-----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, LcLD2szYzC4hRalG8Utk6oZQ6vAnywjXB+lsfHSqS03cfJTkIDotK9SCIRX/Pc4h CBjD01sZEZmeDoWCWe8liA== 0000897101-98-000322.txt : 19980330 0000897101-98-000322.hdr.sgml : 19980330 ACCESSION NUMBER: 0000897101-98-000322 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980327 SROS: NYSE 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: 0104 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-00063 FILM NUMBER: 98574930 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-K405 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 3, 1998 Commission File Number 1-63 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.) 7566 MARKET PLACE DRIVE, MINNEAPOLIS, MINNESOTA 55344-3629 (Address of principal executive office) (Zip Code) Registrant's telephone number: (612) 943-5000 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 New York Stock Exchange Preferred share purchase rights New York Stock Exchange 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. [X] The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the Registrant at March 18, 1998 was $9,869,000, based upon the closing price of $5.1875 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 18, 1998 was 2,319,430. -------------------------- DOCUMENTS INCORPORATED BY REFERENCE: Documents incorporated in part by reference in Parts I and II of this report: Portions of PremiumWear, Inc. 1997 Annual Report to Shareholders for the fiscal year ended January 3, 1998. Documents incorporated in part by reference in Part III of this report: Portions of definitive proxy statement for the 1998 Annual Meeting of Shareholders. This Form 10-K consists of 47 total pages: The exhibit index is on page 18. PART I Item 1. Business A. GENERAL DEVELOPMENT OF BUSINESS The Company (formerly known as Munsingwear, Inc.) 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 June 1996, the Company sold its trademarks and pending trademark applications for certain Far Eastern countries to ITOCHU Corporation, Toyobo Co., Ltd., and Descente, Ltd. for $5,000,000 cash. In September 1996, the Company sold all of its rights to its remaining trademarks and certain associated assets relating to the retail and professional golf businesses to Supreme International Corporation for $18,000,000 in cash. At the time of the September 1996 trademark sale, the Company changed its name 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, pants and shorts. The Company sells Munsingwear(R) brand products through promotional products/advertising specialty channels of distribution which includes advertising specialty incentive customers, specialty distributors and uniform market customers. In early 1998, the Company began sales of its own Page & Tuttle(TM) brand of knit golf shirts to the golf pro shop market. The Company's principal executive offices are located at 7566 Market Place Drive, Minneapolis, Minnesota 55344-3629, and its telephone number is (612) 943-5000. As used in this document, the term "Company" refers to PremiumWear, Inc. and its subsidiary unless otherwise noted or indicated by the context. At January 3, 1998, the Company had one idle foreign subsidiary. B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company operates in one industry segment, apparel manufacturing. As of January 3, 1998, 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 3, 1998, included in Exhibit 13 to this Form 10-K. C. NARRATIVE DESCRIPTION OF BUSINESS Principal Products: The Company sells primarily men's knit and woven sport shirts under the Munsingwear(R) label to promotional products/advertising specialty markets customers pursuant to a license from Supreme International Corporation. In early 1998, the Company began selling its own Page & Tuttle(TM) brand of knit golf shirts to the golf pro shop market. Methods of Distribution of Products: The Company utilizes an independent sales representative firm to solicit orders from promotional products/advertising specialty customers. All products are distributed to customers through the Company's North Carolina distribution facility. The Company plans to use similar sales and distribution methods for its golf pro shop business. Sources and Availability of Raw Materials and Products: Approximately 60% of the Company's products are manufactured domestically. The other 40% is sourced primarily from manufacturers in the Far East and through the 807 program in Central America. The principal raw materials used in the domestic production process are cotton, synthetic and cotton/synthetic blended goods obtained principally from United States sources. The Company purchases fabrics from approximately five sources. There are currently no major problems in availability of raw materials and alternative sources are available. The Company's Fairmont, NC manufacturing facility includes a raw material warehouse, cutting, sewing and embroidery operations, and a finished goods distribution center. The Company also utilizes contract sewing manufacturers in close proximity to its North Carolina facility and all products, produced both domestically and offshore, are distributed to customers from the North Carolina facility. Trademarks and Trade Names: The Company is a licensee of the Munsingwear(R) name under a license agreement entered into in September 1996. The license with Supreme International Corporation allows the Company to use the Munsingwear(R) name on knit shirts for an initial term of 20 years and on woven shirts for an initial term of 5 years. For the first 5 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. The Company also uses the Page & Tuttle(TM) trademark and filed an application to register it in 1997. The Company began selling golf shirts under the Page & Tuttle(TM) brand in early 1998. Seasonal Aspects of the Business: Management expects peak shipments to occur 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 been less than 2% of sales in recent years. Customers: The Company sells to approximately 2,800 customers. In 1997 and 1996, sales to San Mar Corporation were 16% and 12% of net sales, respectively. In 1997, sales to Alpha Shirt Company were 15% of total net sales. In 1995, no single customer represented more than 10% of total Company sales. Backlog of Orders: The Company's backlog of unfilled orders at January 3, 1998 was approximately $1,400,000 as compared to $3,800,000 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 methods of competition are pricing, styling, quality (both in material and production), inventory replenishment programs, brand recognition, and customization services such as embroidery. Many of its 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 production methods. Research and development expenses, other than for product design, are not significant. Environmental Considerations: The Company's manufacturing operations are subject to various federal, state and local laws restricting the discharge of materials into the environment. The Company is not involved in any pending or threatened proceedings which would require curtailment of its operations because of such regulations. In 1997, the Company's capital expenditures for environmental control facilities were not significant, and no significant capital expenditures related to environmental issues are projected in 1998. Employees: As of January 3, 1998, there were 261 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. Item 2. Properties At January 3, 1998, the Company occupied the following properties: Approximate Square Percentage Lease Property Footage Utilized Expires -------- ------- -------- ------- Minneapolis, MN - Headquarters 7,000 100 2002 Fairmont, NC - Cutting and sewing plant, warehouse and distribution center 139,100 70 Owned Management has decided to limit the production capacity of its Fairmont, North Carolina manufacturing facility in order to take advantage of lower unit production costs in offshore locations. Domestic manufacturing remains important in the development and expansion of "quick response" inventory replenishment programs. At January 3, 1998, no facilities were occupied under capitalized leases. Item 3. Legal Proceedings None of a significant nature. Item 4. Submission of Matters to a Vote of Security Holders None. 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 (62) Chief Executive Officer September 1996 to present; 1996 Chairman and director of the Company 1995 to present; 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 (41) President, August 1997 to present; Chief Operating 1995 Officer, December 1996 to present; 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 1990. James S. Bury (54) Vice President of Finance, December 1996 to present; 1990 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. Cynthia L. Boeddeker (40) Vice President and General Merchandise Manager, 1996 December 1996 to present; 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.
PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The information required under this caption is incorporated herein by reference to pages 33 and 41 of the 1997 Annual Report to Shareholders. As of March 18, 1998, the Registrant had 896 shareholders of record (excluding beneficial owners of shares held in nominees' accounts). Item 6. Selected Financial Data The information required under this caption is incorporated herein by reference to page 41 of the 1997 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 pages 31 through 33 of the 1997 Annual Report to Shareholders. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data The information required under this caption is incorporated herein by reference to pages 34 through 41 of the 1997 Annual Report to Shareholders. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. 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 caption "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 3, 1998. 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 3, 1998. 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 3, 1998. 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 3, 1998. 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 in cited pages of the 1997 Annual Report to Shareholders, are incorporated by reference in Item 8: - Consolidated Statements of Operations for the three years ended January 3, 1998 (page 34). - Consolidated Balance Sheets as of January 3, 1998 and January 4, 1997 (page 35). - Consolidated Statements of Cash Flows for the three years ended January 3, 1998 (page 36). - Consolidated Statements of Shareholders' Equity for the three years ended January 3, 1998 (page 37). - Notes to Consolidated Financial Statements (pages 38 through 40). - Report of Independent Public Accountants (page 41). 2. Financial Statement Schedules for the three years ended January 3, 1998. - Schedule II - Valuation and Qualifying Accounts, pages 13-15 of this report. - Report of Independent Public Accountants on Schedules, page 16 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. (2) - Exhibit 3 - Restated Certificate of Incorporation and By-Laws, as amended. (2) (3) - Exhibit 4 - Form of Rights Agreement dated as of July 25, 1997, between the Registrant and Norwest Bank Minnesota, N.A.(6). - Exhibit 10 - Material Contracts (Management Contracts or Compensatory Plans or Agreements): (A) Employment Agreement with James S. Bury dated April 24, 1990. (1) (B) The Registrant's 1991 Stock Plan, as amended. (5) - Exhibit 10 - Material Contracts (Other): (C) Purchase and Sale Agreement, dated May 22, 1996, between the Registrant and Supreme International Corporation, as amended. (4) (D) License Agreement, dated September 6, 1996, between the Registrant and Supreme International Corporation. (4) (E) Credit and Security Agreement, dated February 4, 1997, between the Registrant and FBS Business Finance Corporation. (5) (F) Severance Agreement, dated September 6, 1996, between the Registrant and Lowell M. Fisher. (5) - Exhibit 11 - Computation of Per Share Earnings. (7) - Exhibit 13 - PremiumWear, Inc. 1997 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: Only those periods affected by the new Earnings Per Share calculations pursuant to SAB 98 and SFAS 128 have been restated. 27.1 Financial Data Schedule (Fiscal year ended January 3, 1998). (7) 27.2 Financial Data Schedule (Fiscal year ended January 4, 1997 and the three months ended July 6, 1996 and October 5, 1996, respectively).(7) --------------------------------- (1) Incorporated herein by reference to Exhibit 10(N) of the Registrant's Annual Report on Form 10-K for the year ended January 5, 1991 (File No. 1-63). (2) 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). (3) Incorporated herein by reference to Form 8-K, dated August 1, 1995 (File No. 1-63). (4) 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). (5) 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). (6) Incorporated herein by reference to Exhibit 1 of the Registrants' Registration Statement on Form 8-A filed with the SEC, dated September 22, 1997. (7) Filed herewith. --------------------------------- (b) REPORTS ON FORM 8-K: Form 8-K, filed September 24, 1997, reported the adoption of a Shareholders' Rights Agreement by the Board of Directors on July 25, 1997. This Shareholders' Rights Agreement replaces a similar agreement which expired on November 12, 1997. (c) EXHIBITS: Reference is made to Item 14(a)(3). (d) SCHEDULES: Reference is made to Item 14(a)(2). 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. SCHEDULE II PREMIUMWEAR, INC. Valuation and Qualifying Accounts Year ended January 4, 1997
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 $ 219,000 $ 648,000(d) $ 516,000 $ 674,000 (a) $ 709,000 Allowance for doubtful accounts 242,000 (12,000) - 80,000 (b) 150,000 Allowance for returns 50,000 - 1,933,000 1,933,000 (c) 50,000 -------- ---------- ---------- ---------- ---------- $ 511,000 $ 636,000 $ 2,449,000 $ 2,687,000 $ 909,000 ======== ========== ========== ========== ========== Reserve for restructuring $ 193,000 $ - $ - $ 193,000 $ - ======== ========== =========== ========== ========== Reserve for liabilities related to sold assets $ - $ 4,437,000 (d) $ - $ 2,907,000 $ 1,530,000 ======== ========== ========== ========== ==========
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) Charged against gain on sales of trademarks. SCHEDULE II PREMIUMWEAR, INC. Valuation and Qualifying Accounts Year ended January 6, 1996
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 $ 192,000 $ (8,000) $ 250,000 $ 215,000 (a) $ 219,000 Allowance for doubtful accounts 200,000 62,000 - 120,000 (b) 242,000 Allowance for returns 50,000 - 1,972,000 1,972,000 (c) 50,000 -------- -------- ---------- ---------- -------- $ 422,000 $ 154,000 $ 2,222,000 $ 2,307,000 $ 511,000 ======== ======== ========== ========== ======== Reserve for facility closing $ 37,000 $ (23,000) $ - $ 14,000 $ - ======== ======== ========== ========== ======== Reserve for restructuring $ - $ 519,000 $ - $ 326,000 $ 193,000 ======== ======== ========== ========== ========
(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. [ARTHUR ANDERSEN LLP LETTERHEAD] REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of PremiumWear, Inc. and subsidiary included in the Company's annual report to stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated February 20, 1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in item 14 of this Form 10-K 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 our audits 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. Minneapolis, Minnesota February 20, 1998 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 27, 1998 By: /S/ THOMAS D. GLEASON ---------------------------------- Thomas D. Gleason, Chairman 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/THOMAS D. GLEASON Chairman and Chief Executive Officer March 27, 1998 - --------------------------- (principal executive officer) and Director Thomas D. Gleason /S/JAMES S. BURY Vice President of Finance March 27, 1998 - --------------------------- James S. Bury /S/C. D. ANDERSON Director March 27, 1998 - --------------------------- C. D. Anderson /S/KEITH A. BENSON Director March 27, 1998 - --------------------------- Keith A. Benson /S/GERALD E. MAGNUSON Director March 27, 1998 - --------------------------- Gerald E. Magnuson /S/MARK B. VITTERT Director March 27, 1998 - --------------------------- Mark B. Vittert
EXHIBIT INDEX Exhibit No. Exhibit Page No. - ------------ ----------------------------------------------------- --------- 11 Computation of Per Share Earnings. 19 13 PremiumWear, Inc. 1997 Annual Report to Shareholders. 20-43 21 Subsidiary of the Registrant. 44 23 Consent of Independent Public Accountants. 45 27.1 Financial Data Schedule. 46 27.2 Financial Data Schedule. 47 EX-11 2 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 PREMIUMWEAR, INC. and SUBSIDIARY Computation of Per Share Earnings Year ended ----------------------- January 3, January 4, 1998 1997 ---------- ---------- Basic Earnings Per Share: Weighted average number of common shares outstanding ................ 2,309,000 2,068,000 Net income ...................... $ 837,000 $7,181,000 Net income per common share ..... $ 0.36 $ 3.47 ========== ========== Diluted Earnings Per Share: Weighted average number of common shares outstanding ................ 2,309,000 2,068,000 Common share equivalents from assumed exercise of options ............... 29,000 62,000 ---------- ---------- Total shares .................... 2,338,000 2,130,000 Net income ...................... $ 837,000 $7,181,000 Net income per common share and common share equivalents ...... $ 0.36 $ 3.37 ========== ========== Diluted net income per common share and common share equivalents is computed using the weighted average number of shares and common share equivalents outstanding during each period. Common share equivalents represent the dilutive effects of outstanding stock options using the treasury stock method. The calculation of diluted earnings per share uses the average market price for the period. EX-13 3 ANNUAL REPORT PREMIUMWEAR, INC. 1997 ANNUAL REPORT [PHOTO] COMPANY PROFILE PremiumWear designs, sources and markets knit and woven shirts and other apparel to the promotional products/advertising specialty industry under the Munsingwear(R) brand and to the more than 14,000 U.S. golf pro and resort shops using its new Page & Tuttle(TM) brand. KEY 1997 MILESTONES * Paid special cash distribution of $5.39 per share * 25% sales growth * 5% increase in gross margins * Reduced SG&A expense as a percentage of sales * Profitable in every quarter * Increased market share * Same-day shipping capability * Improved customer service * Improved inventory management * Upgraded forecasting and sales tracking capabilities * Re-entered golf market with new Page & Tuttle(TM) brand * Launched woven shirt line FINANCIAL HIGHLIGHTS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER COMMON SHARE)
Year Ended first Saturday after December 31 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS: Total sales $33,820 $49,948 $51,512 $37,407 $37,635 Gross margin 8,193 9,546 8,798 7,378 8,852 Gross margin % 24.2% 19.1% 17.1% 19.7% 23.5% SG&A % 20.0% 22.9% 27.1% 32.4% 31.5% Income (loss) from operations 1,418 1,097 (1,074) (128) 157 Net income (loss) 837 7,181(1) (2,335) (573) (342) Net income (loss) per common share .36 3.37(1) (1.13) (.28) (.16) BALANCE SHEET: Cash and cash equivalents $ 2,870 $14,477 $ 62 $ 73 $ 441 Working capital 11,149 21,266 3,926 6,847 9,561 Long-term debt -- -- 22 38 57 Shareholders' equity 12,053 22,182 12,984 15,319 15,892
(1) Includes $8,444,000 or $3.96 per share from discontinued royalty income and the sale of assets associated with the exit from the retail marketplace. Promotional Products/Advertising Specialty Business Only: NET SALES (millions) [BAR GRAPH] 1993 $ 0.3 1994 $ 1.9 1995 $15.4 1996 $27.0 1997 $33.8 GROSS MARGIN (millions) [BAR GRAPH] 1993 $ 0.1 1994 $ 0.5 1995 $ 3.7 1996 $ 6.4 1997 $ 8.2 ESTIMATED MARKET SHARE (percent) [BAR GRAPH] 1993 $ 0.1 1994 $ 0.5 1995 $ 3.6 1996 $ 5.4 1997 $ 6.0 1 LETTER TO SHAREHOLDERS 1997 was a good year for our Company. Sales and profits improved in our core promotional products/advertising specialty business, a number of improvements were made in operations and we made preparations to re-enter the professional golf apparel market in 1998. FINANCIAL RESULTS Sales for fiscal 1997 were $33.8 million, up 25% compared to like sales in 1996 in the promotional products/advertising specialty business. Total 1996 sales of $49.9 million included sales to the retail marketplace of $22.9 million. Earnings in 1997 were $837,000 or $.36 per share compared to a loss of $1,263,000 or $.59 per share in 1996 before gains and discontinued royalty income of $8,444,000 or $3.96 per share from the sale of assets associated with our exit from the retail marketplace. The Company's cash position at year-end was strong at $2.9 million, even after payment to shareholders of a special one-time cash distribution of $12.5 million or $5.39 per share in the first quarter of 1997. PROGRESS IN OUR CORE BUSINESS PremiumWear markets knit and woven shirts and other apparel to the promotional products/advertising specialty industry under the Munsingwear(R) brand. Our end customers include many of the premier businesses and institutions in the United States and Canada, whom we reach through a network of advertising specialty/promotional products distributors and uniform providers. Some of the milestones we reached in 1997 include: * Gross margins increased to 24.2% from 19.1% in 1996, due to elimination of markdowns taken in the retail-related businesses in 1996, increased offshore product sourcing and a reduction of domestic manufacturing overhead expense. * SG&A expenses were reduced to 20.0% of sales, down from 22.9% in 1996, due to lower selling costs, distribution center efficiencies, elimination of administrative positions and reduced occupancy expenses. * Inventories were reduced 12% to $8.6 million from $9.8 million in 1996 and deliveries to customers improved as a result of better forecasting procedures. * A $6 million line of credit was established with a large U.S. bank headquartered in Minneapolis. SALES AND OPERATIONS In Marketing and Sales, we increased our market share of the collared knit shirt business to 6% from 3.6% two years ago and successfully introduced a line of woven shirts for our corporate and institutional customers. A new color-coordinated line of women's shirts was introduced for delivery in 1998, supplementing our existing men's line. To help serve customers better, our customer service department was reorganized, combining it with our credit department. Order entry automation procedures were enhanced and an electronic data interchange (EDI) system was established with our key customers to better serve them and improve inventory forecasting. A performance-based bonus plan was initiated for key employees, focusing their efforts on increasing profits and sales and improving inventory turns. We established an Internet site (www.premiumwear.com), upgraded our computer-assisted design (CAD) capabilities, and also moved our Minneapolis headquarters to a new, lower-cost location a few miles from the previous site. We welcome shareholder visits to our new offices. In Operations, we completed installation of computerized master production scheduling and material requirements planning systems, which resulted in improved efficiencies and improvements in our service to customers on a "quick response" basis. Lead times on raw material procurement were reduced through establishment of vendor-held inventory programs. New pattern making and cutting equipment was installed in December, which should result in more efficient fabric utilization. New quality control procedures were introduced, helping to reduce off-standard production by half. Offshore sourcing of our core product increased to about 40% in 1997, compared to some 15% the previous year, helping to boost margins. Our distribution center was also reorganized, resulting in cost reductions and improved customer delivery. We are now shipping orders on a same-day basis. Inventory control procedures in the distribution center were also strengthened, helping to achieve improved inventory accuracy. 2 [PHOTO] THOMAS D. GLEASON, CHAIRMAN & CEO (LEFT) AND DAVID E. BERG, PRESIDENT & COO (RIGHT) NEW DEVELOPMENT: GOLF APPAREL The Company re-entered the golf apparel market in January 1998. As you may recall, we exited both the general retail marketplace and the professional golf marketplace in late 1996 with the sale of our trademark assets. However, we retained considerable expertise in the golf business; the design, sourcing, marketing and administrative management skills that we use in the promotional products business are very similar to those needed in the golf apparel market and we can use similar designs to serve both markets. We will direct our sales and marketing efforts to the "green grass" professional golf shop market, using the Page & Tuttle(TM) brand name. Messrs. Page & Tuttle were the co-founders of our predecessor company in 1886. They were known then for their innovation in comfort products; our new golf line respects that tradition of yesterday while using the fashions and fabrics of today. The new Page & Tuttle(TM) line is being promoted in golf trade and consumer publications and is endorsed by well known PGA and LPGA players, including Scott Simpson who won the Buick Invitational in early February wearing our new Page & Tuttle(TM) shirts. OTHER DEVELOPMENTS: * David Berg was elected president in July and continues as the Company's chief operating officer. Dave, an 18 year veteran with PremiumWear, has been associated with our promotional products business since its inception four years ago and has experience in the retail-related professional golf business. * Our shareholder rights plan was extended for another ten years. This plan helps assure shareholders that the board of directors will have sufficient opportunity to review any potential takeover offer for fairness. * During the year, Messrs. Kevin Moore, William Morgan and Michael Raskin left the board, reducing the number of directors to five. We thank each of these gentlemen for their services to the Company, especially during the critical 1996 year, which saw a significant redeployment of the Company's assets. AS WE MOVE FORWARD We believe PremiumWear is well positioned for the future. The balance sheet has been strengthened and our core promotional products/advertising specialty business is thriving. We are optimistic about our re-entry into the professional golf apparel marketplace under the Page & Tuttle(TM) brand name. Management also intends to pursue acquisitions that would complement our existing businesses. I thank our management team, employees, and directors for their hard work and dedication in making 1997 a successful year. In addition, I want to express my appreciation to you, our shareholders, for your support. Yours very truly, /s/ Thomas D. Gleason Thomas D. Gleason, Chairman & CEO 3 REVIEW OF OPERATIONS BUSINESS REVIEW: THE PROMOTIONAL PRODUCTS/ADVERTISING SPECIALTY INDUSTRY PremiumWear's business no longer involves the retail customer purchasing our shirts or pants from his or her favorite department store, but rather a number of specialty distributors who sell our products directly to a wide variety of end users. In other words, our Company's customers now reside in the "yellow pages" rather than the "white pages." We sell to four principal distribution groups or channels, who in turn sell into several diverse markets: * Wholesale Apparel Distributors * Advertising Specialty (ASI) Dealers * Embroiderers * Uniform Companies [GRAPHIC/FLOW CHART] CHANNELS OF DISTRIBUTION PremiumWear, Inc. |------------------ Munsingwear (R) Brand ---------------| | | | | | | Embroiderers {--------------- Wholesale ---------} ASI Screenprinters Distributors and Uniform Companies | | | | |------------------------{-----------------}---------------------| | | | ABC CORP. | | Customer Gifts/Incentives | | Sales Meetings | | Golf or Corporate Outings | |-------------------} Uniforms {----------| Dealer Incentives Employee Incentives Convention Attire Corporate Catalogs Each of the above distribution channels represents a "mini-industry" of its own, but the first three of these are very difficult to segment because they often perform comparable or duplicate functions and crossing of industry lines is very common. Therefore, for the sake of simplicity, we refer to them collectively as the promotional products/advertising specialty industry. These distributors sell our goods to corporations, schools, churches, civic groups and other organizations who use apparel to promote their name, reward their employees or for a special function. For example, our products, after having logos, designs or names added to them, might now be sold to corporate employees through a company catalog, used as incentives in a corporate sales contest, worn by participants and/or given as prizes in the company golf tournament, given away to good company customers and top prospects or worn by members of the local Lions Club at their annual fund-raiser. Approximately 80% of PremiumWear's sales are to this industry. While highly fragmented, the promotional products/advertising specialty industry is huge and growing, with total dollar sales having expanded from about $5 billion in 1990 to approximately $9.4 billion in 1996. The industry consists of a wide variety of promotional products such as apparel, writing instruments, coffee cups, jewelry, electronics and glassware. Apparel represents the largest single sales category at about 24% of the total and is generally viewed by the end user as the best perceived value. The apparel segment itself has grown [PHOTO/GRAPHIC] A SAMPLE OF OUR NEW PAGE & TUTTLE(TM) GOLF APPAREL IS STYLED IN 100% RINGSPUN COMBED COTTON WITH DISTINCTIVE HERRINGBONE AND PLAID INTERLAYS. 4 [PHOTO/GRAPHIC] IN THE CORE PROMOTIONAL PRODUCTS/ADVERTISING SPECIALTY BUSINESS OUR END CUSTOMERS INCLUDE MANY OF THE PREMIER CORPORATIONS IN THE U.S. AND CANADA. REVIEW OF OPERATIONS from roughly $950 million in dollar volume in 1990 to $2.2 billion in 1996, which represents an annual compounded growth rate of over 15%. As a result, we continue to see tremendous opportunity in this industry. The remaining 20% of PremiumWear's sales go to uniform companies who in turn sell complete uniform packages to customers in service industries such as airlines, fast food and family restaurant operators, retail chains, delivery companies and many other service oriented businesses. As a component of the uniform business, our products fit nicely into the casual-contemporary sportswear segment, which is experiencing strong growth. [GRAPHIC] PREMIUMWEAR MARKETS APPAREL TO THE PROMOTIONAL PRODUCTS/ADVERTISING SPECIALTY INDUSTRY UNDER THE MUNSINGWEAR(R) BRAND. GOLF APPAREL: PAGE & TUTTLE(TM) BRAND LEADS PREMIUMWEAR INTO A NEW MARKET In January 1998, PremiumWear introduced a new brand name into the golf apparel market, an area where we have enjoyed prior success. The Company's key market target will be the more than 14,000 golf pro and resort shops in the U.S., better known as "green grass accounts." Our new Page & Tuttle(TM) brand is named after Frank H. Page and Edward O. Tuttle who co-founded our predecessor company, The Northwestern Knitting Company, in 1886. In the 1950's that company, by then re-named Munsingwear, Inc., introduced the first golf shirt to the world. It was a smashing success then and continues to be popular today. The 1997 golf apparel market at wholesale was estimated by industry sources at approximately $850 million and growing on average at about 10% annually. While big and dynamic, this market is also fragmented, with the largest industry player controlling less than a 10% share of the market. Therefore, with the help of endorsements from well known professional golfers like Scott Simpson, we believe there is ample opportunity for Page & Tuttle(TM) to become a meaningful player within this market. There appear to be two major trends driving increased spending on golf and related apparel and merchandise: * Favorable golf demographics * Shift towards casual dress in the workplace Golf participation in the U.S. last year grew to 27 million golfers, up from 17.5 million a decade ago, according to the National Golf Foundation. Over that same timeframe, rounds played annually have increased from 415 million to nearly 500 million. This growth has translated into a new golf course opening every day in the United States. [PHOTO/GRAPHIC] GOLF PARTICIPATION IN THE U.S. HAS EXPANDED 54% IN THE LAST DECADE; CURRENTLY THERE IS A NEW GOLF COURSE OPENING EVERY DAY IN THIS COUNTRY. 6 [PHOTO/GRAPHIC] THE PAGE & TUTLE(TM) NAPA VALLEY COLLECTION; COLORFUL EXPRESSIONS OF WARMTH AND GOOD TASTE. REVIEW OF OPERATIONS [GRAPHIC] THE PAGE & TUTTLE(TM) BRAND LEADS PREMIUMWEAR INTO THE GOLF APPAREL MARKET. In the past 10 years dollars spent on golf-related purchases increased 93% to over $15 billion from just under $8 billion. Average annual spending per golf participant jumped from $386 to $703, an 82% increase. Looking forward, population growth and overall golf spending trends appear to be working in tandem to support a very favorable backdrop for continued expansion in purchases of golf-related merchandise. While overall population growth in the U.S. is averaging 1% annually, several age groups are projected to grow more rapidly: 45-54 years old at 3.6%, 55-64 at 2.5% and 15-24 at 1.2%. The trends and supporting data further indicate that the 50 and older golfer not only plays more rounds annually, but spends more dollars on golf, suggesting that as the 78 million baby boomers in this country continue to age, the impact on golf related purchases should continue to be quite favorable. Also adding to the level of interest among aging baby boomers is the continued popularity and growth of the Senior PGA tournament circuit with its share of golf superstars like Jack Nicklaus, Arnold Palmer and Raymond Floyd. On the other end of the age spectrum, rising young golf superstars like Tiger Woods are attracting a younger following and fostering a broader ethnic interest in golf. The number of golf participants in both groups is increasing. The trend toward smart casual dress in the workplace began several years ago with the advent of "casual Fridays." Now it is common in many companies to see a full-time casual environment with a more formal requirement only at specific times. With computer literacy increasing geometrically, another developing trend that will likely mushroom as technology continues to advance is "telecommuting" or working remote from home. There are a growing number of employees in service oriented careers that spend an increasing percentage of time or full-time working remotely and therefore aren't "dressing up" every day. As a result "casual" has become an everyday way of life. It is not surprising then that sportswear has become the fastest growing segment of the apparel industry, a trend expected to continue for some time to come. Upscale golf apparel has become and will continue to be a major part of this paradigm shift. [PHOTO/GRAPHIC] THIS NEW PAGE & TUTTLE(TM) OFFERING FEATURES A MODERN APPROACH TO THE CLASSIC STRIPE. 8 [PHOTO/GRAPHIC] OUR MUNSINGWEAR(R) COLLECTION OFFERS THE BEST CHAMBRAY IN THE MARKET WITH BUTTON-DOWN OR BANDED COLLAR, PLUS A NEW STYLE FOR WOMEN. 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 two separate transactions in 1996 the Company sold all of its trade names and trademarks for cash totaling $23,000,000. Proceeds from the transactions and the liquidation of assets related to the exited retail and professional golf-oriented businesses were used to pay off the Company's previous asset-based lender, pay transaction expenses, provide funds for operations and for a $12,500,000 special cash distribution to shareholders on March 5, 1997. These transactions significantly strengthened the Company's financial position. 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 earnings, $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. At January 4, 1997, working capital totaled $21,266,000 compared to $3,926,000 the previous year and the current ratio was 3.9:1 compared to 1.2:1 in 1995. During 1996 operating activities provided $2,195,000 of cash, the result of a combined $6,692,000 reduction in receivables and inventories offset by a $3,677,000 decrease in accounts payable and other liabilities, all of which related primarily to the liquidation of inventories, collection of receivables and payment of liabilities related to the exited retail and golf-oriented businesses. Capital expenditures totaled $689,000 primarily for information systems improvements and purchases of manufacturing equipment. Proceeds of $23,000,000 were received in 1996 from the sale of trademarks and $819,000 was received from the exercise of common stock options. During 1995, operating activities used $4,094,000 of cash, primarily the result of net losses of $2,335,000 and an increase in receivables of $3,468,000 which was due to a 29% increase in fourth quarter revenues compared to the previous year. These uses of cash were offset by a $1,248,000 increase in accounts payable and $782,000 of depreciation and amortization. Capital expenditures totaled $1,201,000, primarily for information systems improvements and purchases of manufacturing equipment. The Company financed the net use of cash through a $5,298,000 increase in its bank line-of-credit borrowings. As a result of the 1996 sale of trademarks the Company's previous asset-based credit arrangement was terminated and all funds due the lender were repaid. On February 4, 1997, the Company entered into a long-term bank line of credit with another lender which provides up to $6,000,000 of funds available based on certain financial formulas. Management believes that continued development of the promotional products/advertising specialty ("special markets") business will lead to steady sales growth, stable gross margins and improved profitability. Management expects to be able to finance working capital needs and capital expenditures, which will approximate $1,000,000 in fiscal 1998, through a combination of funds from operations and its bank line of credit. RESULTS OF OPERATIONS 1997 NET SALES to special markets customers increased 25% over 1996. Sales growth was from added customers and additional volume with existing customers. Management believes the increase was due in part to the Company's product offering, which generally includes more fashion than many of its competitors, and improved delivery performance. In total, net sales decreased from 1996 levels, which included $23,000,000 of sales related to the exited retail and golf-oriented businesses. Selling prices remained relatively constant from 1996 to 1997. Total net sales for 1996 decreased 3% from the prior year. The reduction was due to the September 1996 exit from the retail and golf-oriented businesses which collectively had sales of $23,000,000 in 1996 compared to $36,000,000 in 1995. Special markets volume continued its strong growth, increasing 75% in 1996 to $27,000,000 compared to $15,400,000 the previous year, partially offsetting the decreases in sales to retail and golf accounts. Selling prices remained relatively constant from 1995 to 1996. The Company's backlog of unfilled orders at the end of 1997 was approximately $1,400,000 compared to $3,800,000 the same time last year. The reduction was due to a change in buying patterns by certain distributors who now order merchandise closer to their need as opposed to the prior practice of carrying large quantities of inventory early in the year. The unfilled order backlog consists of orders received for subsequent delivery and includes orders subject to change for color, size, extension of delivery dates and cancellation. Orders for the special markets business are not necessarily indicative of future performance since this channel of distribution is characterized by a large number of "at once" orders which are generally received less than 30 days prior to requested delivery. As a result, the unfilled order backlog does not necessarily relate directly to future sales. 10 Following the 1996 sales of trademarks, the Company no longer receives income from ROYALTIES. As a result, no such income was realized in 1997. Royalties dropped dramatically in 1996 compared to the prior year, primarily the result of the 1996 trademark sale. Royalties in 1995 were at the same level with 1994. GROSS MARGIN for special market sales reached 24.2% of net sales in 1997, compared to 23.6% the prior year. The increase was due primarily to additional off-shore production, which resulted in lower unit costs, and the Company's ability to maintain markups as a result of improved delivery performance and customer acceptance of fashion-oriented items. 1996 margins in the special markets business were 23.6%, but total Company margins were 19.1% due to significant markdowns encountered while liquidating inventories related to the exited retail-oriented business. Gross margin in 1996 was 19.1% of net sales vs. 17.1% in 1995. The increase was primarily due to the cessation of the retail-oriented business which in recent years experienced fierce competition and price pressure in the marketplace, significant markdowns, increased levels of unsold seasonal merchandise and rising production costs. Gross margin for the special markets business was 23.6% in 1996, compared to 24.4% in 1995. The reduction was a result of increased sales to wholesale distributors who receive volume discounts on large quantity purchases. SELLING, GENERAL AND ADMINISTRATIVE expenses for 1997 were 20% of net sales and were $4,643,000 lower than the prior year due to the exit from the retail-oriented business which required substantial design, merchandising and sales support spending. Selling expenses dropped $1,130,000 primarily due to elimination or reduction of expenses such as commissions, sales management, market shows and travel related to the exited businesses. Advertising and promotion costs decreased $834,000 as a result of elimination of significant spending required by the former retail-oriented business. Warehouse and distribution costs dropped $694,000 due in part to reduced volume but also due to efficiencies realized in 1997 as a result of improved systems and workflow. 1996 included $605,000 of royalty expense and trademark amortization, costs not encountered after the sale of trademarks. Information systems expenditures dropped $458,000 as a result of reduced manning and outside programming services related to the Company's business software systems installed in late 1995 which required heavy support throughout 1996. Other administrative costs dropped $232,000 due to lower legal, consulting and investment banker fees; $193,000 as a result of the early 1997 headquarters office relocation; and $140,000 due to a reduction in the number of Board members and meetings. Selling, general and administrative expenses were $2,543,000 lower in 1996 than in 1995 and, as a percent of sales, decreased from 27% in 1995 to 23% in 1996. This reduction was largely due to reductions in staff, design costs, advertising programs and other expenses as a result of the cessation of the retail-oriented business. Design expenses decreased $767,000 due to the exit from the retail-oriented business, which formerly required significantly more product offerings due to multiple labels and merchandising seasons. Advertising expenses decreased $772,000 as a result of lower spending on cooperative advertising programs, point-of-sale materials and PGA Tour endorsements. Selling expenses decreased $735,000 due to the elimination of sales executive positions, closed sales offices and reduced commissions. General and administrative expenses decreased $557,000 due to reduced recruiting expenses, lower staffing, reduced trademark defense costs and lower office lease costs. Management information systems expense increased $513,000 due to support of the Company's new computer systems installed in late 1995. In 1995, RESTRUCTURING COSTS of $520,000 related to staff reductions and future lease payments on excess office space. INTEREST EXPENSE in 1997 was $680,000 lower than in 1996 due to excess funds generated from the 1996 sale of trademarks and improved inventory management. 1996 interest expense was 33% below 1995's level due to payoff of the bank line-of-credit from proceeds from the sale of trademarks and collection of receivables from the retail-oriented business. 1997 INTEREST INCOME of $114,000 was primarily due to excess funds during the first quarter prior to the payment of the $12,500,000 special cash distribution. In 1996, excess funds during the fourth quarter following the sale of trademarks led to $247,000 of interest income. In 1996, GAIN ON SALE OF TRADEMARKS included $4,383,000 realized on the June 1996 sale of certain Far Eastern trademarks and $6,244,000 realized on the September 1996 sale of the Company's remaining trademarks and certain associated assets related to the retail and professional golf-oriented businesses. The gains were comprised of proceeds less transaction and disposition costs. PROVISION FOR INCOME TAXES represents federal, state, local and foreign taxes. The 1995 provision was attributable to state income, franchise and foreign taxes, which are generally not dependent on pre-tax income. At January 3, 1998, the Company had net operating loss carryforwards of approximately $21,000,000 for domestic federal income tax purposes. LOOKING FORWARD Management has completed a transition which generally began in 1994 with entry into the special markets channel of distribution and which intensified in late 1995 when the Company retained an investment banker to explore a range of opportunities to maximize shareholder value. These actions led directly to the 1996 sale of trademarks and exit from the retail and professional golf-oriented businesses. During this period, management continued to increase its focus on and commitment to development of the special markets channel of distribution. Following the 1996 sale of trademarks and other assets related to the retail and professional golf-oriented businesses the Company operated entirely in the special markets channel of distribution, no longer soliciting orders from department stores, chain stores, specialty retail shops and professional golf accounts. Management believes that development and/or acquisition of complementary brands, markets and products are important to the future success of the Company and shortly after 1997 year-end 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) announced the Company's re-entry into the golf-oriented apparel market under the Page & Tuttle(TM) brand. Targeted customers are primarily "green grass" golf shops. Management expects to continue to pursue opportunities through development of additional brands and products and potentially through acquisitions. In addition, management expects to increase off-shore production in 1998 in order to achieve lower unit costs. There can be no assurance, however, that this strategy will be successful. The Company currently pays no license fees on the majority of its sales under the terms of its licensing agreement with Supreme International Corporation and is not required to pay any such fees until aggregate sales dollars reach a specific amount, which will not likely occur until the year 2001. At that time, license fees will represent an additional expense to the Company which management hopes to recover through improved margins and reduced costs in other areas. YEAR 2000 The Company primarily uses licensed software products in its operations with a significant portion of processes and transactions centralized in one particular software package. During 1998, management plans to upgrade to the most current version of this software package which, among other things, is Year 2000 compliant. Cost of the project has not yet been determined. 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) continued implementation of the North American Free Trade Agreement (NAFTA) is expected to put competitive cost pressure on apparel wholesalers with domestic production facilities such as the Company; (iii) the inability to carry out marketing and sales plans would have a materially adverse impact on the Company's projections; (iv) the Company is a licensee of the Munsingwear(R) name and maintaining a harmonious working relationship with the licensor is important for continued successful development of the special markets business; (v) as a licensee, the Company is dependent on the licensor to adequately promote 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 off-shore sourcing and selective price increases. MARKET STATISTICS The Company's common stock is listed on the New York Stock Exchange under the symbol PWA. The 1997 and 1996 market price high and low were as follows: QUARTER ------------------------------------------ 1st 2nd 3rd 4th - ----------------------------------------------------------- 1997 High 9 1/8 6 1/8 5 7/16 5 5/16 Low 3 1/4 3 3/4 4 3/16 4 9/16 1996 High 9 1/8 9 10 7/8 10 1/4 Low 6 7/8 6 5/8 8 7/8 8 3/8 - ----------------------------------------------------------- On March 5, 1997, the Company paid a special cash distribution to shareholders of $5.39 per share which resulted in a comparable reduction in the market price on March 6, 1997. As of February 20, 1998, the Company had 899 shareholders of record. 12 CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED Year ended Year ended JANUARY 3, January 4, January 6, (Amounts in thousands, except per share data) 1998 1997 1996 - --------------------------------------------------------------------------------------- REVENUES: Net sales $ 33,820 $ 49,948 $ 51,512 Royalties -- 2,969 4,609 - --------------------------------------------------------------------------------------- 33,820 52,917 56,121 - --------------------------------------------------------------------------------------- EXPENSES: Cost of goods sold 25,627 40,402 42,714 Selling, general and administrative 6,775 11,418 13,961 Restructuring costs (Note 10) -- -- 520 - --------------------------------------------------------------------------------------- 32,402 51,820 57,195 - --------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) 1,418 1,097 (1,074) - --------------------------------------------------------------------------------------- Interest expense (91) (771) (1,158) Interest income 114 247 2 Gain on sale of trademarks (Note 2) -- 10,627 -- Other 6 52 -- - --------------------------------------------------------------------------------------- Income (loss) before income taxes 1,447 11,252 (2,230) Provision for income taxes 610 4,071 105 - --------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 837 $ 7,181 $ (2,335) ======================================================================================= NET INCOME (LOSS) PER COMMON SHARE: Basic $ .36 $ 3.47 $ (1.13) Diluted $ .36 $ 3.37 $ (1.13) ======================================================================================= Weighted average shares of common stock outstanding: Basic 2,309 2,068 2,066 Diluted, including common stock equivalents 2,338 2,130 2,066 =======================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 13 CONSOLIDATED BALANCE SHEETS
JANUARY 3, January 4, (Amounts in thousands, except share data) 1998 1997 - --------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,870 $ 14,030 Restricted cash -- 447 Receivables: Trade, net of allowances of $538 and $909 4,155 3,705 Other 44 525 - --------------------------------------------------------------------------------------------------- 4,199 4,230 Inventories 8,590 9,804 Prepaid expenses 279 128 - --------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 15,938 28,639 - --------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Land 15 15 Buildings and leasehold improvements 584 552 Machinery and equipment 4,343 4,137 - --------------------------------------------------------------------------------------------------- 4,942 4,704 Less accumulated depreciation and amortization 3,329 3,087 - --------------------------------------------------------------------------------------------------- 1,613 1,617 - --------------------------------------------------------------------------------------------------- DEFERRED TAXES, net of valuation allowance of $10,637 and $10,950 -- -- - --------------------------------------------------------------------------------------------------- $ 17,551 $ 30,256 =================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,821 $ 4,009 Accrued payroll and employee benefits 1,034 1,050 Liabilities related to sold assets 578 1,530 Other accruals 356 761 Current maturities of long-term debt -- 23 - --------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 4,789 7,373 - --------------------------------------------------------------------------------------------------- LONG-TERM LIABILITIES: Postretirement benefits 709 701 - --------------------------------------------------------------------------------------------------- TOTAL LONG-TERM LIABILITIES 709 701 - --------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 7-9 and 11) 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, 2,319,330 and 2,163,153 shares issued) 23 22 Additional paid-in capital 18,661 17,128 Retained earnings (deficit) (6,631) 5,032 - --------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 12,053 22,182 - --------------------------------------------------------------------------------------------------- $ 17,551 $ 30,256 ===================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 14 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED Year ended Year ended JANUARY 3, January 4, January 6, (Amounts in thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) from operations $ 837 $ 7,181 $ (2,335) Reconciling items: Depreciation and amortization 439 847 782 Deferred taxes 463 3,507 -- Provision for losses on accounts receivable 74 75 69 Gain on sale of trademarks -- (10,627) -- Loss on restructuring -- -- 193 Change in unearned royalty income -- (1,988) (356) Changes in operating assets and liabilities: Receivables (43) 3,456 (3,468) Inventories 1,214 3,236 (422) Prepaid expenses (151) 185 282 Accounts payable (1,188) (1,129) 1,248 Other accrued liabilities (1,253) (2,548) (87) - -------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 392 2,195 (4,094) - -------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of property, plant and equipment (435) (689) (1,201) Proceeds from sale of trademarks -- 23,000 -- - -------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (435) 22,311 (1,201) - -------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net change in line of credit borrowings -- (10,890) 5,298 Net change in restricted cash 447 (447) -- Principal payments on long-term debt and capital lease obligations (23) (20) (14) Special cash distribution (12,500) -- -- Proceeds from exercise of stock options 959 819 -- - -------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (11,117) (10,538) 5,284 - -------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,160) 13,968 (11) Cash and cash equivalents at beginning of period 14,030 62 73 - -------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,870 $ 14,030 $ 62 ======================================================================================================== Supplemental disclosures of cash flow information: Cash paid for taxes $ 368 $ 390 $ 178 ======================================================================================================== Cash paid for interest $ 84 $ 728 $ 1,078 ======================================================================================================== Cashless exercise of stock options $ 112 $ -- $ -- ========================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 15 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share data) - ---------------------------------------------------------------------------------------------------------- Common Stock Additional Retained Issued Paid-in Earnings Shares Amount Capital (Deficit) - ---------------------------------------------------------------------------------------------------------- Balance at January 7, 1995 2,026,768 $ 21 $ 15,112 $ 186 Net loss -- -- -- (2,335) - ---------------------------------------------------------------------------------------------------------- Balance at January 6, 1996 2,026,768 $ 21 $ 15,112 $ (2,149) Stock grant 3,500 -- -- -- Cash exercise of stock options 132,885 1 818 -- Utilization of net operating loss carryforwards -- -- 1,198 -- Net income -- -- -- 7,181 - ---------------------------------------------------------------------------------------------------------- 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 -- -- -- (12,500) Net income -- -- -- 837 - ---------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 3, 1998 2,319,330 $ 23 $ 18,661 $ (6,631) ==========================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 16 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 bearing the Munsingwear(R) label under license from Supreme International Corporation ("Supreme", see Note 2). Sales are to the special markets industry through specialty distributors, advertising specialty incentive dealers and the uniforms market. Substantially all sales are to customers in the United States of America. Approximately 60% of the Company's products are manufactured in the United States in one company-owned facility and at several sewing subcontractors. The remaining products are assembled in Central America or are purchased in the Far East. PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of PremiumWear, 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. RESTRICTED CASH At January 4, 1997, $447,000 of cash was pledged as collateral on outstanding letters of credit related to inventory purchases. No amounts were pledged at January 3, 1998. 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 3, January 4, (IN THOUSANDS) 1998 1997 - ----------------------------------------------------------- Raw materials $1,751 $1,906 Work-in-process 1,825 1,265 Finished goods 5,014 6,633 - ----------------------------------------------------------- $8,590 $9,804 =========================================================== 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. TRADEMARKS In 1996, the Company sold all rights to its Munsingwear(R) related trademarks. Prior to the sale, trademarks were recorded at the estimated fair value established in connection with the Company's 1991 reorganization and were being amortized over 20 years. INCOME TAXES The Company accounts for income taxes under the liability method. The tax benefit associated with utilization of the net operating loss carryforwards, which survived a 1991 reorganization, has been recorded as a reduction to deferred taxes and trademarks and as a credit to additional paid-in capital. Any future utilization of these net operating loss carryforwards will be recorded as a credit to additional paid-in capital. REVENUES Net sales are recognized at the time of shipment and reserves are established for returns and allowances at that time. In 1997 and 1996, sales to one customer totaled 16% and 12%, respectively, of total net sales. Sales to another customer in 1997 totaled 15% of total net sales. No customer accounted for greater than 10% of the Company's total net sales in 1995. Following the 1996 sale of its trademarks, the Company no longer receives royalty income, which had been recorded as earned in accordance with specific terms of each license agreement. FISCAL YEAR The Company's fiscal year ends on the first Saturday following December 31. The 1997, 1996 and 1995 fiscal years ended January 3, 1998, January 4, 1997, and January 6, 1996, respectively. NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", effective beginning in 1998, establishes standards of disclosure and financial statement display for reporting total comprehensive income and the individual components thereof. Management believes the adoption of SFAS No. 130 will not have a material impact on the Company's financial position or results of operations. In addition, SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", effective in 1998, establishes new standards for determining reportable segments and for disclosing information regarding each such segment. Since this pronouncement affects only disclosure, it will have no impact 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. 2. TRADEMARK SALES AND LICENSING AGREEMENT On June 28, 1996, the Company sold its trademarks and pending trademark applications for certain Far Eastern countries to ITOCHU Corporation, Toyobo Co., Ltd., and Descente, Ltd. for $5,000,000 cash, resulting in a gain before income taxes of $4,383,000. Proceeds were used to pay down line-of-credit borrowings. On September 6, 1996, the Company sold all of its rights to its remaining trademarks and certain associated assets relating to the retail and professional golf-oriented businesses to Supreme for $18,000,000 in cash, resulting in a gain before income taxes of $6,244,000. As part of the purchase and sale agreement, the Company was required to change its corporate name. At the 1996 Annual Meeting of Shareholders, a name change from Munsingwear, Inc. to PremiumWear, Inc. was approved by shareholders. At the time of the September 1996 sale of trademarks, the Company also entered into a license agreement with Supreme 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 2001 on the sales of knit shirts when such sales reach specified annual amounts. After 2001, license fees will be payable on all sales of knit shirts. In 1997 and 1996, sales did not reach the specified annual amount for knit shirt sales, and management estimates the annual threshold will not be met until the year 2001, at which time license fees would become payable on all knit shirt sales. The Company pays license fees on all sales of other Munsingwear(R) products. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. 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 2000. Borrowings and letters of credit are limited to an aggregate amount equaling approximately 80% of eligible receivables and 50% of eligible finished goods inventories ($5,957,000 at January 3, 1998). Essentially all 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 3, 1998). 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 and restrict consolidation or merger of the Company with another entity. Additionally, the Company is limited in incurring additional indebtedness and liens on assets. 4. INCOME TAXES The income tax provision for the past three years consisted of the following: (IN THOUSANDS) 1997 1996 1995 - ----------------------------------------------------------- Current $147 $ 564 $105 Deferred 463 3,507 -- - ----------------------------------------------------------- $610 $4,071 $105 =========================================================== The current provision resulted from federal alternative minimum, state income, franchise and foreign taxes payable. As of January 3, 1998, the Company had net operating loss carryforwards for regular federal income tax purposes of approximately $21,000,000, which will begin to expire in 2002. The components of the net deferred tax asset were as follows: JANUARY 3, January 4, (IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------ Federal net operating loss carryforwards $ 7,852 $ 7,270 Tax credit carryforwards 845 860 Deductible temporary differences 2,247 3,020 Taxable temporary differences (307) (200) - ------------------------------------------------------------------ 10,637 10,950 Valuation allowance (10,637) (10,950) - ------------------------------------------------------------------ $ -- $ -- ================================================================== A valuation allowance has been established to reduce the deferred tax asset to estimated realizable amounts. A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows: 1997 1996 - ----------------------------------------------------------- Statutory federal income tax rate 34.0% 34.0% State income taxes, net of federal income tax benefits 5.5% 1.5% Other 2.7% 0.7% - ----------------------------------------------------------- 42.2% 36.2% =========================================================== In 1995, the Company incurred a net loss and paid certain minimum state and foreign taxes. 5. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share was computed by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted income per common share for 1997 and 1996 includes the dilutive effects of outstanding stock options using the treasury stock method; however, the impact of common equivalent shares has been excluded from the computation of 1995 diluted net loss per share as such impact would be anti-dilutive. (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 - ------------------------------------------------------------------------ Net income (loss) $ 837 $7,181 $(2,335) ======================================================================== Weighted average number of common shares outstanding 2,309 2,068 2,066 Dilutive effect of outstanding stock options after application of the treasury stock method 29 62 -- - ------------------------------------------------------------------------ Common and common equivalent shares outstanding-- diluted 2,338 2,130 2,066 ======================================================================== Basic net income (loss) per common share $ .36 $ 3.47 $ (1.13) ======================================================================== Diluted net income (loss) per common share $ .36 $ 3.37 $ (1.13) ======================================================================== The Company adopted SFAS No. 128, "Earnings per Share," effective January 3, 1998. As a result, the Company's reported net income (loss) per share for 1996 and 1995 have been restated as follows: 1996 1995 - ----------------------------------------------------------- Primary EPS as reported $3.37 $(1.13) Effect of SFAS No. 128 .10 -- - ----------------------------------------------------------- Basic EPS as restated $3.47 $(1.13) =========================================================== Fully diluted EPS as reported $3.37 $(1.13) Effect of SFAS No. 128 -- -- - ----------------------------------------------------------- Diluted EPS as restated $3.37 $(1.13) =========================================================== 6. SHAREHOLDERS' EQUITY At January 3, 1998, 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. During 1997, the Company canceled all of its Class A shares of preferred stock, none of which were issued or outstanding. 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. On March 5, 1997, a special cash distribution of $5.39 per share, or approximately $12,500,000, was paid to shareholders of record as of February 19, 1997, using proceeds from the 1996 sales of trademarks. 7. STOCK OPTIONS AND RESTRICTED STOCK The Company's 1991 Stock Plan includes 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 No. 123, the Company's net income (loss) and earnings per share would have been reduced to the following pro forma amounts: 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 - ----------------------------------------------------------------------------- Net income (loss): As Reported $ 837 $ 7,181 ($2,335) Pro Forma $ 821 $ 6,750 ($2,476) - ----------------------------------------------------------------------------- Basic earnings (loss) As Reported $ 0.36 $ 3.47 ($ 1.13) per share: Pro Forma $ 0.36 $ 3.26 ($ 1.20) - ----------------------------------------------------------------------------- Diluted earnings (loss) As Reported $ 0.36 $ 3.37 ($ 1.13) per share: Pro Forma $ 0.35 $ 3.17 ($ 1.20) - ----------------------------------------------------------------------------- Because the Statement 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in the future years. 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: 1997 1996 1995 - -------------------------------------------------------------------------------- Risk free interest rate 6.34% to 6.58% 5.84% to 7.55% 5.29% to 5.94% Expected life of options granted 5 YEARS 0 to 5 years 5 years Expected volatility of options granted 48% 40% to 44% 39% to 41% Expected dividend yield $0 $0 to $5 $0 - -------------------------------------------------------------------------------- Shares granted 131,950 75,000 124,500 Weighted average fair value of options granted $1.73 $3.03 $3.53 - -------------------------------------------------------------------------------- A total of 873,500 shares of common stock was reserved under the 1991 Stock Plan for grants to employees in the form of restricted stock awards and incentive and non-qualified stock options. In addition, the Plan annually grants to each non-employee director an option to purchase 1,000 shares of common stock. At January 3, 1998 there were 269,954 shares available for future grants under this Plan. Information regarding the 1991 Stock Plan is summarized below: 1997 1996 1995 - ------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ------------------------------------------------------------------------ Options outstanding, beginning of year 255,800 $7.73 318,485 $6.72 232,095 $6.30 Granted 131,950 3.31 75,000 7.80 124,500 7.80 Canceled (37,900) 8.61 (4,800) 8.90 (38,110) 7.63 Exercised (196,100) 6.86 (132,885) 6.17 -- -- - ------------------------------------------------------------------------ Options outstanding, end of year 153,750 $4.70 255,800 $7.73 318,485 $6.72 ======================================================================== Options exercisable, end of year 64,815 $6.67 255,800 $7.73 218,285 $6.67 ======================================================================== In 1996 and 1995, under another agreement, options to purchase 10,000 and 5,000 shares of common stock, respectively, at a price of $7.50 per share were granted to a non-employee director. All 15,000 options were exercised in 1997. 8. 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 $164,000, $216,000 and $73,000 for 1997, 1996 and 1995, respectively. 9. POSTRETIREMENT MEDICAL AND LIFE INSURANCE PLANS 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. The net periodic benefit cost for the past three years included the following components: (IN THOUSANDS) 1997 1996 1995 - ----------------------------------------------------------- Interest cost on accumulated postretirement benefit obligation $59 $59 $54 Net amortization and deferral 1 38 23 - ----------------------------------------------------------- $60 $97 $77 =========================================================== A 9% increase in the cost of covered medical benefits was assumed for 1997. This rate is assumed to decrease incrementally to 5.5% after seven years and remain at that level thereafter. The discount rate used in determining the accumulated benefit obligation was 7% for 1997 and 7.5% for 1996. The accrued postretirement benefit obligation is summarized as follows: JANUARY 3, January 4, (IN THOUSANDS) 1998 1997 - ----------------------------------------------------------- Accumulated postretirement benefit obligation $869 $792 Unrecognized actuarial loss (90) (10) - ----------------------------------------------------------- Accrued postretirement benefit obligation 779 782 Less current payable 70 81 - ----------------------------------------------------------- $709 $701 =========================================================== 10. RESTRUCTURING COSTS During 1995, the Company developed a restructuring plan which eliminated certain functions to achieve cost efficiencies and provided $520,000 to cover severance and other costs. All related costs were paid during 1996 and 1995. 11. LEASES The Company is party to certain operating lease agreements covering office space and equipment through 2002. 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 3, 1998 are as follows: (IN THOUSANDS) - ----------------------------------------------------------- 1998 $297 1999 83 2000 68 2001 65 2002 22 - ----------------------------------------------------------- $535 =========================================================== Total rent expense under operating leases was $437,000, $655,000 and $821,000 for 1997, 1996 and 1995, respectively. 12. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a condensed summary of actual quarterly results for 1997 and 1996. (IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------ Net income per Operating Net common share Revenues income income (Basic) (Diluted) - ------------------------------------------------------------ 1997: First $ 9,192 $ 277 $ 222 $ .10 $ .10 Second 9,210 508 287 .12 .12 Third 7,836 325 159 .07 .07 Fourth 7,582 308 169 .07 .07 - ------------------------------------------------------------ $33,820 $1,418 $ 837 $ .36 $ .36 ============================================================ 1996: First $15,840 $ 386 $ 12 $ .01 $ .01 Second 19,146 721 3,075 1.48 1.47 Third 10,886 (97) 4,025 1.95 1.86 Fourth 7,045 87 69 .03 .03 - ------------------------------------------------------------ $52,917 $1,097 $7,181 $3.47 $3.37 ============================================================ 19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To PremiumWear, Inc. We have audited the accompanying consolidated balance sheets of PremiumWear, Inc. (a Delaware corporation and formerly Munsingwear, Inc.) and subsidiary as of January 3, 1998 and January 4, 1997, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the three fiscal years in the period ended January 3, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PremiumWear, Inc. and subsidiary as of January 3, 1998 and January 4, 1997, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 3, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, February 20, 1998 FIVE YEAR FINANCIAL REVIEW
(Dollar amounts in thousands) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- FOR THE YEAR - --------------------------------------------------------------------------------------------------------------------- Net sales $ 33,820 $ 49,948 $ 51,512 $ 37,407 $ 37,635 Royalty income -- 2,969 4,609 4,528 3,624 Cost of sales 25,627 40,402 42,714 30,029 28,783 Gross margin % 24.2% 19.1% 17.1% 19.7% 23.5% Interest expense 91 771 1,158 353 286 Income (loss) before income taxes and extraordinary item 1,447 11,252 (2,230) (304) (203) Net income (loss) 837 7,181 (2,335) (573) (342) Purchases of property, plant and equipment 435 689 1,201 865 490 Depreciation and amortization 439 847 782 712 873 Special cash distribution 12,500 -- -- -- -- AS OF THE END OF THE YEAR - --------------------------------------------------------------------------------------------------------------------- Total assets $ 17,551 $ 30,256 $ 33,653 $ 29,738 $ 23,406 Current assets 15,938 28,639 24,244 20,716 14,606 Current liabilities 4,789 7,373 20,318 13,869 5,045 Working capital 11,149 21,266 3,926 6,847 9,561 Current ratio 3.3 3.9 1.2 1.5 2.9 Long-term debt -- -- 22 38 57 Common shareholders' equity 12,053 22,182 12,984 15,319 15,892 Number of employees 261 312 343 348 374 =====================================================================================================================
20 DIRECTORS AND OFFICERS 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 Group, Inc., Minneapolis THOMAS D. GLEASON (3) Chairman of the Board and Chief Executive Officer 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 OFFICERS THOMAS D. GLEASON Chairman of the Board and Chief Executive Officer DAVID E. BERG President and Chief Operating Officer JAMES S. BURY Vice President of Finance and Assistant Secretary CYNTHIA L. BOEDDEKER Vice President and General Merchandise Manager JOHN R. HOUSTON Partner in the law firm of Lindquist & Vennum PLLP Secretary CORPORATE INFORMATION ANNUAL MEETING The Annual Meeting of Shareholders will be held Wednesday, May 13, 1998, at 11:00a.m. CDT at The Thunderbird Hotel and Convention Center, 2201 E. 78th Street, Bloomington, MN 55425-1228. FORM 10-K Copies of Annual Report on Form 10-K, filed with the Securities and Exchange Commission, are available without charge upon written request to Shareholder Relations, PremiumWear, Inc., 7566 Market Place Drive, Minneapolis, MN 55344-3629. TRANSFER AGENT AND REGISTRAR OF COMMON STOCK Norwest Bank Minnesota, N.A. Shareowner Services P. O. Box 64854 St. Paul, MN 55164-0854 (612) 450-4064 / (800) 468-9716 PREMIUMWEAR STOCK PremiumWear Stock is listed on the New York Stock Exchange. Symbol PWA PREMIUMWEAR ON THE INTERNET AND BY FAX Company website: www.premiumwear.com (Contents of the website are not deemed part of this annual report.) 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 Swenson NHB Minneapolis, MN FACILITIES CORPORATE HEADQUARTERS 7566 Market Place Drive Minneapolis, MN 55344-3629 MANUFACTURING AND DISTRIBUTION Fairmont, NC [LOGO] PREMIUMWEAR, INC. CORPORATE HEADQUARTERS 7566 Market Place Drive Minneapolis, MN 55344-3629 Phone: (612) 943-5000 Fax: (612) 943-5052 www.premiumwear.com EX-21 4 SUBSIDIARY OF THE REGISTRANT EXHIBIT 21 PREMIUMWEAR, INC. and SUBSIDIARY Subsidiary of the Registrant State of Jurisdiction of Incorporation ---------------- Munsingwear Canada Limited (inactive) Canada EX-23 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-833386. Minneapolis, Minnesota, March 27, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JAN-03-1998 JAN-03-1998 2,870 0 4,199 538 8,590 15,938 4,942 3,329 17,551 4,789 0 0 0 23 12,030 17,551 33,820 33,820 24,940 25,627 6,775 74 91 1,447 610 837 0 0 0 837 .36 .36
EX-27.2 7 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS 3-MOS 3-MOS JAN-04-1997 JAN-04-1997 JAN-04-1997 JAN-04-1997 JUL-06-1997 OCT-05-1996 14,477 68 15,656 0 0 0 4,230 10,259 5,904 909 615 1,089 9,804 8,359 7,446 28,639 19,563 29,197 4,704 5,106 4,714 3,087 1,978 2,990 30,256 27,257 30,921 20,318 10,706 8,701 0 0 0 0 0 0 0 0 0 23 21 21 22,160 16,199 21,492 30,256 27,257 30,921 49,948 18,021 10,194 52,917 19,146 10,886 40,644 14,301 9,021 40,402 14,610 8,588 11,418 3,815 2,395 75 49 64 771 358 (6) 11,252 4,766 6,171 4,071 1,691 2,146 7,181 3,075 4,025 0 0 0 0 0 0 0 0 0 7,181 3,075 4,025 3.47 1.48 1.95 3.37 1.47 1.86
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