-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B8K8W0SAnaPCcOXVhprL4sgAZniUBTtCReWFDftioaBWgtrGWyxJi6AcmkrAkrN5 DO4gimkaXQFtrgRRWp14Ag== 0000897101-00-000344.txt : 20000403 0000897101-00-000344.hdr.sgml : 20000403 ACCESSION NUMBER: 0000897101-00-000344 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIUMWEAR INC CENTRAL INDEX KEY: 0000069067 STANDARD INDUSTRIAL CLASSIFICATION: MEN'S & BOYS' FURNISHINGS, WORK CLOTHING, AND ALLIED GARMENTS [2320] IRS NUMBER: 410429620 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-00063 FILM NUMBER: 591171 BUSINESS ADDRESS: STREET 1: 7566 MARKET PLACE DRIVE CITY: MINNEAPOLIS STATE: MN ZIP: 55344-3629 BUSINESS PHONE: 6129435000 MAIL ADDRESS: STREET 1: 7566 MARKET PLACE DRIVE CITY: MINNEAPOLIS STATE: MN ZIP: 55344-3629 FORMER COMPANY: FORMER CONFORMED NAME: MUNSINGWEAR INC DATE OF NAME CHANGE: 19920703 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K |X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 or |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ---------------------------------------- For the fiscal year ended January 1, 2000 Commission File Number 000-28501 PREMIUMWEAR, INC. (formerly known as Munsingwear, Inc.) (Exact Name of Registrant as Specified in its Charter) DELAWARE 41-0429620 (State of Incorporation) (I.R.S. Employer Identification No.) 5500 FELTL ROAD, MINNETONKA, MINNESOTA 55343-7902 (Address of principal executive office) (Zip Code) Registrant's telephone number: (612) 979-1700 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange Title of each class on which registered - --------------------------------------- ----------------------------- Common Stock, $.01 par value Nasdaq Preferred share purchase rights Nasdaq SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant at March 24, 2000 was $12,860,669 based upon the closing price of $6.25 per share on that date. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES |X| NO |_| The number of shares of common stock outstanding at March 24, 2000 was 2,563,860. -------------------------- DOCUMENTS INCORPORATED BY REFERENCE: Documents incorporated in part by reference in Parts I and II of this report: Portions of PremiumWear, Inc. 1999 Annual Report to Shareholders for the fiscal year ended January 1, 2000. Documents incorporated in part by reference in Part III of this report: Portions of definitive proxy statement for the 2000 Annual Meeting of Shareholders. This Form 10-K consists of 124 total pages: The exhibit index is on page 19. PART I Item 1. BUSINESS A. GENERAL DEVELOPMENT OF BUSINESS The Company was incorporated under the laws of Delaware in 1923 as the successor to a business founded in 1886. On July 3, 1991, the Company filed a voluntary petition for bankruptcy under Chapter 11 of the United States Bankruptcy Code, together with a proposed Plan of Reorganization. The Company emerged from bankruptcy on October 29, 1991. In two separate transactions in 1996, the Company sold its tradenames and trademarks, and certain associated assets relating to the retail and professional golf businesses for $23,000,000 in cash. The Company then changed its name from Munsingwear, Inc. to PremiumWear, Inc. and entered into a license agreement with Supreme International Corporation for the use of the Munsingwear(R) brand in the sale of knit and woven shirts to the promotional products/advertising specialty channels of distribution which includes advertising specialty incentive customers, specialty distributors and uniform market customers. In 1998, the Company introduced its own Page & Tuttle(R) brand of knit and woven golf shirts and other coordinated golf apparel to the golf pro shop market, and in 1999 introduced the Page & Tuttle(R) brand to the promotional products/advertising specialty markets. In early 1999 the Company acquired Klouda-Lenz, Inc., its independent sales representative agency for the promotional products/advertising specialty market. The purchase price was approximately $1.5 million cash and 241,892 newly issued shares of common stock. Klouda-Lenz, Inc. is a wholly-owned subsidiary of the Company. The Company's principal executive offices are located at 5500 Feltl Road, Minnetonka, Minnesota 55343-7902, and its telephone number is (952) 979-1700. As used in this document, the term "Company" refers to PremiumWear, Inc. and its subsidiaries unless otherwise noted or indicated by the context. At January 1, 2000, the Company's subsidiaries included one idle foreign subsidiary. B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company operates in one industry segment, apparel wholesaling. As of January 1, 2000, the Company's foreign operations were not material. Financial information regarding the Company's revenue, operating profit and assets can be found in the Company's audited Financial Statements for the fiscal Year Ended January 1, 2000, included in Exhibit 13 to this Form 10-K. 2 C. BUSINESS Principal Products: The Company sells knit and woven sport shirts under the Munsingwear(R) label to promotional products/advertising specialty markets customers pursuant to a license from Perry Ellis International Corporation (formerly Supreme International Corporation). The Company sells its Page & Tuttle(R) brand of knit golf shirts and coordinated apparel to golf pro shops, resorts and to promotional products/advertising specialty markets customers. Following the early 1999 acquisition of Klouda-Lenz, Inc., the Company receives commission income from representing other companies' products to the promotional products industry. Methods of Distribution of Products: The Company generally utilizes independent sales representatives to market its products and to solicit orders from customers. All products are distributed to customers through the Company's Tennessee distribution facility. Sources and Availability of Raw Materials and Products: During the past few years, the Company steadily reduced its use of domestic manufacturing. In 1999, only 7% of total production was made domestically, down from 60% in 1997. The balance was sourced primarily from "full package" manufacturers in the Far East, Central and South America and through 807 programs (assembly only) in Central America. The Company still purchases some fabrics for the 807 production program. These purchases are primarily from one source. There are currently no major shortages in availability of raw materials and alternative sources are available. Following the mid-1999 closure of its North Carolina cutting and sewing facility, the Company transferred its embroidery and distribution operations to a new leased facility in Clarksville, Tennessee. Trademarks and Trade Names: The Company owns the Page & Tuttle(R) trademark for apparel and is a licensee of the Munsingwear(R) brand under a license agreement entered into in September 1996, which allows the Company to use the Munsingwear(R) name on knit shirts for an initial term of twenty years and on woven shirts for an initial term of five years. For the first five years, knit shirt sales are subject to payment of royalties only after annual sales reach a certain aggregate total, at which time license fees are due on all such sales. After 2001, all knit shirt sales are subject to royalty payments. Management expects to reach the annual sales threshold at which royalties are due in 2001. All sales of woven shirts are subject to royalty payments. 3 Seasonal Aspects of the Business: The Company generally experiences peak seasonal demand for its products in the second and third quarters of the fiscal year. Working Capital Practices: The Company maintains a secured bank line of credit of $6,000,000 to meet its working capital needs. The bank line of credit is also used for letters of credit that are required for some purchases from Far East sources. The Company allows returns of merchandise as a result of shipping errors, damaged merchandise and for other reasons. Returns have historically been less than 2% of sales. Customers: The Company sells to approximately 4,700 customers. In the promotional products/specialty advertising market, the Company sells primarily to wholesale distributors, uniform companies and advertising specialty dealers. Wholesale distributors comprised approximately 56% of the Company's 1999 sales volume and included seven individual distributors who generally are located in key geographic areas of distribution throughout the United States. In 1999, Alpha Shirt Company and Broder Bros. each represented approximately 20% of total Company net sales. No other customer represented more than 10% of total Company sales. While a loss of one of these customers could have a material short-term impact on the Company's business, management believes that alternate customers are available to minimize the long-term impact of any such loss. Backlog of Orders: The Company's backlog of unfilled orders at January 1, 2000 was approximately $2,900,000 as compared to $2,000,000 a year ago. The unfilled order backlog consists of orders received for subsequent delivery. However, since it includes orders subject to change for color, size, stock adjustments, extension of delivery dates and cancellation, the unfilled order backlog does not necessarily relate directly to future sales. Competition: The promotional products/advertising specialty marketplace for apparel is increasingly competitive and is characterized by a number of broad-line companies. The principal competitive features are pricing, styling, quality (both in material and production), inventory replenishment programs, brand recognition, and customization services such as embroidery and screen printing. Deflationary pricing practices have been used by the Company and its competitors, primarily as a result of increased offshore sourcing, which has lowered unit production costs 4 industry wide. Many of the Company's competitors have greater financial and other resources than the Company. Research and Development: The Company is involved in limited experimental research activities related to the development of new fabrics and customization processes. Research and development expenses, other than for product design, are not significant. Environmental Considerations: The Company is not involved in any pending or threatened proceedings which would require curtailment of its operations because of such regulations. In 1999, the Company's capital expenditures for environmental control facilities were not significant, and no significant capital expenditures related to environmental issues are projected in 2000. Employees: As of January 1, 2000, there were 142 employees, none of whom were represented by a union. Special Cash Distribution to Shareholders: On January 27, 1997, the Board of Directors declared a special cash distribution of $5.39 per share, or approximately $12,500,000, to shareholders of record on February 19, 1997 which was paid on March 5, 1997. The funds utilized were proceeds from the 1996 sales of trademarks and collection of accounts receivable and liquidation of inventories related to the former retail and golf businesses. D. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Sales to foreign customers located outside the United States and its territories for the past three years were not significant. 5 Item 2. Properties At January 1, 2000, the Company occupied the following properties: Approximate Square Percentage Lease Property Footage Utilized Expires - -------- ------- -------- ------- Minnetonka, MN - Headquarters 23,000 85 2003 Clarksville, TN - Embroidery production and distribution center 100,000 60 2006 Fairmont, NC - Idle cutting and sewing plant, warehouse and distribution center 139,100 Idle Owned The Fairmont, NC facility was closed in late 1999 and, following an auction of excess equipment in early 2000, was donated to the City of Fairmont, North Carolina. At January 1, 2000, no facilities were occupied under capitalized leases. Item 3. Legal Proceedings None of a significant nature or which is expected to have a material impact on the Company's business or financial condition. Item 4. Submission of Matters to a Vote of Security Holders None. 6 Executive Officers of the Registrant The following information is furnished with respect to the Company's executive officers as of the date hereof, pursuant to Item 401(b) of Regulation S-K. Each of the officers has been appointed to serve in his respective office until his successor has been elected. Executive Officer Name and Age Position Since - ------------ -------- ----- Thomas D. Gleason (64) Chairman and director of the Company 1996 1995 to present; Chief Executive Officer September 1996 to July 1999; Vice Chairman of Wolverine World Wide, Inc. (footwear manufacturing and marketing), 1993 through April 17, 1996; Chief Executive Officer of Wolverine World Wide, Inc. from 1972 to 1993. David E. Berg (43) Chief Executive Officer of the Company 1995 July 1999 to present; Director May 1999 to present; President, August 1997 to present; Chief Operating Officer, December 1996 to July 1999; Executive Vice President, Sales & Marketing May 1995 to August 1997; Vice President, General Manager, Special Markets, October 1993 to May 1995; Vice President, National Sales Manager, Retail Division, January 1990 to October 1993; Vice President, General Manager, Furnishings Division, February 1989 to January 1980. James S. Bury (56) Vice President of Finance, December 1996 1990 to present; Vice President and Controller, May 1990 to December 1996; Corporate Controller, August 1989 to May 1990; Vice President Finance, Men's Apparel Division, February 1988 to August 1989. 7 Cynthia L. Boeddeker (42) Vice President of Operations since March 1996 2000; Vice President and General Merchandise Manager, December 1996 to March 2000; Director of Sourcing and Inventory Management, February 1994 to December 1996; Import Manager, March 1992 to February 1994; Sourcing Administrator, July 1991 to March 1992. Timothy C. Klouda (47) President, Klouda-Lenz, Inc., a wholly-owned subsidiary of the Company, and director of the Company May 1999 to present; Co-founder in 1986, director and Chief Executive Officer of Klouda-Lenz, Inc., an independent sales representative for the Company acquired by the Company in March 1999. 8 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The information required under this caption in incorporated herein by reference to the information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Statistics" contained in the Company's 1999 Annual Report to Shareholders. Item 6. Selected Financial Data The information required under this caption is incorporated herein by reference to the information set forth under the caption "Five Year Financial Review" contained in the Company's 1999 Annual Report to Shareholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required under this caption is incorporated herein by reference to the information set forth under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's 1999 Annual Report to Shareholders. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required under this caption is incorporated herein by reference to the information set forth under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk" and "Notes to Consolidated Financial Statements - Note 1 - New Accounting Pronouncements" contained in the Company's 1999 Annual Report to Shareholders. Item 8. Financial Statements and Supplementary Data The information required under this caption is incorporated herein by reference to the information set forth under the captions "Consolidated Statements of Operations," "Consolidated Balance Sheets," "Consolidated Statements of Cash Flows," "Consolidated Statements of Shareholders' Equity," "Notes to Consolidated Financial Statements," "Report of Independent Public Accountants," and "Five Year Financial Review" contained in the Company's 1999 Annual Report to Shareholders. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. 9 PART III Item 10. Directors and Executive Officers of the Registrant The information required under this caption is incorporated by reference to the information set forth under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days of Registrant's fiscal year ended January 1, 2000. Information regarding executive officers is included in Part I of this Report. Item 11. Executive Compensation The information required under this caption is incorporated by reference to the information set forth under the caption "Executive Compensation and Other Information" of the definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days of the Registrant's fiscal year ended January 1, 2000. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required under this caption is incorporated by reference to the information set forth under the caption "Security Ownership of Certain Beneficial Owners, Directors and Executive Officers" of the definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days of the Registrant's fiscal year ended January 1, 2000. Item 13. Certain Relationships and Related Transactions The information required under this caption is incorporated by reference to the information set forth under the caption "Executive Compensation and Other Information" of the definitive proxy statement to be filed within 120 days of the Registrant's fiscal year ended January 1, 2000. 10 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT: 1. Financial statements, included under the following headings in the 1999 Annual Report to Shareholders, are incorporated by reference in Item 8: - Consolidated Statements of Operations for the three years ended January 1, 2000. - Consolidated Balance Sheets as of January 1, 2000 and January 2, 1999. - Consolidated Statements of Cash Flows for the three years ended January 1, 2000. - Consolidated Statements of Shareholders' Equity for the three years ended January 1, 2000. - Notes to Consolidated Financial Statements. - Report of Independent Public Accountants. 2. Financial Statement Schedules for the three years ended January 1, 2000. - Schedule II - Valuation and Qualifying Accounts, pages 14-16 of this report. - Report of Independent Public Accountants on Schedules, page 17 of this report. - All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted. 3. Exhibits: - Exhibit 2 - Plan of Reorganization, as confirmed October 1, 1991 by the United States Bankruptcy Court. (1) 11 - Exhibit 3 - Restated Certificate of Incorporation and By-Laws, as amended. (1) (2) - Exhibit 4 - Form of Rights Agreement dated as of July 25, 1997, between the Registrant and Norwest Bank Minnesota, N.A.(5) - Exhibit 10 - Material Contracts (Management Contracts or Compensatory Plans or Agreements): (A) The Registrant's 1991 Stock Plan, as amended. (7) (B) The Registrant's 1999 Stock Plan, as amended. (7) (C) Amended and Restated Change in Control Severance Agreement with Thomas D. Gleason, effective February 23, 2000. (7) (D) Form of Change in Control Severance Agreement with David E. Berg, James S. Bury, Cynthia L. Boeddeker, Timothy C. Klouda and Dennis G. Lenz, dated as of September 23, 1999. (7) - Exhibit 10 - Material Contracts (Other): (E) Purchase and Sale Agreement, dated May 22, 1996, between the Registrant and Supreme International Corporation, as amended. (3) (F) License Agreement, dated September 6, 1996, between the Registrant and Supreme International Corporation. (3) (G) Credit and Security Agreement, dated February 4, 1997, between the Registrant and U.S. Bank National Association. (4) (H) Agreement and Plan of Merger, dated March 25, 1999, between the Registrant, Klouda-Lenz, Inc., and the other parties named therein. (6) (I) Third Amendment to the Credit and Security Agreement, dated July 31, 1999, between the Registrant and U.S. Bank National Association. (7) 12 - Exhibit 13 - PremiumWear, Inc. 1999 Annual Report to Shareholders - Such report, except for those portions thereof which are expressly incorporated by reference in this report, is furnished for the information of the Securities and Exchange Commission and is not to be deemed "filed" as part of this filing. (7) - Exhibit 23 - Consent of Independent Public Accountants. (7) - Exhibit 27 - Financial Data Schedule. (7) --------------------------------- (1) Incorporated herein by reference to Exhibits 2 and 3, respectively, of the Registrant's Annual Report on Form 10-K for the year ended January 4, 1992 (File No. 1-63). (2) Incorporated herein by reference to Form 8-K, dated August 1, 1995 (File No. 1-63). (3) Incorporated herein by reference to Exhibits 2.1 and 2.2 respectively of the Registrant's Form 8-K, dated September 12, 1996 (File No. 1-63). (4) Incorporated herein by reference to Exhibits 10(B), (G) and (H) respectively of the Registrant's Annual Report on Form 10-K for the year ended January 4, 1997 (File No. 1-63). (5) Incorporated herein by reference to Exhibit 1 of the Registrants' Registration Statement on Form 8-A filed with the SEC, dated September 22, 1997. (6) Incorporated herein by reference to Exhibits 10 (C), and (G) respectively of the Registrant's Annual Report on Form 10-K for the year ended January 2, 1999 (File No. 1-63). (7) Filed herewith. --------------------------------- (b) REPORTS ON FORM 8-K: None. (c) EXHIBITS: Reference is made to Item 14(a) (3). (d) SCHEDULES: Reference is made to Item 14 (a) (2). 13 SCHEDULE II PREMIUMWEAR, INC. Valuation and Qualifying Accounts Year ended January 1, 2000
Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions ------------------------ Balance Charged to Beginning Costs and Charged to Balance at Description of Year Expenses Net Sales Deductions End of Year - ----------- ------- -------- --------- ---------- ----------- Allowances deducted from trade receivables Allowance for cash discounts and other customer credits $ 278,000 $ (26,000) $ -- $ 152,000(a) $ 100,000 Allowance for doubtful accounts 400,000 (35,000) -- 138,000(b) 227,000 Allowance for returns 50,000 -- 690,000 690,000(c) 50,000 ----------- ----------- ----------- ----------- ----------- $ 728,000 $ (61,000) $ 690,000 $ 980,000 $ 377,000 =========== =========== =========== =========== =========== Reserve for operations restructuring $ -- $ 1,245,000 $ -- $ 940,000 $ 305,000 =========== =========== =========== =========== ===========
(a) Discounts allowed and other credits to customers' accounts receivable. (b) Uncollectable accounts written off, net of recoveries. (c) Returns applied to customers' accounts receivable. 14 SCHEDULE II PREMIUMWEAR, INC. Valuation and Qualifying Accounts Year ended January 2, 1999
Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions ------------------------ Balance Charged to Beginning Costs and Charged to Balance at Description of Year Expenses Net Sales Deductions End of Year - ----------- ------- -------- --------- ---------- ----------- Allowances deducted from trade receivables Allowance for cash discounts and other customer credits $ 318,000 $ (116,000)(d) $ 75,000 $ (1,000)(a) $ 278,000 Allowance for doubtful accounts 170,000 262,000 -- 32,000(b) 400,000 Allowance for returns 50,000 -- 539,000 539,000(c) 50,000 ---------- ---------- ---------- ---------- ---------- $ 538,000 $ 146,000 $ 614,000 $ 570,000 $ 728,000 ========== ========== ========== ========== ========== Reserve for liabilities related to sold assets $ 578,000 $ (398,000)(e) $ -- $ 180,000 $ -- ========== ========== ========== ========== ==========
(a) Discounts allowed and other credits to customers' accounts receivable. (b) Uncollectable accounts written off, net of recoveries. (c) Returns applied to customers' accounts receivable. (d) $149,000 charged to cost of goods sold, $265,000 credited to bad debt provision. (e) Credited to gain on sale of trademarks. 15 SCHEDULE II PREMIUMWEAR, INC. Valuation and Qualifying Accounts Year ended January 3, 1998
Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions ------------------------ Balance Charged to Beginning Costs and Charged to Balance at Description of Year Expenses Net Sales Deductions End of Year - ----------- ------- -------- --------- ---------- ----------- Allowances deducted from trade receivables Allowance for cash discounts and other customer credits $ 709,000 $ (350,000)(d) $ 42,000 $ 83,000(a) $ 318,000 Allowance for doubtful accounts 150,000 74,000 -- 54,000(b) 170,000 Allowance for returns 50,000 -- 457,000 457,000(c) 50,000 ----------- ----------- ----------- ----------- ----------- $ 909,000 $ (276,000) $ 499,000 $ 594,000 $ 538,000 =========== =========== =========== =========== =========== Reserve for liabilities related to sold assets $ 1,530,000 $ -- $ -- $ 952,000 $ 578,000 =========== =========== =========== =========== ===========
Notes: (a) Discounts allowed and other credits to customers' accounts receivable. (b) Uncollectable accounts written off, net of recoveries. (c) Returns applied to customers' accounts receivable. (d) Credited to bad debt expense. 16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II To PremiumWear, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in the Company's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 18, 2000. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The accompanying schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/Arthur Andersen LLP ------------------------- ARTHUR ANDERSEN LLP Minneapolis, Minnesota, February 18, 2000 17 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf of the undersigned, thereunto duly authorized. PREMIUMWEAR, INC. Date: MARCH 31, 2000 By: /s/DAVID E. BERG -------------------------------- David E. Berg, President and Chief Executive Officer Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
NAME TITLE - ---------------------- ------------------------------------------ /s/DAVID E. BERG President and Chief Executive Officer March 31, 2000 - ---------------------- (Principal Executive Officer) and Director David E. Berg /s/JAMES S. BURY V. P. of Finance March 31, 2000 - ---------------------- Principal Accounting Officer James S. Bury /s/THOMAS D. GLEASON Chairman and Director March 31, 2000 - ---------------------- Thomas D. Gleason /s/C. D. ANDERSON Director March 31, 2000 - ---------------------- C. D. Anderson /s/KEITH A. BENSON Director March 31, 2000 - ---------------------- Keith A. Benson /s/TIMOTHY C. KLOUDA Director March 31, 2000 - ---------------------- Timothy C. Klouda /s/ALAN W. KOSLOFF Director March 31, 2000 - ---------------------- Alan W. Kosloff /s/GERALD E. MAGNUSON Director March 31, 2000 - ---------------------- Gerald E. Magnuson /s/MARK B. VITTERT Director March 31, 2000 - ---------------------- Mark B. Vittert
18 EXHIBIT INDEX Exhibit Exhibit Page No. No. - ------- ----------------------------------------------------- ------------ 10(A) 1991 Stock Plan, as amended 20-33 10(B) 1999 Stock Plan, as amended 34-47 10(C) Amended and Restated Change in Control Severance 48-57 Agreement with Thomas D. Gleason, effective February 23, 2000. 10(D) Form of Change in Control Severance Agreement with 58-67 David E. Berg, James S. Bury, Cynthia L. Boeddeker, Timothy C. Klouda and Dennis G. Lenz, dated as of September 23, 1999. 10(I) Third Amendment to Credit and Security Agreement, dated 68-80 July 31, 1999, between the Registrant and U.S. Bank National Association 13 PremuimWear, Inc. 1999 Annual Report to Shareholders 81-121 21 Subsidiaries of the Registrant. 122 23 Consent of Independent Public Accountants. 123 27 Financial Data Schedule. 124 19 EX-10.(A) 2 1991 STOCK PLAN EXHIBIT 10(A) PREMIUMWEAR, INC. 1991 STOCK PLAN SECTION CONTENTS PAGE 1. General Purpose of Plan; Definitions 1 2. Administration 3 3. Stock Subject to Plan 4 4. Eligibility 4 5. Stock Options 4 6. Restricted Stock 8 7. Transfer, Leave of Absence, etc. 10 8. Amendments and Termination 10 9. Unfunded Status of Plan 10 10. General Provisions 11 11. Effective Date of Plan 12 PREMIUMWEAR, INC. 1991 STOCK PLAN SECTION 1. General Purpose of Plan; Definitions. The name of this plan is the PremiumWear, Inc. 1991 Stock Plan (the "Plan"). The purpose of the Plan is to enable PremiumWear, Inc. (the "Company") and its Subsidiaries to retain and attract executives, other key employees, consultants and directors who contribute to the Company's success by their ability, ingenuity and industry, and to enable such individuals to participate in the long-term success and growth of the Company by giving them a proprietary interest in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: a. "Board" means the Board of Directors of the Company. b. "Cause" means a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, or a participant's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company. c. "Code" means the Internal Revenue Code of 1986, as amended. d. "Committee" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. e. "Company" means PremiumWear, Inc., a corporation organized under the laws of the State of Delaware (or any successor corporation). f. "Disability" means permanent and total disability as determined by the Committee. g. "Early Retirement" means retirement, with consent of the Committee at the time of retirement, from active employment with the Company and any Subsidiary or Parent Corporation of the Company. h. "Fair Market Value" means the value of the Stock on a given date as determined by the Committee in accordance with Section 422 of the Code and any applicable Treasury Department regulations with respect to "incentive stock options." i. "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. j. "Non-Employee Director" means a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as amended, or any successor rule. k. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option, and is intended to be and is designated as a "Non-Qualified Stock Option." l. "Normal Retirement" means retirement from active employment with the Company and any Subsidiary or Parent Corporation of the Company on or after age 65. m. "Outside Director" means a director who (a) is not a current employee of the Company or any member of an affiliated group which includes the Company; (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Company; (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose, remuneration includes any payment in exchange for goods or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. n. "Parent Corporation" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations (other than the Company) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. o. "Restricted Stock" means an award of shares of Stock that are subject to restrictions under Section 6 below. p. "Retirement" means Normal Retirement or Early Retirement. q. "Stock" means the Common Stock, $.01 par value per share, of the Company. r. "Stock Option" means any option to purchase shares of Stock granted pursuant to Section 5 below. s. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 2 SECTION 2. Administration. The Plan shall be administered by the Board or by a Committee appointed by the Board consisting of at least two directors, all of whom shall be Outside Directors and Non-Employee Directors, and who shall serve at the pleasure of the Board. The Committee may be a subcommittee of the Compensation Committee of the Board. The Committee shall have the power and authority to grant to eligible employees, consultants and directors pursuant to the terms of the Plan: (i) Stock Options and (ii) Restricted Stock. In particular, the Committee shall have the authority: (i) to select the officers, other key employees, directors and consultants of the Company and its Subsidiaries to whom Stock Options and/or Restricted Stock awards may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, or Restricted Stock awards, or a combination of the foregoing, are to be granted hereunder; (iii) to determine the number of shares to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, any restriction on any Stock Option or other award and/or the shares of Stock relating thereto); and (v) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may delegate its authority to officers of the Company for the purpose of selecting employees who are not officers of the Company for purposes of (i) above. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. 3 SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 873,500. Such shares may consist, in whole or in part, of authorized and unissued shares. If any shares that have been optioned cease to be subject to Stock Options, or if any shares subject to any Restricted Stock award granted hereunder are forfeited or such award otherwise terminates without a payment being made to the participant, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, other change in corporate structure affecting the Stock, or spin-off or other distribution of assets to shareholders, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Stock Options granted under the Plan, and in the number of shares subject to Restricted Stock awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. SECTION 4. Eligibility. Officers, other key employees, consultants and members of the Board of the Company and Subsidiaries who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and its Subsidiaries are eligible to be granted Stock Options or Restricted Stock awards under the Plan. The optionees and participants under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of shares covered by each award. Notwithstanding the foregoing, no person shall receive grants of Stock Options and Restricted Stock awards under this Plan which exceed 150,000 shares during any fiscal year of the Company. SECTION 5. Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock Options shall be granted under the Plan after October 21, 2001. 4 The Committee shall have the authority to grant any optionee Incentive Stock Options, Non- Qualified Stock Options, or both types of options. To the extent that any option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. The preceding sentence shall not preclude any modification or amendment to an outstanding Incentive Stock Option, whether or not such modification or amendment results in disqualification of such Stock Option as an Incentive Stock Option, provided the optionee consents in writing to the modification or amendment. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant. In no event shall the option price per share of Stock purchasable under an Incentive Stock Option be less than 100% of the Fair Market Value of the Stock on the date of the grant of the Stock Option. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the option price shall be no less than 110% of the Fair Market Value of the Stock on the date the option is granted. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the term of such option shall be no more than five years from the date of grant. (c) Exercisability. Stock Options shall be exercisable at such time or times as determined by the Committee at or after grant. If the Committee provides, in its discretion, that any option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time, provided, however, that unless the Stock Option has been approved by the Board, the Committee or the stockholders of the Company, a Stock Option granted to an officer, director or 10% stockholder of the Company shall not be exercisable for a period of six (6) months after the date of grant. Notwithstanding the foregoing, unless the Stock Option Agreement provides otherwise, any Stock Option granted under this Plan shall be exercisable in full, without regard to any installment exercise or vesting provisions, for a period specified by the Committee, but not to exceed sixty (60) days nor be less than seven (7) days, prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company other than in conjunction with a bankruptcy 5 of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 50% or more of the outstanding Stock of the Company. (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or by any other form of legal consideration deemed sufficient by the Committee and consistent with the Plan's purpose and applicable law, including promissory notes or a properly executed exercise notice together with irrevocable instructions to a broker acceptable to the Company to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price. As determined by the Committee, in its sole discretion, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee or Restricted Stock subject to an award hereunder (based on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee); provided, however, that in the event payment is made in the form of shares of Restricted Stock, the optionee will receive a portion of the option shares in the form of, and in an amount equal to, the Restricted Stock award tendered as payment by the optionee. No shares of Stock shall be issued until full payment therefor has been made. An optionee generally shall have the rights to dividends and other rights of a shareholder with respect to shares subject to the option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 10. (e) Non-transferability of Options. No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (f) Termination by Death. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of death, the Stock Option may thereafter be immediately exercised, to the extent then exercisable (or on such accelerated basis as the Committee shall determine at or after grant), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of three months (or such shorter period as the Committee shall specify at grant) from the date of such death or until the expiration of the stated term of the option, whichever period is shorter. (g) Termination by Reason of Disability. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of termination due to Disability (or on such accelerated basis as the Committee shall determine at or after grant), but may not be exercised after three months (or such shorter period as the Committee 6 shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non- Qualified Stock Option. (h) Termination by Reason of Retirement. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Retirement, any Stock Option held by such optionee may thereafter be exercised to the extent it was exercisable at the time of such Retirement, but may not be exercised after three months (or such shorter period as Committee shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (i) Other Termination. Unless otherwise determined by the Committee, if an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates for any reason other than death, Disability or Retirement, the Stock Option shall thereupon terminate. (j) Annual Limit on Incentive Stock Options. The aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which an Incentive Stock Option under this Plan or any other plan of the Company and any Subsidiary or Parent Corporation is exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. (k) Directors Who Are Not Employees. Each person who (i) is not an employee of the Company or its Subsidiaries, and (ii) is elected or reelected to the Board at any annual or special meeting of the shareholders of the Company, or (iii) is serving an unexpired term as Director on the date of an annual meeting at which any other director is elected, shall as of the date of such meeting automatically be granted a Stock Option to purchase 1,000 shares of the Company's Stock at an exercise price per share equal to 100% of the Fair Market Value of a share of the Company's Stock on the date of the grant of the Stock Option. In the case of an annual or special meeting, the action of the shareholders in electing or reelecting a director who is not an employee shall constitute the granting of Stock Options to all such directors who are not employees, and the date when the shareholders shall take such action shall be the date of grant of the Stock Options. All such options shall be designated as Non-Qualified Stock Options and shall be subject to the same terms and provisions as are then in effect with respect to the grant of Non-Qualified Stock Options to officers and key employees of the Company, except that the term of each such Stock Option shall be equal to five years. In the event discretionary Stock Options are granted to members of the Committee, such Stock Options shall be granted by the Board. SECTION 6. Restricted Stock. 7 (a) Administration. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company and Subsidiaries to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. The Committee may also condition the grant of Restricted Stock upon the attainment of specified performance goals. The provisions of Restricted Stock awards need not be the same with respect to each recipient. In the event that Restricted Stock awards are granted to members of the Committee, such awards shall be granted by the Board. (b) Awards and Certificates. The prospective recipient of an award of shares of Restricted Stock shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the then applicable terms and conditions. (i) Each participant shall be issued a stock certificate in respect of shares of Restricted Stock awarded under the Plan. Such certificate shall be registered in the name of the participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the PremiumWear, Inc. 1991 Stock Plan and an Agreement entered into between the registered owner and PremiumWear, Inc. Copies of such Plan and Agreement are on file in the executive offices of PremiumWear, Inc. (ii) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to the Plan shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. Within these limits, the 8 Committee may provide for the lapse of such restrictions in installments where deemed appropriate. (ii) Except as provided in paragraph (c)(i) of this Section 6, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the shares and the right to receive any cash dividends. The Committee, in its sole discretion, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested in additional shares of Restricted Stock (to the extent shares are available under Section 3 and subject to paragraph (f) of Section 10). Certificates for shares of Unrestricted Stock shall be delivered to the grantee promptly after, and only after, the period of forfeiture shall have expired without forfeiture in respect of such shares of Restricted Stock. (iii) Subject to the provisions of the award agreement and paragraph (c)(iv) of this Section 6, upon termination of employment for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the participant. (iv) In the event of special hardship circumstances of a participant whose employment is terminated (other than for Cause), including death, Disability or Retirement, or in the event of an unforeseeable emergency of a participant still in service, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to such participant's shares of Restricted Stock. (v) All restrictions with respect to any participant's shares of Restricted Stock shall lapse or be deemed to have lapsed or been terminated on the tenth (10th) business day prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company, other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 50% or more of the outstanding Stock of the Company. SECTION 7. Transfer, Leave of Absence, etc. For purposes of the Plan, the following events shall not be deemed a termination of employment: (a) a transfer of an employee from the Company to a Parent Corporation or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or from one Subsidiary to another; 9 (b) a leave of absence, approved in writing by the Committee, for military service or sickness, or for any other purpose approved by the Company if the period of such leave does not exceed ninety (90) days (or such longer period as the Committee may approve, in its sole discretion); and (c) a leave of absence in excess of ninety (90) days, approved in writing by the Committee, but only if the employee's right to reemployment is guaranteed either by a statute or by contract, and provided that, in the case of any leave of absence, the employee returns to work within 30 days after the end of such leave. SECTION 8. Amendments and Termination. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made (i) which would impair the rights of an optionee or participant under a Stock Option or Restricted Stock award theretofore granted, without the optionee's or participant's consent, or (ii) which without the approval of the stockholders of the Company would cause the Plan to no longer comply with Rule 16b-3 under the Securities Exchange Act of 1934, Section 422 of the Code or any other regulatory requirements. The Committee may amend the terms of any award or option theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall impair the rights of any holder without his consent. The Committee may also substitute new Stock Options for previously granted options, including previously granted options having higher option prices. SECTION 9. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. SECTION 10. General Provisions. (a) The Committee may require each person purchasing shares pursuant to a Stock Option under the Plan to represent to and agree with the Company in writing that the optionee is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock delivered under the Plan pursuant to any Restricted Stock awards shall be subject to such stock-transfer orders and other restrictions as the Committee may 10 deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Subject to paragraph (d) below, recipients of Restricted Stock awards under the Plan (not including Stock Options) are not required to make any payment or provide consideration other than the rendering of services. (c) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee of the Company or any subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. (d) Each participant shall, no later than the date as of which any part of the value of an award first becomes includible as compensation in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. With respect to any award under the Plan, if the terms of such award so permit, a participant may elect by written notice to the Company to satisfy part or all of the withholding tax requirements associated with the award by (i) authorizing the Company to retain from the number of shares of Stock that would otherwise be deliverable to the participant, or (ii) delivering to the Company from shares of Stock already owned by the participant, that number of shares having an aggregate Fair Market Value equal to part or all of the tax payable by the participant under this Section 10(d). Any such election shall be in accordance with, and subject to, applicable tax and securities laws, regulations and rulings. (e) At the time of grant, the Committee may provide in connection with any grant or award made under this Plan that the shares of Stock received as a result of such grant shall be subject to a repurchase right in favor of the Company, pursuant to which the participant shall be required to offer to the Company upon termination of employment for any reason any shares that the participant acquired under the Plan, with the price being the then Fair Market Value of the Stock or, in the case of a termination for Cause, an amount equal to the cash consideration paid for the Stock, subject to such other terms and conditions as the Committee may specify at the time of grant. The Committee may, at the time of the grant of an award under the Plan, provide the Company with the right to repurchase, or require the forfeiture of, shares of Stock acquired pursuant to the Plan by any 11 participant who, at any time within two years after termination of employment with the Company, directly or indirectly competes with, or is employed by a competitor of, the Company. (f) The reinvestment of dividends in additional Restricted Stock at the time of any dividend payment shall only be permissible if the Committee (or the Company's chief executive or chief financial officer) certifies in writing that under Section 3 sufficient shares are available for such reinvestment (taking into account then outstanding Stock Options and other Plan awards). SECTION 11. Effective Date of Plan. The Plan became effective on October 21, 1991, and was amended by the shareholders on May 19, 1994. The Board further amended the Plan on September 6, 1996 and February 19, 1997 to comply with new Rule 16b-3 promulgated under the Securities Exchange Act of 1934 and with Section 162(m) of the Code. The Board also amended Sections 5(c), 5(d) and 6(c)(v) of the Plan on July 13, 1999. 12 EX-10.(B) 3 1999 STOCK PLAN EXHIBIT 10(B) PREMIUMWEAR, INC. 1999 STOCK PLAN SECTION CONTENTS PAGE 1. General Purpose of Plan; Definitions 1 2. Administration 3 3. Stock Subject to Plan 4 4. Eligibility 4 5. Stock Options 4 6. Restricted Stock 8 7. Transfer, Leave of Absence, etc. 9 8. Amendments and Termination 10 9. Unfunded Status of Plan 10 10. General Provisions 10 11. Effective Date of Plan 12 PREMIUMWEAR, INC. 1999 STOCK PLAN SECTION 1. General Purpose of Plan; Definitions. The name of this plan is the PremiumWear, Inc. 1999 Stock Plan (the "Plan"). The purpose of the Plan is to enable PremiumWear, Inc. (the "Company") and its Subsidiaries to retain and attract executives, other key employees, consultants and directors who contribute to the Company's success by their ability, ingenuity and industry, and to enable such individuals to participate in the long-term success and growth of the Company by giving them a proprietary interest in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: a. "Board" means the Board of Directors of the Company. b. "Cause" means a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, or a participant's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company. c. "Code" means the Internal Revenue Code of 1986, as amended. d. "Committee" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. e. "Company" means PremiumWear, Inc., a corporation organized under the laws of the State of Delaware (or any successor corporation). f. "Disability" means permanent and total disability as determined by the Committee. g. "Early Retirement" means retirement, with consent of the Committee at the time of retirement, from active employment with the Company and any Subsidiary or Parent Corporation of the Company. h. "Fair Market Value" means the value of the Stock on a given date as determined by the Committee in accordance with Section 422 of the Code and any applicable Treasury Department regulations with respect to "incentive stock options." i. "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. j. "Non-Employee Director" means a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as amended, or any successor rule. k. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option, and is intended to be and is designated as a "Non-Qualified Stock Option." l. "Normal Retirement" means retirement from active employment with the Company and any Subsidiary or Parent Corporation of the Company on or after age 65. m. "Outside Director" means a director who (a) is not a current employee of the Company or any member of an affiliated group which includes the Company; (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Company; (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose, remuneration includes any payment in exchange for goods or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. n. "Parent Corporation" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations (other than the Company) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. o. "Restricted Stock" means an award of shares of Stock that are subject to restrictions under Section 6 below. p. "Retirement" means Normal Retirement or Early Retirement. q. "Stock" means the Common Stock, $.01 par value per share, of the Company. r. "Stock Option" means any option to purchase shares of Stock granted pursuant to Section 5 below. s. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 2 SECTION 2. Administration. The Plan shall be administered by the Board or by a Committee appointed by the Board consisting of at least two directors, all of whom shall be Outside Directors and Non-Employee Directors, and who shall serve at the pleasure of the Board. The Committee may be a subcommittee of the Compensation Committee of the Board. The Committee shall have the power and authority to grant to eligible employees, consultants and directors pursuant to the terms of the Plan: (i) Stock Options and (ii) Restricted Stock. In particular, the Committee shall have the authority: (i) to select the officers, other key employees, directors and consultants of the Company and its Subsidiaries to whom Stock Options and/or Restricted Stock awards may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, or Restricted Stock awards, or a combination of the foregoing, are to be granted hereunder; (iii) to determine the number of shares to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, any restriction on any Stock Option or other award and/or the shares of Stock relating thereto); and (v) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may delegate its authority to officers of the Company for the purpose of selecting employees who are not officers of the Company for purposes of (i) above. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. 3 SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 120,000. Such shares may consist, in whole or in part, of authorized and unissued shares. If any shares that have been optioned cease to be subject to Stock Options, or if any shares subject to any Restricted Stock award granted hereunder are forfeited or such award otherwise terminates without a payment being made to the participant, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, other change in corporate structure affecting the Stock, or spin-off or other distribution of assets to shareholders, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Stock Options granted under the Plan, and in the number of shares subject to Restricted Stock awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. SECTION 4. Eligibility. Officers, other key employees, consultants and members of the Board of the Company and Subsidiaries who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and its Subsidiaries are eligible to be granted Stock Options or Restricted Stock awards under the Plan. The optionees and participants under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of shares covered by each award. Notwithstanding the foregoing, no person shall receive grants of Stock Options and Restricted Stock awards under this Plan which exceed 50,000 shares during any fiscal year of the Company. SECTION 5. Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock Options shall be granted under the Plan after February 22, 2009. The Committee shall have the authority to grant any optionee Incentive Stock Options, Non- Qualified Stock Options, or both types of options. To the extent that any option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. 4 Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. The preceding sentence shall not preclude any modification or amendment to an outstanding Incentive Stock Option, whether or not such modification or amendment results in disqualification of such Stock Option as an Incentive Stock Option, provided the optionee consents in writing to the modification or amendment. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant. In no event shall the option price per share of Stock purchasable under an Incentive Stock Option be less than 100% of the Fair Market Value of the Stock on the date of the grant of the Stock Option. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the option price shall be no less than 110% of the Fair Market Value of the Stock on the date the option is granted. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the term of such option shall be no more than five years from the date of grant. (c) Exercisability. Stock Options shall be exercisable at such time or times as determined by the Committee at or after grant. If the Committee provides, in its discretion, that any option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time, provided, however, that unless the Stock Option has been approved by the Board, the Committee or the stockholders of the Company, a Stock Option granted to an officer, director or 10% stockholder of the Company shall not be exercisable for a period of six (6) months after the date of grant. Notwithstanding the foregoing, unless the Stock Option Agreement provides otherwise, any Stock Option granted under this Plan shall be exercisable in full, without regard to any installment exercise or vesting provisions, for a period specified by the Committee, but not to exceed sixty (60) days nor be less than seven (7) days, prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 50% or more of the outstanding Stock of the Company. 5 (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or by any other form of legal consideration deemed sufficient by the Committee and consistent with the Plan's purpose and applicable law, including promissory notes or a properly executed exercise notice together with irrevocable instructions to a broker acceptable to the Company to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price. As determined by the Committee, in its sole discretion, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee or Restricted Stock subject to an award hereunder (based on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee); provided, however, that in the event payment is made in the form of shares of Restricted Stock, the optionee will receive a portion of the option shares in the form of, and in an amount equal to, the Restricted Stock award tendered as payment by the optionee. No shares of Stock shall be issued until full payment therefor has been made. An optionee generally shall have the rights to dividends and other rights of a shareholder with respect to shares subject to the option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 10. (e) Non-transferability of Options. No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (f) Termination by Death. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of death, the Stock Option may thereafter be immediately exercised, to the extent then exercisable (or on such accelerated basis as the Committee shall determine at or after grant), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of nine months (or such shorter period as the Committee shall specify at grant) from the date of such death or until the expiration of the stated term of the option, whichever period is shorter. (g) Termination by Reason of Disability. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of termination due to Disability (or on such accelerated basis as the Committee shall determine at or after grant), but may not be exercised after nine months (or such shorter period as the Committee shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. 6 (h) Termination by Reason of Retirement. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Retirement, any Stock Option held by such optionee may thereafter be exercised to the extent it was exercisable at the time of such Retirement, but may not be exercised after three months (or such shorter period as Committee shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (i) Other Termination. Unless otherwise determined by the Committee, if an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates for any reason other than death, Disability or Retirement, the Stock Option shall thereupon terminate. (j) Annual Limit on Incentive Stock Options. The aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which an Incentive Stock Option under this Plan or any other plan of the Company and any Subsidiary or Parent Corporation is exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. (k) Directors Who Are Not Employees. Each person who (i) is not an employee of the Company or its Subsidiaries, and (ii) is elected or reelected to the Board at any annual or special meeting of the shareholders of the Company, or (iii) is serving an unexpired term as Director on the date of an annual meeting at which any other director is elected, shall as of the date of such meeting automatically be granted a Stock Option to purchase 1,000 shares of the Company's Stock at an exercise price per share equal to 100% of the Fair Market Value of a share of the Company's Stock on the date of the grant of the Stock Option. In the case of an annual or special meeting, the action of the shareholders in electing or reelecting a director who is not an employee shall constitute the granting of Stock Options to all such directors who are not employees, and the date when the shareholders shall take such action shall be the date of grant of the Stock Options. All such options shall be designated as Non-Qualified Stock Options and shall be subject to the same terms and provisions as are then in effect with respect to the grant of Non-Qualified Stock Options to officers and key employees of the Company, except that the term of each such Stock Option shall be equal to five years. In the event discretionary Stock Options are granted to members of the Committee, such Stock Options shall be granted by the Board. The provisions of this Section 5(k) shall become effective the day following approval of this Plan by the shareholder of the Company and shall then replace and supercede Section 5(k) of the Company's 1991 Stock Plan. 7 SECTION 6. Restricted Stock. (a) Administration. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company and Subsidiaries to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. The Committee may also condition the grant of Restricted Stock upon the attainment of specified performance goals. The provisions of Restricted Stock awards need not be the same with respect to each recipient. In the event that Restricted Stock awards are granted to members of the Committee, such awards shall be granted by the Board. (b) Awards and Certificates. The prospective recipient of an award of shares of Restricted Stock shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the then applicable terms and conditions. (i) Each participant shall be issued a stock certificate in respect of shares of Restricted Stock awarded under the Plan. Such certificate shall be registered in the name of the participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the PremiumWear, Inc. 1999 Stock Plan and an Agreement entered into between the registered owner and PremiumWear, Inc. Copies of such Plan and Agreement are on file in the executive offices of PremiumWear, Inc. (ii) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to the Plan shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the 8 "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. Within these limits, the Committee may provide for the lapse of such restrictions in installments where deemed appropriate. (ii) Except as provided in paragraph (c)(i) of this Section 6, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the shares and the right to receive any cash dividends. The Committee, in its sole discretion, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested in additional shares of Restricted Stock (to the extent shares are available under Section 3 and subject to paragraph (f) of Section 10). Certificates for shares of Unrestricted Stock shall be delivered to the grantee promptly after, and only after, the period of forfeiture shall have expired without forfeiture in respect of such shares of Restricted Stock. (iii) Subject to the provisions of the award agreement and paragraph (c)(iv) of this Section 6, upon termination of employment for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the participant. (iv) In the event of special hardship circumstances of a participant whose employment is terminated (other than for Cause), including death, Disability or Retirement, or in the event of an unforeseeable emergency of a participant still in service, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to such participant's shares of Restricted Stock. (v) All restrictions with respect to any participant's shares of Restricted Stock shall lapse or be deemed to have lapsed or been terminated on the tenth (10th) business day prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company, other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 50% or more of the outstanding Stock of the Company. SECTION 7. Transfer, Leave of Absence, etc. For purposes of the Plan, the following events shall not be deemed a termination of employment: 9 (a) a transfer of an employee from the Company to a Parent Corporation or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or from one Subsidiary to another; (b) a leave of absence, approved in writing by the Committee, for military service or sickness, or for any other purpose approved by the Company if the period of such leave does not exceed ninety (90) days (or such longer period as the Committee may approve, in its sole discretion); and (c) a leave of absence in excess of ninety (90) days, approved in writing by the Committee, but only if the employee's right to reemployment is guaranteed either by a statute or by contract, and provided that, in the case of any leave of absence, the employee returns to work within 30 days after the end of such leave. SECTION 8. Amendments and Termination. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made (i) which would impair the rights of an optionee or participant under a Stock Option or Restricted Stock award theretofore granted, without the optionee's or participant's consent, or (ii) which without the approval of the stockholders of the Company would cause the Plan to no longer comply with Rule 16b-3 under the Securities Exchange Act of 1934, Section 422 of the Code or any other regulatory requirements. The Committee may amend the terms of any award or option theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall impair the rights of any holder without his consent. The Committee may also substitute new Stock Options under this Plan for options previously granted under this Plan or any previous stock option plan of the Company, provided, however, that the exercise price of any such substitute option granted under this Plan shall not be lower than the exercise price of the previously granted option (as adjusted, if applicable, for stock splits, distributions and similar events) without shareholder approval. SECTION 9. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. 10 SECTION 10. General Provisions. (a) The Committee may require each person purchasing shares pursuant to a Stock Option under the Plan to represent to and agree with the Company in writing that the optionee is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock delivered under the Plan pursuant to any Restricted Stock awards shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Subject to paragraph (d) below, recipients of Restricted Stock awards under the Plan (not including Stock Options) are not required to make any payment or provide consideration other than the rendering of services. (c) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee of the Company or any subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. (d) Each participant shall, no later than the date as of which any part of the value of an award first becomes includible as compensation in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. With respect to any award under the Plan, if the terms of such award so permit, a participant may elect by written notice to the Company to satisfy part or all of the withholding tax requirements associated with the award by (i) authorizing the Company to retain from the number of shares of Stock that would otherwise be deliverable to the participant, or (ii) delivering to the Company from shares of Stock already owned by the participant, that number of shares having an aggregate Fair Market Value equal to part or all of the tax payable by the participant under this Section 10(d). Any such election shall be in accordance with, and subject to, applicable tax and securities laws, regulations and rulings. 11 (e) At the time of grant, the Committee may provide in connection with any grant or award made under this Plan that the shares of Stock received as a result of such grant shall be subject to a repurchase right in favor of the Company, pursuant to which the participant shall be required to offer to the Company upon termination of employment for any reason any shares that the participant acquired under the Plan, with the price being the then Fair Market Value of the Stock or, in the case of a termination for Cause, an amount equal to the cash consideration paid for the Stock, subject to such other terms and conditions as the Committee may specify at the time of grant. The Committee may, at the time of the grant of an award under the Plan, provide the Company with the right to repurchase, or require the forfeiture of, shares of Stock acquired pursuant to the Plan by any participant who, at any time within two years after termination of employment with the Company, directly or indirectly competes with, or is employed by a competitor of, the Company. (f) The reinvestment of dividends in additional Restricted Stock at the time of any dividend payment shall only be permissible if the Committee (or the Company's chief executive or chief financial officer) certifies in writing that under Section 3 sufficient shares are available for such reinvestment (taking into account then outstanding Stock Options and other Plan awards). SECTION 11. Effective Date of Plan. The Plan became effective on February 22, 1999. Sections 5(c), 5(d) and 6(c)(v) were amended by the Board on July 13, 1999. 12 EX-10.(C) 4 AMENDED/RESTATED CHANGE IN CONTROL SEV. AGREEMENT EXHIBIT 10(C) AMENDED AND RESTATED CHANGE IN CONTROL SEVERANCE AGREEMENT THIS AGREEMENT is made and entered into by and between PremiumWear, Inc., a Minnesota corporation with its principal offices at 5500 Feltl Road, Minnetonka, Minnesota (the "Company") and Thomas D. Gleason, residing at 656 Manhattan Road, Grand Rapids, MI 49506 (the "Executive"), and shall be effective as of the 23rd day of February, 2000. WHEREAS, the Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders; and WHEREAS, the Executive has made and is expected to make, due to the Executive's intimate knowledge of the business and affairs of the Company, its policies, methods, personnel, and problems, a significant contribution to the profitability, growth, and financial strength of the Company; and WHEREAS, the Company, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist, and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the Executive in the performance of the Executive's duties, to the detriment of the Company and its shareholders; and WHEREAS, it is in the best interests of the Company and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including the Executive, to their assigned duties without distraction and to ensure the continued availability to the Company of the Executive in the event of a Change in Control. THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall be effective from and after the date hereof and shall continue in effect through December 31, 2001, and shall automatically be extended for successive one-year periods thereafter unless the Board of Directors of the Company (the "Board") shall have approved, and the Executive is notified in writing, prior to January 1, 2001 and each January 1 thereafter, that the term of this Agreement shall not be extended or further extended; provided, however, that if a Change in Control shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of 24 months from the date of the occurrence of a Change in Control. In the event that one or more Change in Control events shall occur during the original or any extended term of this Agreement, the 24- month period shall follow the last Change in Control. This Agreement shall neither impose nor confer any further rights or obligations on the Company or the Executive on the day after the end of the term of this Agreement. Expiration of the term of this Agreement of itself and without subsequent action by the Company or the Executive shall not end the employment relationship between the Company and the Executive. 2. Change in Control. No benefits shall be payable hereunder unless there shall have been a Change in Control. For purposes of this Agreement, a "Change in Control" of the Company shall mean a change in control which would be required to be reported in response to Item 6(e) on Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement, including, without limitation, if: (a) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (b) During any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), the Incumbent Directors cease for any reason to constitute at least a majority of the Board of Directors. The term "Incumbent Directors" shall mean those individuals who are members of the Board of Directors on the effective date of this Agreement and any individual who subsequently becomes a member of the Board of Directors (other than a director designated by a person who has entered into agreement with the Company to effect a transaction contemplated by Section 2(c)) whose election or nomination for election by the Company's shareholders was approved by a vote of at least a majority of the then Incumbent Directors; or (c) (i) The Company consummates a merger, consolidation, share exchange, division or other reorganization of the Company with any corporation or entity, other than an entity owned at least 80% by the Company, unless immediately after such transaction, the shareholders of the Company immediately prior to such transaction beneficially own, directly or indirectly 51% or more of the combined voting power of resulting entity's outstanding voting securities as well as 51% or more of the Total Market Value of the resulting entity, or in the case of a division, 51% or more of the combined voting power of the outstanding voting securities of each entity resulting from the division as well as 51% or more of the Total Market Value of each such entity, in each case in substantially the same proportion as such shareholders owned shares of the Company prior to such transaction; (ii) the shareholders of the Company approve an agreement for the sale or disposition (in one transaction or a series of transactions) of assets of the Company, the total consideration of which is greater than 51% of the Total Market Value of the Company, or (iii) the Company adopts a plan of complete liquidation or winding-up of the Company. "Total Market Value" shall mean the aggregate market value of the Company's or the resulting entity's outstanding common stock (on a fully diluted basis) plus the aggregate market value of the Company's or the resulting entity's other outstanding equity securities as measured by the exchange rate 2 of the transaction or by such other method as the Board determines where there is not readily ascertainable exchange rate. 3. Termination Following Change in Control. If a Change in Control shall have occurred during the term of this Agreement, the Executive shall be entitled to the benefits provided in subsection 4(d) unless such termination is (A) because of the Executive's death or Retirement, (B) by the Company for Cause or Disability, or (C) by the Executive other than for Good Reason. (a) Disability; Retirement. If, as a result of incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for at least six (6) consecutive months, and within 30 days after written Notice of Termination is given the Executive shall not have returned to the full-time performance of the Executive's duties, the Company may terminate the Executive's employment for "Disability". Any question as to the existence of the Executive's Disability upon which the Executive and the Company cannot agree shall be determined by a qualified independent physician selected by the Executive (or, if the Executive is unable to make such selection, it shall be made by any adult member of the Executive's immediate family), and approved by the Company. The determination of such physician made in writing to the Company and to the Executive shall be final and conclusive for all purposes of this Agreement. Termination by the Company or the Executive of the Executive's employment based on "Retirement" shall mean termination on or after attaining Normal Retirement Age in accordance with the PremiumWear, Inc. Profit Sharing Plan and Trust. (b) Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure by the Executive (other than any such failure resulting from (1) the Executive's incapacity due to physical or mental illness, (2) any such actual or anticipated failure after the issuance of a Notice of Termination by the Executive for Good Reason or (3) the Company's active or passive obstruction of the performance of the Executive's duties and responsibilities) to perform substantially the duties and responsibilities of the Executive's position with the Company after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the duties or responsibilities; (ii) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (iii) the willful engaging by the Executive in fraud or dishonesty which is demonstrably and materially injurious to the Company, monetarily or otherwise. 3 No act, or failure to act, on the Executive's part shall be deemed "willful" unless committed, or omitted by the Executive in bad faith and without reasonable belief that the Executive's act or failure to act was in the best interest of the Company. The Executive shall not be terminated for Cause unless and until the Company shall have delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive's conduct was Cause and specifying the particulars thereof in detail. (c) Good Reason. The Executive shall be entitled to terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without the Executive's express written consent, any of the following: (i) The assignment to the Executive of any duties inconsistent with the Executive's status or position with the Company, or a substantial alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (ii) A reduction by the Company in the Executive's annual compensation including, but not limited to, base pay or short and/long term incentive pay in effect immediately prior to a Change in Control; (iii) The relocation of the Company's principal executive offices to a location more than fifty miles from Minnetonka, Minnesota; (B) the Company requiring the Executive to be based anywhere other than at his offices in Grand Rapids, Michigan, except for required travel on the Company's business to an extent substantially consistent with the Executive's business travel obligations immediately prior to the Change in Control, provided, however, that the Executive shall not be required to travel to the Company's principal executive offices more than twice a month; or (C) a significant increase in the level of travel required of the Executive as compared to travel obligations immediately prior to the Change in Control; (iv) The failure by the Company to continue to provide the Executive with benefits at least as favorable to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which the Executive was participating immediately prior to the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed immediately prior to the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the 4 Executive is entitled immediately prior to the Change in Control, provided, however, that the Company may amend any such plan or programs as long as such amendments do not reduce any benefits to which the Executive would be entitled upon termination; (v) The failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 7; or (vi) any material violation of this Agreement by the Company. (d) Notice of Termination. Any purported termination of the Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circum stances claimed to provide a basis for termination of the Executive's employment. (e) Date of Termination. For purposes of this Agreement, "Date of Termination" shall mean: (i) If the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall have been absent from full-time performance of duties for at least six (6) months and shall not have returned to the full-time performance of the Executive's duties during such 30 day period in accordance with Section 3(a) hereof); and (ii) If the Executive's employment is terminated pursuant to subsections (b) or (c) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to subsection (b) above shall not be less than 10 days, and in the case of a termination pursuant to subsection (c) above shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given). (f) Dispute of Termination. If, within 10 days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company 5 shall continue to pay the Executive full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this subsection. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. 4. Compensation Upon Termination or During Disability. Following a Change in Control of the Company, as defined in subsection 2(a), upon termination of the Executive's employment or during a period of Disability, the Executive shall be entitled to the following benefits: (a) During any period that the Executive fails to perform full-time duties with the Company as a result of a Disability, the Company shall pay the Executive, the Executive's base salary as in effect at the commencement of any such period and the amount of any other form or type of compensation otherwise payable for such period if the Executive were not so disabled, until such time as the Executive is determined to be eligible for long term disability benefits in accordance with the Company's insurance programs then in effect or the Executive is terminated for Disability. (b) If the Executive's employment shall be terminated by the Company for Cause or by the Executive other than for Good Reason, Disability or Retirement, the Company shall pay to the Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and the Company shall have no further obligation to the Executive under this Agreement, except with respect to any benefits to which the Executive is entitled under any Company pension or welfare benefit plan, insurance program or as otherwise required by law. (c) If the Executive's employment shall be terminated by the Company or by the Executive for Disability or Retirement, or by reason of death, the Company shall immediately commence payment to the Executive (or the Executive's designated beneficiaries or estate, if no beneficiary is designated) of any and all benefits to which the Executive is entitled under the Company's retirement and insurance programs then in effect. (d) If the Executive's employment shall be terminated (A) by the Company other than for Cause, Retirement, Disability or the Executive's death or (B) by the Executive for Good Reason, then the Executive shall be entitled to the benefits provided below: (i) The Company shall pay the Executive, through the Date of Termination, the Executive's base salary as in effect at the time the Notice of Termination is given and any other form or type of compensation otherwise payable for such period; 6 (ii) In lieu of any further salary payments for periods subsequent to the Date of Termination, the Company shall pay a severance payment (the "Severance Payment") equal to two times the Executive's Annual Compensation as defined below. For purposes of this Section 4, "Annual Compensation" shall mean the Executive's annual salary (regardless of whether all or any portion of such salary has been contributed to a deferred compensation plan), the annual amount of the Company bonus for which the Executive is eligible upon attainment of 100% of the target (regardless of whether such target bonus has been achieved or whether conditions of such target bonus are actually fulfilled), and any other type or form of compensation paid to the Executive by the Company (or any corporation (an "Affiliate") affiliated with the Company within the meaning of Section 1504 of the Internal Revenue Code of 1986 as it may be amended from time to time (the "Code")) and included in the Executive's gross income for federal tax purposes during the 12-month period ending immediately prior to the Date of Termination, but excluding: a) any amount actually paid to the Executive as a cash payment of the target bonus (regardless of whether all or any portion of such the Company bonus was contributed to a deferred compensation plan); b) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired; and c) any payments actually or constructively received from a plan or arrangement of deferred compensation between the Company and the Executive. All of the items included in Annual Compensation shall be those in effect on the Date of Termination and shall be calculated without giving effect to any reduction in such compensation which would constitute a breach of this Agreement. The Severance Payment shall be made in a single lump sum within 60 days after the Date of Termination. (iii) For the 24-month period after the Date of Termination, the Company shall arrange to provide, at its sole expense, the Executive with life, disability, accident and health insurance benefits substantially similar to those which the Executive is receiving or entitled to receive immediately prior to the Notice of Termination. The cost of providing such benefits shall be in addition to (and shall not reduce) the Severance Payment. Benefits otherwise receivable by the Executive pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by the Executive during such period, and any such benefits actually received by the Executive shall be reported to the Company. (iv) Up to $10,000 for individual outplacement counseling to the Executive. (v) The Company shall also pay to the Executive all legal fees and expenses incurred by the Executive as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement). 7 (e) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise. (f) The Executive shall be entitled to receive all benefits payable to the Executive under Company pension and welfare benefit plans or any successor of such plan and any other plan or agreement relating to retirement benefits which shall be in addition to, and not reduced by, any other amounts payable to the Executive under this Section 4. (g) The Executive shall be entitled to exercise all rights and to receive all benefits accruing to the Executive under any and all Company stock purchase and stock option plans or programs, or any successor to any such plans or programs, which shall be in addition to, and not reduced by, any other amounts payable to the Executive under this Section 4. Notwithstanding anything herein to the contrary, if the Executive's employment is governed by a separate written employment agreement that provides benefits upon a termination of employment, the aggregate of any payments or benefits payable under such employment agreement shall offset and reduce the aggregate of payments and benefits under this Agreement. 5. Limitation on Parachute Payments. If, in the opinion of tax counsel selected by the Company and acceptable to the Executive, the Severance Payment (in its full amount or as partially reduced, as the case may be) plus all other payments or benefits which constitute "parachute payments" within the meaning of section 280G(b)(2) of the Code exceeds the amount that is deductible by the Company by reason of section 280G, and in the opinion or such tax counsel, the Severance Payment (in its full amount or as partially reduced, as the case may be) plus all other payments or benefits which constitute "parachute payments" within the meaning of section 280G(b)(2) of the Code are not reasonable compensation for services actually rendered or to be rendered, within the meaning of section 280G(b)(4) of the Code, the Severance Payment shall be reduced by the excess of the aggregate "parachute payments" that would be paid to or for the Executive without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code. The value of any non-cash benefit or any deferred cash payments shall be determined by the Company in accordance with the principles of sections 280G(d)(3) and (4) of the Code. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this subsection, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by the Company or its Affiliates by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (A) the excess 8 of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that would have been paid to or for the Executive's's benefit without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code; and (B) interest on the amount set forth in clause (A) of this sentence at the applicable Federal rate (as defined in section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such payment. 6. Funding of Payments. In order to assure the performance of the Company or its successor of its obligations under this Agreement, the Company may deposit in trust an amount equal to the maximum payment that will be due the Executive under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to the Executive (or the Executive's legal representative, as the case may be) the amount to which the Executive shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to the Company. If the Company deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. If and to the extent there are not amounts in trust sufficient to pay the Executive under this Agreement, the Company shall remain liable for any and all payments due to the Executive. In accordance with the terms of such trust, at all times during the term of this Agreement, the Executive shall have no rights, other than as an unsecured general creditor of the Company, to any amounts held in trust and all trust assets shall be general assets of the Company and subject to the claims of creditors of the Company. Failure of the Company to establish or fully fund such trust shall not be deemed a revocation or termination of this Agreement by the Company. 7. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to 51% or more of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to the compensation and benefits from the Company in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, successors, heirs, and designated beneficiaries. If the Executive should die while any amount would still be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries, or, if there is no such designated beneficiary, to the Executive's estate. 9 8. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the last known residence address of the Executive or in the case of the Company, to its principal office to the attention of each of the then directors of the Company with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of, or compliance with, any condition or provision of this Agreement to be performed by such other-party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. 10. Validity. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned officer, on behalf of PremiumWear, Inc., and the Executive have hereunto set their hands to be effective as of the date first above written. PREMIUMWEAR, INC. By /s/ David E. Berg ------------------------------------- David E. Berg Its President & CEO ----------------------------------- EXECUTIVE: /s/ Thomas D. Gleason ---------------------------------------- Thomas D. Gleason 10 EX-10.(D) 5 CHANGE IN CONTROL SEVERANCE AGREEMENT EXHIBIT 10(D) CHANGE IN CONTROL SEVERANCE AGREEMENT THIS AGREEMENT is made and entered into by and between PremiumWear, Inc., a Minnesota corporation with its principal offices at 5500 Feltl Road, Minnetonka, Minnesota (the "Company") and ______________, residing at ________________, (the "Executive"), and shall be effective as of this ____ day of September, 1999. WHEREAS, the Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders; and WHEREAS, the Executive has made and is expected to make, due to the Executive's intimate knowledge of the business and affairs of the Company, its policies, methods, personnel, and problems, a significant contribution to the profitability, growth, and financial strength of the Company; and WHEREAS, the Company, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist, and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the Executive in the performance of the Executive's duties, to the detriment of the Company and its shareholders; and WHEREAS, it is in the best interests of the Company and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including the Executive, to their assigned duties without distraction and to ensure the continued availability to the Company of the Executive in the event of a Change in Control. THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall be effective from and after the date hereof and shall continue in effect through December 31, 2001, and shall automatically be extended for successive one-year periods thereafter unless the Board of Directors of the Company (the "Board") shall have approved, and the Executive is notified in writing, prior to January 1, 2001 and each January 1 thereafter, that the term of this Agreement shall not be extended or further extended; provided, however, that if a Change in Control shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of 24 months from the date of the occurrence of a Change in Control. In the event that more than one Change in Control shall occur during the original or any extended term of this Agreement, the 24- month period shall follow the last Change in Control. This Agreement shall neither impose nor confer any further rights or obligations on the Company or the Executive on the day after the end of the term of this Agreement. Expiration of the term of this Agreement of itself and without subsequent action by the Company or the Executive shall not end the employment relationship between the Company and the Executive. 2. Change in Control. No benefits shall be payable hereunder unless there shall have been a Change in Control. For purposes of this Agreement, a "Change in Control" of the Company shall mean a change in control which would be required to be reported in response to Item 6(e) on Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement, including, without limitation, if: (a) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (b) During any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), the Incumbent Directors cease for any reason to constitute at least a majority of the Board of Directors. The term "Incumbent Directors" shall mean those individuals who are members of the Board of Directors on the effective date of this Agreement and any individual who subsequently becomes a member of the Board of Directors (other than a director designated by a person who has entered into agreement with the Company to effect a transaction contemplated by Section 2(c)) whose election or nomination for election by the Company's shareholders was approved by a vote of at least a majority of the then Incumbent Directors; or (c) (i) The Company consummates a merger, consolidation, share exchange, division or other reorganization of the Company with any corporation or entity, other than an entity owned at least 80% by the Company, unless immediately after such transaction, the shareholders of the Company immediately prior to such transaction beneficially own, directly or indirectly 51% or more of the combined voting power of resulting entity's outstanding voting securities as well as 51% or more of the Total Market Value of the resulting entity, or in the case of a division, 51% or more of the combined voting power of the outstanding voting securities of each entity resulting from the division as well as 51% or more of the Total Market Value of each such entity, in each case in substantially the same proportion as such shareholders owned shares of the Company prior to such transaction; (ii) the shareholders of the Company approve an agreement for the sale or disposition (in one transaction or a series of transactions) of assets of the Company, the total consideration of which is greater than 51% of the Total Market Value of the Company, or (iii) the Company adopts a plan of complete liquidation or winding-up of the Company. "Total Market Value" shall mean the aggregate market value of the Company's or the resulting entity's outstanding common stock (on a fully diluted basis) plus the aggregate market value of the Company's or the resulting entity's other outstanding equity securities as measured by the exchange rate of the transaction or by such other method as the Board determines where there is not readily ascertainable exchange rate. 2 3. Termination Following Change in Control. If a Change in Control shall have occurred during the term of this Agreement, the Executive shall be entitled to the benefits provided in subsection 4(d) unless such termination is (A) because of the Executive's death or Retirement, (B) by the Company for Cause or Disability, or (C) by the Executive other than for Good Reason. (a) Disability; Retirement. If, as a result of incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for at least six (6) consecutive months, and within 30 days after written Notice of Termination is given the Executive shall not have returned to the full-time performance of the Executive's duties, the Company may terminate the Executive's employment for "Disability". Any question as to the existence of the Executive's Disability upon which the Executive and the Company cannot agree shall be determined by a qualified independent physician selected by the Executive (or, if the Executive is unable to make such selection, it shall be made by any adult member of the Executive's immediate family), and approved by the Company. The determination of such physician made in writing to the Company and to the Executive shall be final and conclusive for all purposes of this Agreement. Termination by the Company or the Executive of the Executive's employment based on "Retirement" shall mean termination on or after attaining Normal Retirement Age in accordance with the PremiumWear, Inc. Profit Sharing Plan and Trust. (b) Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure by the Executive (other than any such failure resulting from (1) the Executive's incapacity due to physical or mental illness, (2) any such actual or anticipated failure after the issuance of a Notice of Termination by the Executive for Good Reason or (3) the Company's active or passive obstruction of the performance of the Executive's duties and responsibilities) to perform substantially the duties and responsibilities of the Executive's position with the Company after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the duties or responsibilities; (ii) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct; or (iii) the willful engaging by the Executive in fraud or dishonesty which is demonstrably and materially injurious to the Company, monetarily or otherwise. No act, or failure to act, on the Executive's part shall be deemed "willful" unless committed, or omitted by the Executive in bad faith and without reasonable belief that the Executive's act or failure to act was in the best interest of the Company. The Executive shall not be terminated for Cause unless and until the Company shall have delivered to the Executive a 3 copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive's conduct was Cause and specifying the particulars thereof in detail. (c) Good Reason. The Executive shall be entitled to terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without the Executive's express written consent, any of the following: (i) The assignment to the Executive of any duties inconsistent with the Executive's status or position with the Company, or a substantial alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (ii) A reduction by the Company in the Executive's annual compensation including, but not limited to, base pay or short and/long term incentive pay in effect immediately prior to a Change in Control; (iii) (A) The relocation of the Company's principal executive offices to a location more than fifty miles from Minnetonka, Minnesota; (B) the Company requiring the Executive to be based anywhere other than the Company's principal executive offices except for required travel on the Company's business to an extent substantially consistent with the Executive's business travel obligations immediately prior to the Change in Control; or (C) a significant increase in the level of travel required of the Executive as compared to travel obligations immediately prior to the Change in Control; (iv) The failure by the Company to continue to provide the Executive with benefits at least as favorable to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which the Executive was participating immediately prior to the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed immediately prior to the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled immediately prior to the Change in Control, provided, however, that the Company may amend any such plan or programs as long as such amendments do not reduce any benefits to which the Executive would be entitled upon termination; 4 (v) The failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 7; or (vi) any material violation of this Agreement by the Company. (d) Notice of Termination. Any purported termination of the Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circum stances claimed to provide a basis for termination of the Executive's employment. (e) Date of Termination. For purposes of this Agreement, "Date of Termination" shall mean: (i) If the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall have been absent from full-time performance of duties for at least six (6) months and shall not have returned to the full-time performance of the Executive's duties during such 30 day period in accordance with Section 3(a) hereof); and (ii) If the Executive's employment is terminated pursuant to subsections (b) or (c) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to subsection (b) above shall not be less than 10 days, and in the case of a termination pursuant to subsection (c) above shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given). (f) Dispute of Termination. If, within 10 days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company shall continue to pay the Executive full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this subsection. Amounts paid under this 5 subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement. 4. Compensation Upon Termination or During Disability. Following a Change in Control of the Company, as defined in subsection 2(a), upon termination of the Executive's employment or during a period of Disability, the Executive shall be entitled to the following benefits: (a) During any period that the Executive fails to perform full-time duties with the Company as a result of a Disability, the Company shall pay the Executive, the Executive's base salary as in effect at the commencement of any such period and the amount of any other form or type of compensation otherwise payable for such period if the Executive were not so disabled, until such time as the Executive is determined to be eligible for long term disability benefits in accordance with the Company's insurance programs then in effect or the Executive is terminated for Disability. (b) If the Executive's employment shall be terminated by the Company for Cause or by the Executive other than for Good Reason, Disability or Retirement, the Company shall pay to the Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and the Company shall have no further obligation to the Executive under this Agreement, except with respect to any benefits to which the Executive is entitled under any Company pension or welfare benefit plan, insurance program or as otherwise required by law. (c) If the Executive's employment shall be terminated by the Company or by the Executive for Disability or Retirement, or by reason of death, the Company shall immediately commence payment to the Executive (or the Executive's designated beneficiaries or estate, if no beneficiary is designated) of any and all benefits to which the Executive is entitled under the Company's retirement and insurance programs then in effect. (d) If the Executive's employment shall be terminated (A) by the Company other than for Cause, Retirement, Disability or the Executive's death or (B) by the Executive for Good Reason, then the Executive shall be entitled to the benefits provided below: (i) The Company shall pay the Executive, through the Date of Termination, the Executive's base salary as in effect at the time the Notice of Termination is given and any other form or type of compensation otherwise payable for such period; (ii) In lieu of any further salary payments for periods subsequent to the Date of Termination, the Company shall pay a severance payment (the "Severance Payment") equal to two times the Executive's Annual Compensation as defined below. For purposes of this Section 4, "Annual Compensation" shall mean the 6 Executive's annual salary (regardless of whether all or any portion of such salary has been contributed to a deferred compensation plan), the annual amount of the Company bonus for which the Executive is eligible upon attainment of 100% of the target (regardless of whether such target bonus has been achieved or whether conditions of such target bonus are actually fulfilled), and any other type or form of compensation paid to the Executive by the Company (or any corporation (an "Affiliate") affiliated with the Company within the meaning of Section 1504 of the Internal Revenue Code of 1986 as it may be amended from time to time (the "Code")) and included in the Executive's gross income for federal tax purposes during the 12-month period ending immediately prior to the Date of Termination, but excluding: a) any amount actually paid to the Executive as a cash payment of the target bonus (regardless of whether all or any portion of such the Company bonus was contributed to a deferred compensation plan); b) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired; and c) any payments actually or constructively received from a plan or arrangement of deferred compensation between the Company and the Executive. All of the items included in Annual Compensation shall be those in effect on the Date of Termination and shall be calculated without giving effect to any reduction in such compensation which would constitute a breach of this Agreement. The Severance Payment shall be made in a single lump sum within 60 days after the Date of Termination. (iii) For the 24-month period after the Date of Termination, the Company shall arrange to provide, at its sole expense, the Executive with life, disability, accident and health insurance benefits substantially similar to those which the Executive is receiving or entitled to receive immediately prior to the Notice of Termination. The cost of providing such benefits shall be in addition to (and shall not reduce) the Severance Payment. Benefits otherwise receivable by the Executive pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by the Executive during such period, and any such benefits actually received by the Executive shall be reported to the Company. (iv) Up to $10,000 for individual outplacement counseling to the Executive. (v) The Company shall also pay to the Executive all legal fees and expenses incurred by the Executive as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement). (e) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any 7 compensation earned by the Executive as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise. (f) The Executive shall be entitled to receive all benefits payable to the Executive under Company pension and welfare benefit plans or any successor of such plan and any other plan or agreement relating to retirement benefits which shall be in addition to, and not reduced by, any other amounts payable to the Executive under this Section 4. (g) The Executive shall be entitled to exercise all rights and to receive all benefits accruing to the Executive under any and all Company stock purchase and stock option plans or programs, or any successor to any such plans or programs, which shall be in addition to, and not reduced by, any other amounts payable to the Executive under this Section 4. Notwithstanding anything herein to the contrary, if the Executive's employment is governed by a separate written employment agreement that provides benefits upon a termination of employment, the aggregate of any payments or benefits payable under such employment agreement shall offset and reduce the aggregate of payments and benefits under this Agreement. 5. Limitation on Parachute Payments. If, in the opinion of tax counsel selected by the Company and acceptable to the Executive, the Severance Payment (in its full amount or as partially reduced, as the case may be) plus all other payments or benefits which constitute "parachute payments" within the meaning of section 280G(b)(2) of the Code exceeds the amount that is deductible by the Company by reason of section 280G, and in the opinion or such tax counsel, the Severance Payment (in its full amount or as partially reduced, as the case may be) plus all other payments or benefits which constitute "parachute payments" within the meaning of section 280G(b)(2) of the Code are not reasonable compensation for services actually rendered or to be rendered, within the meaning of section 280G(b)(4) of the Code, the Severance Payment shall be reduced by the excess of the aggregate "parachute payments" that would be paid to or for the Executive without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code. The value of any non-cash benefit or any deferred cash payments shall be determined by the Company in accordance with the principles of sections 280G(d)(3) and (4) of the Code. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this subsection, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by the Company or its Affiliates by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (A) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that would have been paid to or for the Executive's's benefit without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code; 8 and (B) interest on the amount set forth in clause (A) of this sentence at the applicable Federal rate (as defined in section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such payment. 6. Funding of Payments. In order to assure the performance of the Company or its successor of its obligations under this Agreement, the Company may deposit in trust an amount equal to the maximum payment that will be due the Executive under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to the Executive (or the Executive's legal representative, as the case may be) the amount to which the Executive shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to the Company. If the Company deposits funds in trust, payment shall be made no later than the occurrence of a Change in Control. If and to the extent there are not amounts in trust sufficient to pay the Executive under this Agreement, the Company shall remain liable for any and all payments due to the Executive. In accordance with the terms of such trust, at all times during the term of this Agreement, the Executive shall have no rights, other than as an unsecured general creditor of the Company, to any amounts held in trust and all trust assets shall be general assets of the Company and subject to the claims of creditors of the Company. Failure of the Company to establish or fully fund such trust shall not be deemed a revocation or termination of this Agreement by the Company. 7. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to 51% or more of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to the compensation and benefits from the Company in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, successors, heirs, and designated beneficiaries. If the Executive should die while any amount would still be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designated beneficiaries, or, if there is no such designated beneficiary, to the Executive's estate. 8. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage 9 prepaid, addressed to the last known residence address of the Executive or in the case of the Company, to its principal office to the attention of each of the then directors of the Company with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of, or compliance with, any condition or provision of this Agreement to be performed by such other-party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. 10. Validity. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned officer, on behalf of PremiumWear, Inc., and the Executive have hereunto set their hands as of the date first above written. PREMIUMWEAR, INC. By ------------------------------------- Its ----------------------------------- EXECUTIVE: ------------------------------------- 10 EX-10.(I) 6 THIRD AMENDMENT TO CREDIT AND SECURITY AGREEMENT EXHIBIT 10(I) THIRD AMENDMENT TO CREDIT AND SECURITY AGREEMENT THIS THIRD AMENDMENT, dated as of July 31st, 1999, amends and modifies a certain Credit and Security Agreement, dated as of February 4, 1997 as amended by a First Amendment to Credit and Security Agreement dated as of July 21, 1997 and by a Second Amendment to Credit and Security Agreement dated as of November 1, 1998 (as amended, the "Credit Agreement"), between U.S. BANK NATIONAL ASSOCIATION, as assignee of FBS BUSINESS FINANCE CORPORATION, (the "Lender"), PREMIUMWEAR, INC., a Delaware corporation (the "Borrower"). Terms not otherwise expressly defined herein shall have the meanings set forth in the Credit Agreement. PRELIMINARY STATEMENT WHEREAS, the Borrower and the Lender desire to amend the Credit Agreement as hereinafter set forth; NOW, THEREFORE, for value received, the Borrower and the Lender agree as follows: ARTICLE I - AMENDMENTS 1.1 Supplement A. Supplement A to the Credit Agreement is deleted and Supplement A attached hereto is substituted in its place. 1.2 Year 2000. A new Section 4.26 is hereby added following Section 4.25 of the Credit Agreement to read as follows: 4.26 Year 2000. Borrower has reviewed and assessed its business operations and computer systems and applications to address the "year 2000 problem" (that is, that computer applications and equipment used by Borrower, directly or indirectly through third parties, may be unable to properly perform date-sensitive functions before, during and after January 1, 2000). Borrower reasonably believes that the year 2000 problem will not result in a material adverse change in the Borrower's business condition (financial or otherwise) operations, properties or prospects or ability to repay Lender. Borrower agrees that this representation will be true and correct on and shall be deemed made by Borrower on each date Borrower requests any advance under this Agreement or Note or delivers any information to Lender. Borrower will promptly deliver to Lender such information relating to this representation as Lender requests from time to time. 1.3 Construction. All references in the Credit Agreement to "this Agreement," "herein" and similar references shall be deemed to refer to the Credit Agreement as amended by this Amendment. ARTICLE II - REPRESENTATIONS AND WARRANTIES 2.1 Authorization; Validity and Binding Effect. To induce the Lender to enter into this Amendment and to make and maintain the Loans under the Credit Agreement as amended hereby, the Borrower hereby warrants and represents to the Lender that it is duly authorized to execute and deliver this Amendment and each other document delivered in connection herewith, and to perform its obligations under the Credit Agreement as amended hereby and each other document delivered in connection herewith, that this Amendment and the other documents delivered in connection herewith constitute the legal, valid and binding obligations of the Borrower, enforceable in accordance with their respective terms, and that the Borrower has taken all action necessary under its Articles of Incorporation, Bylaws and applicable law regarding the transactions contemplated herein. 2.2 Affirmation of Representations and Warranties. The Borrower hereby restates all the representations and warranties in Article V of the Credit Agreement and affirms to the Lender that such representations and warranties are true and correct as though made on the date hereof the same as if made on the date hereof and fully set forth herein, except for changes that are permitted by the terms of the Credit Agreement. ARTICLE III - CONDITIONS PRECEDENT This Amendment shall become effective on the date first set forth above; provided, however, that the effectiveness of this Amendment is subject to the satisfaction of each of the following conditions precedent: 3.1 Warranties. Before and after giving effect to this Amendment, the representations and warranties in Article V of the Credit Agreement shall be true and correct as though made on the date hereof, except for changes that are permitted by the terms of the Credit Agreement. 3.2 Defaults. Before and after giving effect to this Amendment, no Event of Default and no Unmatured Event of Default shall have occurred and be continuing under the Credit Agreement except as waived herein. The execution by the Borrower of this Amendment shall be deemed a representation that the Borrower has complied with the foregoing condition. 3.3 Documents. The following shall have been delivered to the Lender, each duly executed and dated, or certified, as of the date hereof, as the case may be: (a) Secretary's Certificate. The certificate of the Secretary or an Assistant Secretary of the Borrower certifying that the resolutions authorizing any Designated Person to, among other things, execute amendments to the Credit Agreement are still in full force and effect and that the list of Designated Persons set forth in that Secretary's Certificate of February 4, 1997 has not changed. - 2 - (b) Confirmation of Security Agreement. A confirmation of the Third Party Security Agreement in the form of Exhibit A attached to this Amendment, duly executed by Klouda-Lenz. ARTICLE IV - GENERAL 4.1 Expenses. The Borrower agrees to reimburse the Lender upon demand for all reasonable expenses (including reasonable attorneys' fees and legal expenses of Dorsey & Whitney LLP, counsel for the Lender) incurred by the Lender in connection with the preparation of this Amendment and in enforcing the obligations of the Borrower hereunder, and to pay and save the Lender harmless from all liability for any stamp or other taxes which may be payable with respect to the execution or delivery of this Amendment, which obligations of the Borrower shall survive any termination of the Credit Agreement. 4.2 Counterparts. This Amendment may be executed in as many counterparts as may be deemed necessary or convenient, and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same instrument. 4.3 Severability. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions hereof or affecting the validity or enforceability of such provisions in any other jurisdiction. 4.4 Law. This Amendment shall be a contract made under the laws of the State of Minnesota, which laws shall govern all the rights and duties hereunder. 4.5 Successors; Enforceability. This Amendment shall be binding upon the Borrower and the Lender and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Lender and the successors and assigns of the Lender. Except as hereby amended, the Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] - 3 - IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first written above. U.S. BANK NATIONAL ASSOCIATION By /s/ Leonard H. Ramotar ------------------------------------- Leonard H. Ramotar Its VP PREMIUMWEAR, INC. By /s/ James S. Bury ------------------------------------- James S. Bury Its VP of Finance Signature Page to Third Amendment SUPPLEMENT A (AMENDED JULY 31ST, 1999) TO CREDIT AND SECURITY AGREEMENT DATED AS OF FEBRUARY 4, 1997 BETWEEN U.S. BANK NATIONAL ASSOCIATION, AS ASSIGNEE OF FBS BUSINESS FINANCE CORPORATION (THE "LENDER") AND PREMIUMWEAR, INC. (THE "BORROWER") 1. CREDIT AGREEMENT REFERENCE. This Supplement A, as it may be amended or modified from time to time, is a part of the Credit and Security Agreement, dated as of February 4, 1997, between the Borrower and the Lender (together with all amendments, modifications and supplements thereto, the "Credit Agreement"). Capitalized terms used herein which are defined in the Credit Agreement shall have the meanings given such terms in the Credit Agreement unless the context otherwise requires. 2. DEFINITIONS. 2.1 CREDIT AMOUNT. The term "Credit Amount" shall mean the maximum amount of Loans which the Lender will make available to the Borrower which amount shall not exceed Six Million Dollars ($6,000,000); provided, however, that the aggregate outstanding principal balance of the Loans plus the Letter of Credit Obligations shall not exceed the Credit Amount. 2.2 BORROWING BASE. (a) DEFINITION. The term "Borrowing Base" shall mean: (i) an amount (the "Accounts Receivable Availability") of up to 80% of the net amount (as determined by the Lender after deduction of such reserves and allowances as the Lender deems proper and necessary) of the Borrower's Eligible Accounts Receivable; plus (ii) an amount (the "Inventory Availability") of up to 50% of the net value (the lower of the cost, determined on a first in first out basis, or market value of such Inventory, as determined by the Lender after deduction of such reserves and allowances as the Lender deems proper and necessary) of the Borrower's Eligible Inventory. 2.3 LETTER OF CREDIT SUBLIMIT. The term "Letter of Credit Sublimit" shall mean $2,000,000. 2.4 TERMINATION DATE. The term "Termination Date" shall mean February 3, 2002. 2.5 ADDITIONAL DEFINITIONS. As used herein, the following terms shall have the following respective meanings: "Adjusted Eurodollar Rate": With respect to each Interest Period applicable to a Eurodollar Rate Advance, the rate (rounded upward, if necessary, to the next one hundredth of one percent) determined by dividing the Eurodollar Rate for such Interest Period by 1.00 minus the Eurodollar Reserve Percentage. "Advance": Any portion of the outstanding principal balance under the Credit Agreement as to which the Borrower elected one of the available interest rate options and, if applicable, an Interest Period. An Advance may be a Eurodollar Rate Advance or a Reference Rate Advance. "Applicable Margin": With respect to: (a) Reference Rate Advances -- 0%. (b) Eurodollar Rate Advances -- 2.25%. "Board": The Board of Governors of the Federal Reserve System or any successor thereto. "Eurodollar Business Day": A Business Day which is also a day for trading by and between Lenders in United States dollar deposits in the interbank Eurodollar market and a day on which banks are open for business in New York City. "Eurodollar Rate": With respect to each Interest Period applicable to a Eurodollar Rate Advance, the interest rate per annum (rounded upward, if necessary, to the next one-sixteenth of one percent) at which United States dollar deposits are offered to the Lender in the interbank Eurodollar market two Eurodollar Business Days prior to the first day of such Interest Period for delivery in Immediately Available Funds on the first day of such Interest Period and in an amount approximately equal to the Advance to which such Interest Period is to apply as determined by the Lender and for a maturity comparable to the Interest Period; provided, that in lieu of determining the rate in the foregoing manner, the Lender may substitute the per annum Eurodollar interest rate (LIBOR) for United States dollars displayed on the Reuters Screen LIBO Page two Eurodollar Business Days prior to the first day of the Interest Period. "Reuters Screen LIBO Page" means the display designated as page "LIBO" on the Reuter Monitor Money Rates Screen (or such other page as may replace the LIBO page on that service) for the purpose of displaying London Interbank offered rates of major Lenders for United States dollar deposits. "Eurodollar Rate Advance": An Advance with respect to which the interest rate is determined by reference to the Adjusted Eurodollar Rate. "Eurodollar Reserve Percentage": As of any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board for determining the maximum reserve requirement (including any basic, supplemental or emergency reserves) for a member Lender of the Federal Reserve 2 System, with deposits comparable in amount to those held by the Lender, in respect of "Eurocurrency Liabilities" as such term is defined in Regulation D of the Board. The rate of interest applicable to any outstanding Eurodollar Rate Advances shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. "Interest Period": With respect to each Eurodollar Rate Advance, the period commencing on the date of such Advance or on the last day of the immediately preceding Interest Period, if any, applicable to an outstanding Advance and ending one, two or three months thereafter, as the Borrower may elect in the applicable notice of borrowing, continuation or conversion; provided that: (1) Any Interest Period that would otherwise end on a day which is not a Eurodollar Business Day shall be extended to the next succeeding Eurodollar Business Day unless such Eurodollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Eurodollar Business Day; (2) Any Interest Period that begins on the last Eurodollar Business Day of a calendar month (or a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Eurodollar Business Day of a calendar month; and (3) Any Interest Period that would otherwise end after the Termination Date shall end on the Termination Date. "Reference Rate": The rate of interest from time to time publicly announced by Lender as its "reference rate." The Lender may lend to its customers at rates that are at, above or below the Reference Rate. For purposes of determining any interest rate hereunder or under any Note which is based on the Reference Rate, such interest rate shall change as and when the Reference Rate shall change. "Reference Rate Advance": An Advance with respect to which the interest rate is determined by reference to the Reference Rate. "Regulatory Change": Any change after the date of the Credit Agreement in federal, state or foreign laws or regulations or the adoption or making after such date of any interpretations, directives or requests applying to a class of Lenders including the Lender under any federal, state or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. 3. INTEREST; FEES. 3.1 PROCEDURE FOR ADVANCES. Any request for an Advance must be given so as to be received by the Lender not later than 1:00 p.m. (Minneapolis time) two Eurodollar 3 Business Days prior to the date of the requested Advance if the Advance is requested as a Eurodollar Rate Advance and not later than 1:00 p.m. on the date of the requested Advance if the Advance is requested as a Reference Rate Advance. Each request for an Advance shall specify (i) the date of the Advance, (ii) the amount of the Advance to be made on such date which shall be in a minimum amount of $1,000 for Reference Rate Advances, or $500,000 for Eurodollar Rate Advances or, if more in either case, an integral multiple thereof, (iii) whether such Advance is to be funded as a Reference Rate Advance or a Eurodollar Rate Advance, and (iv) in the case of a Eurodollar Rate Advance, the duration of the initial Interest Period applicable thereto. 3.2 CONVERSIONS AND CONTINUATIONS. On the terms and subject to the limitations hereof, the Borrower shall have the option at any time and from time to time to convert all or any portion of the Advances into Reference Rate Advances or Eurodollar Rate Advances, or to continue a Eurodollar Rate Advance as such; provided, however that a Eurodollar Rate Advance may be converted or continued only on the last day of the Interest Period applicable thereto and no Advance may be converted or continued as a Eurodollar Rate Advance if a Default or Event of Default has occurred and is continuing on the proposed date of continuation or conversion. Advances may be converted to, or continued as, Eurodollar Rate Advances only in amounts of $500,000 or an integral multiple thereof. The Borrower shall give the Lender written notice of any continuation or conversion of any Advance and such notice must be given so as to be received by the Lender not later than 3:00 p.m. (Minneapolis time) two Eurodollar Business Days prior to requested date of conversion or continuation in the case of the continuation of, or conversion to, a Eurodollar Rate Advance. Each such notice shall specify (a) the amount to be continued or converted, (b) the date for the continuation or conversion (which must be (i) the last day of the preceding Interest Period for any continuation or conversion of Eurodollar Rate Advances, and (ii) a Eurodollar Business Day), and (c) in the case of conversions to or continuations as Eurodollar Rate Advances, the Interest Period applicable thereto. Any notice given by the Borrower under this Section shall be irrevocable. If the Borrower shall fail to notify the Lender of the continuation of any Eurodollar Rate Advance within the time required by this Section, such Advance shall, on the last day of the Interest Period applicable thereto, automatically be converted into a Reference Rate Advance of the same principal amount. 3.3 INTEREST RATES, INTEREST PAYMENTS AND DEFAULT INTEREST. Interest shall accrue and be payable on the Advances as follows: 3.3 (a) Each Eurodollar Rate Advance shall bear interest on the unpaid principal amount thereof during the Interest Period applicable thereto at a rate per annum equal to the sum of (i) the Adjusted Eurodollar Rate for such Interest Period, plus (ii) the Applicable Margin. 3.3(b) Each Reference Rate Advance shall bear interest on the unpaid principal amount thereof at a varying rate per annum equal to the sum of (i) the Reference Rate, plus (ii) the Applicable Margin. 3.3 (c) Any Advance not paid when due, whether at the date scheduled therefor or earlier upon acceleration, shall bear interest until paid in full at the 4 Default Rate, which shall be (i) during the balance of any Interest Period applicable to such Advance, at a rate per annum equal to the sum of the rate applicable to such Advance during such Interest Period plus 2.0%, and (ii) otherwise, at a rate per annum equal to the sum of (A) the Reference Rate, plus (B) the Applicable Margin for Reference Rate Advances, plus (C) 2.0%. 3.3 (d) Interest shall be payable (i) with respect to each Eurodollar Rate Advance having an Interest Period of three months or less, on the last day of the Interest Period applicable thereto; (ii) with respect to any Eurodollar Rate Advance having an Interest Period greater than three months, on the last day of the Interest Period applicable thereto and on each day that would have been the last day of the Interest Period for such Advance had successive Interest Periods of three months duration been applicable to such Advance; (iii) with respect to any Reference Rate Advance, on the last day of each month; (iv) with respect to all Advances, upon any permitted prepayment (on the amount prepaid); and (v) with respect to all Advances, on the Termination Date; provided that interest under Section 3.3 (c) shall be payable on demand. 3.4 OPTIONAL PREPAYMENTS. The Borrower may prepay Reference Rate Advances, in whole or in part, at any time, without premium or penalty. Any such prepayment must be accompanied by accrued and unpaid interest on the amount prepaid. Each partial prepayment shall be in a minimum amount of $10,000 or, if more, an integral multiple thereof. Except upon an acceleration following an Event of Default or upon termination of the Credit in whole, the Borrower may pay Eurodollar Rate Advances only on the last day of the Interest Period applicable thereto. Amounts paid (unless following an acceleration or upon termination of the Credit in whole) or prepaid on Advances under this Section 3.4 may be reborrowed upon the terms and subject to the conditions and limitations of the Credit Agreement. 3.5 INTEREST RATE NOT ASCERTAINABLE, ETC. If, on or prior to the date for determining the Adjusted Eurodollar Rate in respect of the Interest Period for any Eurodollar Rate Advance, the Lender determines (which determination shall be conclusive and binding, absent error) that: (a) deposits in dollars (in the applicable amount) are not being made available to the Lender in the relevant market for such Interest Period, or (b) the Adjusted Eurodollar Rate will not adequately and fairly reflect the cost to the Lender of funding or maintaining Eurodollar Rate Advances for such Interest Period, the Lender shall forthwith give notice to the Borrower of such determination, whereupon the obligation of the Lender to make or continue, or to convert any Advances to, Eurodollar Rate Advances, as the case may be, shall be suspended until the Lender notifies the Borrower that the circumstances giving rise to such suspension no longer exist. While any such suspension continues, all further Advances by the Lender shall be made as Reference Rate Advances. No such suspension shall affect the interest rate then in effect during the 5 applicable Interest Period for any Eurodollar Rate Advance outstanding at the time such suspension is imposed. 3.6 INCREASED COST. If any Regulatory Change: (a) shall subject the Lender to any tax, duty or other charge with respect to its Eurodollar Rate Advances, its obligation to make Eurodollar Rate Advances or shall change the basis of taxation of payment to the Lender of the principal of or interest on Eurodollar Rate Advances or any other amounts due under this Agreement in respect of Eurodollar Rate Advances or its obligation to make Eurodollar Rate Advances (except for changes in the rate of tax on the overall net income of the Lender imposed by the jurisdiction in which the Lender's principal office is located); or (b) shall impose, modify or deem applicable any reserve, special deposit, capital requirement or similar requirement (including, without limitation, any such requirement imposed by the Board, but excluding with respect to any Eurodollar Rate Advance any such requirement to the extent included in calculating the applicable Adjusted Eurodollar Rate) against assets of, deposits with or for the account of, or credit extended by, the Lender or shall impose on the Lender or on the interbank Eurodollar market any other condition affecting its Eurodollar Rate Advances or its obligation to make Eurodollar Rate Advances; and the result of any of the foregoing is to increase the cost to the Lender of making or maintaining any Eurodollar Rate Advance, or to reduce the amount of any sum received or receivable by the Lender under this Agreement or under the Note, then, within 30 days after demand by the Lender, the Borrower shall pay to the Lender such additional amount or amounts as will compensate the Lender for such increased cost or reduction. The Lender will promptly notify the Borrower of any event of which it has knowledge, occurring after the date hereof, which will entitle the Lender to compensation pursuant to this Section. A certificate of the Lender claiming compensation under this Section, setting forth the additional amount or amounts to be paid to it hereunder and stating in reasonable detail the basis for the charge and the method of computation, shall be conclusive in the absence of error. In determining such amount, the Lender may use any reasonable averaging and attribution methods. Failure on the part of the Lender to demand compensation for any increased costs or reduction in amounts received or receivable with respect to any Interest Period shall not constitute a waiver of the Lender's rights to demand compensation for any increased costs or reduction in amounts received or receivable in any subsequent Interest Period. 3.7 ILLEGALITY. If any Regulatory Change shall make it unlawful or impossible for the Lender to make, maintain or fund any Eurodollar Rate Advances, the Lender shall notify the Borrower, whereupon the obligation of the Lender to make or continue, or to convert any Advances to, Eurodollar Rate Advances shall be suspended until the Lender notifies the Borrower that the circumstances giving rise to such suspension no longer exist. If the Lender determines that it may not lawfully continue to maintain any Eurodollar Rate Advances to the end of the applicable Interest Periods, all of the affected Advances shall 6 be automatically converted to Reference Rate Advances as of the date of the Lender's notice, and upon such conversion the Borrower shall indemnify the Lender in accordance with Section 3.8. 3.8 FUNDING LOSSES; EURODOLLAR RATE ADVANCES. The Borrower shall compensate the Lender, upon its written request, for all losses, expenses and liabilities (including any interest paid by the Lender to lenders of funds borrowed by it to make or carry Eurodollar Rate Advances to the extent not recovered by the Lender in connection with the re-employment of such funds and including loss of anticipated profits) which the Lender may sustain: (i) if for any reason, other than a default by the Lender, a funding of a Eurodollar Rate Advance does not occur on the date specified therefor in the Borrower's request or notice as to such Advance under Section 3.1 or 3.2, or (ii) if, for whatever reason (including, but not limited to, acceleration of the maturity of Advances following an Event of Default), any repayment of a Eurodollar Rate Advance, or a conversion pursuant to Section 3.7, occurs on any day other than the last day of the Interest Period applicable thereto. The Lender's request for compensation shall set forth the basis for the amount requested and shall be final, conclusive and binding, absent error. 3.9 DISCRETION OF LENDER AS TO MANNER OF FUNDING. The Lender shall be entitled to fund and maintain its funding of Eurodollar Rate Advances in any manner it may elect, it being understood, however, that for the purposes of this Agreement all determinations hereunder (including, but not limited to, determinations under Section 3.8, but excluding determinations that the Lender may elect to make from the Telerate System, Inc. screen) shall be made as if the Lender had actually funded and maintained each Eurodollar Rate Advance during the Interest Period for such Advance through the purchase of deposits having a maturity corresponding to the last day of the Interest Period and bearing an interest rate equal to the Eurodollar Rate for such Interest Period. 3.10 OVERDRAFT LOANS; OVER ADVANCES. Overdraft Loans and Over Advances shall bear interest at the rate(s) determined pursuant to Section 2.7 or Section 2.8 of the Credit Agreement, as applicable. 3.11 COMMITMENT FEE. The Borrower shall pay to the Lender a commitment fee for the period from the date hereof to the date the Credit terminates in an amount equal to the sum of .25% per annum on the average daily Unused Credit Amount that is between the outstanding balance of the Loans and the Borrowing Base plus .25% per annum on the average daily Unused Credit Amount that is between the Borrowing Base and the Credit Amount. 3.12 LETTER OF CREDIT FEES. The Borrower shall pay the Lender, or any Affiliate, a commission on the undrawn amount of each standby Letter of Credit and on each L/C Draft accepted by the Lender or such Affiliate, on any standby Letter of Credit, in an amount equal to 1.75% per annum. The Borrower will pay the Lender, or any Affiliate, a commission of .75% per annum (subject to a minimum fee of $50) on the drawn amount of all trade Letters of Credit, plus the Lender's or such Affiliate's standard issuance fee and out of pocket expenses. 7 3.13 CREDIT TERMINATION FEE. Upon termination or cancellation of the Credit by the Borrower, the Borrower shall pay to the Lender a termination fee in an amount equal to one percent (1%) of the Credit Amount in the event that the Credit is terminated or canceled by the Borrower during the period from the date hereof through the one year anniversary of such date. 3.14. AUDIT FEES. In the absence of an Event of Default, fees for collateral audits shall be limited to $500 per day plus expenses for up to three collateral audits per year. 4. ELIGIBLE ACCOUNT RECEIVABLE REQUIREMENTS. The Account Receivable must not be unpaid on the date that is 121 days after the date of the invoice evidencing such Account Receivable. If invoices representing 10% or more of the unpaid amount of all Accounts Receivable from any one Account Debtor are unpaid more than 120 days after the dates of such invoices, then all Accounts Receivable relating to such Account Debtor shall cease to be Eligible Accounts Receivable. The Account Receivable must not be for finance charges. 5. ELIGIBLE INVENTORY REQUIREMENTS. The Inventory must be finished goods and not raw materials or work in process. 6. Intentionally Omitted. 7. ADDITIONAL COVENANTS. From the date of the Credit Agreement and thereafter until all of the Borrower's Obligations under the Credit Agreement are paid in full, the Borrower agrees that, unless the Lender shall otherwise consent in writing, it will not, and will not permit any Subsidiary to, do any of the following: 7.1 NET WORTH. Permit the Borrower's Net Worth to be less than twelve million dollars ($12,000,000) at any time. 7.2 CAPITAL EXPENDITURES. Make Capital Expenditures in an amount exceeding $2,500,000 on a consolidated basis in any fiscal year. 7.3 INTEREST COVERAGE RATIO. Permit the ratio, as of the last day of any fiscal quarter, of the Borrower's Earnings Before Interest and Taxes for the four consecutive fiscal quarters ending on that date to its consolidated interest expense (including, without limitation, imputed interest expense on Capitalized Leases) for the same period to be less than 1.1 to 1.0. Borrower's Initials __JSB__ Lender's Initials __LHR__ Date: July 31, 1999. 8 CONFIRMATION OF SECURITY AGREEMENT Reference is made to that certain Third Party Security Agreement dated as of April 27th, 1999 (the "Security Agreement"), made and given by the undersigned to secure the Obligations (as defined in the Security Agreement) of PREMIUMWEAR , INC. (the "Borrower") under that certain Credit and Security Agreement dated as of February 4, 1997 (as amended, the "Credit Agreement"), between the Borrower and U.S. BANK NATIONAL ASSOCIATION, as assignee of FBS BUSINESS FINANCE CORPORATION (the "Lender"). The undersigned acknowledges that it has received a copy of a proposed Third Amendment to Credit and Security Agreement to be dated on or about July 31, 1999 (the "Amendment"). The undersigned hereby (a) consents to the terms of the Amendment, and to the execution and delivery of the Amendment by the Borrower to the Lender; (b) acknowledges that the obligations of the Borrower to the Lender under the Credit Agreement constitute "Obligations" of the Borrower to the Lender within the meaning of the above-referenced Security Agreement; and (c) reaffirms that the security interests granted pursuant to the Security Agreement secure, among other things, the Borrower's obligations and duties under the Credit Agreement and the obligations of the undersigned under the Security Agreement. The undersigned further reaffirms that all of the terms, covenants and conditions of the Security Agreement remain in full force and effect. Date: August 16, 1999. KLOUDA-LENZ By /s/ James S. Bury -------------------------------- James S. Bury Its Secretary EX-13 7 1999 ANNUAL REPORT EXHIBIT 13 PREMIUMWEAR, INC. 1999 Annual Report to Shareholders LETTER FROM THE CHAIRMAN [PHOTO] THOMAS D. GLEASON CHAIRMAN It was some three and a half years ago that we changed the course of Munsingwear Inc.'s business by exiting the segment that marketed to retail stores. This segment accounted for more than two-thirds of the Company's sales in 1995 but also suffered sizeable operating losses. By mid-1996, we had downsized the Company by two-thirds, changed the Company's name to PremiumWear, Inc., and focused on a smaller segment serving the promotional products/advertising specialty market (which we referred to as "special markets"). Since then, our operating earnings (excluding one-time charges to close a manufacturing plant in North Carolina and open a new distribution and embroidery center in Tennessee) have grown to $4.0 million in 1999 from a loss of $6.3 million (before royalty income) in 1995. During this time, our sales to the promotional products/advertising specialty industry have tripled. In 1998, we entered the golf apparel business with the introduction of the Page & Tuttle(R) brand. Since then, we have expanded distribution to more than 1,200 on-course professional and specialty golf shops. We expect this new line to continue to grow in golf shops and to add to our promotional products business as Page & Tuttle(R) gains momentum in that market also. In March 1999, we acquired our independent sales and customer service representative firm, Klouda-Lenz, Inc. This acquisition has not only increased our ability to sell and service our promotional products customers more effectively, it also allows us the opportunity to expand the breadth of our product offerings to this market in and beyond apparel. Recent examples of this include PremiumWear's designation as the exclusive special markets representative for CROAKIES(R) eyeglass retainers and lanyards and for the Softspikes(R) golf specialty products. I am personally gratified by the turnaround and progress that the Company has made in the past three and a half years. During my tenure as chief executive officer from mid-1996 to mid-1999, I witnessed substantial growth in sales and earnings but, more importantly, a dramatic growth in the confidence and ability of our management team. This team has advanced the Company's competitive position in the markets we now serve and has put PremiumWear on sound marketing and financial footing. In July, I was both pleased and proud to turn over the chief executive's post to David E. Berg. Dave lives and breathes this business. He has grown in stature from leading the special markets sales and marketing effort to assuming full responsibility for both our special markets and golf businesses. I have seen Dave grow as an executive, providing both operational and strategic leadership to our seasoned, capable management team. I am confident he will continue to provide this leadership in the years ahead. It is an honor for me to have served as your chief executive officer and to continue to serve as your chairman of the board. I wish to thank the shareholders for your support and our customers for their confidence in us. But most of all, I want to thank my valued and dedicated associates who have built the Company to what it is today. Sincerely, /s/ Thomas D. Gleason Thomas D. Gleason Chairman of the Board LETTER FROM THE CEO [PHOTO] DAVID E. BERG PRESIDENT & CEO In my first shareholder letter, I am very pleased to report that 1999 was a banner year for PremiumWear, marked by improved financial results and several strategic operating accomplishments. For 1999, revenues increased 11% to $47.0 million, and, excluding special items, net income advanced 69% to $2.5 million, or $0.96 per share. Our operating margin improved to 8.4% of revenues from 5.6% last year, again excluding special charges. The source of the charges was actually a major reason for 1999's improvement. We incurred operations restructuring charges of $1.7 million pretax, or $1.1 million ($0.40 per share) after tax, in order to shut down our Fairmont, N.C., facility and transfer our embroidery and distribution operations to a newer, more efficient and more centrally located facility in Clarksville, Tenn. As part of this operating initiative, we have outsourced production completely to lower-cost, high-quality offshore manufacturers. Two other initiatives-the acquisition of Klouda-Lenz and the further development of our higher margin Page & Tuttle(R) line-also contributed to the nearly three percentage point increase in our operating margin ratio. I'm also glad to report that the market for promotional apparel continues to grow with the popularity of golf and casual attire in the workplace. In 1999, domestic promotional products sales were approximately $15 billion, and wearables remained the largest and fastest growing segment of that market. Our sales to this market approached $43 million in 1999, earning us a top-10 supplier status within the promotional products industry. Our success has been the result of our notoriety as a quick-response source for branded, high-quality apparel. Within this market, we are active in the more upscale segment of the apparel and accessories market, purposely avoiding lower-margin promotional items such as screenprinted T-shirts and plastic trinkets. For example, a recent addition to PremiumWear's line has been Page & Tuttle(R), which we first introduced as a logo'd apparel line to golf pro and resort shops in 1998. We have built the brand as an in-stock fashion product that a pro shop can order daily or weekly if need be, and this unique approach, along with the product quality and growing recognition of the brand, has led to its success. Today, a year and a half since its introduction, Page & Tuttle(R) apparel is in more than 1,200 golf pro and resort shops, including well-known golf courses such as Pebble Beach, Pinehurst, Kapalua, The Phoenician and The Broadmoor. Corporate executives who are also golf enthusiasts find Page & Tuttle(R) apparel at the pro shop, carrying the country club's logo. Now they have the opportunity to have their company's logo embroidered on Page & Tuttle(R) golf shirts, windshirts, sweaters and other apparel. We are certain that this two-pronged marketing effort will augment Page & Tuttle(R)'s brand power, resulting in higher golf and promotional product sales. In 1999, we introduced the Page & Tuttle line to the promotional products market, and we have been pleased by its initial reception. For 1999, Page & Tuttle(R) sales quadrupled to nearly $5 million. Of these sales, approximately 60% was to the golf pro and resort shop market and the balance to the promotional products market. In March 1999, we acquired Klouda-Lenz, a leading customer service and sales representative firm that had marketed our products to the promotional products industry. It now acts as our internal sales force and continues to represent several complementary lines, including sweaters, jackets and leather outerwear, alongside PremiumWear's own Page & Tuttle(R) and Munsingwear(R) lines. In addition, early in 2000 we began representing two additional lines, CROAKIES(R) eye restraints and other products and Softspikes(R) golf accessories. PremiumWear's commission income totaled $1.3 million for the nine months in 1999 that Klouda-Lenz was a PremiumWear subsidiary. Equally as important, in acquiring Klouda-Lenz, we also brought on board the firm's principals, Timothy Klouda and Dennis Lenz, who offer our Company a wealth of promotional product experience. In this industry, there are six S-words that, if executed effectively, lead to another: success. They are strategy, sourcing, systems, service, style and sales. By remaining focused on these areas, I am confident that we will meet or exceed our financial goals of 10% to 15% internal revenue growth, 15% to 20% earnings growth and a 10% operating income margin. We hope that you share our excitement for the future. Thank you for your continued support and vote of confidence. Sincerely, /s/ David E. Berg David E. Berg President and Chief Executive Officer Q&A DAVID E. BERG PRESIDENT & CEO WHAT ARE THE GREATEST GROWTH OPPORTUNITIES FOR PREMIUMWEAR? "WE WILL GROW OUR CORE PROMOTIONAL BUSINESS IN SEVERAL WAYS, THROUGH LINE AND PRODUCT EXTENSIONS, NEW LICENSES, NEW PARTNERSHIPS AND ACQUISITIONS. LINE AND PRODUCT EXTENSIONS SERVE TO FILL OUT OUR PRODUCT OFFERING TO MEET THE NEEDS OF THE MARKETPLACE. FOR INSTANCE, WITH PAGE & TUTTLE(R), WE SAW THE OPPORTUNITY TO CREATE PREMIUM LOGO'D GOLF APPAREL AS BOTH A PRO SHOP LINE AND A PROMOTIONAL PRODUCT LINE. IN THE PAST YEAR, THE NUMBER OF GOLF PRO AND RESORT SHOPS CARRYING THE PAGE & TUTTLE(R) LINE INCREASED FROM APPROXIMATELY 500 TO OVER 1,200 TODAY, AND SALES QUADRUPLED. WITH NEW LICENSING AGREEMENTS LIKE MUNSINGWEAR(R) OR NEW PARTNERSHIPS SIMILAR TO THE MARKETING AGREEMENTS WE RECENTLY SIGNED WITH CROAKIES(R) AND SOFTSPIKES(R), WE WILL BE ABLE TO EXPAND THE NUMBER OF BRANDED LINES WE REPRESENT TO THE PROMOTIONAL PRODUCTS MARKET. WE ARE TARGETING STRONG BRANDS, WELL RECOGNIZED BY THE INDUSTRY AND THE END CUSTOMER. AS WE INCREASE OUR STABLE OF BRANDS, WE WILL IMPROVE OUR COMPETITIVE POSITIONING WITHIN THE INDUSTRY. AS FOR ACQUISITIONS, PREMIUMWEAR IS FINANCIALLY UNLEVERAGED. SIMPLY PUT, WE HAVE ALMOST NO LONG-TERM DEBT AND, AS A RESULT, ARE IN A POSITION TO BE ON THE ACQUISITION PATH. TWO IMPORTANT CRITERIA FOR US ARE ACQUISITIONS BOTH COMPLEMENTARY TO OUR CORE PROMOTIONAL BUSINESS AND ACCRETIVE TO EARNINGS IN THE FIRST YEAR OF PURCHASE." LOOKING AHEAD, WHAT IS THE SINGLE-GREATEST CHALLENGE FOR THE COMPANY? "OUR SINGLE-GREATEST CHALLENGE IS THE COMPETITIVENESS OF THE INDUSTRY. IN THIS INDUSTRY, YOU MUST DELIVER ON PRICE, QUALITY AND SERVICE TO THE CUSTOMER. WE HAVE REALLY FOCUSED ON THIS, AND IT IS A MAJOR REASON WE HAVE ACHIEVED A TOP-10 SUPPLIER STATUS IN THE PROMOTIONAL APPAREL INDUSTRY." WHAT ROLE WILL THE INTERNET PLAY IN THE COMPANY'S BUSINESS IN THE FUTURE? "WE DEFINITELY SEE OPPORTUNITIES FOR THE INTERNET TO ENHANCE PREMIUMWEAR'S SALES AND CUSTOMER SERVICE CAPABILITIES. THE FIRST STEP WE ARE TAKING IN THIS DIRECTION IS UPDATING OUR WEB SITE, WWW.PREMIUMWEAR.COM, AND ADDING FUNCTIONALITY THAT WILL ALLOW CUSTOMERS TO PREVIEW OUR ENTIRE PRODUCT LINE AND ORDER OVER THE INTERNET. WE EXPECT THE UPGRADED WEB SITE TO BE UP AND RUNNING IN THE NEXT FEW MONTHS." WHAT IS THE MOST IMPORTANT TREND IN THE PROMOTIONAL APPAREL INDUSTRY? "THE MOST IMPORTANT TREND IN APPAREL IN THE LAST FIVE YEARS HAS BEEN THE INCREASED ACCEPTANCE AND PRESENCE OF CASUAL APPAREL IN CORPORATE AMERICA. MORE THAN 90% OF WORKPLACES OFFER CASUAL DRESS OPPORTUNITIES OF SOME SORT. AS A RESULT, SALES OF CASUAL PROMOTIONAL APPAREL-LIKE KNIT GOLF SHIRTS WITH COMPANY LOGOS-HAVE ACCELERATED ALONG WITH THIS TREND." THE GROWING PROMOTIONAL PRODUCTS BUSINESS Golf shirts embroidered with an organization's logo used as giveaways for a fundraising golf outing...windshirts with the company's logo distributed to its salesforce...a logo'd chambray shirt provided to top customers. These are just a few ways PremiumWear's products-promotional products-are used. Promotional products, as a concept, originated more than 50 years ago, when sales representatives gave away pens, pencils and pads of paper with the supplier's logo to their customers' buyers. Today, just like then, promotional products are used to create brand identity-heightening awareness while building recognition and loyalty. Promotional products serve as a functional and ongoing reminder of the company's or organization's marketing message. To the recipients, promotional products are useful. Today the market for promotional products in the U.S. is approximately $15 billion and has grown more than 10% annually over the past decade. Accounting for approximately one-quarter of all promotional products sales, "wearables," the category in which PremiumWear participates, is the largest and fastest growing segment. Just recently, PremiumWear became recognized as a top-10 supplier of unimprinted apparel to the promotional products/advertising specialty industry (PPAI/ASI). As illustrated by the flow chart to the left, PremiumWear supplies promotional apparel to wholesale apparel distributors, advertising specialty dealers, embroiderers, and uniform companies, collectively referred to as the promotional products/advertising specialty industry. The Company sells to more than 3,000 of the approximately 16,000 companies that comprise this industry. Some of the Company's largest customers include Alpha Shirt Co., Boise Marketing, Broder Bros., Corporate Express and HA-LO. These companies, in turn, sell PremiumWear apparel to corporations, schools, churches, civic groups and other organizations wanting to promote their name, to reward customers, donors or employees, or to use as giveaways for a special function. WHERE'S ALL THAT GROWTH COMING FROM? Two important trends have been the key growth drivers for the promotional apparel industry. For one, what was once a workplace perk is fast becoming a standard. In 1992, 17% of U.S. offices allowed employees to wear casual dress all week, according to one study. By 1997, 53% allowed casual dress five days a week. Another study, by the Society for Human Resources Management, found that in 1999, 95% of all companies surveyed offered casual dress opportunities, whether it be during holidays, once a week or five times a week. That was an increase from 83% two years prior. There can be no doubt that Corporate America has embraced the casual look as a way to boost morale and attract employees. How does logo'd apparel fit into all of this? Many companies have begun offering logo'd apparel that can be worn on casual days. They have found logo'd apparel to be a great marketing tool, a morale booster, and a great way to provide clothing acceptable as part of their casual policy. Some companies offer the logo'd apparel as gifts or incentives; others have a corporate catalog where employees can purchase company logo'd apparel. The second trend is golf's increased popularity. The wealth of young talent that is now competing on the PGA Tour-Tiger Woods, David Duval, Justin Leonard, and Sergio Garcia to name a few-has sparked renewed interest in the sport. According to the National Golf Foundation, 26 million Americans in 1998 played golf, with almost 3 million Americans taking up the game for the first time that year. Golf has grown into a $30 billion industry, with $2.5 billion being spent each year on golf apparel. PREMIUMWEAR LINES: MUNSINGWEAR(R) AND PAGE & TUTTLE(R) PremiumWear currently designs, sources, markets and distributes apparel under two brand names: Munsingwear(R) and Page & Tuttle(R). Munsingwear(R), the brand PremiumWear licenses from Perry Ellis International Corporation, was the brand under which PremiumWear began to design and market promotional apparel in 1993. Today Munsingwear(R) logo'd apparel such as golf shirts, long-sleeved shirts, sweaters, jackets and windshirts still represents the majority of the Company's sales. In 1998, PremiumWear introduced the Page & Tuttle(R) line to the retail golf market, positioning it as an upscale brand bearing the logo of golf courses and resorts. Today it can be found in over 1,200 golf pro and resort shops, approximately 10% of the number of such shops nationwide, including many well-known courses such as Pebble Beach and Pinehurst. Page & Tuttle(R)-named after Frank H. Page and Edward O. Tuttle who together founded PremiumWear's predecessor company, The Northwestern Knitting Co., in 1886-marries the tradition and heritage of golf with today's fashion. In 1999, PremiumWear expanded the presence of the Page & Tuttle(R) line by marketing it to the promotional products industry, offering corporations and organizations the opportunity to put their logo on the same apparel. Page & Tuttle(R) has become a premium, complementary line to the Munsingwear(R) line the Company already provides to the wholesale apparel distributors, advertising specialty dealers and embroiderers in the promotional products industry. PremiumWear continues to expand and redesign these lines, adding apparel in new styles, new colors and new fabrics. For instance, short-sleeved micro cord polo shirts were added to both the Munsingwear(R) and Page & Tuttle(R) lines (see the front cover and inside front cover). This shirt is expected to be one of PremiumWear's top sellers this year. REPRESENTED LINES With the March 1999 acquisition of Klouda-Lenz, Inc., a leading sales representative and customer service firm to the promotional products industry, PremiumWear began representing several additional lines for other companies in the industry. By outsourcing sales and customer service, these companies can focus on design, manufacturing and distribution. The lines PremiumWear represents-California Outerwear, Burk's Bay(TM) leather outerwear and accessories, Winona Knitting Mills sweaters-are complementary to its own Munsingwear(R) and Page & Tuttle(R) lines. This way, PremiumWear offers a more complete line to the wholesale apparel distributors, advertising specialty dealers and embroiderers. In early 2000, PremiumWear announced agreements to represent two additional lines: CROAKIES(R) and Softspikes(R). Both are well-recognized brands, CROAKIES(R) for its outdoor accessories and Softspikes(R) for its golf accessories. Through these agreements, PremiumWear represents CROAKIES(R) eyewear restraints and other accessories and MagneSport(TM) magnetic sports bracelets and DriStix(TM) rain hoods for golf bags, two lines owned by Softspikes(R). These CROAKIES(R) and Softspikes(R) lines offer companies and other organizations the opportunity to imprint their logo on quality branded products. PREMIUMWEAR'S HALLMARK: SERVICE Service is the foundation of the promotional products industry. PremiumWear has made its mark by offering complete lines of high-quality, branded imprinted apparel and accessories and making them available on a quick-response basis. The two latest initiatives in service for PremiumWear center on a new distribution facility and renovation of its Internet site. In fall 1999, PremiumWear opened its Clarksville, Tenn., facility, replacing an outdated facility in North Carolina. The new facility is more efficient and more centrally located, allowing quicker and more cost effective delivery to customers. PremiumWear also is in the process of updating its Web site, www.premiumwear.com. When the renovation is complete, customers will be able to view the entire product line and order online. PremiumWear's quick ascent as a leader in promotional apparel, since entering the industry just six years ago, is a tribute to the Company's ability to complement quality branded products with excellent service. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES, WHICH PROVIDE ADDITIONAL INFORMATION CONCERNING THE COMPANY'S FINANCIAL ACTIVITIES AND CONDITION. CAPITAL RESOURCES AND LIQUIDITY In the past three years, the Company's operations have become increasingly profitable. Operating income has improved from 4.2% of revenue in 1997 to 8.4% in 1999, excluding the effects of restructuring of operations in 1999. This has been primarily the result of increased offshore sourcing. In 1997 imports represented approximately 40% of total product needs, while in 1999 that ratio grew to 93%, eventually leading to the closure of the Company's North Carolina production facility. Management has used the reduced unit production costs as a means to improve profitability and to remain competitive in the marketplace. Profitability has also improved as a result of strong revenue growth. Revenues increased from $33.8 million in 1997 to $47 million in 1999. The increase has been the result of focusing on the PPAI/ASI market following the sale of the Company's former retail-oriented business to Perry Ellis International, Inc. in late 1996, the re-entry into the golf pro shop and resort market in 1998 under the Page & Tuttle(R) label, and the early 1999 purchase of Klouda-Lenz, Inc., the Company's former independent sales organization, which provides infrastructure to expand products and brands in the PPAI/ASI market. As a result of improved profitability, increased revenues, better inventory management and utilization of significant net operating loss carryforwards, the Company's financial position has become stronger over the past three fiscal years. At January 1, 2000, working capital totaled $14,623,000 compared to $14,824,000 the previous year and the current ratio was 2.7:1 compared to 4.0:1 in 1998. During 1999 operating activities provided $2,747,000 of cash, primarily due to an increase of $2,767,000 in accounts payable resulting from imported goods received in late-December 1999. During the year the Company utilized $793,000 of net operating loss carryforwards while depreciation and amortization of $545,000 was lower than the prior year's $731,000, which included an asset impairment charge of $472,000 for declining use of the Company's North Carolina production facility. These sources of cash were offset by a $1,318,000 increase in accounts receivable, primarily due to a 24% increase in fourth quarter revenue compared to the same quarter in 1998, and a $1,309,000 increase in inventories to meet anticipated fiscal 2000 needs. Capital expenditures of $2,379,000 included $1,362,000 of leasehold improvements, equipment and systems at the Company's new leased Tennessee distribution and embroidery facility. In addition, the Company spent $812,000 to replace core business software in conjunction with a general systems upgrade and its Year 2000 compliance project. In March 1999 the Company spent $1,554,000 net cash in the acquisition of Klouda-Lenz, Inc. In mid-1999 the Company purchased 50,000 shares of its outstanding common stock for $272,000 and in late 1999 issued $937,000 of long-term debt to help finance equipment 2 purchases and leasehold improvements for the new distribution center. At fiscal year-end cash and cash equivalents of $2,744,000 were essentially all invested in short-term government securities. At January 2, 1999, working capital totaled $14,824,000 compared to $11,149,000 the previous year and the current ratio was 4.0:1 compared to 3.3:1 in 1997. During 1998 operating activities provided $837,000 of cash, primarily due to net income of $1,453,000, depreciation of $989,000 and $731,000 from the utilization of net operating loss carryforwards. These sources of cash were offset by a $2,089,000 increase in receivables due to higher sales in the fourth quarter of 1998 compared to the 1997 fourth quarter. Capital expenditures totaled $609,000, primarily for purchases of embroidery equipment, leasehold improvements and upgrading of the Company's information systems. At 1998 year-end cash and cash equivalents totaling $3,215,000 were essentially all invested in short-term government securities. At January 3, 1998, working capital totaled $11,149,000 compared to $21,266,000 the previous year and the current ratio was 3.3:1 compared to 3.9:1 in 1996. After giving effect, on a pro forma basis, to the $12,500,000 special cash distribution in early 1997, working capital at January 4, 1997 would have totaled $8,766,000 and the current ratio would have been 2.2:1. During 1997, operating activities provided $392,000 of cash, primarily due to a $1,214,000 decrease in inventories as a result of more effective inventory management practices, $837,000 of net income, $463,000 from the utilization of net operating loss carryforwards and $439,000 of depreciation. These sources of cash were offset by a $2,441,000 reduction in payables and other liabilities, primarily due to payments of severance and professional services related to the 1996 sales of trade names and trademarks and reduced trade payables as a result of lower year-end inventories. Capital expenditures totaled $435,000, primarily for purchases of manufacturing equipment, leasehold improvements and upgrading of the Company's information systems. Financing activities included the March 1997 special cash distribution of $12,500,000 and $959,000 received from officers, directors and employees in the exercise of common stock options. At 1997 year-end cash and cash equivalents totaling $2,870,000 were essentially all invested in short-term government securities. Management expects the Company's financial resources and liquidity to continue to improve through profitable development of the promotional products and golf businesses. In addition, management will continue to focus efforts on inventory control. Over the past three years improved inventory management practices and forecasting procedures led to an increase in inventory turns from 2.7 in 1997 to 3.4 in 1999, which generated significant positive cash flow. Finally, the Company has net operating loss carryforwards of approximately $18,000,000 for domestic federal income tax purposes, which will reduce cash outlays otherwise necessary for income taxes. Management expects to be able to finance working capital needs and capital expenditures, which are estimated to be approximately $1,500,000 in fiscal 2000, through a combination of funds from operations and its long-term bank line of credit which provides up to $6,000,000 of available funds based on certain financial formulas. 3 RESULTS OF OPERATIONS REVENUES for fiscal 1999 increased 11% due to increased sales to promotional products customers and golf pro shops in addition to commission revenue received by the promotional products division as a result of the early-1999 purchase of Klouda-Lenz. Sales to PPAI/ASI customers increased 15%, primarily due to the Company's improved inventory position during the last half of 1999, while sales to distributors were flat due to consolidation of customers and stricter buying methods used by distributors to improve inventory turns. Sales to golf pro shops, although relatively small in proportion to total Company revenues, increased nearly threefold. At 1999 year end the Company had opened over 1,100 new accounts since entering the golf pro shop channel of distribution in 1998. Commission revenue was income earned from representing apparel products of other companies to the PPAI/ASI marketplace. Selling prices remained relatively flat from 1998 to 1999. 1998 revenues increased 26% over 1997 primarily due to a 22% increase in sales to promotional products customers. Sales growth was due to both added customers and additional volume with existing customers. The remaining growth came from the introduction of the Page & Tuttle(R) brand into the golf market, where the Company opened nearly 500 accounts. Selling prices remained relatively constant from 1997 to 1998. GROSS MARGIN reached 32.6% in 1999 compared to 25.4% in 1998. A significant portion of this improvement was due to increased offshore manufacturing, which lowered unit production costs in 1999. Offshore production comprised 93% of 1999 total units produced compared to two-thirds of production in 1998. Gross margin improved to 25.4% in 1998 compared to 22.4% in 1997. The improvement was due to increased offshore manufacturing, which comprised approximately two-thirds of 1998 production versus 40% in 1997. This was the result of management's strategy to expand offshore sourcing in order to reduce costs and remain competitive in the marketplace. Golf market sales, while modest, helped increase gross margin. SELLING, GENERAL AND ADMINISTRATIVE expenses in 1999 increased $2,935,000 over 1998 spending, reaching 24.2% of sales for the year versus 19.9% in 1998. Expenses of Klouda-Lenz after the purchase date comprised approximately $1,300,000 of the increase. In addition, selling expenses increased $855,000 due to increased commissions expense, salaries and fringe benefits related to additional sales management and customer service personnel, and expenses related to customer service process improvements. Advertising expenses increased $358,000 over 1998 levels due to increased trade and cooperative advertising programs with customers. Warehouse and distribution costs increased $263,000 due to an increase in the number of orders processed, higher freight costs and additional manning in the new distribution center after opening in November through year-end. Amortization of goodwill resulting from the Klouda-Lenz acquisition totaled $122,000 for the year. Selling, general and administrative expenses in 1998 increased $2,297,000 over the prior year, reaching 19.9% of sales versus 18.2% in 1997. Selling expenses accounted 4 for $1,155,000 of the increase, primarily due to the volume effect on variable costs such as commissions, advertising and warehouse expenses. The bad debt provision increased by $188,000 over the prior year, and management incentives and profit sharing covering all employees increased $507,000 versus 1997. Other administrative expenses increased $431,000, primarily due to costs related to various potential acquisition activities, public and shareholder relations expenses and accelerated depreciation on computer systems that were retired in mid-1999 as a result of a general systems upgrade and the Company's Year 2000 project. In 1999 the Company recognized a $1,684,000 OPERATIONS RESTRUCTURING EXPENSE, comprised of $1,245,000 of costs related to closing the Company's North Carolina production and distribution facilities and $439,000 of pre-opening expenses related to the new leased distribution and embroidery facility in Tennessee. Closing costs for the North Carolina facility included severance and fringe benefit costs for 217 terminated employees, occupancy costs, legal and professional fees and asset impairment charges. Pre-opening expenses for the Tennessee facility included salaries and fringe benefits, moving, occupancy and other costs incurred prior to the early November opening of the facility. In 1998, a $472,000 asset impairment charge was recorded to recognize the reduced production levels experienced at the North Carolina facility resulting from management's decision to source more goods offshore. INTEREST EXPENSE increased and INTEREST INCOME decreased in 1999 compared to 1998 as a result of the $1,554,000 net cash paid in the acquisition of Klouda-Lenz in early 1999. Interest expense decreased and interest income increased in 1998 compared to 1997 as a result of improved inventory control, which led to excess funds throughout 1998. During all periods, excess funds were invested in short-term government securities. In 1998, the Company recognized a $398,000 GAIN ON SALE OF TRADEMARKS from 1996 transactions due to remaining accruals that were no longer deemed necessary. PROVISION FOR INCOME TAXES represents federal, state, local and foreign taxes. At January 1, 2000, the Company had net operating loss carryforwards of approximately $18,000,000 for domestic federal income tax purposes. Due to the adoption of "Fresh Start Reporting" in 1991, the Company recognized no benefit from net operating loss carryforwards in its statement of operations, but rather reflected such benefit as a direct credit to shareholders' equity, which amount totaled $793,000 in 1999, $731,000 in 1998 and $463,000 in 1997. LOOKING FORWARD Management's strategy is to continue profitable development of the special markets channel of distribution. This is expected to occur through internal development of additional brands and labels, continued growth of the licensed Munsingwear(R) brand of knit and woven shirts, and through the licensing of and acting as sales representative for other brands and labels for apparel and accessory products. For example, in early 1998 the Company entered the golf-oriented apparel market under its internally developed Page & Tuttle(R) brand, following management's strategy to develop and/or 5 acquire complementary brands, markets and products. The Company then introduced the Page & Tuttle(R) brand to the PPAI/ASI market in 1999. In early 2000, the Company announced agreements to act as the exclusive sales representative for CROAKIES(R) and Softspikes(R) accessories in the PPAI/ASI market. Management expects to maintain substantially all 2000 production offshore in order to achieve lower unit costs to help the Company remain competitive in the apparel marketplace, where deflationary pricing practices are common. The Company currently pays no license fees on the majority of its sales under the terms of its licensing agreement with Perry Ellis International, Inc. and is not required to pay any such fees until aggregate sales dollars reach a specific amount, which is not likely to occur until the year 2001. At that time, license fees will represent an additional expense to the Company, which management plans to recover through improved margins and reduced costs in other areas. MARKET RISK Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates and commodity futures pricing. The Company is exposed to various market risks, including fluctuations in foreign currency exchange rates, interest rates and commodity prices for cotton. The Company does not enter into derivatives or other financial instruments for trading, speculative or hedging purposes. The Company follows certain practices to manage market risk. Contracts for the purchase of goods from Far East suppliers are negotiated in U.S. dollars, which tends to minimize the potential for short-term loss due to adverse changes in foreign currency exchange rates. The Company invests excess funds in U.S. government securities with maturities of 30 days or less, minimizing the effect of short-term interest rate changes on investments. The Company's products are made chiefly of cotton, the price of which is affected by worldwide commodity futures markets. The Company negotiates fabric purchases for twelve-month intervals, which minimizes the effect of short-term fluctuations in the price of cotton. YEAR 2000 The Year 2000 issue was the result of computer programs using a two-digit format, as opposed to four digits, to indicate the year. Computer systems based on a two-digit format were potentially unable to interpret dates beyond the year 1999 which could have caused a system failure or other computer errors, leading to disruption in operations. The Company spent $812,000 of identifiable costs related to the replacement and upgrade of its computer systems and to become year 2000 compliant. Such costs were capitalized in accordance with established Company accounting policy. The Company encountered no material disruption of operations as a result of the year 2000 date change and will continue to monitor the potential for disruption throughout the year. However, there can be no assurances that disruptions will not occur. 6 CAUTIONARY STATEMENT Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Letter to Shareholders, elsewhere in the Annual Report, in the Company's Form 10-K, in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect the Company's actual results and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) competitive conditions that currently exist, including the entry into the market by a number of competitors with significantly greater financial resources than the Company, are expected to continue, placing pressure on selling prices which could adversely impact sales and gross margins; (ii) the inability to carry out marketing and sales plans would have a materially adverse impact on the Company's projections; (iii) the Company is a licensee of the Munsingwear(R) name and maintaining a cooperative working relationship with the licensor is important for continued successful development of the special markets business; (iv) as a licensee, the Company is dependent on the licensor to adequately promote and properly distribute the brand and defend it from trademark infringement. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. IMPACT OF INFLATION Inflation affects the Company's business principally in the form of cost increases for materials and wages. The Company generally attempts to offset these cost increases by a combination of merchandising and design techniques, purchasing practices, improved workflow efficiencies, increased offshore sourcing and selective price increases. MARKET STATISTICS On December 15, 1999, the Company's common stock became listed on The Nasdaq Stock Market under the symbol WEAR. Prior to that date, the Company's common stock was listed on the New York Stock Exchange under the symbol PWA. 7 The 1999 and 1998 market price high and low were as follows: QUARTER - -------------------------------------------------------------------------------- 1ST 2ND 3RD 4TH - -------------------------------------------------------------------------------- 1999 - -------------------------------------------------------------------------------- High 7 5 7/8 6 6 Low 4 3/4 4 1/4 4 11/16 5 1998 - -------------------------------------------------------------------------------- High 5 7/8 5 9/16 7 13/16 7 5/8 Low 4 11/16 4 3/4 4 7/8 6 ================================================================================ No dividends were paid in the past two years. The Company's long-term bank line of credit restricts the payment of dividends. As of March 8, 2000, the Company had 845 shareholders of record. 8 CONSOLIDATED STATEMENTS OF OPERATIONS PremiumWear, Inc.
Year ended Year ended Year ended January 1, January 2, January 3, (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------ REVENUES: Net sales $ 45,647 $ 42,445 $ 33,820 Commissions 1,305 -- -- - ------------------------------------------------------------------------------------------------------------ 46,952 42,445 33,820 - ------------------------------------------------------------------------------------------------------------ EXPENSES: Cost of goods sold 31,610 31,647 26,256 Selling, general and administrative 11,378 8,443 6,146 Operations restructuring (See Note 3) 1,684 472 -- - ------------------------------------------------------------------------------------------------------------ 44,672 40,562 32,402 - ------------------------------------------------------------------------------------------------------------ OPERATING INCOME 2,280 1,883 1,418 - ------------------------------------------------------------------------------------------------------------ Interest expense (62) (40) (91) Interest income 97 180 114 Gain on sale of trademarks -- 398 -- Other 17 (57) 6 - ------------------------------------------------------------------------------------------------------------ Income before income taxes 2,332 2,364 1,447 Provision for income taxes 900 911 610 - ------------------------------------------------------------------------------------------------------------ NET INCOME $ 1,432 $ 1,453 $ 837 ============================================================================================================ NET INCOME PER COMMON SHARE: - ------------------------------------------------------------------------------------------------------------ Basic $ .57 $ .63 $ .36 Diluted $ .56 $ .60 $ .36 - ------------------------------------------------------------------------------------------------------------ Weighted average number of common shares outstanding 2,506 2,324 2,309 Dilutive effect of outstanding stock options after application of the treasury stock method 53 81 29 ------------------------------------------------------------------------------------------------------- Common and common equivalent shares outstanding - diluted 2,559 2,405 2,338 =======================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 9 CONSOLIDATED BALANCE SHEETS PremiumWear, Inc.
January 1, January 2, (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) 2000 1999 - ----------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,744 $ 3,215 Receivables: Trade, net of allowances of $377 and $728 7,518 5,670 Other 251 356 - ----------------------------------------------------------------------------------------------------------------- 7,769 6,026 Inventories 10,421 9,037 Deferred taxes 1,224 944 Prepaid expenses 1,146 624 - ----------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 23,304 19,846 - ----------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Land -- 15 Buildings and leasehold improvements 273 738 Machinery and equipment 4,156 4,700 - ----------------------------------------------------------------------------------------------------------------- 4,429 5,453 Less accumulated depreciation and amortization 1,171 4,335 - ----------------------------------------------------------------------------------------------------------------- 3,258 1,118 - ----------------------------------------------------------------------------------------------------------------- DEFERRED TAXES, net of valuation allowance of $4,490 and $6,961 2,788 1,556 NONCURRENT PREPAID EXPENSES 176 -- GOODWILL 2,277 -- - ----------------------------------------------------------------------------------------------------------------- $ 31,803 $ 22,520 ================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 6,607 $ 3,061 Accrued payroll and employee benefits 1,323 1,552 Other accruals 751 409 - ----------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 8,681 5,022 - ----------------------------------------------------------------------------------------------------------------- LONG-TERM LIABILITIES: Long-term debt 937 -- Postretirement benefits 657 695 - ----------------------------------------------------------------------------------------------------------------- TOTAL LONG-TERM LIABILITIES 1,594 695 - ----------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTES 4, 5, AND 8-12) SHAREHOLDERS' EQUITY Series B preferred stock, $100 stated value; voting, cumulative and participating (authorized 75,000 shares, none issued) -- -- Preferred stock, no par value (authorized 925,000 shares, none issued) -- -- Common stock, $.01 par value (authorized 20,000,000 shares, 2,596,610 and 2,339,530 shares issued) 26 23 Additional paid-in capital 18,052 14,490 Treasury stock (50,000 shares, at cost) (272) -- Retained earnings 3,722 2,290 - ----------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 21,528 16,803 - ----------------------------------------------------------------------------------------------------------------- $ 31,803 $ 22,520 =================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 10 CONSOLIDATED STATEMENTS OF CASH FLOWS PremiumWear, Inc.
Year Year Year Ended ended ended January 1, January 2, January 3, (AMOUNTS IN THOUSANDS) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 1,432 $ 1,453 $ 837 Reconciling items: Depreciation and amortization 545 989 439 Deferred taxes 793 731 463 Provision for losses on accounts receivable (35) 262 74 Gain on sale of trademarks -- (398) -- Loss on sale of property, plant and equipment -- 64 -- Changes in operating assets and liabilities: Receivables (1,318) (2,089) (43) Inventories (1,309) (447) 1,214 Prepaid expenses (613) (345) (151) Accounts payable 2,767 240 (1,188) Other accrued liabilities 485 377 (1,253) - ------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 2,747 837 392 - ------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Purchases of property, plant and equipment (2,379) (609) (435) Proceeds from sale of property, plant and equipment -- 51 -- Purchase of Klouda-Lenz, Inc. net of cash acquired (1,554) -- -- - ------------------------------------------------------------------------------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (3,933) (558) (435) - ------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Net change in restricted cash -- -- 447 Proceeds from issuance of long-term debt 937 -- -- Principal payments on long-term debt and capital lease obligations -- -- (23) Special cash distribution -- -- (12,500) Purchase of treasury stock (272) -- -- Proceeds from exercise of stock options 50 66 959 - ------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 715 66 (11,117) - ------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (471) 345 (11,160) Cash and cash equivalents at beginning of period 3,215 2,870 14,030 - ------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,744 $ 3,215 $ 2,870 ======================================================================================================================== Supplemental disclosures of cash flow information: Cash paid for taxes $ 84 $ 69 $ 368 - ------------------------------------------------------------------------------------------------------------------------ Cash paid for interest $ 58 $ 40 $ 84 - ------------------------------------------------------------------------------------------------------------------------ Cashless exercise of stock options $ -- $ -- $ 112 - ------------------------------------------------------------------------------------------------------------------------ Common shares issued in connection with the acquisition of Klouda-Lenz, Inc. 242 -- -- - ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 11 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY PremiumWear, Inc.
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) - -------------------------------------------------------------------------------------------------------------------------- Common Stock Treasury Additional Issued Stock Paid-in Retained Shares Amount Shares Amount Capital Earnings - -------------------------------------------------------------------------------------------------------------------------- Balance at January 4, 1997 2,163,153 $ 22 -- -- $ 17,128 $ 5,032 Exercise of stock options 156,177 1 -- -- 1,070 -- Utilization of net operating loss carryforwards -- -- -- -- 463 -- Special cash distribution -- -- -- -- (7,468) (5,032) Net Income -- -- -- -- -- 837 - -------------------------------------------------------------------------------------------------------------------------- Balance at January 3, 1998 2,319,330 $ 23 -- -- $ 11,193 $ 837 Exercise of stock options 20,200 -- -- -- 66 -- Utilization of net operating loss carryforwards and adjustment of related reserves -- -- -- -- 3,231 -- Net Income -- -- -- -- -- 1,453 - -------------------------------------------------------------------------------------------------------------------------- Balance at January 2, 1999 2,339,530 $ 23 -- -- $ 14,490 $ 2,290 Issued pursuant to 1991 reorganization 38 -- -- -- -- -- Shares issued in purchase of Klouda-Lenz, Inc. 241,892 3 -- -- 1,207 -- Exercise of stock options 15,150 -- -- -- 50 -- Utilization of net operating loss carryforwards and adjustment of related reserves -- -- -- -- 2,305 -- Purchase of treasury stock -- -- (50,000) $ (272) -- -- Net income -- -- -- -- -- 1,432 - -------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2000 2,596,610 $ 26 (50,000) $ (272) $ 18,052 $ 3,722 - --------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS PremiumWear, Inc. (the "Company") designs, sources and markets knit and woven shirts and other apparel to the promotional products/advertising specialty industry and to golf pro and resort shops utilizing its Page & Tuttle(R) brand and other licensed brands. In addition, the Company derives commission income by representing products of other companies to the promotional products/advertising specialty industry. Over 95% of all sales are to customers in the United States. The Company's products are assembled or manufactured primarily in Central America, South America and the Far East. PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of PremiumWear, Inc., its wholly - owned subsidiary Klouda-Lenz, Inc. and one inactive foreign subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying value of cash equivalents approximates fair value. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. Inventoriable costs include raw materials, labor and related manufacturing overhead expenses. Inventories consist of: January 1, January 2, (IN THOUSANDS) 2000 1999 ----------------------------------------------------------------------- Raw materials $ 141 $ 632 Work in process 1,458 1,432 Finished goods 8,822 6,973 ----------------------------------------------------------------------- $10,421 $9,037 ======================================================================= 13 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. The Company provides for depreciation using the straight-line method for financial reporting purposes and generally uses accelerated methods for income tax purposes. Estimated useful lives used in computing depreciation and amortization for financial reporting purposes range from five to forty years for buildings and leasehold improvements and from two to ten years for machinery and equipment. Assets recorded under leasehold improvements are amortized over the lease terms. The Company periodically reviews property, plant and equipment to determine that the carrying values have not been impaired (see Note 3). INCOME TAXES The Company accounts for income taxes under the liability method. In accordance with Fresh Start Reporting, any tax benefit associated with utilization of the net operating loss carryforwards which survived a 1991 reorganization is reflected as additional paid-in capital. NET INCOME PER COMMON SHARE Net income per common share was computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted income per common share includes the dilutive effect of outstanding stock options using the treasury stock method. REVENUES Net sales are recognized at the time of shipment and reserves are established for returns and allowances at that time. Sales to one customer in 1999, 1998 and 1997 totaled 20%, 17% and 15%, respectively, of total net sales. Sales to another customer in 1999 and 1998 totaled 20% and 14%, respectively, of total net sales. Sales to a third customer in 1998 and 1997 totaled 11% and 16%, respectively, of total net sales. ADVERTISING COSTS Advertising costs are comprised primarily of cooperative advertising programs, catalogs and trade advertising. Cooperative advertising obligations are expensed at the time the related revenues are generated. Catalog and trade advertising costs are capitalized upon production and expensed ratably over the corresponding sales period. Advertising expense for the last three fiscal years was $1,175,000, $770,000 and $537,000, respectively. FISCAL YEAR The Company's fiscal year ends on the first Saturday following December 31. The 1999, 1998 and 1997 fiscal years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively. NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," will be adopted by the Company 14 on January 1, 2001. Since the Company does not currently engage or plan to engage in derivative or hedging activities, there will be no impact to the Company's results of operations, financial position or cash flows upon adoption of this standard. The Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101 is effective for the Company's fiscal quarter beginning January 2, 2000. SAB No. 101 is not expected to have a material effect on the Company's financial position or results of operations. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. RECLASSIFICATIONS Certain amounts in the 1998 and 1997 financial statements have been reclassified to conform to 1999 presentation. These reclassifications had no effect on previously reported net income or shareholder's equity. 15 2. PURCHASE OF KOUDA-LENZ, INC. On March 25, 1999, the Company acquired Klouda-Lenz, Inc., its independent sales representative agency for the promotional products/advertising specialty market. Klouda-Lenz, Inc. merged into a wholly owned subsidiary of the Company. The purchase price was $1,554,000 net cash and 241,892 newly issued shares of common stock, which are subject to a two-year holding restriction. The $2,398,811 excess of purchase cost over net assets acquired was recorded as goodwill and is being amortized over 15 years. Amortization of $121,587 was recorded in 1999 selling, general and administrative expenses in the accompanying consolidated statements of operations. 16 3. OPERATIONS RESTRUCTURING In early 1999 the Company announced a plan to close its North Carolina production and distribution facilities, the result of management's decision to move all production offshore in order to achieve lower unit production costs and to improve shipping time to customers. Sewing operations were closed in early July 1999, cutting operations were closed at the end of September 1999, and the distribution center was closed in mid-November 1999. During the year, $1,245,000 was charged to operations restructuring expense primarily for estimated severance, fringe benefits, legal services, occupancy costs and asset impairment charges. At 1999 year-end, shutdown obligations of $305,000 remained and were classified in other accrued expenses in the accompanying consolidated balance sheets. Following an early 2000 auction of used equipment, the Company donated the facilities to the city of Fairmont, North Carolina and the remaining employees were terminated. In conjunction with the North Carolina closing, the Company transferred distribution center and embroidery operations to a new 100,000 square foot leased facility in Clarksville, Tennessee, which opened for operations in early November 1999. In 1999 the Company recognized $439,000 of operations restructuring expense primarily for training pay, fringe benefits, inventory moving costs and occupancy expenses incurred prior to opening the facility. During the last half of 1998 the Company reduced sewing production levels at its North Carolina facility to one-half the previous level. As a result, the Company recognized a $472,000 asset impairment charge to operations restructuring expense to write-down the facility to net realizable value. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the carrying value was determined by projecting cash flows over the expected remaining useful productive life of the facility. 17 4. LICENSING AGREEMENT AND SALE OF TRADEMARKS In 1996 the Company entered into a license agreement with Perry Ellis International, Inc. for the use of the Munsingwear(R) brand for knit shirts for twenty years and certain other products for five years. The license agreement includes an obligation to pay license fees through late 2001 on the sales of knit shirts when such sales reach specified annual amounts. Since the inception of the agreement, sales have not reached the specified annual amount for knit shirt sales. Management estimates the annual threshold will not be met until late in the year 2001, at which time license fees will become due under the agreement on knit shirt sales in excess of the specified amount. After 2001 license fees will be payable on all sales of knit shirts, regardless of the sales level, and will represent an additional cost to the Company at that time. The Company pays license fees on all sales of other Munsingwear(R) products. There are no guaranteed minimum royalty payments under the license agreement. 18 5. FINANCING AGREEMENTS AND LONG-TERM DEBT The Company has a bank line-of-credit under which up to $6,000,000 is available for borrowings and letters of credit through February 2002. Borrowings and letters of credit are limited to an aggregate amount equaling approximately 80% of eligible receivables and 50% of eligible finished goods inventories. Essentially all the assets of the Company except property, plant and equipment are pledged as collateral under the agreement. Borrowings under the facility bear interest at the bank's base rate of interest (8.5% at January 1, 2000). At January 1, 2000, $1,605,000 was utilized for letters of credit, resulting in unused availability of $4,395,000. The agreement contains a commitment fee of .5% per annum on the unused line of credit and also contains cross default provisions to other agreements and other covenants which, among other matters, require maintenance of certain financial ratios, restrict the sale of assets, restrict payment of dividends and restrict consolidation or merger of the Company with another entity. Additionally, the Company is restricted from incurring additional indebtedness and liens on assets. At January 1, 2000, the Company was in compliance with all debt covenants. The Company has a $937,000 seven-year bank term loan with annual interest of 9.25%. Principal is due on October 1, 2006. The loan is secured by certain property, plant and equipment at the Company's new Tennessee distribution facility. 19 6. INCOME TAXES The income tax provision for the past three years consisted of the following: (IN THOUSANDS) 1999 1998 1997 ----------------------------------------------------------------------- Current $107 $180 $147 Deferred 793 731 463 ======================================================================= $900 $911 $610 ----------------------------------------------------------------------- The current provision resulted from federal alternative minimum, state income, franchise and foreign taxes payable. As of January 1, 2000, the Company had net operating loss carryforwards for regular federal income tax purposes of approximately $18,000,000, which will begin to expire in 2005. The components of the net deferred tax asset were as follows: January 1, January 2, (IN THOUSANDS) 2000 1999 ----------------------------------------------------------------------- Net operating loss carryforwards $7,390 $ 6,884 Tax credit carryforwards 471 864 Deductible temporary differences 641 1,713 ----------------------------------------------------------------------- 8,502 9,461 Valuation allowance (4,490) (6,961) ----------------------------------------------------------------------- $4,012 $ 2,500 ======================================================================= A valuation allowance has been established to reduce the deferred tax asset to estimated realizable amounts. In 1999 and 1998, respectively, the Company reversed previously established valuation reserves of $1,512,000 and $2,500,000 for the estimated realizable portion of the deferred tax asset and, in accordance with "Fresh Start Reporting", credited additional paid-in capital for the adjustment. A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows: 1999 1998 ----------------------------------------------------------------------- Statutory federal income tax rate 34.0% 34.0% State income taxes, net of federal income tax benefits 2.7% 4.0% Other 1.3% 0.5% ----------------------------------------------------------------------- 38.0% 38.5% ======================================================================= The effective tax rate was reduced by the result of certain state taxes which do not vary with income and by permanent differences that become less significant as income increases. 20 7. SHAREHOLDERS' EQUITY At January 1, 2000, the Company's capital structure included 20,000,000 shares authorized for all classes of common stock and 1,000,000 shares authorized for all classes of preferred stock, of which 75,000 shares are reserved for Class B preferred stock. There are restrictions with respect to the trading of common stock to or from Five Percent Holders, as defined in the Company's 1991 Plan of Reorganization, through October 2001 as a means of preserving the benefits of the net operating loss carryforwards following the Company's reorganization in 1991. Preferred stock has been reserved for issuance under a shareholders' rights plan, which replaced the prior rights plan that expired in late 1997. Upon the occurrence of certain events, the shareholders' rights plan entitles the registered holder to purchase one one-hundredth of a share of preferred stock at a stated price or to purchase either the Company's shares or stock in an acquiring entity at half their market value. In 1999 the Company's Board of Directors authorized the repurchase of up to 50,000 shares of the Company's common stock. The Board considered this to be an advantageous use of funds as a result of the market price of the Company's common stock at that time. Subsequently, 50,000 shares of common stock were repurchased and were held in treasury at January 1, 2000. On March 5, 1997 a special cash distribution of $5.39 per share, or approximately $12,500,000, was paid to shareholders of record February 19, 1997, using proceeds from the 1996 sales of trademarks. 21 8. STOCK OPTIONS AND RESTRICTED STOCK The Company's 1991 and 1999 Stock Plans include a provision for the granting of stock options, which are accounted for under Accounting Principles Board (APB) Opinion No. 25, under which no compensation cost has been recognized. Had compensation costs for these plans been determined consistent with SFAS Statement No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 ------------------------------------------------------------------------------------------ As Reported $1,432 $1,453 $837 Net income: Pro Forma $1,352 $1,410 $821 ------------------------------------------------------------------------------------------ As Reported $0.57 $0.63 $0.36 Basic earnings per share: Pro Forma $0.54 $0.61 $0.36 ------------------------------------------------------------------------------------------ As Reported $0.56 $0.60 $0.36 Diluted earnings per share: Pro Forma $0.53 $0.59 $0.35 ==========================================================================================
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions summarized below:
1999 1998 1997 ------------------------------------------------------------------------------------------ Risk free interest rate 5.64% to 6.28% 4.28% to 5.66% 6.34% to 6.58% Expected life of options granted 5 years 5 to 10 years 5 years Expected volatility of options granted 48% to 51% 44% to 52% 48% Expected dividend yield $0 $0 $0 ------------------------------------------------------------------------------------------ Shares granted 40,000 261,600 131,950 Weighted average fair value of options granted $2.75 $2.34 $1.73 ==========================================================================================
22 The 1991 and 1999 Stock Plans reserved 873,500 and 120,0000 shares, respectively, of common stock for grants to employees in the form of restricted stock awards and incentive and non-qualified stock options. In addition, the Plans annually grant to each non-employee director an option to purchase a combined total of 1,000 shares of common stock. At January 1, 2000 there were 6,704 shares and 105,000 shares, respectively, available for future grants under the 1991 and 1999 Stock Plans. Information regarding the plans is summarized below:
1999 1998 1997 --------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------------------------------------------------------------------------------------------------- Options outstanding, beginning of year 390,200 $4.99 153,750 $4.70 255,800 $7.73 Granted 40,000 5.46 261,600 5.05 131,950 3.31 Canceled (18,400) 4.63 (4,950) 7.56 (37,900) 8.61 Exercised (15,150) 3.31 (20,200) 3.25 (196,100) 6.86 -------------------------------------------------------------------------------------------------- Options outstanding, end of year 396,650 $5.12 390,200 $4.99 153,750 $4.70 -------------------------------------------------------------------------------------------------- Options exercisable, end of year 146,488 93,975 $6.49 64,815 $6.67 ==================================================================================================
Options outstanding under the Plans expire during the years 2001 through 2008. 23 9. RETIREMENT PLAN The Company has a 401(k) profit-sharing plan covering all employees. The Company also matches one-half of the employee's first 5% contribution. Expense under this plan, including profit sharing and company match, totaled $246,000, $289,000 and $164,000 for 1999, 1998 and 1997, respectively. The Company's wholly owned subsidiary Klouda-Lenz, Inc. had a retirement plan which was terminated at the time of the acquisition. Distribution of all vested benefits, which totaled $147,000 at January 1, 2000, was made in early 2000. At January 1, 2000, vested benefits in this terminated plan approximated plan assets. 24 10. POSTRETIREMENT MEDICAL AND LIFE INSURANCE PLANS The Company sponsors postretirement benefit plans for certain retirees. The Company has adopted SFAS No. 132 "Employer's Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 is intended to standardize certain footnote disclosure requirements for pension and other retirement benefits. The Company has unfunded plans providing certain medical and life insurance benefits to specific retiree groups. Future retirees are not covered by these plans. The Company accounts for these plans under the accrual method of accounting. Information concerning these plans is as follows:
(IN THOUSANDS) 1999 1998 ---------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATIONS: Benefit obligation at beginning of year $ 844 $ 869 Interest cost 52 55 Actuarial (gains)/losses (76) (7) Benefits paid (76) (73) ---------------------------------------------------------------------------- Benefit obligations at end of year $ 744 $ 844 ============================================================================ FUNDED STATUS RECONCILIATION: Funded status $ (744) $ (844) Unrecognized actuarial losses 12 90 ---------------------------------------------------------------------------- Net accrued liability recognized $ (732) $ (754) ============================================================================
The following table provides the components of net periodic benefit cost for the plans for the past three years:
(IN THOUSANDS) 1999 1998 1997 --------------------------------------------------------------------------------------- Interest cost on accumulated postretirement benefit obligation $52 $55 $59 Net amortization and deferral -- -- 1 --------------------------------------------------------------------------------------- Annual net benefit expense $52 $55 $60 =======================================================================================
An 8.0% increase in the cost of covered medical benefits was assumed for 1999. This rate is assumed to decrease incrementally to 5.5% after 6 years and remain at that level thereafter. The discount rate used in determining the accumulated benefit obligation was 7.5% for 1999, 6.75% for 1998 and 7.0% for 1997. 25 Assumed health care cost trend rates have a significant effect on the amounts reported for the post retirement medical plans. A 1% change in assumed health care costs trend rates would have the following effects:
(IN THOUSANDS) 1% Increase 1% Decrease ------------------------------------------------------------------------------------- Effect on total service and interest cost components $ 3 $ (3) Effect on the accumulated benefit obligation $ 41 $ (39)
26 11. LEASES The Company is party to certain operating lease agreements covering office space and equipment through 2006. Minimum future obligations on operating leases in effect that have initial or remaining non-cancelable lease terms in excess of one year as of January 1, 2000 are as follows: (IN THOUSANDS) ---------------------------------------------------------------------- 2000 $ 789 2001 649 2002 610 2003 547 2004 303 2005 and beyond 518 ---------------------------------------------------------------------- $ 3,416 ====================================================================== Total rent expense under operating leases was $676,000, $443,000 and $437,000 for 1999, 1998 and 1997, respectively. 27 12. COMMITMENTS AND CONTINGENCIES The Company has Change in Control Severance Agreements with certain executives. The agreements provide the employees with certain severance rights after a Change in Control (as defined) of the Company and other events occur. The agreements continue until December 31, 2001, and will automatically renew for additional one-year periods unless the Board of Directors elects not to renew them. As of January 1, 2000, if such events had occurred, the Company's liability would have been approximately $2,900,000. 28 13. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a condensed summary of actual quarterly results for 1999 and 1998:
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------------------------------------------------------------------------------------- Net income per Operating Net common share Quarter Revenue income income(1) Basic Diluted -------------------------------------------------------------------------------------- 1999: First $ 9,047 $ 453 $ 290 $.12 $.12 Second 14,379 189 115 .05 .04 Third 11,859 831 505 .20 .20 Fourth 11,667 807 522 .20 .20 -------------------------------------------------------------------------------------- $46,952 $2,280 $1,432 $.57 $.56 ====================================================================================== 1998: First $9,350 $ 419 $ 256 $.11 $.11 Second 12,938 736 460 .20 .19 Third 10,719 444 293 .13 .12 Fourth 9,438 284 444 .19 .18 -------------------------------------------------------------------------------------- $42,445 $1,883 $1,453 $.63 $.60 ======================================================================================
(1) 1999 includes operations restructuring charges of $100,000, $1,200,000, $86,000 and $298,000 for the first, second, third and fourth quarters, respectively, before income taxes. 1998 includes $472,000 asset impairment charge and $398,000 gain from the reversal of liabilities related to sold assets, in the fourth quarter, before income taxes. 29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To PremiumWear, Inc. We have audited the accompanying consolidated balance sheets of PremiumWear, Inc. (a Delaware corporation) and subsidiaries as of January 1, 2000 and January 2, 1999, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the three fiscal years in the period ended January 1, 2000. 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 auditing standards generally accepted in the United States. 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 PremiumWear, Inc. and subsidiaries as of January 1, 2000 and January 2, 1999 and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 1, 2000 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, February 18, 2000 30 FIVE YEAR FINANCIAL REVIEW
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------------------------------------- FOR THE YEAR 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Net sales $ 45,647 $ 42,445 $ 33,820 $ 49,948 $ 51,512 Commissions 1,305 -- -- -- -- Royalty income -- -- -- 2,969 4,609 Cost of sales 31,610 31,647 26,256 40,452 42,714 Gross margin % 32.6% 25.4% 22.4% 23.6% 23.9% Interest expense 62 40 91 771 1,158 Income (loss) before income taxes 2,332 2,364 1,447 11,252 (2,230) Net income (loss) 1,432 1,453 837 7,181 (2,335) Earnings per share $ 0.56 $ 0.60 $ 0.36 $ 3.37 $ (1.13) Purchases of property, plant and equipment 2,379 609 435 689 1,201 Depreciation and amortization 545 989 439 847 782 Special cash distribution -- -- 12,500 -- -- AS OF THE END OF THE YEAR - ------------------------------------------------------------------------------------------------------------- Total assets $ 31,803 $ 22,520 $ 17,551 $ 30,256 $ 33,653 Current assets 23,304 19,846 15,938 28,639 24,244 Current liabilities 8,681 5,022 4,789 7,373 20,318 Working capital 14,623 14,824 11,149 21,266 3,926 Current ratio 2.7 4.0 3.3 3.9 1.2 Long-term debt 937 -- -- -- 22 Common shareholders' equity 21,528 16,803 12,053 22,182 12,984 Number of employees 142 265 261 312 343 =============================================================================================================
No dividends were declared or paid for the years listed. 31 DRAFT COPY - PRINTED 03/23/00 BOARD OF DIRECTORS C. D. Anderson(2) SENIOR MANAGING PARTNER PLANTAGENET CAPITAL MANAGEMENT LLC, SAN FRANCISCO Keith A. Benson(1,2) VICE CHAIRMAN, CHIEF FINANCIAL OFFICER MUSICLAND STORES CORPORATION, MINNEAPOLIS David E. Berg PRESIDENT AND CHIEF EXECUTIVE OFFICER Thomas D. Gleason(3) CHAIRMAN OF THE BOARD Timothy C. Klouda PRESIDENT, KLOUDA-LENZ, INC. Alan W. Kosloff(1) CHAIRMAN AND CHIEF EXECUTIVE OFFICER, KOSLOFF AND PARTNERS, LLC, KANSAS CITY Gerald E. Magnuson(1,3) OF COUNSEL TO LINDQUIST & VENNUM PLLP, MINNEAPOLIS Mark B. Vittert(2,3) PRIVATE INVESTOR (1) Member of Audit Committee (2) Member of Compensation Committee (3) Member of Governance Committee 32 OFFICERS Thomas D. Gleason CHAIRMAN OF THE BOARD David E. Berg PRESIDENT AND CHIEF EXECUTIVE OFFICER James S. Bury CHIEF FINANCIAL OFFICER AND ASSISTANT SECRETARY Cynthia L. Boeddeker VICE PRESIDENT OF OPERATIONS Timothy C. Klouda PRESIDENT, KLOUDA-LENZ, INC. Dennis G. Lenz VICE PRESIDENT, KLOUDA-LENZ, INC. James R. Murphy GENERAL MANAGER, GOLF DIVISION Frank B. Bennett PARTNER IN THE LAW FIRM OF LINDQUIST & VENNUM PLLP SECRETARY 33 CORPORATION INFORMATION ANNUAL MEETING The Annual Meeting of Shareholders will be held Wednesday, May 17, 2000, at 3:30 p.m. CDT at the Company's headquarters, 5500 Feltl Road, Minnetonka, MN 55343-7902 FORM 10-K Copies of Form 10-K annual report, filed with the Securities and Exchange Commission, are available without charge upon written request to Seyferth & Associates, Inc., Rockford Center, 110 Ionia Avenue NW, Grand Rapids, MI 49503-3003, (616) 776-3511, E-mail: seyferthPR@aol.com. TRANSFER AGENT AND REGISTRAR OF COMMON STOCK Norwest Bank Minnesota, N.A. Shareowner Services P. O. Box 64854 St. Paul, MN 55164-0854 (651) 450-4064 / (800) 468-9716 PREMIUMWEAR STOCK Nasdaq: WEAR PREMIUMWEAR ON THE INTERNET AND BY FAX Company website: www.premiumwear.com Company News On Call (through PR Newswire): 1-800-758-5804 (Code #589750) LEGAL COUNSEL Lindquist & Vennum PLLP Minneapolis, MN INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP Minneapolis, MN INVESTOR RELATIONS COUNSEL Seyferth & Associates, Inc. Grand Rapids, MI FACILITIES CORPORATE HEADQUARTERS DISTRIBUTION AND EMBROIDERY 5500 Feltl Road 975 International Blvd. Minnetonka, MN 55343-7902 Clarksville, TN 37040 34 EX-21 8 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 PREMIUMWEAR, INC. and SUBSIDIARIES Subsidiaries of the Registrant State of Jurisdiction of Incorporation --------------------- Munsingwear Canada Limited (inactive) Canada Klouda-Lenz, Inc. Minnesota EX-23 9 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 18, 2000 incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements File Nos. 33-833386 and 33-381153. /s/ARTHUR ANDERSEN LLP -------------------------- ARTHUR ANDERSEN LLP Minneapolis, Minnesota March 31, 2000 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JAN-01-2000 JAN-01-2000 2,744 0 7,769 377 10,421 23,304 4,429 1,171 31,803 8,681 0 0 0 26 21,502 31,803 45,647 46,952 31,610 31,610 13,062 (35) 62 2,332 900 1,432 0 0 0 1,432 .57 .56
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