture), machinery, motor vehicles,
fixtures and other assets owned, leased or used by the Seller, including,
without limitation, all buildings, land and equipment leased by the Seller;
provided, however, that Fixed Assets shall not include any inventory, accounts
receivable, intellectual property, books and records, intangible assets,
Contracts, real property, causes of action or claims, cash, deposits,
investments or supplies of the Seller.
"Forfeited Payment" has the meaning specified in Section 2.3(e) of
this Agreement.
"GAAP" means United States generally accepted accounting principles.
"Governmental Authority" means any agency, instrumentality,
department, commission, court, tribunal or board of any government, whether
foreign or domestic and whether national, federal, state or local.
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"Hazardous Substances or Wastes" means any substance that (i) is or
contains asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls,
petroleum or petroleum-derived substances or wastes, radon gas or related
materials, (ii) requires investigation, removal or remediation under any
Environmental Law, or is defined, listed or identified as a "hazardous waste" or
"hazardous substance" thereunder, or (iii) is toxic, explosive, corrosive,
flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise
hazardous and is regulated by any Governmental Authority or Environmental Law.
"Indemnification Threshold" has the meaning specified in Section 9.4
of this Agreement.
"Indemnified Party" has the meaning specified in Section 9.3(a) of
this Agreement.
"Indemnifying Party" has the meaning specified in Section 9.3(a) of
this Agreement.
"Indemnity Notice Period" has the meaning specified in Section
9.3(a) of this Agreement.
"Installment Payment" has the meaning specified in Section 2.3(c) of
this Agreement.
"Initial Share Allotment" has the meaning specified in Section
2.3(b) of this Agreement.
"Intellectual Property" means (i) patents, patent applications,
patent disclosures, industrial designs and inventions (whether or not patentable
and whether or not reduced to practice), (ii) registered and unregistered
trademarks, service marks, domain names, licenses, logos, sales materials and
trade names, (iii) registrations, applications and renewals of any of the
foregoing, (iv) trade secrets, confidential information, know-how, customers,
software, formulae, manufacturing and production processes and techniques, mask
works, research and development information, product designations, quality
standards, investigations, drawings, specifications, designs, plans,
improvements, proposals, technical and computer data, and (v) license agreements
and sub-license agreements to and from third parties relating to any of the
foregoing.
"Interim Financial Statements" has the meaning specified in Section
3.3 of this Agreement.
"IPO" has the meaning specified in Section 2.3(b) of this Agreement.
"Laws" means laws, rules, regulations, codes, orders, ordinances,
judgments, injunctions, decrees and policies.
"Leased Premises" has the meaning specified in Section 3.7 of this
Agreement.
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"Liabilities" means debts, liabilities, obligations, duties, whether
absolute or contingent, monetary or non-monetary, direct or indirect, known or
unknown or matured or unmatured.
"Liens" means any security interest, lien, mortgage, pledge,
restriction, equitable interest or encumbrance of any nature.
"Minimum Price" has the meaning specified in Section 2.3(j)(i) of
this Agreement.
"Notice of Disagreement" has the meaning specified in Section 2.3(k)
of this Agreement.
"Obligation Shortfall" has the meaning specified in Section 2.3(g)
of this Agreement.
"Parent" means The Pietrafesa Corporation, a Delaware corporation.
"Parent Guarantee" means the subordinated guarantee of the
Purchaser's obligations under Article IX of this Agreement, which guarantee
shall be made by the Parent pursuant to a guarantee that is in the form of
Exhibit E to this Agreement.
"Parties" means both the Seller and the Purchaser and "Party" means
either the Seller or the Purchaser.
"Payoff Amount" has the meaning specified in Section 2.3(j) of this
Agreement.
"Permitted Liens" means all Liens securing any loan made by Finova
Capital Corp. to the Seller or any other obligation of the Seller to Finova
Capital Corp. and all Liens set forth on Schedule 1.1(d).
"Person" means any natural person, corporation, business trust,
joint venture, association, company, firm, partnership, or other entity or
government or Governmental Authority.
"Pivot Rules Assignment and Assumption Agreement" means the Pivot
Rules assignment and assumption agreement in the form of Exhibit F to this
Agreement, which agreement shall be entered into on or prior to the Closing Date
by Klearknit Sales, Inc. and the Purchaser
"Postponed Payment" has the meaning specified in Section 2.3(e) of
this Agreement.
"Pre-Closing Income Statement" has the meaning specified in Section
2.5(a) of this Agreement.
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"Pre-Closing Taxes" means the amount equal to the product of the
Effective Tax Rate and the Pre-Closing Taxable Income.
"Pre-Closing Taxable Income" means the aggregate amount of the net
taxable income of the Seller as passed through to the stockholders of the Seller
in accordance with Subchapter S of the Code for the period commencing on January
1, 1999 and ending on (and including) the Closing Date, excluding any gains or
losses recognized by the Seller as a result of the consummation of the
transactions contemplated by this Agreement.
"Pre-Tax Income" has the meaning specified in Section 2.3(c) of this
Agreement.
"Pre-Tax Income Report" has the meaning specified in Section 2.3(k)
of this Agreement.
"Pre-Tax Income Target" has the meaning specified in Section 2.3(c)
of this Agreement.
"Projected Pre-Closing Taxable Income" means the net income of the
Seller for the period commencing on January 1, 1999 and ending on (and
including) the Closing Date as projected in the 1999 Business Plan and excluding
any gains or losses recognized by the Seller as a result of the consummation of
the transactions contemplated by this Agreement; provided, however, that if the
Closing Date occurs on any day other than the last day of a month, "Projected
Pre-Closing Taxable Income" shall mean the sum of (i) the income of the Seller
for the period commencing on January 1, 1999 and ending on (and including) the
last day of the month immediately preceding the month in which the Closing Date
occurs as projected in the 1999 Business Plan, plus (ii) the product of (x) the
income of the Seller for the month in which the Closing Date occurs as projected
in the 1999 Business Plan and (y) a fraction, the numerator of which shall be
equal to the number of days from the start of the month in which the Closing
Date occurs until (and including) the Closing Date and the denominator of which
shall be equal to the number of days in the month in which the Closing Date
occurs.
"Projected Pre-Closing Taxes" means the amount equal to the product
of the Effective Tax Rate and the Projected Pre-Closing Taxable Income.
"Proposed Business Plan" has the meaning specified in Section 8.6.
"Purchase Price" has the meaning specified in Section 2.3(a) of this
Agreement.
"Purchaser" means Windsong Acquisition Corp., a Delaware corporation
that is a wholly owned subsidiary of the Parent.
"Purchaser's Accountant" means Ernst & Young, LLP.
"Purchaser's Board" has the meaning specified in Section 2.3(c) of
this Agreement.
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"Purchaser Indemnitees" has the meaning specified in Section 9.1 of
this Agreement.
"Purchaser Material Adverse Effect" means a material adverse effect
on the business, operations, assets, properties, liabilities, obligations,
condition (financial or otherwise) or results of operations of the Purchaser.
"Purchaser Material Asset" has the meaning specified in Section
2.3(j) of this Agreement.
"Purchaser Note" means the contingency promissory note of the
Purchaser payable to the Seller, dated as of the date of this Agreement, which
note shall be the form of Exhibit H to this Agreement.
"Receivables" has the meaning specified in Section 3.22 of this
Agreement.
"Review Period" has the meaning specified in Section 2.3(k) of this
Agreement.
"RCRA " means the Resource Conservation and Recovery Act, 42 U.S. C.
ss.6901 et seq.
"Securities Act" means the Securities Act of 1933, as amended.
"Seller" means Windsong, Inc., a Connecticut corporation.
"Seller's Accountant" means Weissbarth, Altman & Michaelson, LLP.
"Seller Indemnitees" has the meaning specified in Section 9.2 of
this Agreement.
"Seller Material Adverse Effect" means a material adverse effect on
the business, operations, assets, properties, liabilities, obligations,
condition (financial or otherwise) or results of operations of the Seller.
"Seller Note" means the contingency promissory note of the Seller
payable to the Purchaser, dated as of the date of this Agreement, which note
shall be in the form of Exhibit I to this Agreement.
"Stockholder Guarantee" means the guarantee of the Seller's
obligations under Article IX of this Agreement, which guarantee shall be made by
the Stockholders, jointly and severally, pursuant to a guarantee that is in the
form of Exhibit D to this Agreement.
"Stockholders" means Joseph Sweedler, William Sweedler, David
Sweedler and Alan Rummelsburg.
"Subordinated Debt Repayment Amount" means $1,501,535.87.
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"Target Date" has the meaning specified in Section 2.3(c) of this
Agreement.
"Tax" or "Taxes" means (i) all forms of taxation, charges, levies or
other assessments, whether direct or indirect and whether levied by reference to
net income, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, ad valorem, franchise, profits, license, withholding (whether with
respect to receipts or payments), payroll, privilege, employment, including
benefits or cost of benefits provided or deemed by applicable law to be provided
to employees, excise, severance, capital gains, transfer gains, stamp,
occupation, premium or similar tax measured by insurance premiums, real and
personal property, environmental or windfall profit tax, custom, duty or other
tax, governmental fee or other like assessment or charge of any kind whatsoever,
and any interest or any penalty, addition to tax or additional amount, imposed
by any Taxing Authority, (ii) any Liability, whether to a Taxing Authority or
pursuant to an agreement with or legal obligation to any Person, for the payment
of any amounts of the type described in clause (i) of this definition as a
result of being a member of an affiliated, consolidated, combined or unitary
group for any taxable period, and (iii) any Liability for the payment of any
amounts of the type described in clause (i) or (ii) of this definition as a
result of an obligation to indemnify any other Person.
"Tax Returns" means, with respect to any Person, all of the returns,
declarations, reports, estimates, information returns and statements required to
be filed with or supplied to any Taxing Authority in connection with any Taxes
payable by such Person.
"Taxing Authority" means a Governmental Authority responsible for
and having requisite jurisdiction with respect to the imposition of Taxes.
ARTICLE II
SALE AND PURCHASE OF THE ASSETS
Section 2.1 Closing. The closing of the Acquisition (the "Closing") shall
take place at the offices of Roberts, Sheridan & Kotel, a Professional
Corporation, 12 East 49th Street, New York, New York, on the Closing Date at
10:00 a.m., New York time, on the date on which the IPO is consummated or at
such other time or place as the Parties may mutually agree. The day on which the
Closing actually occurs is referred to in this Agreement as the "Closing Date."
Section 2.2 Assets To Be Transferred. Subject to the terms and conditions
of this Agreement, in consideration for the payment of the Purchase Price to the
Seller, the Seller hereby agrees to sell, convey, transfer, assign and deliver
the Acquired Assets to the Purchaser, and the Purchaser hereby agrees to
purchase and acquire the Acquired Assets from the Seller, on the Closing Date
(the "Acquisition").
Section 2.3 Payment of Purchase Price. (a) The total amount payable to the
Seller for the Acquired Assets shall be up to, but shall not exceed,
$48,000,000, which shall be payable in cash and stock as, when and to the extent
provided in this Section 2.3 as adjusted by Section 2.5
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of this Agreement.
(b) On the Closing Date, the Purchaser shall pay $26,000,000 of the
Purchase Price as follows:
(i) the Purchaser shall pay the Seller $22,000,000 in immediately
available funds by wire transfer to the account or accounts designated by
the Seller; and
(ii) the Purchaser shall deliver to the Seller the number of shares
of Class A Common Stock, par value $0.001 per share ("Class A Common
Stock"), of the Parent equal to the quotient of $4,000,000 divided by the
initial public offering price per share of Class A Common Stock (such
shares, the "Initial Share Allotment") in the initial public offering of
Class A Common Stock (the "IPO"); provided that the number of such shares
that are registered in the IPO shall not be less than the quotient of
$700,000 divided by the initial public offering price per share of Class A
Common Stock in the IPO (and such registration shall be maintained for at
least thirteen (13) months). The Seller agrees that it shall not sell,
assign or transfer the Initial Share Allotment to any Person other than
(1) its stockholders or their immediate family at any time to the extent
permitted by applicable securities laws and regulations, or (2) by
operation of law, or (3) except as follows: (A) up to 10% of the Initial
Share Allotment on or after the date which is six months after the Closing
Date, (B) up to 30% of the Initial Share Allotment on or after the date
which is 12 months after the Closing Date, (C) up to 42.5% of the Initial
Share Allotment on or after the date that is 15 months after the Closing
Date, (D) up to 55% of the Initial Share Allotment on or after the date
that is 18 months after the Closing Date, (E) up to 67.5% of the Initial
Share Allotment on or after the date that is 21 months after the Closing
Date, (F) up to 80% of the Initial Share Allotment on or after the date
that is 24 months after the Closing Date, (G) up to 92.5% of the Initial
Share Allotment on or after the date that is 27 months after the Closing
Date, and (H) up to 100% of the Initial Share Allotment on or after the
date that is 30 months after the Closing Date.
(c) In addition, subject to the terms of this Section 2.3, the
Purchaser shall pay the Seller up to, but not more than, $22,000,000 in cash and
stock in accordance with the terms of this Section 2.3, which shall be payable
in installments (each such installment, an "Installment Payment") during the
period commencing on the Closing Date and ending on December 31, 2004 (the last
day of each calendar year for which an Installment Payment is payable is
referred to in this Agreement as a "Target Date"). The maximum amount of the
Installment Payment that is payable with respect to each year is set forth in
the table below, the full amount of which shall be payable if the Pre-Tax Income
of the Purchaser for such year equals or exceeds the amount of the pre-tax
income target for such year (each such target, a "Pre-Tax Income Target");
provided, however, that if the Purchaser achieves less than 100% of the Pre-Tax
Income Target for any year, all or part of the Installment Payment payable with
respect to such year shall be deferred or forfeited as set forth in Section
2.3(e) in this Agreement. The Pre-Tax Income of the Purchaser and the Pre-Tax
Income Targets for any year shall be adjusted as and to the extent required by
the terms of this Agreement. The Pre-Tax Income Targets and the Installment
Payments payable with respect to each year is set forth below:
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Target Date Pre-Tax Income Target Installment Payment
----------- --------------------- -------------------
December 31, 1999 $ 6,275,000 $ 7,500,000*
December 31, 2000 6,575,000 1,500,000
December 31, 2001 7,000,000 2,700,000
December 31, 2002 7,475,000 2,800,000
December 31, 2003 7,975,000 3,700,000
December 31, 2004 8,375,000 3,800,000
* (i) $6,500,000 in cash, and (ii) the number of shares of Class A Common Stock
equal to $1,000,000 divided by the average of the closing price of Class A
Common Stock for the 20 trading days preceding such payment, as reported in The
Wall Street Journal.
For purposes of this Agreement, the term "Pre-Tax Income" means income
before amortization of goodwill and taxes and any other amortization or
depreciation attributable to any increase in the value of the Acquired Assets as
a result of the Acquisition (including, without limitation, all deferred
charges). The Pre-Tax Income of the Purchaser shall be determined in accordance
with (i) GAAP consistently applied as adjusted pursuant to the terms of this
Agreement, (ii) this Agreement, and (iii) Schedule I to this Agreement if the
Purchaser does not have its own credit line or Schedule IA to this Agreement if
the Purchaser does have its own credit line; provided, however, that if the
Purchaser does not have its own credit line, the interest expense charged to the
Purchaser by the Parent for purposes of calculating Pre-Tax Income shall not
exceed the interest expense that the Purchaser would have incurred under the
Seller's credit line as of the date of this Agreement (or, if such credit line
is subsequently modified or replaced with a separate line of credit after the
date of this Agreement, the interest expense that the Purchaser would have
incurred under such modified or replacement line of credit); provided further,
however, that in the event of any inconsistencies or conflicts between this
Section and Schedule I or Schedule IA, the provisions of Schedule I or Schedule
IA shall govern and control. The Pre-Tax Income of the Purchaser for the period
commencing on January 1, 1999 and ending on the Closing Date shall be calculated
on a pro forma basis in accordance with GAAP consistently applied by the Seller
prior to the Acquisition and as adjusted pursuant to the terms of this Agreement
to give effect to the Acquisition as of January 1, 1999; provided, however, that
the calculation of the Purchaser's Pre-Tax Income for any period shall not
include any fees, costs, expenses or liabilities paid or incurred by (A) the
Seller with respect to or in connection with (i) its pension and retirement
plans that are being maintained, frozen or terminated by the Seller and not
being transferred to the Purchaser, (ii) its subordinated debt, (iii) obtaining
the Consents (including, without limitation, any payments made by or on behalf
of the Seller to obtain the consent of the transfer of the Colours/Alexander
Julian license to the Purchaser), and (iv) the Acquisition Agreements and the
consummation of the transactions contemplated thereby, including any fees paid
to Finova Capital Corporation with respect to the termination, renewal or
transfer of the working capital facility (and the reasonable fees and expenses
incurred with respect to any such renewal or transfer), or (B) the Purchaser,
the Parent or any of their subsidiaries or other affiliates prior to, or in
connection with, or as a result of, the Acquisition (including any success fee
or other amounts payable to Finova Capital Corporation as a result of
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the Acquisition, the payment of which shall not be included in the calculation
of any Pre-Tax Income, but excluding all other Assumed Liabilities, if any, that
have not reduced the Pre-Tax Income of the Seller, the payment of which shall be
included in the calculation of the Purchaser's Pre-Tax Income if and to the
extent required by GAAP consistently applied by the Seller prior to the
Acquisition); provided further, however, that the Pre-Tax Income of the
Purchaser shall be reduced by the Royalty Payments (as defined in the Pivot
Rules Assignment and Assumption Agreement), other commission fees paid by the
Purchaser to Klearknit Sales, Inc., commissions paid by the Purchaser to Mr.
William Roberti, and commissions paid by the Purchaser to Pivot Rules, Inc., all
as made pursuant to the terms of the Pivot Rules Assignment and Assumption
Agreement, and payments made by the Purchaser to the JHE Foundation, if and to
the extent such payments and commissions would not otherwise reduce the
Purchaser's Pre-Tax Income under GAAP consistently applied. Notwithstanding the
foregoing or anything to the contrary in this Agreement, none of the gains,
losses or liabilities resulting from the Acquisition (including, without
limitation, any tax liabilities) shall be included in the calculation of any
Pre-Tax Income. In calculating the Pre-Tax Income of the Purchaser for purposes
of determining whether a Pre-Tax Income Target for any year has been achieved,
the Purchaser will, for accounting purposes, be treated as an independent and
separate business unless otherwise provided (and then only to the extent
expressly provided) in this Agreement. All disputes between the Seller and the
Purchaser with respect to the amount of the Pre-Tax Income of the Purchaser
during any period (including, without limitation, the Pre-Tax Income for 1999
calculated on a pro forma basis and the amount of any adjustments required to be
made to such Pre-Tax Income pursuant to this Agreement), and all disputes
relating to any adjustment to the Pre-Tax Income Targets required by this
Agreement, shall be resolved by binding arbitration as set forth in Section
11.10 of this Agreement, and the Parties shall act in good faith to resolve all
such disputes as expeditiously as practicable.
To secure the payment of the amount of the Installment Payment, if
any, that becomes due and payable to the Seller for the year ended December 31,
1999, the Purchaser shall deposit $4,250,000 (the "Escrow Amount") with the
Escrow Agent pursuant to the terms of the Escrow Agreement on or prior to the
Closing Date. If the pro forma Pre-Tax Income of the Purchaser for the year
ended December 31, 1999 (as calculated and adjusted in accordance with this
Section 2.3) is less than $6,275,000, the Purchase Price will be reduced by a
multiple of 7.649 times the amount of the short fall, in which case (i) the
first $5,000,000 of such reduction shall be applied against the Installment
Payment payable to the Seller with respect to 1999, and (ii) the balance, if
any, of such reduction shall be spread proportionately over the balance of the
remaining Installment Payments.
(d) In the event that Philip E. Cohen owns, directly or indirectly,
less than a majority of the voting securities of the Parent other than as a
result of death or total and permanent disability (such event, a "Change of
Control"), the present value of all Installment Payments not yet due and
payable, and all Deferred Payments and all Postponed Payments, shall immediately
become due and payable to the Seller. The discount factor used to calculate the
present value of any such Installment Payments shall be the then current
borrowing rate of the Purchaser's working capital facility or, if there is none,
the then current borrowing rate of the Parent's working capital facility.
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(e) Subject to the terms and conditions of this Agreement, the
Installment Payment payable with respect to each year shall occur not later than
90 days after the Target Date for such year. No Installment Payment shall be
paid to the Seller with respect to any year in which the Pre-Tax Income of the
Purchaser is less than 60% of the Pre-Tax Income Target for such year (each such
Installment Payment, a "Forfeited Payment"). Subject to the provisions of
Section 2.3(i) of this Agreement, the payment of the Installment Payment payable
with respect to any year shall be postponed for five years from the Target Date
for such year if the Pre-Tax Income of the Purchaser for such year is 60% or
more but less than 80% of the Pre-Tax Income Target for such year (each such
postponed Installment Payment, a "Postponed Payment"). Subject to the provisions
of Section 2.3(i) of this Agreement, the payment of 50% of the Installment
Payment payable with respect to any year shall be deferred for five years from
the Target Date for such year if the Pre-Tax Income of the Purchaser for such
year is 80% or more but less than 100% of the Pre-Tax Income Target for such
year (each such deferred Installment Payment, a "Deferred Payment"), and the
remaining 50% of such Installment Payment shall be payable to the Seller within
90 days of the Target Date for such year. Subject to the provisions of Section
2.3(i) and Section 11.10 of this Agreement, 100% of the Installment Payment
payable with respect to any year in which the Pre-Tax Income of the Purchaser
for such year is 100% or more of the Pre-Tax Income Target for such year shall
be payable to the Seller within 90 days of the Target Date for such year.
(f) If the Purchaser claims that the Seller has breached a
contractual obligation to the Purchaser under this Agreement in any material
respect, the amount of damages reasonably claimed by the Purchaser with respect
to such breach may be withheld from any Installment Payment, Postponed Payment
or Deferred Payment that is then due and payable; provided, however, that the
amount withheld shall in no event exceed the maximum amount for which the Seller
could be liable to the Purchaser with respect to such claim under the
indemnification provisions set forth in Article IX of this Agreement; provided
further that any amount withheld by the Purchaser pursuant to this Section
2.3(f) shall be immediately deposited into an escrow account with the Escrow
Agent pending the resolution of such claim pursuant to an escrow agreement that
is in form and substance substantially similar to the Escrow Agreement with such
changes as may be required by the Escrow Agent that are reasonably acceptable to
the Seller and the Purchaser. Any such claim shall be resolved by binding
arbitration as set forth in Section 11.10 of this Agreement, and the Parties
shall act in good faith to resolve all such disputes as expeditiously as
possible. Immediately upon the resolution of any such claim, the amount owed to
the Seller (if any) shall be paid to the Seller, and the remainder of the
withheld amount (if any) shall be paid to the Purchaser. Interest earned on any
amount deposited into an escrow account pending resolution of any such claim
shall be allocated between the Purchaser and the Seller in the same proportion
as the escrowed amount is allocated between them.
(g) At the option of the Purchaser, any Installment Payment,
Postponed Payment or Deferred Payment for any year commencing on or after
January 1, 2001 may be paid with shares of Class A Common Stock if, and only if,
such shares are then freely transferable by the Seller and its designees without
any legal or contractual restriction. With respect to any Installment Payment,
Postponed Payment or Deferred Payment paid with shares of Class A
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Common Stock, the following shall apply:
(i) the number of shares issued to the Seller in respect of
any Installment Payment, Postponed Payment or Deferred Payment shall not
exceed the average daily trading volume of shares of Class A Common Stock
in the preceding 90 trading days, it being understood and agreed that if
no shares of Class A Common Stock are traded on any one or more of the
preceding 90 trading days, the volume of shares traded for such day(s),
which is zero (0), will still be included for such day(s) in calculating
the average trading volume of shares of the Class A Common Stock for such
90 trading day period;
(ii) all shares issued and delivered to the Seller as payment
of any Installment Payment, Postponed Payment or Deferred Payment (except
with respect to shares issued and delivered to the Seller as an Additional
Stock Payment pursuant to clause (iii) of this Section 2.3(g)) shall be
valued at the average of the closing price of Class A Common Stock for the
20 trading days preceding such payment as reported in The Wall Street
Journal;
(iii) in the event that the Seller sells all of the Class A
Common Stock paid to it with respect to any Installment Payment, Postponed
Payment or Deferred Payment within five (5) Business Days after its
receipt of such shares and such sale results in gross cash proceeds, less
reasonable brokerage fees, to the Seller that are less than the amount of
such Installment Payment, Postponed Payment or Deferred Payment (such
difference, the "Obligation Shortfall"), the Purchaser shall promptly (but
in no event later than three (3) Business Days) either (x) pay the
Obligation Shortfall to the Seller in cash, or (y) cause the issuance to
the Seller of an additional number of shares of Class A Common Stock (an
"Additional Stock Payment") equal to the quotient of the Obligation
Shortfall divided by the average of the closing price of Class A Common
Stock for the 20 trading days preceding such payment as reported in The
Wall Street Journal, and if the gross cash proceeds, less reasonable
brokerage fees, paid to the Seller from the sale of the Additional Stock
Payment are less than the amount of such Obligation Shortfall, the
Purchaser shall either pay the Seller the amount of such short fall in
cash or cause the issuance of additional shares to the Seller until the
gross cash proceeds, less reasonable brokerage fees, paid to the Seller
from the sale of all such shares equals the full amount of such
Installment Payment, Postponed Payment or Deferred Payment; and
(iv) the Purchaser represents and warrants that all shares of
Class A Common Stock issued to the Seller pursuant to the preceding
clauses (i), (ii) or (iii) of this Section 2.3(g) shall be freely
transferable by the Seller and its designees without any legal or
contractual restriction.
(h) Unless otherwise agreed to by the Advisory Board, (i) if the
Purchaser is required, directly on indirectly, by its board of directors or
stockholders to sell, transfer or otherwise convey any license or other material
asset (it being agreed that any asset that generates
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more than $10,000 of revenues during any year shall be a material asset) of the
Purchaser to any entity that is controlled, directly on indirectly, by the
Parent, then all income and reasonable expenses attributable to each such
license and asset shall be deemed to have been earned or incurred, as the case
may be, by the Purchaser for purposes of calculating the Pre-Tax Income of the
Purchaser, (ii) if the Purchaser is required, directly on indirectly, by its
board of directors or stockholders to incur any material expenditure or
liability (it being agreed that any expenses and/or liabilities that exceed
$10,000 in the aggregate during any fiscal year shall be material) not in the
ordinary course of its business consistent with the strategic annual business
plan of the Purchaser then in effect developed by the Advisory Board and
approved by the Purchaser's Board (as such strategic annual business plan is
modified by the Advisory Board and then approved by the Purchaser's Board in
connection with any quarterly review of such strategic annual business plan),
such expenditures and liabilities (and any associated revenues) shall be
excluded from the calculation of the Purchaser's Pre-Tax Income, and/or (iii) if
the Purchaser is required, directly or indirectly, by its board of directors or
stockholders to enter into a joint venture or partnership, or acquire a new
business, a subsidiary or any material asset (including, without limitation, the
capital stock or any other equity interest of any other Person), or is merged,
consolidated or otherwise combined with another entity and the surviving entity
is controlled by the Parent, the Purchaser's business prior to such joint
venture, partnership, acquisition, merger, consolidation or other business
combination shall be treated as an independent and separate business for
purposes of calculating the Pre-Tax Income of the Purchaser; provided, however,
that if any of the forgoing transactions is approved by the Advisory Board, the
revenues and expenses resulting from, and all of the fees, costs and expenses
incurred by the Purchaser in connection with, such transaction shall be included
in the calculation of the Purchaser's Pre-Tax Income from and after the
effective date of such transaction in accordance with GAAP consistently applied
on a consolidated basis as adjusted pursuant to this Agreement. In addition,
unless consented to by the Advisory Board, all of the fees, costs, expenses and
liabilities incurred or paid by, and all of the income earned by, the Purchaser
in connection with, or as a result of, any transaction that the Purchaser is
required to enter into by its board of directors or stockholders shall not be
included in the calculation of the Purchaser's Pre-Tax Income, whether or not
any such transaction is consummated. All disputes between the Seller and the
Purchaser with respect to any adjustments to the Pre-Tax Income under this
Section 2.3(h) shall be resolved by binding arbitration as set forth in Section
11.10, and the Parties shall act in good faith to resolve all such disputes as
expeditiously as practicable.
(i) In the event that the Purchaser's Pre-Tax Income for any year
exceeds the Pre-Tax Income Target for such year, the Seller may elect:
(1) to credit such excess amount (or any portion thereof as
specified by the Seller) to any one or more of the prior years selected by
the Seller for which there was a Postponed Payment or a Deferred Payment
(but not a Forfeited Payment) and, if the amount of the Pre-Tax Income of
the Purchaser for any such prior year plus the amount of such credit would
have equaled the Pre-Tax Income Target for such year, the Postponed and/or
Deferred Payment for such year shall, subject to Section 11.10 of this
Agreement, become due and payable within 90 days of the Target Date for
the year in which such excess amount occurred;
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(2) if there are no unpaid Postponed Payments or Deferred
Payments (or if all of the Postponed and Deferred Payments have become due
and payable as a result of a credit of part of such excess to a prior
year), to be paid the Advance Percentage of such excess amount (or any
part thereof specified by the Seller that has not been credited to a prior
year), which shall be credited against the Installment Payment for the
December 31, 2004 Target Date, which payment shall become due and payable
within 90 days of the Target Date of the year in which such excess
occurred. The term "Advance Percentage" shall mean, as of any year, a
percentage equal to 1.0 minus the effective tax rate of the Purchaser for
such year; and/or
(3) to cause the Purchaser to pay the Stockholders in
accordance with their employment agreements a bonus equal to 25% of such
excess (less any part of such excess that is credited to a prior year) as
provided in the Employment Agreements; provided, however, that in
calculating such bonus the amount of such excess shall be reduced by the
product of (a) the amount of such excess, if any, credited to the
Installment Payment for the December 31, 2004 Target Date pursuant to the
preceding clause (2) of this Section 2.3(i), and (b) a fraction, the
numerator of which shall be equal to 1.0 and the denominator of which
shall be equal to the Advance Percentage for such year. Therefore, for
example, if the excess Pre-Tax Income for any year was $1,000,000 and the
effective tax rate was 40% and the Seller elected to credit 50% of such
excess to the Installment Payment for the year ending December 31, 2004,
then (x) $300,000 would be paid to the Seller and credited to such
Installment Payment ($500,000 x 60%), and (y) the Stockholders would be
paid an aggregate bonus of $125,000 [25% x ($1,000,000 minus the product
of $300,000 and 1/.60) = 25% x ($1,000,000 minus $500,000)].
(j) Unless otherwise consented to by the Advisory Board, if a
majority of the outstanding or voting capital stock of the Purchaser, or any one
or more assets of the Purchaser that generate 50% or more of the revenues of the
Purchaser (such asset or assets referred to herein as a "Purchaser Material
Asset"), is sold, transferred or otherwise conveyed to one or more Persons
(other than entities controlled, directly or indirectly, by the Parent) in one
or more transactions on or prior to December 31, 1999, all of the Installment
Payments shall become due and payable on the date of such sale, transfer or
conveyance. Unless otherwise consented to by the Advisory Board, if a majority
of the outstanding or voting capital stock, or any Purchaser Material Asset is
sold, transferred or otherwise conveyed to one or more Persons (other than
entities controlled, directly or directly, by the Parent) in one or more
transactions after December 31, 1999, the Payoff Amount shall become due and
payable on the date of such sale, transfer or conveyance; provided, however,
that if any of the consideration payable with respect to any such sale, transfer
or conveyance is deferred, all of the cash payable with respect to such sale,
transfer or conveyance shall be paid to the Seller as and when received by the
Parent and/or its Affiliates until the Payoff Amount has been paid in full (and,
if the deferred consideration is accruing interest, the Payoff Amount shall
accrue interest at the same rate). The term "Payoff Amount" means:
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(i) if the Minimum Price (as defined below) is equal to or greater
than $48,000,000, the Payoff Amount shall equal the present value of all
unearned and unpaid Installment Payments plus the aggregate amount of all
Deferred Payments and all Postponed Payments. The term "Minimum Price"
shall mean an amount equal to the product of 7.649 and the average annual
Pre-Tax Income of the Purchaser for each full fiscal year since January 1,
1999 (including the pro forma Pre-Tax Income of the Purchaser for the year
ending December 31, 1999 (as calculated in accordance with Section 2.3 of
this Agreement), it being acknowledged and agreed that the Pre-Tax Income
of the Purchaser for any partial fiscal year shall not be included in the
calculation of the Minimum Price. The present value of any Installment
Payments shall be determined using a discount factor equal to the then
current borrowing rate of the Purchaser under its working capital facility
or, if there is none, the then current borrowing rate of Parent under its
working capital facility.
(ii) if the Minimum Price is less than $48,000,000, the Purchaser
shall pay to the Seller an amount equal to the Minimum Price less the
aggregate amount of the Purchase Price previously paid to the Seller and
all Forfeited Payments.
(iii) in the event that there are two consecutive years of Forfeited
Payments, the Parent may elect, but shall not be required, to liquidate
the Purchaser's business without any obligation to the Seller other than
the immediate payment of all earned but unpaid Installment Payments
(including all Deferred Payments and all Postponed Payments); provided,
however, that the sale, transfer or conveyance of a Purchaser Material
Asset to one or more Persons (other than entities controlled, directly or
indirectly, by the Parent) in one or more transactions shall be governed
by clause (i) or (ii) of this Section 2.3 (j), as applicable. In the event
that the Parent elects to liquidate the Purchaser's business, (x) the
Seller shall have a right of first offer to purchase the assets of the
Purchaser upon the terms and conditions offered by the Purchaser in
accordance with the procedures set forth on Schedule 2.3(j)(iii) to this
Agreement, and (y) the Employment Agreements shall terminate and be of no
further force or effect (including, without limitation, any agreements not
to compete).
In the event that any asset or group of assets of the Purchaser
(other than an asset disposed of in the ordinary course of business as a result
of obsolescence, wear and tear, or no longer being useful to the business) is
sold, transferred or otherwise conveyed to one or more Persons (other than
entities controlled by the Parent) in one more transactions, all of the
remaining Pre-Tax Income Targets shall be reduced by the greater of (i) the
amount of Pre-Tax Income attributable to each such asset in the strategic annual
business plan in effect for the year in negotiations for such sale, transfer or
conveyance began, or (ii) the amount of Pre-Tax Income attributable to each such
asset in the strategic annual business plan in effect for the year in which such
sale, transfer or conveyance occurs. In the event that the Purchaser acquires a
material asset after the Pre-Tax Income Targets have been reduced pursuant to
this paragraph, the Pre-Tax Income Target for the year in which such asset is
acquired, and each year thereafter during which such asset is owned by the
Purchaser, shall be increased by the actual Pre-Tax Income attributable to such
asset during such year; provided, however, that the Pre-Tax Income Target
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for any year shall not exceed the original Pre-Tax Income Targets for such year
as set forth in Section 2.3(c) of this Agreement under any circumstances. All
disputes between the Seller and the Purchaser with respect to any adjustments to
the Pre-Tax Income Targets under this Section 2.3(j) shall be resolved by
binding arbitration as set forth in Section 11.10 of this Agreement, and the
Parties shall act in good faith to resolve all such disputes as expeditiously as
practicable.
(k) Within ninety (90) days after the end of each of the Purchaser's
1999 through 2004 fiscal years (each of which shall be a calendar year), the
Purchaser shall prepare and deliver to the Seller financial statements for the
Purchaser for such year prepared in accordance with GAAP consistently applied on
an unconsolidated basis (unless the Purchaser has acquired the capital stock or
other equity interest of another Person pursuant to a transaction approved by
the Advisory Board, in which the financial results of the Purchaser and each
such Person shall be included in such financial statements on a consolidated and
consolidating basis in accordance with GAAP consistently applied), together with
a statement of the Purchaser's Accountant or the chief financial officer of the
Parent that concurs with the accuracy of the financial information set forth on
such Pre-Tax Income Report and a statement setting forth the Purchaser's Pre-Tax
Income for such year as adjusted pursuant to the terms of this Agreement (each
such statement, a "Pre-Tax Income Report"), which shall set forth the
calculation of such Pre-Tax Income in reasonable detail. During the forty-five
(45) day period following the Seller's receipt of any Pre-Tax Income Report, the
Seller shall be permitted to review, or have its accountants, financial
advisors, counsel or other representatives review, all relevant working papers
and books and records of the Purchaser relating to such Pre-Tax Income Report;
provided, however, that the Seller may, at its option, extend any such
forty-five (45) day period to one hundred and eighty (180) days by giving notice
of such extension to the Purchaser prior to the end of such forty-five (45) day
period (such 45 day period, as may be extended to 180 days, is referred to as
the "Review Period"); provided further, however, that such forty-five (45) day
period or one hundred and eighty (180) day period, as the case may be, shall be
extended by the number of days, if any, that the Seller or any of its
accountants, financial advisors, counsel or other representatives are not
provided access to the work papers and books and records of the Purchaser. Each
Pre-Tax Income Report shall become final and binding upon the Parties on the day
following the Review Period for such Pre-Tax Income Report unless the Seller
delivers a written notice of objection thereto together with a statement of the
Seller's Accountant or the chief financial officer of the Seller that concurs
with the basis of the Seller's objection (a "Notice of Disagreement") to the
Purchaser prior to end of such Review Period. The Notice of Disagreement
delivered to the Purchaser shall specify in reasonable detail the amount in
dispute and the items on the Pre-Tax Income Report disputed, and shall describe
in reasonable detail the basis for the Seller's objection. During the 30-day
period following the delivery of a Notice of Disagreement pursuant to this
Section 2.3(k), each of the Seller and the Purchaser shall negotiate in good
faith to resolve the matters objected to in the Notice of Disagreement. At the
end of such 30-day period, if the Seller and the Purchaser have not reached
agreement on such matters, the dispute shall be resolved by binding arbitration
as set forth in Section 11.10 of this Agreement, and the Parties shall act in
good faith to resolve all such disputes as expeditiously as practicable.
Promptly after the Purchaser has delivered a Pre-Tax Income Report to the Seller
for any year, the Purchaser shall pay to the Seller the amount, if any, of the
Installment Payment payable to the Seller based on the calculation of the
Pre-Tax Income for such year as set forth in such report. In
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the event that the Seller subsequently disputes the calculation of the Pre-Tax
Income for any year, the Purchaser shall promptly deposit into an escrow account
the additional amount, if any, that would be payable to the Seller based on the
Seller's calculation of the Purchaser's Pre-Tax Income for such year (the escrow
account shall be maintained with the Escrow Agent pending the resolution of such
dispute pursuant to an escrow agreement that is in form and substance
substantially similar to the Escrow Agreement with such changes as may be
required by the Escrow Agent that are reasonably acceptable to the Purchaser and
the Seller).
(l) Except as expressly provided otherwise in Schedule I and
Schedule IA to this Agreement, none of the fees, costs, expenses or liabilities
incurred or paid by the Parent or any of its subsidiaries (other than the
Purchaser) or other affiliates shall be allocated to the Purchaser or included
in the calculation of the Purchaser's Pre-Tax Income for any year. In addition,
in the event that the Purchaser enters into any transaction that is not
authorized or contemplated by the strategic annual business plan then in effect
or approved by the Advisory Board and the Pre-Tax Income of the Purchaser for
any fiscal year is reduced in connection with, or as a result of, such
transaction, the Pre-Tax Income of the Purchaser for such fiscal year shall be
increased by the amount of such reduction for purposes of determining whether
the Purchaser has achieved the Pre-Tax Income Target for such year.
Section 2.4 Additional Excluded Assets. (a) Notwithstanding any other
provision to this Agreement to the contrary (including, without limitation,
Section 5.2 of this Agreement), in the event that the Projected Pre-Closing
Taxes as of the Closing Date exceeds the Subordinated Debt Repayment Amount,
then on the Closing Date, immediately prior to the Closing, the Seller may
distribute to the Stockholders an amount of cash equal to the amount by which
the Projected Pre-Closing Taxes exceed the Subordinated Debt Repayment Amount
(all such retained or distributed cash shall be Excluded Assets). To the extent
deemed necessary or appropriate by the Seller, any amounts payable to the Seller
pursuant to this Section 2.4 may be funded with borrowings under the Seller's
working capital facility (which borrowings may be overdrafts and all of which
shall be Assumed Liabilities).
(b) On the Closing Date, the Purchaser shall execute and deliver the
Purchaser Note to the Seller pursuant to which the Purchaser shall be obligated
to pay the Seller the amount, if any, by which the Pre-Closing Taxes exceed the
Projected Pre-Closing Taxes plus interest on such amount at a rate per annum of
10% from the Closing Date until paid in full. Any amount payable to the Seller
pursuant to the Purchaser Note shall be paid to the Seller no later than three
(3) Business Days after the Pre-Closing Income Statement has become final
pursuant to Section 2.5 of this Agreement.
Section 2.5 Adjustments to the Purchase Price. (a) In the event that the
Subordinated Debt Repayment Amount exceeds the Projected Pre-Closing Taxes as of
the Closing Date, then the amount of the Purchase Price payable to the Seller
pursuant to Section 2.3 of this Agreement shall be reduced by the amount by
which the Subordinated Debt Repayment Amount exceeds the Projected Pre-Closing
Taxes.
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(b) On the Closing Date, the Seller shall execute and deliver the
Seller Note to the Purchaser pursuant to which the Seller shall be obligated to
pay the Purchaser the amount, if any, by which the Projected Pre-Closing Taxes
exceed the Pre-Closing Taxes plus interest on such amount at a rate per annum of
10% from the Closing Date until paid in full. Any amount payable to the
Purchaser pursuant to the Seller Note shall be paid to the Purchaser no later
than three (3) Business Days after the Pre-Closing Income Statement has become
final pursuant to this Section 2.5.
(c) As soon as reasonably practicable after the Closing, but in any
event within forty-five (45) days after the Closing Date, the Seller shall
deliver to the Purchaser (i) a balance sheet of the Purchaser as of the Closing
Date immediately after giving effect to the Closing (the "Closing Date Balance
Sheet"), which shall have been prepared in accordance with GAAP consistently
applied by the Seller prior to the Acquisition, and (ii) a pre-closing income
statement (the "Pre-Closing Income Statement") of the Seller for the period
commencing on January 1, 1999 and ending on the Closing Date, which shall, among
other things, set forth the calculation of the Pre-Closing Taxable Income. The
fees, costs and expenses incurred by the Seller in connection with the
preparation of the Closing Date Balance Sheet shall be paid by the Seller;
provided, however, that such fees, costs and expenses shall be excluded from the
calculation of the Purchaser's Pre-Tax Income.
(d) The Closing Date Balance Sheet and the Pre-Closing Income
Statement shall become final and binding upon the Parties after sixty (60) days
following the Purchaser's receipt thereof unless the Purchaser delivers to the
Seller a written notice of objection to the Closing Date Balance Sheet or the
Pre-Closing Income Statement (a "Dispute Notice") prior to end of such 60-day
period. The Dispute Notice shall specify in reasonable detail the amount in
dispute and the items on the Closing Date Balance Sheet and/or the Pre-Closing
Income Statement being disputed, and such notice shall describe in reasonable
detail the basis for the Purchaser's objection. During the 30-day period
following the delivery of the Dispute Notice pursuant to this Section 2.5, the
Seller and the Purchaser shall negotiate in good faith to resolve the matters
objected to in the Dispute Notice. At the end of such 30-day period, if the
Seller and the Purchaser have not reached agreement on such matters, the dispute
shall be resolved by binding arbitration as set forth in Section 11.10 of this
Agreement, and the Parties shall act in good faith to resolve all such disputes
as expeditiously as practicable. In the event of any dispute with respect to the
Closing Date Balance Sheet and/or the Pre-Closing Income Statement, as the case
may be, that requires arbitration pursuant to Section 11.10 of this Agreement,
the financial statement in dispute shall become final upon the resolution of
such dispute.
Section 2.6 Assumption of Liabilities. (a) As of the Closing, the
Purchaser shall assume and agree to pay, honor and discharge in full when due
and payable any and all of the (i) Liabilities reflected on the balance sheet of
the Seller as at December 31, 1998 other than the Excluded Liabilities, (ii)
Liabilities incurred by the Seller in the ordinary course of business after
December 31, 1998, (iii) Liabilities under the working capital facility of the
Seller as of the Closing Date and all amounts that become due and payable under,
or with respect to, such working capital facility as a result of, or in
connection with, the Acquisition (including, without limitation, the Seller's
liabilities with respect to overdrafts advanced, and letters of credit
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outstanding, under such working capital facility and any success or other fees
payable to Finova Capital Corporation as a result of the Acquisition), (iv)
accrued and unpaid withholding Taxes and sales Taxes that are not past due, (v)
unused vacation time that has accrued in 1999 for each employee of the Seller,
and (vi) unpaid sick pay that has accrued in 1999 for each employee of the
Seller (collectively, the "Assumed Liabilities"). The Seller shall remain liable
for, and shall pay as and when due and payable, all of the Excluded Liabilities.
(b) At the Closing, the Purchaser shall assume all of the Assumed
Liabilities by executing and delivering the Assignment and Assumption Agreement
to the Seller.
Section 2.7 Allocation of Purchase Price. The cash payable at the Closing
Date, the value of the Initial Share Allotment on the Closing Date and the
amount of the Assumed Liabilities that are liabilities for tax purposes shall be
allocated to the Acquired Assets in accordance with a schedule to be mutually
agreed upon by the Seller and the Purchaser, which schedule shall be attached to
this Agreement on the Closing Date as Schedule 2.7. Schedule 2.7 to this
Agreement may be amended from time to time in a manner acceptable to the Seller
and the Purchaser to reflect the amount of each Installment Payment and any
other adjustments made to the Purchase Price after the date of this Agreement
pursuant to this Agreement. Each Party agrees to (x) reflect the Acquired Assets
upon its books for tax reporting purposes in accordance with Schedule 2.7 to
this Agreement, as amended from time to time, and (y) file all tax returns in
accordance with and based upon such schedule. The allocation of the Purchase
Price made pursuant to this Section 2.7 is intended to comply with the
requirements of ss.1060 of the Code.
Section 2.8 Bulk Sales Law Compliance; Transfer Taxes; Franchise Taxes.
The Seller agrees to pay and discharge all claims of creditors (other than the
Assumed Liabilities, which shall be paid in full by the Purchaser as and when
due and payable) that may be asserted against the Purchaser by reason of the
noncompliance of the Seller with the provisions of the bulk sales or transfer
laws of any state as a result of the transactions contemplated by this
Agreement; provided, however, that the foregoing shall not preclude the Seller
from contesting any claims in good faith; provided further, that the Seller
agrees to indemnify and hold the Purchaser harmless from and against claims
suffered or incurred by the Purchaser by reason of or arising out of the (i)
failure of the Seller to pay or discharge any such claims (other than Assumed
Liabilities) when due or (ii) the noncompliance with the provisions of any
applicable bulk sales or transfer laws. This indemnification provision is not
subject to the restrictions and limitations set forth in Article IX of this
Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller represents and warrants to the Purchaser as of the date of this
Agreement as follows:
Section 3.1 Good Standing. The Seller (i) is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Connecticut, (ii) has full power and
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authority to own, lease and operate its properties and assets and to conduct the
Business as it is being conducted, and (iii) except as set forth on Schedule 3.1
to this Agreement, is duly qualified or licensed to do business as a foreign
corporation in each of the jurisdictions set forth on such schedule, and (iv) is
duly qualified or licensed to do business as a foreign corporation, and is in
good standing, in all jurisdictions in which such qualification or licensing is
required, except for such jurisdictions in which the failure to be duly
qualified or licensed would not reasonably be expected to have, either
individually or in the aggregate, a Seller Material Adverse Effect. The Seller
has made available to the Purchaser true, correct and complete copies of its
certificate of incorporation and by-laws, as amended as of the date of this
Agreement.
Section 3.2 Authorization. The Seller has full right, authority and power
to (i) enter into and deliver the Acquisition Documents to which it is a party,
(ii) to consummate the transactions contemplated by such Acquisition Documents,
and (iii) perform its obligations under such Acquisition Documents. The
Acquisition Documents to which the Seller is a party have been duly executed and
delivered by the Seller, and such Acquisition Documents are legal, valid and
binding obligations of the Seller enforceable against the Seller in accordance
with their terms.
Section 3.3 Financial Statements. The Seller has provided the Purchaser
with a copy of (a) the unaudited balance sheet, and the related unaudited
statements of income, retained earnings and cash flow of the Seller as at and
for the three-month period ended March 31, 1999 (collectively, the "Interim
Financial Statements"), and (b) the audited balance sheets of the Seller as at
December 31 in each of the years 1996 through 1998, together with the related
statements of income, retained earnings and cash flows for the years ended on
such dates, together with the notes thereto (collectively, the "Audited
Financial Statements" and together with the Interim Financial Statements, the
"Financial Statements"). Each of the Financial Statements was prepared in
accordance with GAAP consistently applied, except that the Interim Financial
Statements do not contain footnotes or year-end adjustments, and each of the
Financial Statements fairly presents the financial position, results of
operations and changes in financial position of Seller as at, or for the periods
ended on, the dates thereof. Except as set forth on Schedule 3.3 to this
Agreement, the Seller has not changed its policy or procedures with respect to
its accounting practices since the Balance Sheet Date.
Section 3.4 Taxes. (a) Except with respect to the Seller's 1998 Tax
Return, for which the Seller has filed an extension and has paid all amounts
required to have been paid for such year as of the date of this Agreement, the
Seller has timely filed, or caused to be timely filed, all Tax Returns required
to be filed by the Seller on or prior to the Closing Date, and all such Tax
Returns are complete and accurate in all material respects and comply in all
material respects with all applicable Laws. The Seller has made available to the
Purchaser true, correct and complete copies of all Tax Returns filed by the
Seller for each of its past two fiscal years ended December 31, 1997. Except as
set forth on Schedule 3.4 to this Agreement, during the last thirty-six (36)
months, none of the Seller's Tax Returns have been audited by the United States
Internal Revenue Service or any other Governmental Authority, nor is any such
audit scheduled or pending. The Seller shall retain any and all rights to claim
a refund for any Taxes and the proceeds thereof paid by the Seller.
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(b) The Seller has timely paid and through the Closing Date will
have timely paid, all Taxes due and payable on or before the Closing Date. The
Seller has, and through the Closing Date will have, established on its books and
records reserves that are adequate for the payment of all Taxes attributable to
any period (or portion of a period) occurring on or before the Closing Date, but
which are not due and payable on or before the Closing Date. The provision for
Taxes of the Seller shown on the Balance Sheet are sufficient for the payment of
all such Taxes not paid for the period then ended and for all periods prior to
the Balance Sheet Date thereto. The provision for employment withholding and
payroll taxes made by the Seller through the Closing Date will be adequate to
pay all unpaid liabilities for such taxes through the Closing Date and the
Seller has, and through the Closing Date will have, within the time and in the
manner prescribed, withheld from employees' wages and paid over to the proper
Governmental Authority all amounts required to be so withheld and paid over
under all applicable Laws.
Section 3.5 Ownership of Assets. The Acquired Assets are sufficient to
operate the Business in the manner in which it is being operated as of the date
of this Agreement. Except as set forth on Schedule 3.5 to this Agreement, the
Seller has good and marketable title to, or valid leasehold interests in, all of
the Acquired Assets, free and clear of all liens other than Permitted Liens.
Section 3.6 Fixed Assets. Schedule 3.6 to this Agreement sets forth a
true, correct and complete list of all Fixed Assets of the Seller that have a
book value of more than $1,000 as of the date of this Agreement.
Section 3.7 Real Property. (a) The Seller does not own any real property.
Schedule 3.7(a)(i) to this Agreement sets forth a true, correct and complete
list of each lease for real property executed by or binding upon the Seller as
lessee, sub-lessee, tenant or assignee (the "Leased Premises"). Except as set
forth on Schedule 3.7(a)(ii) to this Agreement, each such lease is in full force
and effect on the date of this Agreement without any default or breach thereof
by the Seller or, to the Seller's knowledge, any other party thereto. Except as
set forth on Schedule 3.7(a)(iii), no consent of any landlord or any other party
is required under any such lease in order to assign each such lease to the
Purchaser (or its designee) and to keep such lease in full force and effect
after the execution and delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement. True, correct and complete copies
of all leases listed on Schedule 3.7(a)(i) to this Agreement (including all
amendments, addenda, waivers and all other binding documents affecting the
tenant's rights thereunder) have been delivered to the Purchaser.
(b) Except as set forth on Schedule 3.7(b)(i) to this Agreement, the
Seller has not received any notice from any insurance company that has issued a
policy covering any part of any Leased Premises (or by any board of fire
underwriters or other body exercising similar functions) that requires or
recommends any repairs or work to be done on any part of the Leased Premises.
All of the public utilities required for the operation of the Leased Premises in
the manner currently operated are installed and operating, and all installation
and connection charges have been paid in full or provided for. Except as set
forth on Schedule 3.7(b)(ii) to this Agreement,
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the plumbing, electrical, heating, air conditioning, ventilating and other
structural or material mechanical systems in the Leased Premises are in good
working order and are adequate for the operation of the business of Seller on
the date of this Agreement. Except as set forth on Schedule 3.7(b)(iii) to this
Agreement, there are no leaks or other defects in or on the roof, basement or
foundation walls of the Leased Premises are in good working order and are
adequate for the operation of the business of Seller on the date of this
Agreement. Except as provided in the leases for the Leased Premises and except
as set forth on Schedule 3.7(b)(iv) to this Agreement, the Seller has not
received notice of any assessments, and has no knowledge of any pending
assessments, affecting the Leased Premises.
Section 3.8 Intellectual Property. Schedule 3.8(a) to this Agreement lists
of all of the Intellectual Property owned or used by the Seller. Schedule 3.8(b)
to this Agreement sets forth a true, correct and complete list of all written
and material licenses and arrangements pursuant to which the Seller is permitted
to use the Intellectual Property of a third party in the conduct of its
Business. No use by the Seller of any Intellectual Property infringes on any
Intellectual Property right of any other Person. Except as disclosed in Schedule
3.8(c) to this Agreement, no action, claim, suit or proceeding has been brought
against the Seller or, to the knowledge of the Seller, has been threatened
against the Seller with respect to any of the Intellectual Property used by the
Seller in the Business that challenges the Seller's right to use any such
Intellectual Property or that alleges that the Seller infringes any of the
Intellectual Property of any other Person. To the knowledge of the Seller, no
other Person is infringing on any of the Intellectual Property owned or used by
the Seller.
Section 3.9 Contracts. (a) Schedule 3.9(a) to this Agreement lists all of
the contracts described below and to which the Seller is a party (collectively,
the "Material Contracts") that are in effect as of the date of this Agreement:
(i) any lease of real property or any lease of personal property
that (x) involves annual rental payments in excess of $10,000 in the
aggregate or (y) is not cancelable within 30 days notice without penalty;
(ii) any royalty, commission, distribution, agency, territorial or
license agreement that involve aggregate payments by the Seller of more
than $10,000;
(iii) any employment contract that involves annual payments by the
Seller in excess of $50,000;
(iv) any agreement with any professional person or firm, consultant,
independent contractor or advertising firm or agency that involves annual
payments by the Seller in excess of $10,000 (excluding payments to legal
and accounting advisors in connection with the Acquisition);
(v) any contract or collective bargaining agreement with any labor
union or representative of employees;
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(vi) any contract obligating the Seller to guaranty the payment or
performance of the obligations of others that involves an amount in excess
of $10,000;
(vii) any pension, profit sharing, retirement, medical, bonus,
incentive, severance, stock option or stock purchase plan or other similar
benefit plan in effect with respect to its employees or others;
(viii) any contract materially limiting the freedom of the Seller to
engage in any line of business or to compete with any Person;
(ix) any license agreement that involves aggregate payments by or to
the Seller in excess of $10,000;
(x) any franchise agreement that involves aggregate payments by or
to the Seller in excess of $10,000; and
(xi) any other Contract that (x) involves aggregate annual payments
by or to the Seller in excess of $10,000, or (y) requires performance for
over six months and cannot be terminated within thirty (30) days notice
without penalty.
(b) The Seller has delivered or made available to the Purchaser true,
correct and complete copies of all of the Material Contracts.
(c) Except as set forth on Schedule 3.9(c) to this Agreement, each of the
Material Contracts to which the Seller is a party constitutes the legal, valid
and binding obligation of the Seller enforceable against it in accordance with
its terms and is, to the knowledge of the Seller, a legal, valid and binding
obligation of the other parties thereto enforceable against them in accordance
with its terms.
(d) Except as set forth on Schedule 3.9(d)(i) to this Agreement, the
Seller is not as of the date of this Agreement, in breach or violation of, or
default under, any of the Material Contracts, and no event has occurred
thereunder that, with or without the lapse of time or the giving of notice, or
both, would constitute a default by the Seller thereunder, except any such
breach, violation or default that would not reasonably be expected to result in
a Seller Material Adverse Effect. Except as set forth on Schedule 3.9(d)(ii) to
this Agreement, to the knowledge of the Seller, no other party is in default
under any Material Contract.
Section 3.10 Customers and Vendors. Schedule 3.10(a) to this Agreement
lists (i) the five (5) largest customers of the Seller in terms of revenues
during the twelve-month period ended March 31, 1999, showing the approximate
total sales by the Seller to each such customer during such period; and (ii) the
five (5) largest vendors of the Seller in terms of purchases of goods or
services by the Seller during such twelve-month period, showing the approximate
total purchases by the Seller from each such vendor during such period. Except
as set forth on Schedule 3.10(b) to this Agreement, since the Balance Sheet
Date, there has been no material adverse change in the business relationship of
the Seller with any customer or vendor named in
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Schedule 3.10(a) to this Agreement. Except as set forth on Schedule 3.10(c) to
this Agreement, the Seller has not received any written or oral notice, or to
the knowledge of the Seller any oral notice, from any existing customer or
vendor of the Seller that states that such customer or vendor intends to
terminate its business relationship with the Seller.
Section 3.11 Legal Proceedings. Except as set forth on Schedule 3.11(a) to
this Agreement, there are no Actions pending or, to the knowledge of the Seller,
threatened against the Seller. Except as set forth on Schedule 3.11(b) to this
Agreement, the Seller is not in default with respect to any order, writ,
injunction or decree of any Governmental Authority. There is no Action pending
or, to the knowledge of the Seller, threatened against or affecting the Seller
or the Seller's ability to consummate the transactions contemplated by this
Agreement.
Section 3.12 Orders; Decrees. Except as set forth on Schedule 3.12 to this
Agreement, there are no outstanding orders, decrees, injunctions, rulings,
decisions, directives, consents, pronouncements or regulations of any court or
other Governmental Authority issued against, or binding on, the Seller or the
Acquired Assets.
Section 3.13 Compliance With Law. Except as set forth in Schedule 3.13(a)
to this Agreement, the Seller has complied with all Laws applicable to the
Seller and the Acquired Assets in all material respects. Schedule 3.13(b) to
this Agreement sets forth all of the licenses, permits, consents, approvals,
franchises and other authorizations that the Seller has obtained from
Governmental Authorities. Except as set forth in Schedule 3.13(c) to this
Agreement, the Seller has been granted, and it is in compliance with in all
material respects, all of the licenses, permits, consents, approvals, franchises
and other authorizations from Governmental Authorities that are necessary for
the operation of the Business or the ownership of the Acquired Assets. Except as
set forth in Schedule 3.13(d) to this Agreement, the Seller has not received any
notice that any of its licenses, permits, consents, approvals, franchises or
other authorizations from Governmental Authorities that are necessary for the
operation of the Business or the ownership of the Acquired Assets will be
revoked, canceled, rescinded or not renewed.
Section 3.14 Inventory. The inventory (including, without limitation, new
product inventory, and work-in-progress) owned by the Seller as of the Closing
has been acquired in the ordinary course of the its business. The Seller has
good and valid title to the inventory, free and clear of all Liens, except
Permitted Liens. The allowance for obsolete and slow moving inventory reflected
in the Balance Sheet was determined in accordance with GAAP consistently
applied.
Section 3.15 Capital Projects and Expenditures. All capital projects and
capital expenditures (including any leases capitalized in accordance with GAAP
consistently applied) that have been committed to or undertaken by the Seller
but that have not been fully paid for on the date of this Agreement (in each
instance having a cost of $10,000 or more), as well as the terms of any and all
financing arranged in connection therewith and details of the payments, if any,
to be made after the date of this Agreement with respect to any such capital
projects or expenditures, are either (i) described in, or contemplated by, the
1999 Business Plan, or (ii) identified on Schedule 3.15 to this Agreement.
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Section 3.16 Compensation. Schedule 3.16 to this Agreement lists the
names, titles, and total annual compensation (including, as separately set forth
figures, any bonuses) of all employees, salaried officers and directors of the
Seller that earned more than $10,000 in compensation from the Seller in 1998.
Section 3.17 Environmental Protection. (a) Except as set forth in Schedule
3.17(a)(i) to this Agreement, the Seller has complied in all material respects
with all Environmental Laws. Except as set forth in Schedule 3.17(a)(ii) to this
Agreement, the Seller has obtained all material permits, licenses, certificates
and other authorizations that are required under any Environmental Laws with
respect to the operation of the Business and ownership of the Acquired Assets.
(b) Except as set forth in Schedule 3.17(b) to this Agreement, the
Seller is in compliance in all material respects with (x) all permits, licenses
and authorizations required, to be obtained by it under any Environmental Laws,
and (y) all other material limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
any Environmental Laws or contained in any regulation, code, plan, order,
decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder.
(c) Except as set forth in Schedule 3.17(c) to this Agreement, there
is no pending or, to the knowledge of the Seller, threatened civil, criminal or
administrative Action, demand, claim, hearing, notice of violation,
investigation, proceeding, notice or demand letter against the Seller.
(d) Except as set forth in Schedule 3.17(d) to this Agreement, there
are no past or present events, conditions, circumstances, activities, practices,
incidents, Actions or plans that would cause the Seller to be in violation in
any material respect with any Environmental Laws.
Section 3.18 Employee Benefits. Except as set forth in Schedule 3.18 to
this Agreement, the Seller has not maintained, sponsored, adopted, made
contributions to or obligated itself to make contributions to or to pay any
benefits or grant rights under or with respect to any "Employee Pension Benefit
Plan" (as defined in Section 3(2) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), "Employee Welfare Benefit Plan" (as defined in
Section 3(1) of ERISA), "multi-employer plan" (as defined in Section 3(37) of
ERISA), plan of deferred compensation, or other plan providing for the welfare
of any of the Seller's employees or former employees or beneficiaries thereof,
personnel policy (including, without limitation, vacation time, holiday pay,
bonus programs, moving expense reimbursement programs and sick leave), excess
benefit plan, bonus or incentive plan (including, without limitation, stock
options, restricted stock, stock bonus and deferred bonus plans), salary
reduction agreement, change-of-control agreement, employment agreement,
consulting agreement or any other benefit, program or contract (collectively,
the "Employee Benefit Plans"), whether or not written or pursuant to a
collective bargaining agreement, that could give rise to or result in the Seller
having any material debt, liability, claim or obligation of any kind or nature,
whether accrued, absolute, contingent, direct, indirect, known or unknown,
perfected or inchoate or
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otherwise and whether or not due or to become due. Copies of all of the Seller's
Employee Benefit Plans have been made available to the Purchaser and the
Seller's Employee Benefit Plans are in compliance in all material respects with
governing documents and agreements and with all applicable Laws.
Section 3.19 Approvals. Schedule 3.19 to this Agreement sets forth each
material authorization, approval, order, license, permit, franchise and Consent
that is required to be obtained by the Seller in connection with the execution,
delivery and performance of the Acquisition Documents. Except as set forth on
Schedule 3.19 to this Agreement, no authorization, approval, order, license,
permit, franchise or Consent is required to be obtained by the Seller, and no
registration, declaration or filing with any Governmental Authority or any other
Person is required to be made by the Seller, in connection with the execution,
delivery and performance of the Acquisition Documents.
Section 3.20 No Brokers. Neither the Seller nor any of its Affiliates has
entered into any contract, agreement, arrangement or understanding with any
Person or firm that will result in the obligation of the Purchaser to pay any
finder's fee or financial advisory fee, brokerage fee or commission or similar
payment in connection with the transactions contemplated by this Agreement.
Section 3.21 Absence of Undisclosed Liabilities. On the Balance Sheet
Date, there were no Liabilities of the Seller other than those Liabilities
reflected, disclosed or provided for on the Balance Sheet (including the notes
thereto). The Assumed Liabilities shall only include the Liabilities of the
Seller set forth on the Balance Sheet (other than the Excluded Liabilities) and
the Liabilities of the Seller set forth on, or described in, Schedule 3.21 to
this Agreement, and such other liabilities, if any, incurred by the Seller in
the ordinary course of its business after December 31, 1998 that are less than
$50,000 in the aggregate.
Section 3.22 Accounts Receivable. Schedule 3.22 to this Agreement sets
forth all of the outstanding accounts receivables of the Seller, and an aging
schedule for such receivables, as of the date hereof (the "Receivables"). All of
the Receivables have arisen from bona fide transactions in the ordinary course
of the Seller's business. The allowance for doubtful accounts for the
Receivables has been determined in accordance with GAAP consistently applied.
Section 3.23 Accounts Payable. Except as set forth on Schedule 3.23 to
this Agreement, none of the accounts payable of the Seller as of the date hereof
are past due other than those being contested in good faith.
Section 3.24 Insurance Policies. Except as set forth on Schedule 3.24 to
this Agreement, no policy of Seller has been canceled, or has had its premiums
increased (except for workers' compensation) by more than 10% by the issuer
thereof, during the past 18 months.
Section 3.25 Labor Relations. The Seller is not a party to any collective
bargaining agreement. There are no labor strikes, disputes, slow downs, work
stoppages or other labor troubles or grievances pending or, to the knowledge of
the Seller, threatened against or involving
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the Seller. No unfair labor practice complaint before the National Labor
Relations Board, no discharge or grievance before the Equal Employment
Opportunity Commission and no complaint, charge or grievance of any nature
before any similar or comparable state, local or foreign agency, in any case
relating to the Seller or the conduct of its business is pending or, to the
knowledge of the Seller and the Stockholders, threatened. Neither the Seller nor
the Stockholders has received notice, or has knowledge, of the intent of any
Governmental Authority responsible for the enforcement of labor or employment
laws to conduct any investigation of or relating to Seller or the conduct of its
business. To the knowledge of the Seller and the Stockholders, no officer or key
employee of Seller has any plans to terminate his or her employment with the
Seller.
Section 3.26 No Omissions. None of the representations or warranties by
the Seller contained in this Agreement, or in the Schedules and Exhibits to this
Agreement, contains any untrue statement of any material fact, or omits to state
any material fact necessary in order to make the statements contained in any
such representations and warranties not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Seller as of the date
of this Agreement as follows:
Section 4.1 Good Standing. The Purchaser (i) is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, (ii) has full power and authority to own, lease and operate its
properties and assets and to conduct its business as now being conducted, and
(iii) is duly qualified or licensed to do business as a foreign corporation and
is in good standing, in all jurisdictions in which such qualification or
licensing is required, except for such jurisdictions in which the failure to be
duly qualified or licensed would not be reasonably expected to have, either
individually or in the aggregate, a Purchaser Material Adverse Effect. The
Purchaser has made available to the Seller true, correct and complete copies of
the certificates of incorporation and by-laws of the Purchaser and the Parent,
each as amended as of the date of this Agreement.
Section 4.2 Authorization. The Purchaser has full right, authority and
power to (i) enter into and deliver the Acquisition Documents to which it is a
party, (ii) consummate the transactions contemplated by such Acquisition
Documents, and (iii) perform its obligations under such Acquisition Documents.
The Acquisition Documents to which the Purchaser is a party have been duly
executed and delivered by the Purchaser, and such Acquisition Documents are
legal, valid and binding obligations of the Purchaser enforceable against the
Purchaser in accordance with their terms.
Section 4.3 Capitalization. The authorized capital stock of the Parent
consists of 5,000,000 shares of Class A Common Stock, 10,000,000 shares of Class
B Common Stock, par
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value $0.001 per share ("Class B Common Stock"), and 5,000,000 shares of
Preferred Stock, par value $0.001 per share ("Preferred Stock").
Section 4.4 Legal Proceedings. Except as set forth on Schedule 4.4(a) to
this Agreement, there are no Actions pending or, to the knowledge of the
Purchaser, threatened against the Purchaser. Except as set forth on Schedule
4.4(b) to this Agreement, the Purchaser is not in default with respect to any
order, writ, injunction or decree of any Governmental Authority. There is no
action pending or, to the knowledge of the Purchaser, threatened against or
affecting the Purchaser's ability to consummate the transactions contemplated by
this Agreement.
Section 4.5 Contracts. The Purchaser will not be party to any Contracts
immediately prior to the Acquisition other than the Acquisition Documents and
the other Contracts contemplated thereby and, as of the Closing Date immediately
after giving effect to the Acquisition, the Purchaser will not be a party to any
Contract other than the Acquisition Documents, the Contracts contemplated by the
Acquisition Documents, and the Contracts being assumed by the Purchaser from the
Seller in connection with the Acquisition.
Section 4.6 Orders; Decrees. Except as set forth on Schedule 4.6 to this
Agreement, there are outstanding orders, decrees, injunctions, rulings,
decisions, directives, consents, pronouncements or regulations of any court or
any Governmental Authority issued against, or binding on, the Purchaser or any
of its assets.
Section 4.7 Compliance With Law. Except as set forth on Schedule 4.7(a) to
this Agreement, the Purchaser has complied with all applicable Laws in all
material respects. Schedule 4.7(b) to this Agreement sets forth all of the
licenses, permits, consents, approvals, franchises and other authorizations
obtained by the Purchaser from Governmental Authorities. Except as set forth on
Schedule 4.7(b) to this Agreement, the Purchaser has been granted and is in
compliance with, in all material respects, all of its licenses, permits,
consents, approvals, franchises and other authorizations from Governmental
Authorities that are necessary for the operation of its businesses or the
ownership its assets. Except as set forth in Schedule 4.7(c) to this Agreement,
the Purchaser has not received any written notice that any of their licenses,
permits, consents, approvals, franchises and other authorizations from
Governmental Authorities that are necessary for the operation of their
businesses or the ownership of their assets will be revoked, canceled, rescinded
or not renewed.
Section 4.8 Approvals. Schedule 4.8(a) to this Agreement sets forth each
material authorization, approval, order, license, permit, franchise and Consent
that is required to be obtained by the Purchaser in connection with the
execution, delivery and performance of the Acquisition Documents. Except as set
forth on Schedule 4.8(b) to this Agreement, no authorization, approval, order,
license, permit, franchise, or Consent is required to be obtained by the
Purchaser, and no registration, declaration or filing with any Governmental
Authority or any other Person is required to be made by the Purchaser, in
connection with the execution, delivery and performance of the Acquisition
Documents.
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Section 4.9 No Brokers. Except for Mr. William Roberti and as set forth on
Schedule 4.9 of this Agreement, neither the Purchaser nor any of its Affiliates
has entered into any contract, agreement, arrangement or understanding with any
Person that will result in the obligation of the Seller to pay any finder's fee
or financial advisory fee, brokerage fee or commission or similar payment in
connection with the transactions contemplated by this Agreement.
Section 4.10 Absence of Liabilities. The Purchaser will not have any
Liabilities immediately prior to the Acquisition and, except for the Assumed
Liabilities, the Purchaser will not have any Liabilities whatsoever immediately
following the Acquisition.
Section 4.11 Business Activities. The Purchaser is a newly formed wholly
owned subsidiary of the Parent that has been formed for the purpose of
purchasing the Acquired Assets from the Seller. The Purchaser has not had any
business activities prior to the Acquisition.
Section 4.12 No Omissions. None of the representations or warranties by
the Purchaser contained in this Agreement, or in the Schedules and Exhibits to
this Agreement, contains any untrue statement of any material fact, or omits to
state any material fact necessary in order to make the statements contained in
any such representations and warranties not misleading.
ARTICLE V
CONDUCT PRIOR TO THE CLOSING
Section 5.1 Investigation by the Purchaser and the Seller. (a) During the
period from the date of this Agreement through the Closing Date, the Purchaser
may, through its own representatives (including its counsel, accountants and
consultants), make such investigations of the properties, plants and operations
of the Seller and such review of the financial condition of the Seller as the
Purchaser deems necessary or advisable in connection with the transactions
contemplated by this Agreement. The Seller shall authorize and permit the
Purchaser and its representatives to have access during normal business hours,
upon reasonable notice and for reasonable purposes and in such manner as shall
not unreasonably interfere with the conduct of the Seller's business, to (x) the
Seller's officers and premises, and (y) all of the financial books and records
of the Seller, and the Purchaser shall have the right to make copies thereof and
excerpts therefrom; provided, however, that all such information shall be
subject to the Confidentiality Agreement, dated as of April 6, 1999, between the
Seller and the Parent (the "Confidentiality Agreement"). The Seller shall
furnish the Purchaser with such financial and operating data and other
information with respect to the Seller and the Acquired Assets as the Purchaser
may from time to time reasonably request. Upon reasonable advance notice to the
Seller and subject to the Seller's consent and restrictions (such consent not to
be unreasonably withheld), the Seller agrees to permit the Purchaser and its
authorized representatives to visit material suppliers, customers and others
having material business relations with the Seller.
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(b) During the period from the date of this Agreement through the
Closing Date, the Seller may, through its own representatives (including its
counsel, accountants and consultants), make such investigations of the
properties, plants and operations of the Parent and its subsidiaries and such
review of the financial condition of the Parent and its subsidiaries as the
Seller deems necessary or advisable in connection with the transactions
contemplated by this Agreement. The Purchaser shall cause the Parent and its
other subsidiaries to authorize and permit the Seller and its representatives to
have access during normal business hours, upon reasonable notice and for
reasonable purposes and in such manner as shall not unreasonably interfere with
the conduct of the business of the Parent or its other subsidiaries, to (x) the
officers and premises of the Parent and its other subsidiaries, and (y) all
financial books and records of the Parent and its other subsidiaries, and the
Seller shall have the right to make copies thereof and excerpts therefrom;
provided, however, that all such information shall be subject to the
Confidentiality Agreement. The Purchaser will cause the Parent and its other
subsidiaries to furnish to the Seller such financial and operating data and
other information with respect to the business of the Parent and its other
subsidiaries as the Seller may from time to time reasonably request.
Section 5.2 Conduct of Business. The Seller agrees that, unless otherwise
consented to by the Purchaser, from the date of this Agreement until the
Closing:
(a) the Seller shall conduct its Business in the ordinary course
consistent with past practices;
(b) the Seller will use commercially reasonable efforts to:
(i) preserve the Business and to maintain satisfactory
relationships with its material customers, suppliers, distributors and any
other Person that has material business relations with the Seller;
(ii) maintain its tangible assets in good order and repair,
ordinary wear and tear excepted;
(iii) perform its obligations under each Material Contract,
and keep each Material Contract in full force and effect, free from any
right of cancellation, forfeiture or termination (except in accordance
with its terms);
(iv) retain the services of its key officers and employees;
(v) promptly notify the Purchaser of any material adverse
change in the business, assets, financial condition or results of
operations of the Seller; and
(c) without the prior consent of the Purchaser or except with
respect to the Excluded Assets and Excluded Liabilities, the Seller will not:
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(i) incur any liabilities, obligations or indebtedness for
borrowed money or guarantee any such liabilities, obligations or
indebtedness in excess of $10,000 or which has a term of more than one
year other than to an independent third party in the ordinary course of
business consistent with past practices;
(ii) cancel any material indebtedness (other than Excluded
Asset) owed to the Seller other than in the ordinary course of business
consistent with past practices;
(iii) acquire or agree to acquire by merging or consolidating
with, or by purchasing stock or a substantial portion of the assets of, or
by any other manner, any material operating business, corporation,
partnership, association or other business organization (or division
thereof);
(iv) enter into any lease of real property;
(v) modify, amend or terminate any lease of, or other material
agreement pertaining to, real property (except modifications or amendments
associated with renewals of leases in the ordinary course of business),
except for such modifications, amendments or terminations that would not
reasonably be expected to have, individually or in the aggregate, a Seller
Material Adverse Effect;
(vi) except as disclosed on Schedule 3.15 of this Agreement or
in the 1999 Business Plan, make capital expenditures or purchases in
excess of $10,000 in the aggregate;
(vii) increase the compensation of any officer, director or
Stockholder except in the ordinary course of business;
(viii) enter into any material Contract or commitment or incur
any Liability other than in the ordinary course of business consistent
with past practices;
(ix) waive any rights of substantial value affecting the
Acquired Assets;
(x) dispose of, permit to lapse (except pursuant to its
terms), or otherwise fail to use commercially reasonably efforts to
preserve any of its material Intellectual Property, dispose of or permit
to lapse (except pursuant to its terms) any material license, permit or
other form of authorization, or dispose of or disclose any customer list,
trade secret, formula process or know-how to any Person except in the
ordinary course of business consistent with past practices;
(xi) make any change in any method of accounting or accounting
practice or in the application of such method of accounting or accounting
practice;
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(xii) pay, loan or advance any amount to or in respect of, or
sell, transfer or lease any assets (whether real, personal or mixed,
tangible or intangible) to, or enter into any agreement, arrangement or
transaction with, any of its officers or directors, any of its Affiliates
or any Person in which it or any of its officers, directors, Affiliates
has any direct or indirect interest, except for (A) directors' fees and
compensation to its officers and employees, and (B) advances made to
directors, officers and employees for travel and other business expenses
in reasonable amounts consistent with past practices;
(xiii) hire any person that is a relative of any of the
Stockholders;
(xiv) agree, whether in writing or otherwise, to take any
action prohibited by this Section 5.2; or
(xv) distribute any cash to its stockholders other than
salaries paid in the ordinary course of business consistent with past
practices.
Section 5.3 Other Transactions. Except with respect to the Excluded
Assets, the Seller will not, and the Seller shall not permit its directors,
officers and agents to, directly or indirectly, solicit or initiate the
submission of proposals from, or solicit, encourage, entertain or enter into any
arrangement, agreement or understanding with, or engage in any discussions with,
or furnish any information to, any Person other than the Purchaser or a
representative thereof, with respect to the acquisition of all or any part of
the Acquired Assets, except for sales of inventory in the ordinary course of
business consistent with past practices. In the event that the Seller receives
any such offer or inquiry relating to any proposed acquisition of the Acquired
Assets prior to the Closing Date, the Seller will provide the Purchaser with
notice thereof as promptly as practicable, which notice will include the
identity of the prospective offeror and the price and terms of any offer.
Section 5.4. Consents. The Purchaser and the Seller shall each use
commercially reasonable efforts to obtain in writing, prior to the Closing, all
Consents necessary or reasonably required in order to permit it to consummate
the transactions contemplated by this Agreement. To the extent that the
assignment of or the agreement to assign any Contract to the Purchaser under
this Agreement would constitute a breach of that Contract unless the consent or
waiver of another party thereto has been obtained, this Agreement shall not
constitute any such assignment or agreement to assign unless and until such
consent or waiver is obtained. The Purchaser and the Seller agree to use their
commercially reasonable efforts to obtain all such consents and waivers prior to
the Closing Date. If any such consent or waiver is not obtained before the
Closing Date and the Closing is nevertheless consummated, the Seller agrees to
continue to use its commercially reasonable efforts to obtain all such consents
as have not been obtained on or prior to such date and further agrees to
cooperate with the Purchaser after such date in any reasonable arrangement (such
as subcontracting, sublicensing or subleasing) designed to provide for the
Purchaser, on terms commercially reasonable to the Purchaser, the benefits under
the applicable Contracts.
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Section 5.5. Public Announcements. Each of the Parties agree that it will
(x) consult with the other Party before issuing any press releases or otherwise
making any public statements with respect to this Agreement or the transactions
contemplated by this Agreement, and (y) not issue any press release or make any
public statement prior to Closing without the prior written consent of the other
Party, except as may be required by law.
Section 5.6. Employees. On or prior to the Closing, the Purchaser shall
offer employment to all of the employees of the Seller, and the compensation and
benefits offered to each employee shall be at least as favorable as the
compensation and benefits being paid to such employee by the Seller immediately
prior to the Closing Date. In addition, the Purchaser shall (i) assume and pay
with respect to each employee of the Seller all accrued and unpaid compensation
that is not past due, (ii) provide such employee all of his or her unused
vacation time that has accrued on or after January 1, 1999 in a manner
consistent with the past practices of the Seller and (iii) provide such employee
all of his or her unpaid sick pay that has accrued on or after January 1, 1999
in a manner consistent with the past practices of the Seller.
Section 5.7. Notification. Each Party (a "Reporting Party") shall give the
other Party prompt written notice of (i) the existence of any fact or the
occurrence of any event that constitutes, or with the giving of notice or the
passage of time or both would constitute, a material breach of any
representation or warranty of the Reporting Party made in the Acquisition
Documents, and (ii) the taking of any action by the Reporting Party that would
breach or violate, or constitute a default under, any agreement or covenant made
by the Reporting Party in the Acquisition Documents. The giving of any such
notice shall not affect, modify or limit in any way any representation,
warranty, agreement or covenant made by the either Party made in the Acquisition
Documents or the other Party's right to rely thereon.
Section 5.8. Supplemental Disclosure. Each Reporting Party covenants that
until the Closing it shall promptly advise the other Party with respect to any
matter arising or discovered that is outside of the ordinary course of business
that, if existing or known at the date of this Agreement, would have been
required to be set forth or described in a schedule to this Agreement by the
Reporting Party, or that constitutes a breach or prospective breach of this
Agreement by the Reporting Party.
ARTICLE VI
CONDITIONS OF THE PURCHASER'S OBLIGATIONS TO CLOSE
The obligations of the Purchaser under this Agreement are subject to
the conditions set forth below, which conditions may be waived by the Purchaser
in its sole discretion:
Section 6.1 Agreement and Conditions. On or prior to the Closing Date, the
Seller shall have complied in all material respects with all of the covenants,
agreements and conditions to be performed by it pursuant to the Acquisition
Documents on or prior to the Closing Date.
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Section 6.2 Representations and Warranties. The representations and
warranties of the Seller contained in the Acquisition Documents, as amended,
modified or supplemented by the Officer's Certificate to be delivered pursuant
to Section 6.5 of this Agreement, shall be true and correct as of the Closing
Date; provided, however, that without the consent of the Purchaser,
modifications, amendments or supplements to the representations and warranties
of the Seller shall be limited to events, developments and transactions that
occurred after the date of this Agreement (or, if earlier, the effective date of
any such representation or warranty) or that occurred in the ordinary course of
the Seller's business.
Section 6.3 Opinion of Counsel. The Purchaser shall have received an
opinion of Duval & Stachenfeld LLP and the local and special counsel for the
Seller if appropriate, each in form and substance reasonably satisfactory to the
Purchaser.
Section 6.4 No Legal Proceeding. No Action shall have been instituted or
threatened to restrain or prohibit the transactions contemplated by this
Agreement.
Section 6.5 Officer's Certificate. The Purchaser shall have received a
certificate dated the Closing Date and executed by the chief executive officer
and the chief financial officer of the Seller to the effect that the conditions
expressed in Sections 6.1, 6.2 and 6.4 of this Agreement shall have been
satisfied, which shall be in form and substance reasonably satisfactory to the
Purchaser.
Section 6.6 Secretary's Certificate. The Purchaser shall have received a
certificate dated as of the Closing Date and executed by the secretary of the
Seller certifying to (i) the Seller's certificate of incorporation and bylaws;
(ii) the incumbency of all officers of the Seller having authority to execute
and deliver the Acquisition Documents to which the Seller is a party; and (iii)
the resolutions of the Seller's board of directors and stockholders approving
the execution, delivery and performance of the Acquisition Documents to which
the Seller is a party, all of which shall be in form and substance reasonably
satisfactory to the Purchaser.
Section 6.7 Employment Agreement. The Stockholders shall have entered into
employment agreements with the Purchaser, which agreements shall be
substantially in the form of Exhibit C to this Agreement.
Section 6.8 IPO. The Parent shall have received gross proceeds of $50
million or more from the IPO.
Section 6.9 Consents. The Seller and the Purchaser shall have received all
of the authorizations, consents, orders, licenses, permits and approvals
required to be obtained by them from Governmental Authorities and all other
Persons for the consummation of the transactions contemplated by this Agreement,
and each such authorization, consent, order, and approval shall be in form and
substance satisfactory to the Purchaser, including without limitation, the
consent of the Parent's lender.
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Section 6.10 No Change. There shall not have been any change since the
date of this Agreement in the Business or financial condition of the Seller that
has resulted in a Seller Material Adverse Effect.
Section 6.11 Pivot Rules. The Stockholders shall have caused Klearknit,
Inc. to execute and deliver to the Purchaser an assignment and assumption
agreement for the "Pivot Rules" trademark, which agreement shall be in the form
of Exhibit F to this Agreement (the "Pivot Rules Assignment and Assumption
Agreement").
Section 6.12 Colours/Alexander Julian. For no additional consideration by
the Purchaser, the Seller shall have caused the transfer of the
Colours/Alexander Julian license upon its current terms and conditions to the
Purchaser on the Closing Date, which license shall not have been modified
between the date of this Agreement and the Closing Date without the prior
written consent of the Purchaser, and the current term of such license shall
expire no earlier than December 31, 2001, with a renewal option of no less than
five years exercisable at the Purchaser's option.
Section 6.13 Performance by the Seller. The Seller shall have satisfied or
performed all of its liabilities and obligations with respect to its
subordinated indebtedness and pension plan liabilities or, if such liabilities
and obligations have not been paid in full as of Closing, such liabilities and
obligations shall be Excluded Liabilities.
Section 6.14 Working Capital. The Purchaser shall have obtained working
capital financing sufficient to fund its business after the Closing on terms and
conditions reasonably satisfactory to the Purchaser.
Section 6.15 Stockholder Guarantee. Each of the Stockholders shall have
executed and delivered the Stockholder Guarantee and to the Purchaser.
Section 6.16 Board Approval. The Purchaser's Board of Directors shall have
approved the transactions contemplated by the Acquisition Documents.
Section 6.17 Due Diligence. The Purchaser shall be satisfied with the
results of its due diligence investigation of the Seller, which due diligence
shall have been completed no later than three weeks after the date on which all
information requested by the Purchaser has been delivered to the Purchaser.
Section 6.18 Loss, Damage or Destruction. Between the date of this
Agreement and the Closing Date there shall not have been any loss, damage or
destruction to or of any of the assets, property or business of Seller in excess
of $100,000 in the aggregate, nor shall the assets, properties and business of
Seller have been materially adversely affected in any way as a result of any
fire, accident, or other casualty, war, civil strife, riot or act of God or the
public enemy.
Section 6.19 Business Plan. The 1999 Business Plan shall have been
delivered in form and substance reasonably satisfactory to the Purchaser.
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Section 6.20 Seller Note. The Seller shall have executed and delivered the
Seller Note to the Purchaser.
ARTICLE VII
CONDITIONS OF THE SELLER'S OBLIGATIONS TO CLOSE
The obligations of the Seller under this Agreement are subject to
the satisfaction of the conditions set forth below, which conditions may be
waived by the Seller in its sole discretion:
Section 7.1 Agreements and Conditions. On or prior to the Closing Date,
the Purchaser shall have complied in all material respects with all of the
covenants, agreements and conditions to be performed by it pursuant to the
Acquisition Documents on or prior to the Closing Date.
Section 7.2 Representations and Warranties. The representations and
warranties of the Purchaser contained in the Acquisition Documents, as amended,
modified or supplemented by the Officer's Certificate to be delivered pursuant
to Section 7.5 of this Agreement, shall be true and correct as of the Closing;
provided, however, that without the consent of the Seller, modifications,
amendments or supplements to the representations and warranties of the Purchaser
shall be limited to events, developments and transactions that occurred after
the date of this Agreement (or, if earlier, the effective date of any such
representation or warranty) or that occurred in the ordinary course of the
Purchaser's business.
Section 7.3 Opinion of Counsel. The Seller shall have received an opinion
of Scolaro, Shulman, Cohen, Lawler & Burstein, P.C., counsel for the Purchaser,
in form and substance reasonably satisfactory to the Seller.
Section 7.4 No Legal Proceeding. No Action shall have been instituted or
threatened to restrain or prohibit the transactions contemplated by this
Agreement.
Section 7.5 Officer's Certificate. The Seller shall have received a
certificate dated the Closing Date and executed by the chief executive officer
and the chief financial officer of the Purchaser to the effect that the
conditions expressed in Sections 7.1, 7.2 and 7.4 and of this Agreement shall
have been satisfied, which shall be in form and substance reasonably
satisfactory to the Seller.
Section 7.6 Secretary's Certificate. The Seller shall have received a
certificate dated as of the Closing Date and executed by the secretary of the
Purchaser certifying to (i) the certificate of incorporation and bylaws of the
Purchaser and the Parent; (ii) the incumbency of all officers of the Purchaser
and the Parent having authority to execute and deliver the Acquisition Documents
to which the Purchaser and/or the Parent is a party; and (iii) the resolutions
of the boards of directors and stockholders of the Purchaser and the resolutions
of the Parent's board of
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directors approving the execution, delivery and performance of the Acquisition
Documents to which the Purchaser and the Parent is a party, all of which shall
be in form and substance reasonably satisfactory to the Seller.
Section 7.7 Employment Agreement. The Purchaser shall have entered into
employment agreements with each of the Stockholders, which agreements shall be
substantially in the form of Exhibit C to this Agreement.
Section 7.8 Consents. The Seller and the Purchaser shall have received all
of the authorizations, consents, orders, licenses, permits and approvals
required to be obtained by them from Governmental Authorities and all other
Persons (including, without limitations, the consent of Alexander Julian) for
the consummation of the transactions contemplated by this Agreement, and each
such authorization, consent, order and approval shall be in form and substance
satisfactory to the Seller, including without limitation, the consent of the
Seller's lender if required.
Section 7.9 Escrow Agreement. Each of the Purchaser, the Seller and Escrow
Agent shall have executed and delivered to the other the Escrow Agreement, and
the Purchaser shall have deposited the Escrow Amount with the Escrow Agent as
contemplated by Section 2.3(c) of this Agreement.
Section 7.10 Working Capital. The Purchaser shall have obtained working
capital financing sufficient to fund its business after the Closing on terms and
conditions reasonably satisfactory to the Seller.
Section 7.11 Pivot Rules Trademark. The Purchaser shall have executed and
delivered to Klearknit, Inc. the Pivot Rules Assignment and Assumption
Agreement.
Section 7.12 Parent Guarantee. The Parent shall have executed and
delivered the Parent Guarantee to the Seller.
Section 7.13 Purchaser Note. The Purchaser shall have executed and
delivered the Purchaser Note to the Seller.
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ARTICLE VIII
ADDITIONAL COVENANTS AND AGREEMENTS
Section 8.1 Cooperation; Access to Books and Records. From the date of
this Agreement until the Closing, each Party will (i) cooperate with the other
Party, and (ii) use commercially reasonable efforts to have its officers,
directors and other employees cooperate with the other Party. From and after the
Closing, the Purchaser will authorize and permit the Seller and its
representatives to have access during normal business hours, upon reasonable
notice and for reasonable purposes and in such manner as will not unreasonably
interfere with the conduct of the Purchaser's business, to all of the
Purchaser's books and records for tax purposes and any other reasonable purpose
relating to the Seller's rights and obligations under the Agreement. From and
after the Closing, the Seller will authorize and permit the Purchaser and its
representatives to have access during normal business hours, upon reasonable
notice and for reasonable purposes and in such manner as will not unreasonably
interfere with the conduct of the Seller's business, to all of the Seller's
books and records for tax purposes and any other reasonable purpose relating to
Purchaser's rights and obligations under the Agreement.
Section 8.2 Collection of Receivables; Delivery of Mail. The Seller agrees
that the Purchaser shall have the right and authority to (x) collect for the
account of the Purchaser all of the accounts receivable and other assets that
are transferred to the Purchaser pursuant to this Agreement, and (y) endorse
with the name of the Seller any checks received with respect to any such
accounts receivable or other assets. The Seller agrees that it will promptly
transfer and deliver to the Purchaser any cash or other property that the Seller
may receive in respect of any such receivables or other items. The Seller agrees
to deliver to the Purchaser promptly upon receipt any mail, checks or other
documents received by it pertaining to the Acquired Assets or otherwise to the
Business of the Seller (other than with respect to the Excluded Assets) or any
of the Assumed Liabilities. Upon demand of the Purchaser, the Seller shall
promptly repurchase from the Purchaser the accounts receivables assigned from
the Seller to the Purchaser on the Closing Date that are not collected within
120 days after their creation to the extent the amount not collected exceeds the
reserve for doubtful accounts set forth in the Closing Date Balance Sheet;
provided, however, with respect to all of the accounts receivables not collected
due to returned merchandise from Sam's Club returned in the ordinary course of
business, such accounts receivables shall be deemed collected in full for
purposes of this Section 8.2, and with respect to accounts receivables not
collected due to all other returned merchandise, such accounts receivables shall
be deemed collected to the extent of the cost of such returned merchandise for
purposes of this Section 8.2 and the balance of such receivables shall be deemed
uncollectible; provided further, however, if any such merchandise is
subsequently sold, any proceeds received by the Purchaser from such sale in
excess of the cost of such merchandise shall be paid to the Seller if and to the
extent that the Seller has paid any amounts to the Purchaser pursuant to this
Section 8.2 as a result of the return of such merchandise. The Seller shall own,
and shall be entitled to keep, all of the proceeds from the accounts
receivables, if any, repurchased by the Seller from the Purchaser.
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Section 8.3. Confidentiality. (a) The Seller agrees not to, directly or
indirectly, without the prior written consent of the Purchaser, use or disclose
to any Person any information, trade secrets, confidential customer information,
technical data or know-how relating to the Business; provided, however, that
this provision shall not prohibit the Seller's use or disclosure of information
that (i) is or becomes generally available to the public or the industry in
which the Purchaser conducts business other than as a result of disclosure by
the Seller, or (ii) is used by the Seller in any activity or business that is
not the same as, similar to, or competitive with the Business.
(b) Notwithstanding the terms of the Confidentiality Agreement, the
Parent may include information about the Seller in the registration statement
being prepared by the Parent if and to the extent required by applicable Law;
provided, however, that the Seller shall be given ample opportunity to review
any material concerning the Seller that is to be included in such registration
statement, and the Seller shall be permitted to edit and revise all such
material, before any such information is filed with the Securities and Exchange
Commission; provided further that the Parent shall have the final authority as
to the form and content of the information included in such registration
statement; provided further, however, that the Parent hereby agrees to indemnify
and hold harmless the Seller from and against any and all of the Damages
incurred or suffered by the Seller as a result of any material misstatement or
omission included in such registration statement with respect to the Seller if
the Seller has objected in writing to the inclusion of such material in the
registration statement (provided further, however, that no such objection shall
be required with respect to any such material if the Seller has not been given a
reasonable and adequate opportunity to review such material in the registration
statement before it is filed with the Securities and Exchange Commission).
Section 8.4. Further Assurances. Each Party agrees that at any time and
from time to time after the Closing Date, upon the reasonable request of the
other Party, to use commercially reasonable efforts to do, execute, acknowledge
and deliver, or to cause to be done, executed, acknowledged and delivered, all
such further acts, assignments, transfers, powers of attorney and assurances as
may be reasonably necessary or appropriate to carry out the terms and conditions
of this Agreement.
Section 8.5 Advisory Board. The Purchaser shall have an advisory board
(the "Advisory Board") of five persons (or such other number of persons selected
by the Seller, but not less than three persons), all but one of which shall be
designated by the Stockholders and one of which shall be designated by the
Purchaser's Board; provided, however, that if someone other than a Stockholder
is selected to serve as the Chief Executive Officer of the Purchaser, such
person shall also be entitled to serve on the Advisory Board (decisions of the
Advisory Board shall be made by majority vote, with each person being entitled
to one vote). The Advisory Board shall have full control of the day-to-day
operations and affairs of the Purchaser, provided that such control is
consistent with the written strategic annual business plan of the Purchaser
developed by such Advisory Board and approved by the Purchaser's Board; provided
further that such control may be delegated to the chief executive officer of the
Purchaser if such officer is a Stockholder. The Advisory Board shall have no
authority to authorize or approve any action that would be inconsistent with the
strategic annual business plan of the Purchaser then in effect. The
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Advisory Board may adopt procedures and policies with respect to its management,
operations and affairs as a majority of its members determine appropriate. The
Advisory Board shall be entitled to select one member of the operating advisory
board of the Parent.
Section 8.6 Strategic Annual Business Plan. The 1999 Business Plan shall
be the strategic annual business plan of the Purchaser for the remainder of
1999. The strategic annual business plan of the Purchaser for each year shall be
reviewed quarterly by the Advisory Board and the Purchaser's Board and, if there
has been a material change in the Purchaser's business during any such quarter,
the Advisory Board may (and, if requested by the Purchaser's Board, the Advisory
Board shall) prepare a revised strategic annual business plan for the approval
of the Purchaser's Board. On or before September 30 of each fiscal year
beginning in 1999, the Advisory Board shall prepare and submit to the
Purchaser's Board a proposed strategic annual business for the following year
(such strategic annual business plan submitted by the Advisory Board and revised
pursuant to this Section 8.6, the "Proposed Business Plan"). The Purchaser's
Board shall review the Proposed Business Plan and recommend revisions to the
Proposed Business Plan (if any) to the Advisory Board by October 31 of such
year. If revisions are requested by the Purchaser's Board, the Advisory Board
shall revise the Proposed Business Plan as it deems appropriate based on the
revisions proposed by the Purchaser's Board, and the Advisory Board shall submit
a revised Proposed Business Plan to the Purchaser's Board for approval by
November 15 of such year, after which the Advisory Board and the Purchaser's
Board shall work to finalize the Proposed Business Plan; provided, however, that
if the Proposed Business Plan is not approved and adopted by the Purchaser's
Board by the end of business on November 30 of such year, the then current
strategic annual business plan shall remain in effect until a new strategic
annual business plan for the Purchaser has been developed by the Advisory Board
and approved by the Purchaser's Board. The Purchaser's Board and the Advisory
Board shall cooperate in good faith to develop a strategic annual business plan
for each year, and to modify, amend or supplement such plan from time to time as
necessary or appropriate to maximize the Purchaser's Pre-Tax Income during the
period commencing on the Closing Date and ending on December 31, 2004 in a
manner consistent with the fiduciary duties of the Purchaser's Board to its
stockholders.
Section 8.7 Additional Working Capital. The Purchaser shall cause its
business and operations to be funded in accordance with the provisions of
paragraph (c) of Schedule I and Schedule IA to this Agreement.
Section 8.8 Discharge of Liabilities. The Purchaser shall pay, honor and
discharge in full when due and payable all of the Assumed Liabilities as and
when such liabilities become due and payable, and the Seller shall pay honor and
discharge in full all of the Excluded Liabilities as and when such liabilities
become due and payable. Except as provided in Article IX and Section 11.10 of
this Agreement, the Parties acknowledge and agree that the Seller shall have no
liability or responsibility for any fees, costs, expenses or liabilities
incurred by the Purchaser prior to, as a result of, or after the Acquisition,
all of which shall be paid in full by the Parent.
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Section 8.9 Non-Competition of the Seller. Until December 31, 2004, the
Seller shall not engage in any business in the men's apparel industry that
competes with any business in which the Purchaser, the Parent or any of their
affiliates is engaged as of the date of this Agreement.
Section 8.10 Physical Inventory. Prior to the Closing Date, on such date
as requested by the Purchaser on reasonable notice, the Seller shall conduct one
physical inventory, which may be observed by the Purchaser's representatives.
The reasonable fees, costs and expenses of conducting a physical inventory
pursuant this Section 8.10 shall be paid by the Seller.
Section 8.11 Name Change. The Seller shall change its name at or prior to
the Closing.
ARTICLE IX
INDEMNIFICATION
Section 9.1. Indemnification by the Seller. The Seller agrees to indemnify
the Purchaser and its Affiliates, officers, directors, employees, agents and
representatives (collectively, the "Purchaser Indemnitees") against and hold
them harmless from any and all Damages that a Purchaser Indemnitee may sustain
at any time by reason of (i) any Excluded Liability, and (ii) any breach by the
Seller of any of its representations, warranties, covenants or agreements set
forth in the Acquisition Documents.
Section 9.2. Indemnification by the Purchaser. The Purchaser agrees to
indemnify and hold the Seller and its Affiliates, officers, directors,
employees, agents and representatives (collectively, the "Seller Indemnitees")
against and hold them harmless from any and all Damages that a Seller Indemnitee
may sustain at any time by reason of (i) any Assumed Liability, and (ii) any
breach by the Purchaser of any of its representations, warranties, conditions,
covenants or agreements set forth in the Acquisition Documents.
Section 9.3. Procedures for Indemnification. (a) Subject to Section 9.5 of
this Agreement, a Party seeking indemnification under this Article IX (the
"Indemnified Party") shall promptly notify the Party against whom a claim for
indemnification is sought under this Agreement (the "Indemnifying Party") in
writing, which notice shall specify, in reasonable detail, the nature and
estimated amount of the claim and shall include a complete and accurate copy of
any notice, complaint or other information received by the Indemnified Party
with respect to such claim. If a claim by a third party is made against an
Indemnified Party, and if the Indemnified Party intends to seek indemnity with
respect thereto under this Article IX, the Indemnified Party shall promptly (but
in no event longer than 30 days ("Indemnity Notice Period") of such claim being
made) notify the Indemnifying Party of such claim and the reasonable details
thereof, including a complete and accurate copy of any notice, complaint or
other information received by the Indemnified Party with respect to such claim;
provided, however, that any failure by an Indemnified Party to notify the
Indemnifying Party of a claim within the Indemnity Notice Period for such claim
shall not affect the Indemnified Party's right to indemnification under the
Article IX except (and then only) to the extent that the Indemnifying
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Party is actually prejudiced by such failure. The Indemnifying Party shall have
30 days after receipt of such notice to undertake, conduct and control, through
counsel of its own choosing and at its expense, the settlement or defense
thereof, and the Indemnified Party shall cooperate with it in connection
therewith, except that with respect to settlements entered into by the
Indemnifying Party (i) the consent of the Indemnified Party shall be required if
the settlement provides for equitable relief against, or otherwise adversely
affects, the Indemnified Party, which consent shall not be unreasonably withheld
or delayed; and (ii) the Indemnifying Party shall obtain a complete release of
the Indemnified Party. If the Indemnifying Party undertakes, conducts and
controls the settlement or defense of such claim, the Indemnifying Party shall
permit the Indemnified Party to participate in such settlement or defense
through counsel chosen by the Indemnified Party, provided that the fees and
expenses of the Indemnified Party's counsel shall be borne by the Indemnified
Party.
(b) With respect to third party claims, if the Indemnifying Party
does not notify the Indemnified Party within the Indemnity Notice Period after
receipt of the Indemnified Party's notice of a claim of indemnity under this
Agreement that it elects to undertake the defense thereof, the Indemnified Party
shall have the right, but not the obligation, to contest, settle or compromise
the claim in the exercise of its reasonable judgment at the expense of the
Indemnifying Party. However, the Indemnified Party shall not pay or settle any
claim so long as the Indemnifying Party is reasonably contesting any such claim
in good faith on a timely basis; provided further, however, that notwithstanding
the foregoing, the Indemnified Party shall have the right to pay or settle any
such claim if it waives any right to indemnity from the Indemnifying Party with
respect to such claim.
(c) In the event of any claim by a third party against an
Indemnified Party, the defense of which is being undertaken and controlled by
the Indemnifying Party, the Indemnified Party will use all reasonable efforts to
make available to the Indemnifying Party those employees whose assistance,
testimony or presence is necessary or appropriate to assist the Indemnifying
Party in evaluating and in defending any such claims.
(d) With respect to third party claims, the Indemnified Party shall
make available to the Indemnifying Party or its representatives on a timely
basis all documents, records and other materials in the possession of the
Indemnified Party, at the expense of the Indemnifying Party, reasonably required
by the Indemnifying Party for its use in defending any claim and shall otherwise
cooperate in good faith and on a timely basis with the Indemnifying Party in the
defense of such claim.
(e) With respect to any re-assessment for income, corporate, sales,
excise, or other tax or other liability enforceable by a lien or other
encumbrance against the property of the Indemnified Party, the Indemnifying
Party's right to contest such re-assessment shall only apply after the payment
of such re-assessment or the provision of such security as is necessary to avoid
any lien or other encumbrance being placed on the property of the Indemnified
Party.
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(f) Notwithstanding anything to the contrary set forth in this
Article IX, the Parties shall not be entitled to indemnification or set-off with
respect to any matter set forth in Sections 9.1 or 9.2 of this Agreement (each,
a "Disputed Matter") until the Disputed Matter is finally resolved as provided
in this Section 9.3(f). For a period of 30 days following the giving of the
notice of any Disputed Matter as provided in this Section 9.3, the Parties to
this Agreement shall attempt to resolve any differences they may have with
respect to such Disputed Matter. If a resolution is not reached within such
30-day period (unless the Parties to this Agreement mutually agree in writing to
extend such period), the Disputed Matter shall be resolved by binding
arbitration as set forth in Section 11.10 of this Agreement.
Section 9.4 Indemnification Threshold and Ceilings. Notwithstanding
anything to the contrary in this Agreement, the Parties agree that an
Indemnified Party shall not seek indemnification for Damages unless and until
such Indemnified Party's claim or claims for Damages are at least $50,000 in the
aggregate (the "Indemnification Threshold"). After the Indemnification Threshold
is reached, any Indemnified Party may seek indemnification for the total amount
of such Damages pursuant to the procedures set forth in this Article IX;
provided, however, that:
(i) the absolute maximum aggregate amount of the Seller's liability
for Damages suffered by the Purchaser Indemnitees shall be limited as
follows:
(A) with respect to title, federal, state and local taxes or
assessments or any similar charges (whether foreign or domestic) and
liabilities arising from a breach of any environmental
representations and warranties in Section 3.17 of this Agreement,
the aggregate amount of the Purchase Price actually paid to the
Seller; and
(B) with respect to all other matters, up to $10,000,000 in
the aggregate;
(ii) the absolute maximum aggregate amount of the Purchaser's
liability for Damages suffered by the Seller Indemnitees shall be limited
as follows;
(A) with respect to the non-payment of any part of the
Purchase Price that has become due and payable to the Seller
pursuant to the terms of this Agreement (including, without
limitation, all of the Installment Payments, Postponed Payments and
Deferred Payments that become payable pursuant to the terms of this
Agreement), the aggregate unpaid amount of the Purchase Price plus
interest thereon at a rate equal to the borrowing rate then in
effect under the Purchaser's working capital facility (or, if there
is none, the borrowing rate then in effect under the Parent's
working capital facility) plus all reasonable fees, costs and
expenses paid or incurred by the Seller to collect any such unpaid
amount less all Forfeited Payments, if any; and
(B) with respect to all other matters, up to $10,000,000 in
the aggregate;
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(iii) the amount of any Damages payable to an Indemnified Party
pursuant to this Article IX shall be net of any tax benefits, insurance
proceeds, and damages derived from third party claims by such Indemnified
Party on account of, or in connection with, such Damages; and
(iv) notwithstanding anything to the contrary in this Agreement, in
the case of fraud or intentional misrepresentation by either Party in
connection with the transactions contemplated by the Agreement, the other
Party shall have all of the remedies available to it at law and at equity
without giving effect to any of the limitations set forth in this Section
9.4.
Section 9.5 Survival of Representations: Effect of Certificates. The
representations and warranties of the Parties in the Acquisition Documents shall
survive the Closing for a period of 18 months from the Closing Date, except the
representations and warranties contained in (i) Sections 3.5 and 4.3 of this
Agreement, which shall survive indefinitely, (ii) Section 3.4 of this Agreement,
which shall survive until the expiration of the applicable statute of
limitations with respect to the matters contained in such section, and (iii)
Section 3.17 of this Agreement, which shall survive for a period of ten years
from the Closing Date with respect to environmental conditions pertaining to the
warehouse and distribution center and related real property that was used by the
Seller in connection with its Business, and all other matters contained in
Section 3.17 of this Agreement shall survive for a period of six years from the
Closing Date. Notwithstanding anything in this Agreement to the contrary, any
Damages as to which a notice of claim for indemnification under this Article IX
has been given in writing prior to the expiration of the applicable period set
forth in this Section 9.5 shall survive until payment or other final resolution
of such indemnification claim as provided in this Agreement.
ARTICLE X
TERMINATION
Section 10.1 Termination. This Agreement may be terminated at any time
prior to the Closing by any of the following:
(a) by mutual written agreement of the Purchaser and the Seller;
(b) by either Party if the Closing has not occurred by October 31,
1999 upon written notice by such terminating Party;
(c) by either Party if the Parent terminates its efforts to raise
capital pursuant to the IPO;
(d) by either Party if the Parent or the underwriters to the IPO
terminate the underwriting agreement to be entered into by them in connection
with the IPO; or
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(e) by the Purchaser if the licensor of the Colours/Alexander Julian
license has not consented to the transfer of such license from the Seller to the
Purchaser by July 19, 1999; provided, however, that such right shall expire if
not exercised within five Business Days after the delivery of such consent to
the Purchaser; or
(f) by the Purchaser if the Seller does not deliver the 1999
Business Plan to the Purchaser, in a form approved by the Purchaser, by July 19,
1999; provided, however, that such right shall expire if not exercised within
five Business Days after the delivery of such plan to the Purchaser.
Section 10.2 Effect of Termination. In the event of the termination of
this Agreement pursuant to Section 10.1 of this Agreement, this Agreement shall
become void and have no effect, without any liability to any Party or any other
Person with respect to, or under, this Agreement or in connection with the
transactions contemplated by this Agreement, except as specified in Section 11.1
of this Agreement and except for any liability resulting from a Party's
intentional breach of its representations, warranties covenants and agreements
in the Acquisition Documents.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Fees and Disbursements. Except as provided in this Agreement
with respect to the arbitration of any disputed matters and except as otherwise
expressly provided in this Agreement, the Seller and the Purchaser shall each
bear its own expenses, costs and fees (including attorneys' and auditors' fees
and expenses) in connection with the transactions contemplated by this
Agreement, including the preparation, execution, delivery and performance of
this Agreement. Notwithstanding the foregoing, the Purchaser shall reimburse the
Seller for all of the reasonably incurred costs, fees and expenses (including
the fees and expenses of the Seller's legal and financial advisors) up to an
amount not to exceed $225,000 if (i) the Acquisition fails to close (a) as a
result of the Purchaser being unable to arrange adequate financing prior to
October 31, 1999, or (b) the Purchaser has breached any of its representations,
warranties, covenants or agreements in the Acquisition Documents in any material
respect, including its agreement to use good faith and commercially reasonable
efforts to cause the conditions of the Closing to be satisfied, and (ii) the
Seller has not breached any of its covenants or agreements in the Acquisition
Documents in any material respect, including its agreement to use good faith and
commercially reasonable efforts to cause the conditions to the Closing to be
satisfied.
Section 11.2 Notices. All notices, requests, demands and other
communications provided for by this Agreement shall be in writing and shall be
deemed to have been given when hand delivered, when received if sent by
telecopier or by same day or overnight recognized commercial courier service or
three business days after being mailed in any general or branch office of the
United States Postal Service, enclosed in a registered or certified postpaid
envelope,
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addressed to the address of the parties stated below (or to such changed address
as such party may have fixed by notice pursuant to this Section 11.2):
To the Seller: Windsong, Inc.
1599 Post Road East
Westport, Connecticut 06880
Fax: (203) 319-3600
Attn: Joseph Sweedler
William Sweedler
with a copy to:
Duval & Stachenfeld LLP
405 Lexington Avenue
New York, New York 10174-3299
Fax: (212) 883-8883
Attn: Patrick W. Duval
Harsha Murthy
To the Purchaser: Windsong Acquisition Corp.
7400 Morgan Road
Liverpool, New York 13090
Fax: (315) 451-5459
Attn: Richard C. Pietrafesa, Jr.
with a copy to:
Scolaro, Shulman, Cohen, Lawler & Burstein, P.C.
90 Presidential Plaza
Syracuse, New York 13202
Fax: (315) 425-3621
Attn: Richard S. Scolaro
Todd S. Smith
Section 11.3 Entire Agreement. The Acquisition Documents set forth the
entire agreement and understanding between the Parties and merges and supersedes
all prior discussions, agreements and understandings of every kind and nature
among them as to the subject matter hereof (including, without limitation, the
Letter of Intent, dated May 12, 1999) other than the Confidentiality Agreement,
which shall survive until the Closing.
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Section 11.4 Taxes. Any Taxes in the nature of a sales or transfer tax
(including any realty transfer tax or realty gains transfer tax) payable on the
sale or transfer of all or any part of the Acquired Assets or the consummation
of any other transaction contemplated by this Agreement, of up to $20,000 in the
aggregate, shall be shared equally between the Seller and the Purchaser, and
such taxes that exceed $20,000 shall be paid by the Purchaser.
Section 11.5 GOVERNING LAW. THIS AGREEMENT AND ITS VALIDITY, CONSTRUCTION
AND PERFORMANCE SHALL BE GOVERNED IN ALL RESPECTS BY THE LAWS OF THE STATE OF
NEW YORK, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
Section 11.6 Benefit of Parties' Assignment. This Agreement shall be
binding upon and shall inure to the benefit of the Parties and their successors
and assigns. This Agreement may not be assigned by the Seller or the Purchaser
without the prior written consent of the other Party assign to Party without
consent; provided, however that the Purchaser may assign this Agreement to the
Parent without the consent of the Seller if the Parent assumes all of the
Purchaser's obligations under this Agreement.
Section 11.7 Pronouns. Whenever the context requires, the use in this
Agreement of a pronoun of any gender shall be deemed to refer also to any other
gender, and the use of the singular shall be deemed to refer also to the plural.
Section 11.8 Headings. The headings in the Sections, Schedules and
Exhibits of this Agreement are inserted for convenience of reference only and
shall not constitute a part hereof. The words "herein" "hereof, " "hereto" and
"hereunder," as well as other words of similar import, refer to this Agreement
as a whole and not to any particular provision of this Agreement.
Section 11.9 Knowledge. As it pertains to the Seller, when used in this
Agreement, the phrases "to the knowledge of" or derivatives thereof shall mean
the actual knowledge of the Stockholders and the knowledge that reasonable
persons serving in the same or substantially similar capacities, acting
prudently under similar circumstances, would be expected to have. As it pertains
to the Purchaser, when used in this Agreement, the phrases "to the knowledge of"
or derivatives thereof shall mean the actual knowledge of the Chief Executive
Officer, the Chief Financial Officer and the Chief Operating Officer of the
Parent and the knowledge that reasonable persons serving in the same or
substantially similar capacities, acting prudently under similar circumstances,
would be expected to have.
Section 11.10 Consent to Arbitration. The Parties agree to submit, and
consent to the binding resolution of any dispute, claims or controversy under
this Agreement, to resolution by arbitration in accordance with the rules of the
American Arbitration Association in the City of New York. Any such arbitration
shall be conducted by a panel of at least three arbitrators, an equal number of
whom shall be appointed by each Party and the balance of whom shall be mutually
agreed by the arbitrators so appointed; provided, however, that with respect to
disputed matters pertaining to (i) the calculation of Pre-Tax Income for any
year, (ii) the adjustment of Pre-Tax Income Target for any year, (iii) the
calculation of Projected Pre-Closing Taxes, or (iv)
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the calculation of Pre-Closing Income Taxes, the arbitrators may, in their
discretion, retain an independent public accounting firm to advise them in
connection with such dispute, and the cost of retaining such accounting firm
shall be paid by the Parties as provided below in this Section 11.10; provided
that such accounting firm does not at the time of retention provide, and has not
in the prior two (2) years provided, services to the Seller or the Purchaser (or
to any of their Affiliates). The arbitrators shall, as promptly as practicable
and in no event later than 90 days following the date of its retention, resolve
the dispute(s) between the Seller and the Purchaser; provided, however, that the
arbitrators may extend the time in which any dispute is to be resolved if and to
the extent that the arbitrators determine that such extension is necessary to
resolve the dispute. Payment of all the fees, costs and expenses incurred in
connection with a dispute (including, without limitation, the costs of reviewing
books, records and working papers) shall be allocated between the Parties as
follows: (i) if the Seller is awarded all of the amount in dispute, the
Purchaser shall reimburse the Seller for all of its reasonable fees, costs and
expenses; (ii) if the Seller is awarded a portion of the amount in dispute, (a)
the Purchaser shall reimburse the Seller an amount equal to the product of the
total amount of the reasonable fees, costs and expenses incurred by the Seller
multiplied by a fraction, the numerator of which shall be equal to the amount
that the Seller is awarded and the denominator of which shall be equal to the
amount that was in dispute, and (b) the Seller shall reimburse the Purchaser an
amount equal to the product of the total amount of the reasonable fees, costs
and expenses incurred by the Purchaser multiplied by a fraction, the numerator
of which shall be equal to the difference of the amount that was in dispute
minus the amount that was awarded to the Seller and denominator of which shall
be equal to the amount that was in dispute; and (iii) if the Purchaser is
awarded all of the amount in dispute, the Seller shall reimburse the Purchaser
for all of its reasonable fees, costs and expenses. All arbitration awards made
pursuant to this Section 11.10 shall be final and binding upon the Purchaser and
the Seller, and shall be deemed a final arbitration award that is enforceable
pursuant to the terms of the Federal Arbitration Act, 9 U.S.C. ss.ss. 1 et seq.
(b) The arbitration procedures set forth in this Section 11.10 shall
be the sole and exclusive method for the resolution of all disputes and
disagreements between the Seller and the Purchaser with respect to this
Agreement, and such procedures shall be in lieu of all other or alternative
judicial or dispute resolution procedures. The Seller and the Purchaser hereby
waive all defenses and challenges to the arbitration procedures set forth in
this Section 11.10, (including, without limitation, (i) exclusivity, (ii)
jurisdiction and venue, and (iii) costs and damages).
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IN WITNESS WHEREOF, the Seller and the Purchaser have caused this
Agreement to be duly executed as of the day and year first above written.
WINDSONG ACQUISITION CORP.
By: /s/ Richard C. Pietrafesa, Jr.
-------------------------------------
Richard C. Pietrafesa, Jr.
President
WINDSONG, INC.
By: /s/ Joseph Sweedler
-------------------------------------
Joseph Sweedler
President
<PAGE>
SCHEDULE I
(a) General. The provisions of this Schedule I are applicable only during such
times that the Purchaser does not have its own working capital facility.
In calculating Pre-Tax Income of the Purchaser for the purpose of
determining whether the Pre-Tax Income Targets have been achieved for any
year, the business of the Purchaser (the "Business") shall be treated as
an independent and separate business for accounting purposes except as
otherwise provided (and then only to the extent expressly provided) in the
Agreement.
(b) Accounts receivable. Reserves for delinquent accounts, sales, returns and
allowances will be maintained in accordance with GAAP consistently
applied. The effect of an increase or decrease of delinquent accounts on
Pre-Tax Income for any period shall be determined in accordance with GAAP
consistently applied.
(c) Funding and Operation of the Business. The Purchaser shall maintain its
own checking account and checks on such account will be issued by the
accounting department of the Purchaser. The Parent will fund such account
on a daily basis to meet all ordinary course expenses of operating the
Business and all other expenses consistent with the strategic annual
business plan of the Purchaser then in effect (as modified as a result of
any quarterly reviews by the Advisory Board and the Purchaser's board of
directors). All expenses of the Purchaser that are not in the ordinary
course of its business or that are not consistent with the approved
strategic annual business plan of the Purchaser then in effect shall
require the approval of the Purchaser's board of directors.
(d) Allocations of Overhead. Except as otherwise provided in the Agreement,
all direct operating costs of the Purchaser shall be charged to the
Purchaser for purposes of determining its Pre-Tax Income. The operating
costs shall include all costs of operating the Business, including all
payroll (including bonuses other than the bonuses payable to the
Stockholders as a result of the Pre-Tax Income exceeding the Pre-Tax
Income Targets, which shall be excluded in the calculation of Pre-Tax
Income), health insurance, payroll processing, payroll taxes and other
costs directly related to the operation of the Business that are paid by
the Parent (but excluding all transaction fees, costs and expenses
incurred in connection with, or as a result of, the Acquisition). All
persons who are primarily engaged in the operation of the Business shall
be employees of the Purchaser and not the Parent. In addition, for
purposes of determining its Pre-Tax Income, the Purchaser shall be charged
its pro rata share (as determined below) of the following overhead costs
of the Parent:
(i) the costs of any additional staff or consultants hired by the
Purchaser after the Closing that are required to perform the accounting
functions of the Parent and all of its subsidiaries;
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(ii) the costs of any additional management information system
investment after the Closing Date that is required to carry out the
operations of the Parent and all of its subsidiaries, excluding any costs
incurred in connection with any Year 2000 maintenance, upgrade or
compliance programs of the Parent or any of its other subsidiaries;
(iii) legal, accounting and other expenses related to the reporting
and other obligations of the Parent as a public company, provided that:
(A) for the year 1999, the amount allocable to the Purchaser
shall be equal to the product of (x) the actual amount of such costs
incurred by the Parent during 1999 that would have been allocated to the
Purchaser on the basis of its gross revenues as provided below if the
Acquisition had occurred on January 1, 1999, and (y) a fraction, the
numerator of which shall be equal to the number of days in the period
commencing on the Closing Date and ending on December 31, 1999 and the
denominator of which shall be equal to 365; provided, however, that the
amount allocable to the Purchaser for the year 1999 shall not exceed
$50,000; and
(B) in each year after 1999, the amount allocable to the
Purchaser shall not exceed the product of (i) the amount allocable to the
Purchaser for the immediately preceding year (based on a full year's
allocation for the year 1999), and (ii) a fraction, the numerator of which
shall be equal to the Pre-Income Tax Target for the current year and the
denominator of which shall be equal to the Pre-Income Tax Target for the
immediately preceding year; and
(iv) legal and other transaction fees and expenses payable by the
Parent in connection with any working capital and term financing
originated by the Parent on or after the Closing Date that is used by the
Purchaser.
To the extent practicable, overhead costs shall be allocated among the
Purchaser, the Parent and the Parent's other subsidiaries based on their
usage of the personnel, programs, financings, benefits or other assets
that gave rise to such overhead costs. Overhead costs that cannot be
allocated based on usage shall be allocated to the Purchaser as follows:
The Purchaser's pro rata share of such overhead costs during any
period shall be equal to the product of such overhead costs during
such period and a fraction, the numerator of which shall be equal to
the gross revenues of the Purchaser during such period and the
denominator of which shall be equal to the aggregate gross revenues
of the Purchaser, the Parent and all of the other subsidiaries of
the Parent. In the event that the revenues of the Parent or any of
its subsidiaries is based on commissions or royalties, then the
gross revenues of each such company that is used in calculating the
allocations of overhead costs shall include
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the amount of gross sales on which such commission or royalty is
based.
Notwithstanding the foregoing, the Purchaser shall not be allocated any of
the overhead costs of the Parent and its subsidiaries or any of its other
affiliates for any period prior to the Closing Date.
(e) Capital Costs. For purposes of calculating Pre-Tax Income, subject to the
terms of the Agreement (including, without limitation, the terms of
Section 2.3(c) of the Agreement) and subject to the terms of subsections
(f) and (g) of this Schedule I, the Purchaser may be charged interest by
the Parent on a monthly basis based on the working capital requirements of
the Purchaser. For purposes of calculating such interest expense, working
capital of the Purchaser at any time shall be defined as the current
assets of the Purchaser at such time less the current liabilities of the
Purchaser at such time (provided that such current liabilities shall
exclude any taxes payable by the Purchaser). The basis for the working
capital charge for any month shall be an amount (the "Charge Amount")
equal to (i) the average working capital balance of the Purchaser at the
end of such month and the end of the prior month, minus (ii) the amount of
Net Distributed Cash (as defined below). If the Charge Amount is positive
at the end of any month, the Purchaser will be charged interest on the
positive balance, which shall be calculated as follows: (1) the Debt
Principal (as defined below) multiplied by the weighted average of the
prevailing interest rate under the Parent's working capital facility
during such month, divided by 12, plus (2) the Equity Principal (as
defined below) multiplied by 35%, divided by 12. For purposes hereof, (x)
the term "Debt Principal" with respect to any month shall mean the lesser
of (A) the amount of the Purchaser's current assets at the end of such
month that would constitute "eligible collateral" under the Parent's
working capital facility, and (B) the Charge Amount, (y) the term "Equity
Principal" means the amount, if any, by which the Charge Amount exceeds
the Debt Principal, and (z) the term "Net Distributed Cash" means, with
respect to any fiscal year of the Purchaser, the amount, if any, by which
the amount of cash distributed from the Purchaser to the Parent since the
first day of such fiscal year (or the Closing Date for the year 1999)
exceeds the amount of cash provided to the Purchaser by the Parent since
the first day of such fiscal year (or the Closing Date for the year 1999),
provided that such amount may not be less than $0. If the Charge Amount is
negative at the end of any month, the Parent shall be charged interest on
the negative balance, which interest expense shall be equal to the amount
of the negative balance multiplied by the weighted average of the
prevailing interest rate under the Parent's working capital facility
during such month, divided by 12.
The Purchaser's Pre-Tax Income shall be (i) reduced by the amount of
interest charged to it pursuant to the preceding paragraph, and (ii)
increased by the amount of interest charged to the Parent pursuant to the
preceding paragraph.
(f) Transaction Costs. Notwithstanding any provision in the Agreement to the
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contrary, except for the Assumed Liabilities that are being assumed and
paid by the Purchaser as provided in the Agreement, all of the fees,
expenses, costs and liabilities incurred by the Seller, the Purchaser and
the Parent in connection with, or as a result of, the Acquisition, will be
the responsibility of the Party that incurred such fees, expenses, costs
and liabilities; provided, however, that none of such fees, expenses,
costs or liabilities incurred by the Purchaser will be funded by the
Purchaser's working capital facility or other assets and that none of such
fees, expenses, costs or liabilities (including, without limitation, any
amortization or depreciation expenses of the Purchaser or the Parent)
shall reduce the Pre-Tax Income of the Seller or the Purchaser for
purposes of determining whether the Purchaser has achieved its Pre-Tax
Income Targets for any year.
(g) Acquisition Related Payments. Notwithstanding any provision in the
Agreement to the contrary, none of the amounts payable by the Purchaser to
the Seller pursuant to the Agreement (including, without limitation, the
Purchase Price, the Installment Payments, Damages, and any fees, costs and
expenses incurred in connection with any dispute between the Purchaser and
the Seller), and none of the amounts payable to the Stockholders pursuant
to the Employment Agreements other than their base salaries, shall reduce
the Pre-Tax Income or working capital of the Purchaser. In addition,
notwithstanding anything to the contrary in the Agreement, the Purchaser
shall not be charged interest on any funds contributed or advanced by the
Parent or any of its affiliates to the Purchaser to pay any such
acquisition related payment or any part thereof.
<PAGE>
SCHEDULE IA
(a) General. The provisions of this Schedule IA are applicable only during
such times that the Purchaser has its own working capital facility. In
calculating Pre-Tax Income of the Purchaser for the purpose of determining
whether the Pre-Tax Income Targets have been achieved for any year, the
business of the Purchaser (the "Business") shall be treated as an
independent and separate business for accounting purposes except as
otherwise provided (and then only to the extent expressly provided) in the
Agreement.
(b) Accounts receivable. Reserves for delinquent accounts, sales, returns and
allowances will be maintained in accordance with GAAP consistently
applied. The effect of an increase or decrease of delinquent accounts on
Pre-Tax Income for any period shall be determined in accordance with GAAP
consistently applied.
(c) Funding and Operation of the Business. The Purchaser shall maintain its
own checking account and checks on such account will be issued by the
accounting department of the Purchaser. Working capital requirements of
the Business shall be funded from the Finova Factoring Arrangement (the
"Finova Credit Line") or any other credit line of the Purchaser. All costs
associated with the Finova Credit Line or any other credit line of the
Purchaser shall be included in the calculation of the Purchaser's Pre-Tax
Income (excluding all of the transaction and other costs incurred as a
result of the Acquisition, which shall not be included in the calculation
of the Purchaser's Pre-Tax Income). On a monthly basis, to the extent
permitted by the Finova Credit Line or any other credit line of the
Purchaser, the Purchaser shall transfer to the Parent the "free cash flow"
of the Purchaser as reported in the monthly financial statements of the
Purchaser. For purposes of this schedule, the term "free cash flow" shall
mean earnings before interest, taxes, depreciation and amortization minus
interest expense, taxes, amortization of the principal amount of
outstanding loans, capital lease expenses, reserves to fund anticipated
working capital requirements, amounts payable under the Finova Credit Line
or any other credit line of the Purchaser, and capital expenditures.
If at any time the Purchaser requires additional working capital above the
amount that is available under the Finova Credit Line or any other credit
line of the Purchaser, subject to the availability of funds to the Parent
taking into consideration the current and anticipated cash needs of the
Parent and its subsidiaries (including the Purchaser), the Parent shall
provide such working capital advance to the Purchaser. For purposes of
calculating the Pre-Tax Income of the Purchaser for any fiscal year,
subject to the terms of the Agreement (including, without limitation, the
terms of Section 2.3(c) of the Agreement), the Purchaser shall be charged
for any such working capital advance made by the Parent to the Purchaser
during such fiscal year as follows: (i) to the extent that on any day the
aggregate outstanding amount of the advances from the Parent to the
Purchaser since the first day of such fiscal
<PAGE>
year (or the Closing Date for the year 1999) is less than the aggregate
amount of free cash flow previously transferred from the Purchaser to the
Parent since the first day of such fiscal year (or the Closing Date for
the year 1999), the Purchaser shall not be charged any interest on such
advance, (ii) in the event that the preceding clause (i) does not apply to
any advance (or any part of an advance), to the extent that funds for such
advance (or part thereof) are available under the Parent's working capital
facility, the Purchaser shall be charged a monthly interest on such
advance (or part thereof) equal to the Parent's prevailing interest rate
under its working capital facility, and (iii) to the extent that the
preceding clause (i) and clause (ii) does not apply to any advance (or any
part of an advance), the funds ("equity financing") provided by the Parent
to the Purchaser for such advance (or part thereof) shall result in a
monthly interest charge to the Purchaser of 35% per annum with respect to
such advance (or part thereof). All interest charges shall be based on the
actual number of days that such financing remains outstanding, and all
transfers of cash from the Purchaser to the Parent shall reduce the amount
of the advances from the Parent to the Purchaser (with all outstanding
equity financing being deemed repaid before any other advance is deemed
repaid). All interest charged to the Purchaser with respect to working
capital advances from the Parent for any period shall reduce the Pre-Tax
Income of the Purchaser for such period.
To the extent that the aggregate amount of the funds provided by the
Purchaser to the Parent at any time during any fiscal year exceeds the
amount of funds provided by the Parent to the Purchaser at such time, the
Parent will be charged interest on such excess amount at the prevailing
rate under the Finova Credit Line or other credit line of the Purchaser,
and any such interest charge shall increase the Pre-Tax Income of the
Purchaser during the period that such advance remains outstanding.
(d) Allocations of Overhead. Except as otherwise provided in the Agreement,
all direct operating costs of the Purchaser shall be charged to the
Purchaser for purposes of determining its Pre-Tax Income. The operating
costs shall include all costs of operating the Business, including all
payroll (including bonuses other than the bonuses payable to the
Stockholders as a result of the Pre-Tax Income exceeding the Pre-Tax
Income Targets, which shall be excluded in the calculation of Pre-Tax
Income), health insurance, payroll processing, payroll taxes and other
costs directly related to the operation of the Business that are paid by
the Parent (but excluding all transaction fees, costs and expenses
incurred in connection with, or as a result of, the Acquisition). All
persons who are primarily engaged in the operation of the Business shall
be employees of the Purchaser and not the Parent. In addition, for
purposes of determining its Pre-Tax Income, the Purchaser shall be charged
its pro rata share (as determined below) of the following overhead costs
of the Parent:
(i) the costs of any additional staff or consultants hired by the
Parent after the Closing Date that are required to perform the accounting
functions of the Parent and all of its subsidiaries;
<PAGE>
(ii) the costs of any additional management information system
investment after the Closing Date that is required to carry out the
operations of the Parent and all of its subsidiaries, excluding any costs
incurred in connection with any Year 2000 maintenance, upgrade or
compliance programs of the Parent or any of its other subsidiaries;
(iii) legal, accounting and other expenses related to the reporting
and other obligations of the Parent as a public company, provided that:
(A) for the year 1999, the amount allocable to the Purchaser
shall be equal to the product of (x) the actual amount of such costs
incurred by the Parent during 1999 that would have been allocated to
the Purchaser on the basis of its gross revenues as provided below
if the Acquisition had occurred on January 1, 1999, and (y) a
fraction, the numerator of which shall be equal to the number of
days in the period commencing on the Closing Date and ending on
December 31, 1999 and the denominator of which shall be equal to
365; provided, however, that the amount allocable to the Purchaser
for the year 1999 shall not exceed $50,000; and
(B) in each year after 1999, the amount allocable to the
Purchaser shall not exceed the product of (i) the amount allocable
to the Purchaser for the immediately preceding year (based on a full
year's allocation for the year 1999), and (ii) a fraction, the
numerator of which shall be equal to the Pre-Tax Income Target for
the current year and the denominator of which shall be equal to the
Pre-Tax Income Target for the immediately preceding year; and
(iv) legal and other transaction fees and expenses payable by the
Parent in connection with any working capital and term financing
originated by the Parent on or after the Closing Date that is used by the
Purchaser; provided, however, that no such fees and expenses shall be
allocated to the Purchaser during any period in which the Finova Credit
Line or any other credit line of the Purchaser is in effect.
To the extent practicable, overhead costs shall be allocated among the
Purchaser, the Parent and the Parent's other subsidiaries based on their
usage of the personnel, programs, financings, benefits or other assets
that gave rise to such overhead costs. Overhead costs that cannot be
allocated based on usage shall be allocated to the Purchaser as follows:
<PAGE>
The Purchaser's pro rata share of such overhead costs during any
period shall be equal to the product of such overhead costs during
such period and a fraction, the numerator of which shall be equal to
the gross revenues of the Purchaser during such period and the
denominator of which shall be equal to the aggregate gross revenues
of the Purchaser, the Parent and all of the other subsidiaries of
the Parent. In the event that the revenues of the Parent or any of
its subsidiaries is based on commissions or royalties, then the
gross revenues of each such company that is used in calculating the
allocations of overhead costs shall include the amount of gross
sales on which such commission or royalty is based.
Notwithstanding the foregoing, the Purchaser shall not be allocated any of
the overhead costs of the Parent and its subsidiaries or any of its other
affiliates for any period prior to the Closing Date.
(e) Transaction Costs. Notwithstanding any provision in the Agreement to the
contrary, except for the Assumed Liabilities that are being assumed and
paid by the Purchaser as provided in the Agreement, all of the fees,
expenses, costs and liabilities incurred by the Seller, the Purchaser and
the Parent in connection with, or as a result of, the Acquisition, will be
the responsibility of the Party that incurred such fees, expenses, costs
and liabilities; provided, however, that none of such fees, expenses,
costs or liabilities incurred by the Purchaser will be funded by the
Purchaser's working capital facility or other assets and that none of such
fees, expenses, costs or liabilities (including, without limitation, any
amortization or depreciation expenses of the Purchaser or the Parent)
shall reduce the Pre-Tax Income of the Seller or the Purchaser for
purposes of determining whether the Purchaser has achieved its Pre-Tax
Income Targets for any year.
(f) Acquisition Related Payments. Notwithstanding any provision in the
Agreement to the contrary, none of the amounts payable by the Purchaser to
the Seller pursuant to the Agreement (including, without limitation, the
Purchase Price, the Installment Payments, Damages, and any fees, costs and
expenses incurred in connection with any dispute between the Purchaser and
the Seller), and none of the amounts payable to the Stockholders pursuant
to the Employment Agreements other than their base salaries, shall reduce
the Pre-Tax Income or working capital of the Purchaser. In addition,
notwithstanding anything to the contrary in the Agreement, the Purchaser
shall not be charged interest on any funds contributed or advanced by the
Parent or any of its affiliates to the Purchaser to pay any such
acquisition related payment or any part thereof.
<PAGE>
SCHEDULE 2.3(j)(iii)
In the event that Windsong Acquisition Corp (the "Offeror") elects to offer to
sell, transfer, convey or otherwise liquidate its assets pursuant to Section
2.3(j)(iii) of the Asset Purchase Agreement (the "Agreement"), the Offeror shall
make an irrevocable written offer (the "Offer") to sell its assets to Windsong,
Inc. (the "Offeree"), which Offer shall set forth the purchase price and all of
the other material terms and conditions of the Offer. The Offeree shall have 45
days after actual receipt of the Offer within which to notify the Offeror
whether or not the Offeree will accept the Offer. If the Offeree does not accept
the Offer within such 45-day period, the Offeror shall then have 120 days within
which enter into a definitive agreement with a third party for the sale of its
assets to such third party for no less purchase price and no less favorable
terms and conditions than as set forth in the Offer. In the event that the sale
of the Offeror's assets to such third party pursuant to the terms and conditions
of such definitive agreement does not close within 120 days after such
definitive agreement was entered into by the Offeror and such third party, and
if the Offeror wishes to continue its efforts to sell, transfer, convey or
otherwise liquidate its assets, the Offerer shall be required to re-offer such
assets to the Seller in accordance with the terms set forth on this Schedule
2.3(j)(iii).
<PAGE>
EXHIBIT 21
List of Subsidiaries of The Pietrafesa Corporation
1. DAG Acquisition Corp., a Delaware corporation.
2. Components Acquisition Corp., a Delaware corporation
3. Global Sourcing Network, Ltd., a New York corporation
4. Windsong Acquisition Corp., a Delaware corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 12, 1999 (except for Note 12, as to which the
date is July 15, 1999), in the Pre-Effective Amendment No. 2 to Registration
Statement (Form S-1 No. 333-74439) and related prospectus of The Pietrafesa
Corporation for the registration of 4,658,333 shares of its common stock.
/s/ Ernst & Young LLP
Syracuse, New York
July 15, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated March 4, 1999, with respect to the financial statements
and schedules of Components by John McCoy, Inc. included in the Registration
Statement (Form S-1) and related prospectus of The Pietrafesa Corporation for
the registration of 4,658,333 shares of its common stock.
/s/ Lawrence B. Goodman & Co. P.A.
Certified Public Accountants
Fair Lawn, New Jersey
July 14, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 2, 1999, with respect to the financial
statements and schedules of Global Sourcing Network, Ltd. included in the
Registration Statement (Form S-1--No. 333-74439) and related prospectus of The
Pietrafesa Corporation for the registration of 4,658,333 shares of its common
stock.
/s/ Pasquale & Bowers, LLP
Syracuse, New York
July 14, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated May 7, 1999 for the Financial Statements of Windsong,
Inc. in the Registration Statement (Form S-1--No. 333-74439) and related
prospectus of The Pietrafesa Corporation for the registration of 4,658,333
shares of its common stock.
/s/ Weissbarth, Altman & Michaelson LLP
New York, New York
July 14, 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>
