-----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, SV1pDB5YH75v7xzu2yuLD2iO67+QbTXDBpG3uTw4nVupBDuVotaVl2igR+pJcvGm U0pVfE8kZ88HAprz2VGccg== 0000897101-99-000346.txt : 19990403 0000897101-99-000346.hdr.sgml : 19990403 ACCESSION NUMBER: 0000897101-99-000346 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990401 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-K SEC ACT: SEC FILE NUMBER: 001-00063 FILM NUMBER: 99585407 BUSINESS ADDRESS: STREET 1: 7566 MARKET PLACE DRIVE CITY: MINNEAPOLIS STATE: MN ZIP: 55344-3629 BUSINESS PHONE: 6129435000 MAIL ADDRESS: STREET 1: 7566 MARKET PLACE DRIVE CITY: MINNEAPOLIS STATE: MN ZIP: 55344-3629 FORMER COMPANY: FORMER CONFORMED NAME: MUNSINGWEAR INC DATE OF NAME CHANGE: 19920703 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K |X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 or |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 -------------------------------------------- For the fiscal year ended January 2, 1999 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.) 5500 FELTL ROAD, MINNETONKA, MINNESOTA 55343-7902 (Address of principal executive office) (Zip Code) Registrant's telephone number: (612) 979-1700 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange Title of each class on which registered - --------------------------------- --------------------------- Common Stock, $.01 par value 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. The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the Registrant at March 25, 1999 was $10,227,000, based upon the closing price of $5.00 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 25, 1999 was 2,581,422. -------------------------- DOCUMENTS INCORPORATED BY REFERENCE: Documents incorporated in part by reference in Parts I and II of this report: Portions of PremiumWear, Inc. 1998 Annual Report to Shareholders for the fiscal year ended January 2, 1999. Documents incorporated in part by reference in Part III of this report: Portions of definitive proxy statement for the 1999 Annual Meeting of Shareholders. This Form 10-K consists of 86 total pages: The exhibit index is on page 18. PART I Item 1. Business A. GENERAL DEVELOPMENT OF BUSINESS The Company was incorporated under the laws of Delaware in 1923 as the successor to a business founded in 1886. On July 3, 1991, the Company filed a voluntary petition for bankruptcy under Chapter 11 of the United States Bankruptcy Code, together with a proposed Plan of Reorganization. The Company emerged from bankruptcy on October 29, 1991. In two separate transactions in 1996, the Company sold its tradenames and trademarks, and certain associated assets relating to the retail and professional golf businesses for $23,000,000 in cash. The Company then changed its name from Munsingwear, Inc. to PremiumWear, Inc. and entered into a license agreement with Supreme International Corporation for the use of the Munsingwear(R) brand in the sale of knit and woven shirts to the promotional products/advertising specialty channels of distribution which includes advertising specialty incentive customers, specialty distributors and uniform market customers. In early 1998, the Company introduced its own Page & Tuttle(R) brand of knit and woven golf shirts to the golf pro shop market and, in late 1998, expanded this product line to include fleece, windshirts, sweaters, pants and shorts. In late 1998 the Company announced it would also market the Page & Tuttle(R) brand to the promotional products/advertising specialty markets starting in 1999. The Company's principal executive offices are located at 5500 Feltl Road, Minnetonka, Minnesota 55343-7902, and its telephone number is (612) 979-1700. 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 2, 1999, 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 2, 1999, 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 2, 1999, included in Exhibit 13 to this Form 10-K. 2 C. NARRATIVE DESCRIPTION OF BUSINESS Principal Products: The Company sells knit and woven sport shirts under the Munsingwear(R) label to promotional products/advertising specialty markets customers pursuant to a license from Supreme International Corporation. The Company sells its Page & Tuttle(R) brand of knit golf shirts and coordinated bottoms and outerwear to golf pro shops, resorts and to promotional products/advertising specialty markets customers. Methods of Distribution of Products: The Company utilizes independent sales representative firms to solicit orders from customers. All products are distributed to customers through the Company's North Carolina distribution facility. Sources and Availability of Raw Materials and Products: Approximately one-third of the Company's products were manufactured domestically in 1998. The balance was sourced primarily from "full package" manufacturers in the Far East, Central and South America and through the 807 program (assembly only) 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 occasionally utilizes contract sewing manufacturers in close proximity to its North Carolina facility to handle seasonal peak demand. Trademarks and Trade Names: The Company owns the Page & Tuttle(R) trademark for apparel and is a licensee of the Munsingwear(R) brand under a license agreement entered into in September 1996, which allows the Company to use the Munsingwear(R) name on knit shirts for an initial term of 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. 3 Seasonal Aspects of the Business: The Company generally experiences peak seasonal demand for its products in the second and third quarters of the fiscal year. Working Capital Practices: The Company maintains a secured bank line of credit of $6,000,000 to meet its working capital needs. The bank line of credit is also used for letters of credit that are required for some purchases from Far East sources. The Company allows returns of merchandise as a result of shipping errors, damaged merchandise and for other reasons. Returns have historically been less than 2% of sales. Customers: The Company sells to approximately 3,300 customers. In the promotional products/specialty advertising market, the Company sells primarily to wholesale distributors, uniform companies and advertising specialty dealers. Wholesale distributors comprised approximately 60% of the Company's 1998 sales volume and included eight individual distributors who generally are located in key geographic areas of distribution. In 1998, Alpha Shirt Company, Broder Bros. and San Mar Corporation represented 17%, 14% and 11%, respectively, of total Company net sales. No other customer represented more than 10% of total Company sales. While a loss of one of these customers could have a material short-term impact on the Company's business, management believes that alternate customers are available to minimize the long-term impact of any such loss. Backlog of Orders: The Company's backlog of unfilled orders at January 2, 1999 was approximately $2,000,000 as compared to $1,400,000 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. Recently, deflationary pricing practices have increasingly been used by the Company and its competition, primarily the result of increased offshore sourcing that has lowered unit production 4 costs. Many of the Company's competitors have greater financial and other resources than the Company. Research and Development: The Company is involved in limited experimental research activities related to the development of new fabrics and customization processes. Research and development expenses, other than for product design, are not significant. Environmental Considerations: The Company'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 1998, the Company's capital expenditures for environmental control facilities were not significant, and no significant capital expenditures related to environmental issues are projected in 1999. Employees: As of January 2, 1999, there were 265 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. Subsequent Events: On March 25, 1999, the Company acquired Klouda-Lenz, Inc., its independent sales representative agency for the promotional products/advertising specialty market. Klouda-Lenz, Inc. merged into a wholly-owned acquisition subsidiary of the Company. The purchase price was $1,510,634 in cash and 241,892 newly issued shares of common stock, which are subject to a two-year holding restriction. Klouda-Lenz' 1998 revenues totaled approximately $4.4 million, about 44% of which represented commissions from the Company. D. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Sales to foreign customers located outside the United States and its territories for the past three years were not significant. 5 Item 2. Properties At January 2, 1999, the Company occupied the following properties: Approximate Square Percentage Lease Property Footage Utilized Expires -------- ------- -------- ------- Minnetonka, MN - Headquarters 23,000 100 2003 Fairmont, NC - Cutting and sewing plant, warehouse and distribution center 139,100 50 Owned Approximately half of the Minnetonka, MN facility is subleased to the Company's special markets sales representative agency. Management has decided to reduce the production capacity of its Fairmont, North Carolina manufacturing facility in order to take advantage of lower unit production costs in offshore locations. 1998 financial results included an asset impairment charge to reduce the carrying value of this facility. At January 2, 1999, no facilities were occupied under capitalized leases. Item 3. Legal Proceedings None of a significant nature or which is expected to have a material impact on the Company's business or financial condition. Item 4. Submission of Matters to a Vote of Security Holders None. 6 Executive Officers of the Registrant The following information is furnished with respect to the Company's executive officers as of the date hereof, pursuant to Item 401(b) of Regulation S-K. Each of the officers has been appointed to serve in his respective office until his successor has been elected. Executive Officer Name and Age Position Since - ------------ -------- ----- Thomas D. Gleason (63) Chief Executive Officer September 1996 to 1996 present; 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 (42) President, August 1997 to present; Chief 1995 Operating 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 (55) Vice President of Finance, December 1996 to 1990 present; Vice President and Controller, May 1990 to December 1996; Corporate Controller, August 1989 to May 1990; Vice President Finance, Men's Apparel Division, February 1988 to August 1989. Cynthia L. Boeddeker (41) Vice President and General Merchandise 1996 Manager, 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. 7 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The information required under this caption in incorporated herein by reference to the information set forth under caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Statistics" contained in the Company's 1998 Annual Report to Shareholders. Item 6. Selected Financial Data The information required under this caption is incorporated herein by reference to the information set forth under caption "Five Year Financial Review" contained in the Company's 1998 Annual Report to Shareholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required under this caption is incorporated herein by reference to the information set forth under captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's 1998 Annual Report to Shareholders. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required under this caption is incorporated herein by reference to the information set forth under caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk" and "Notes to Consolidated Financial Statements - Note 1 - New Accounting Pronouncements" contained in the Company's 1998 Annual Report to Shareholders. Item 8. Financial Statements and Supplementary Data The information required under this caption is incorporated herein by reference to the information set forth under captions "Consolidated Statements of Operations," "Consolidated Balance Sheets," "Consolidated Statements of Cash Flows," "Consolidated Statements of Shareholders' Equity," "Notes to Consolidated Financial Statements," "Report of Independent Public Accountants," and "Five Year Financial Review" contained in the Company's 1998 Annual Report to Shareholders. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. 8 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 2, 1999. 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 2, 1999. 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 2, 1999. 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 2, 1999. 9 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT: 1. Financial statements, included under the following headings in the 1998 Annual Report to Shareholders, are incorporated by reference in Item 8: - Consolidated Statements of Operations for the three years ended January 2, 1999. - Consolidated Balance Sheets as of January 2, 1999 and January 3, 1998. - Consolidated Statements of Cash Flows for the three years ended January 2, 1999. - Consolidated Statements of Shareholders' Equity for the three years ended January 2, 1999. - Notes to Consolidated Financial Statements. - Report of Independent Public Accountants. 2. Financial Statement Schedules for the three years ended January 2, 1999. - 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) 10 - 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) (C) The Registrant's 1999 Stock Plan. (7) - Exhibit 10 - Material Contracts (Other): (D) Purchase and Sale Agreement, dated May 22, 1996, between the Registrant and Supreme International Corporation, as amended. (4) (E) License Agreement, dated September 6, 1996, between the Registrant and Supreme International Corporation. (4) (F) Credit and Security Agreement, dated February 4, 1997, between the Registrant and U.S. Bank National Association. (5) (G) Agreement and Plan of Merger, dated March 25, 1999, between the Registrant, Klouda-Lenz, Inc., and the other parties named therein. (7) - Exhibit 13 - PremiumWear, Inc. 1998 Annual Report to Shareholders - Such report, except for those portions thereof which are expressly incorporated by reference in this report, is furnished for the information of the Securities and Exchange Commission and is not to be deemed "filed" as part of this filing. (7) - Exhibit 23 - Consent of Independent Public Accountants. (7) - Exhibit 27 - Financial Data Schedule. (7) ---------------------------- 11 (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: None. (c) EXHIBITS: Reference is made to Item 14(a) (3). (d) SCHEDULES: Reference is made to Item 14 (a) (2). 12 SCHEDULE II PREMIUMWEAR, INC. Valuation and Qualifying Accounts Year ended January 2, 1999
Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions ---------------------------- Balance Charged to Beginning Costs and Charged to Balance at Description of Year Expenses Net Sales Deductions End of Year - ----------- ------- -------- --------- ---------- ----------- Allowances deducted from trade receivables Allowance for cash discounts and other customer credits $ 318,000 $(116,000)(d) $ 75,000 $ (1,000)(a) $ 278,000 Allowance for doubtful accounts 170,000 262,000 -- 32,000 (b) 400,000 Allowance for returns 50,000 -- 539,000 539,000 (c) 50,000 --------- --------- --------- --------- --------- $ 538,000 $ 146,000 $ 614,000 $ 570,000 $ 728,000 ========= ========= ========= ========= ========= Reserve for liabilities related to sold assets $ 578,000 $(398,000)(e) $ -- $ 180,000 $ -- ========= ========= ========= ========= =========
(a) Discounts allowed and other credits to customers' accounts receivable. (b) Uncollectable accounts written off, net of recoveries. (c) Returns applied to customers' accounts receivable. (d) $149,000 charged to cost of goods sold, $265,000 credited to bad debt provision. (e) Credited to gain on sale of trademarks. 13 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. 14 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. 15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II To PremiumWear, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in the Company's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 19, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The accompanying schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP --------------------------------- ARTHUR ANDERSEN LLP Minneapolis, Minnesota, February 19, 1999 16 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: APRIL 1, 1999 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 April 1, 1999 - ------------------------- (Principal Executive Officer) Thomas D. Gleason and Director /S/ JAMES S. BURY V. P. of Finance April 1, 1999 - ------------------------- Principal Accounting Officer James S. Bury /S/ C. D. ANDERSON Director April 1, 1999 - ------------------------- C. D. Anderson /S/ KEITH A. BENSON Director April 1, 1999 - ------------------------- Keith A. Benson /S/ ALAN W. KOSLOFF - ------------------------- Alan W. Kosloff Director April 1, 1999 /S/ GERALD E. MAGNUSON Director April 1, 1999 - ------------------------- Gerald E. Magnuson /S/ MARK B. VITTERT Director April 1, 1999 - ------------------------- Mark B. Vittert 17 EXHIBIT INDEX Exhibit No. Exhibit Page No. - ------------ ----------------------------------------------------- -------- 10(C) 1999 Stock Plan. 19-32 10(G) Agreement and Plan of Merger. 33-51 13 PremiumWear, Inc. 1998 Annual Report to Shareholders. 52-83 21 Subsidiary of the Registrant. 84 23 Consent of Independent Public Accountants. 85 27 Financial Data Schedule. 86 18 EX-10.C 2 1999 STOCK PLAN EXHIBIT 10(C) PREMIUMWEAR, INC. 1999 STOCK PLAN SECTION CONTENTS PAGE 1. General Purpose of Plan; Definitions 1 2. Administration 3 3. Stock Subject to Plan 4 4. Eligibility 4 5. Stock Options 4 6. Restricted Stock 8 7. Transfer, Leave of Absence, etc. 9 8. Amendments and Termination 10 9. Unfunded Status of Plan 10 10. General Provisions 10 11. Effective Date of Plan 12 PREMIUMWEAR, INC. 1999 STOCK PLAN SECTION 1. General Purpose of Plan; Definitions. The name of this plan is the PremiumWear, Inc. 1999 Stock Plan (the "Plan"). The purpose of the Plan is to enable PremiumWear, Inc. (the "Company") and its Subsidiaries to retain and attract executives, other key employees, consultants and directors who contribute to the Company's success by their ability, ingenuity and industry, and to enable such individuals to participate in the long-term success and growth of the Company by giving them a proprietary interest in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: a. "Board" means the Board of Directors of the Company. b. "Cause" means a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, or a participant's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company. c. "Code" means the Internal Revenue Code of 1986, as amended. d. "Committee" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. e. "Company" means PremiumWear, Inc., a corporation organized under the laws of the State of Delaware (or any successor corporation). f. "Disability" means permanent and total disability as determined by the Committee. g. "Early Retirement" means retirement, with consent of the Committee at the time of retirement, from active employment with the Company and any Subsidiary or Parent Corporation of the Company. h. "Fair Market Value" means the value of the Stock on a given date as determined by the Committee in accordance with Section 422 of the Code and any applicable Treasury Department regulations with respect to "incentive stock options." i. "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. j. "Non-Employee Director" means a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as amended, or any successor rule. k. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option, and is intended to be and is designated as a "Non-Qualified Stock Option." l. "Normal Retirement" means retirement from active employment with the Company and any Subsidiary or Parent Corporation of the Company on or after age 65. m. "Outside Director" means a director who (a) is not a current employee of the Company or any member of an affiliated group which includes the Company; (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Company; (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose, remuneration includes any payment in exchange for goods or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. n. "Parent Corporation" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations (other than the Company) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. o. "Restricted Stock" means an award of shares of Stock that are subject to restrictions under Section 6 below. p. "Retirement" means Normal Retirement or Early Retirement. q. "Stock" means the Common Stock, $.01 par value per share, of the Company. r. "Stock Option" means any option to purchase shares of Stock granted pursuant to Section 5 below. s. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 2 SECTION 2. Administration. The Plan shall be administered by the Board or by a Committee appointed by the Board consisting of at least two directors, all of whom shall be Outside Directors and Non-Employee Directors, and who shall serve at the pleasure of the Board. The Committee may be a subcommittee of the Compensation Committee of the Board The Committee shall have the power and authority to grant to eligible employees, consultants and directors pursuant to the terms of the Plan: (i) Stock Options and (ii) Restricted Stock. In particular, the Committee shall have the authority: (i) to select the officers, other key employees, directors and consultants of the Company and its Subsidiaries to whom Stock Options and/or Restricted Stock awards may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, or Restricted Stock awards, or a combination of the foregoing, are to be granted hereunder; (iii) to determine the number of shares to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, any restriction on any Stock Option or other award and/or the shares of Stock relating thereto); and (v) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may delegate its authority to officers of the Company for the purpose of selecting employees who are not officers of the Company for purposes of (i) above. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. 3 SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 120,000. Such shares may consist, in whole or in part, of authorized and unissued shares. If any shares that have been optioned cease to be subject to Stock Options, or if any shares subject to any Restricted Stock award granted hereunder are forfeited or such award otherwise terminates without a payment being made to the participant, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, other change in corporate structure affecting the Stock, or spin-off or other distribution of assets to shareholders, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Stock Options granted under the Plan, and in the number of shares subject to Restricted Stock awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. SECTION 4. Eligibility. Officers, other key employees, consultants and members of the Board of the Company and Subsidiaries who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and its Subsidiaries are eligible to be granted Stock Options or Restricted Stock awards under the Plan. The optionees and participants under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of shares covered by each award. Notwithstanding the foregoing, no person shall receive grants of Stock Options and Restricted Stock awards under this Plan which exceed 50,000 shares during any fiscal year of the Company. SECTION 5. Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock Options shall be granted under the Plan after February 22, 2009. The Committee shall have the authority to grant any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of options. To the extent that any option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. 4 Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. The preceding sentence shall not preclude any modification or amendment to an outstanding Incentive Stock Option, whether or not such modification or amendment results in disqualification of such Stock Option as an Incentive Stock Option, provided the optionee consents in writing to the modification or amendment. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant. In no event shall the option price per share of Stock purchasable under an Incentive Stock Option be less than 100% of the Fair Market Value of the Stock on the date of the grant of the Stock Option. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the option price shall be no less than 110% of the Fair Market Value of the Stock on the date the option is granted. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the term of such option shall be no more than five years from the date of grant. (c) Exercisability. Stock Options shall be exercisable at such time or times as determined by the Committee at or after grant. If the Committee provides, in its discretion, that any option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time, provided, however, that unless the Stock Option has been approved by the Board, the Committee or the stockholders of the Company, a Stock Option granted to an officer, director or 10% stockholder of the Company shall not be exercisable for a period of six (6) months after the date of grant. Notwithstanding the foregoing, unless the Stock Option Agreement provides otherwise, any Stock Option granted under this Plan shall be exercisable in full, without regard to any installment exercise or vesting provisions, for a period specified by the Committee, but not to exceed sixty (60) days nor be less than seven (7) days, prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 75% or more of the outstanding Stock of the Company. 5 (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or by any other form of legal consideration deemed sufficient by the Committee and consistent with the Plan's purpose and applicable law, including promissory notes or a properly executed exercise notice together with irrevocable instructions to a broker acceptable to the Company to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price. As determined by the Committee, in its sole discretion, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee or Restricted Stock subject to an award hereunder (based on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee); provided, however, that in the event payment is made in the form of shares of Restricted Stock, the optionee will receive a portion of the option shares in the form of, and in an amount equal to, the Restricted Stock award tendered as payment by the optionee. If the terms of an option so permit, an optionee may elect to pay all or part of the option exercise price by having the Company withhold from the shares of Stock that would otherwise be issued upon exercise that number of shares of Stock having a Fair Market Value equal to the aggregate option exercise price for the shares with respect to which such election is made. No shares of Stock shall be issued until full payment therefor has been made. An optionee generally shall have the rights to dividends and other rights of a shareholder with respect to shares subject to the option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 10. (e) Non-transferability of Options. No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (f) Termination by Death. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of death, the Stock Option may thereafter be immediately exercised, to the extent then exercisable (or on such accelerated basis as the Committee shall determine at or after grant), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of nine months (or such shorter period as the Committee shall specify at grant) from the date of such death or until the expiration of the stated term of the option, whichever period is shorter. (g) Termination by Reason of Disability. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of termination due to Disability (or on such accelerated basis as the Committee shall determine at or after grant), but may not be exercised after nine months (or such shorter period as the Committee shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is shorter. In the event of termination of employment by reason 6 of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a NonQualified Stock Option. (h) Termination by Reason of Retirement. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Retirement, any Stock Option held by such optionee may thereafter be exercised to the extent it was exercisable at the time of such Retirement, but may not be exercised after three months (or such shorter period as Committee shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (i) Other Termination. Unless otherwise determined by the Committee, if an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates for any reason other than death, Disability or Retirement, the Stock Option shall thereupon terminate. (j) Annual Limit on Incentive Stock Options. The aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which an Incentive Stock Option under this Plan or any other plan of the Company and any Subsidiary or Parent Corporation is exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. (k) Directors Who Are Not Employees. Each person who (i) is not an employee of the Company or its Subsidiaries, and (ii) is elected or reelected to the Board at any annual or special meeting of the shareholders of the Company, or (iii) is serving an unexpired term as Director on the date of an annual meeting at which any other director is elected, shall as of the date of such meeting automatically be granted a Stock Option to purchase 1,000 shares of the Company's Stock at an exercise price per share equal to 100% of the Fair Market Value of a share of the Company's Stock on the date of the grant of the Stock Option. In the case of an annual or special meeting, the action of the shareholders in electing or reelecting a director who is not an employee shall constitute the granting of Stock Options to all such directors who are not employees, and the date when the shareholders shall take such action shall be the date of grant of the Stock Options. All such options shall be designated as Non-Qualified Stock Options and shall be subject to the same terms and provisions as are then in effect with respect to the grant of Non-Qualified Stock Options to officers and key employees of the Company, except that the term of each such Stock Option shall be equal to five years. In the event discretionary Stock Options are granted to members of the Committee, such Stock Options shall be granted by the Board. The provisions of this Section 5(k) shall become effective the day following approval of this Plan by the shareholder of the Company and shall then replace and supercede Section 5(k) of the Company's 1991 stock Plan. 7 SECTION 6. Restricted Stock. (a) Administration. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company and Subsidiaries to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. The Committee may also condition the grant of Restricted Stock upon the attainment of specified performance goals. The provisions of Restricted Stock awards need not be the same with respect to each recipient. In the event that Restricted Stock awards are granted to members of the Committee, such awards shall be granted by the Board. (b) Awards and Certificates. The prospective recipient of an award of shares of Restricted Stock shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the then applicable terms and conditions. (i) Each participant shall be issued a stock certificate in respect of shares of Restricted Stock awarded under the Plan. Such certificate shall be registered in the name of the participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the PremiumWear, Inc. 1999 Stock Plan and an Agreement entered into between the registered owner and PremiumWear, Inc. Copies of such Plan and Agreement are on file in the executive offices of PremiumWear, Inc. (ii) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to the Plan shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the 8 "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. Within these limits, the Committee may provide for the lapse of such restrictions in installments where deemed appropriate. (ii) Except as provided in paragraph (c)(i) of this Section 6, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the shares and the right to receive any cash dividends. The Committee, in its sole discretion, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested in additional shares of Restricted Stock (to the extent shares are available under Section 3 and subject to paragraph (f) of Section 10). Certificates for shares of Unrestricted Stock shall be delivered to the grantee promptly after, and only after, the period of forfeiture shall have expired without forfeiture in respect of such shares of Restricted Stock. (iii) Subject to the provisions of the award agreement and paragraph (c)(iv) of this Section 6, upon termination of employment for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the participant. (iv) In the event of special hardship circumstances of a participant whose employment is terminated (other than for Cause), including death, Disability or Retirement, or in the event of an unforeseeable emergency of a participant still in service, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to such participant's shares of Restricted Stock. (v) All restrictions with respect to any participant's shares of Restricted Stock shall lapse or be deemed to have lapsed or been terminated on the tenth (10th) business day prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company, other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 75% or more of the outstanding Stock of the Company. SECTION 7. Transfer, Leave of Absence, etc. For purposes of the Plan, the following events shall not be deemed a termination of employment: 9 (a) a transfer of an employee from the Company to a Parent Corporation or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or from one Subsidiary to another; (b) a leave of absence, approved in writing by the Committee, for military service or sickness, or for any other purpose approved by the Company if the period of such leave does not exceed ninety (90) days (or such longer period as the Committee may approve, in its sole discretion); and (c) a leave of absence in excess of ninety (90) days, approved in writing by the Committee, but only if the employee's right to reemployment is guaranteed either by a statute or by contract, and provided that, in the case of any leave of absence, the employee returns to work within 30 days after the end of such leave. SECTION 8. Amendments and Termination. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made (i) which would impair the rights of an optionee or participant under a Stock Option or Restricted Stock award theretofore granted, without the optionee's or participant's consent, or (ii) which without the approval of the stockholders of the Company would cause the Plan to no longer comply with Rule 16b-3 under the Securities Exchange Act of 1934, Section 422 of the Code or any other regulatory requirements. The Committee may amend the terms of any award or option theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall impair the rights of any holder without his consent. The Committee may also substitute new Stock Options for previously granted options, including previously granted options having higher option prices. SECTION 9. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. SECTION 10. General Provisions. (a) The Committee may require each person purchasing shares pursuant to a Stock Option under the Plan to represent to and agree with the Company in writing that the optionee is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. 10 All certificates for shares of Stock delivered under the Plan pursuant to any Restricted Stock awards shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Subject to paragraph (d) below, recipients of Restricted Stock awards under the Plan (not including Stock Options) are not required to make any payment or provide consideration other than the rendering of services. (c) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee of the Company or any subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. (d) Each participant shall, no later than the date as of which any part of the value of an award first becomes includible as compensation in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. With respect to any award under the Plan, if the terms of such award so permit, a participant may elect by written notice to the Company to satisfy part or all of the withholding tax requirements associated with the award by (i) authorizing the Company to retain from the number of shares of Stock that would otherwise be deliverable to the participant, or (ii) delivering to the Company from shares of Stock already owned by the participant, that number of shares having an aggregate Fair Market Value equal to part or all of the tax payable by the participant under this Section 10(d). Any such election shall be in accordance with, and subject to, applicable tax and securities laws, regulations and rulings. (e) At the time of grant, the Committee may provide in connection with any grant or award made under this Plan that the shares of Stock received as a result of such grant shall be subject to a repurchase right in favor of the Company, pursuant to which the participant shall be required to offer to the Company upon termination of employment for any reason any shares that the participant acquired under the Plan, with the price being the then Fair Market Value of the Stock or, in the case of a termination for Cause, an amount equal to the cash consideration paid for the Stock, subject to such other terms and conditions as the Committee may specify at the time of grant. The Committee may, at the time of the grant of an award under the Plan, provide the Company with the 11 right to repurchase, or require the forfeiture of, shares of Stock acquired pursuant to the Plan by any participant who, at any time within two years after termination of employment with the Company, directly or indirectly competes with, or is employed by a competitor of, the Company. (f) The reinvestment of dividends in additional Restricted Stock at the time of any dividend payment shall only be permissible if the Committee (or the Company's chief executive or chief financial officer) certifies in writing that under Section 3 sufficient shares are available for such reinvestment (taking into account then outstanding Stock Options and other Plan awards). SECTION 11. Effective Date of Plan. The Plan became effective on February 22, 1999. 12 EX-10.G 3 AGREEMENT AND PLAN OF MERGER EXHIBIT 10(G) AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated effective March 25, 1999, is among PremiumWear, Inc., a Delaware corporation ("PremiumWear"), KLI Acquisition Corp., a Minnesota corporation and a wholly-owned subsidiary of PremiumWear ("Acquisition Corp."), Klouda- Lenz, Inc., a Minnesota corporation ("KLI"), and Timothy C. Klouda and Dennis G. Lenz, the shareholders of KLI (individually, the "Shareholder" and collectively, the "Shareholders"). BACKGROUND: KLI has been and continues to act as PremiumWear's independent sales representative organization. PremiumWear desires to acquire KLI by means of a merger (the "Merger") of KLI into Acquisition Corp. with Acquisition Corp. as the surviving corporation ("Surviving Corporation") and the separate corporate existence of KLI shall cease, on the terms and conditions set forth in this Agreement and in the Plan of Merger attached as Exhibit A. NOW, THEREFORE, it is agreed: 1. Merger. 1.1 Closing. The closing (the "Closing") of the Merger will take place at such time and place as may be mutually agreeable to the parties as soon as practicable after satisfaction of the conditions stated in Sections 4.1 and 4.2 (the "Closing Date"), and no later than April 5, 1999, unless a later date is subsequently agreed to by the parties hereto in writing. 1.2 The Merger. As soon as practicable after satisfaction, or, to the extent permitted under this Agreement, the written waiver, of all conditions to the Merger set forth in Sections 4.1 and 4.2, the parties must cause the Merger to be consummated by filing articles of merger (the "Articles of Merger") with the Minnesota Secretary of State, in such form as required by, and executed in accordance with, the relevant provisions of the Minnesota Business Corporation Act ("MBCA"), and the parties must make all other filings or recordings required by the MBCA in connection with the Merger and the transactions contemplated by this Agreement. The Merger shall be effective when the Articles of Merger are duly filed with the Minnesota Secretary of State or such later date as may be set forth in the Articles of Merger (the "Effective Time"), but in no event later than the date of Closing unless a later date is subsequently agreed to by the parties in writing. 1.3 Merger Consideration; Exchange of Shares. Each share of common stock, no par value per share, of KLI ("KLI Common Stock") outstanding immediately prior to the Effective Time will, by virtue of the Merger and without any action on the part of the holder thereof, be converted into (A) 0.241892 of shares of newly authorized $.01 par value Common Stock of PremiumWear ("PremiumWear Common Stock"), as a result of which the aggregate number of shares of PremiumWear Common Stock to be received by each of the two Shareholders shall be 120,946; and (B) $1.510634 in cash, as a result of which the aggregate cash to be received by each of the two Shareholders shall be $755,317. 1.4 Additional Effects of the Merger. (A) Rights and Obligations. All the properties, rights, privileges, powers and franchises of KLI and Acquisition Corp. shall vest in the Surviving Corporation, and all debts, liabilities and duties of KLI and Acquisition Corp. shall become the debts, liabilities and duties of the Surviving Corporation. (B) Articles of Incorporation and Bylaws. The articles of incorporation of Acquisition Corp. in effect at the Effective Time shall be the articles of incorporation of the Surviving Corporation until amended in accordance with applicable law. The bylaws of Acquisition Corp. in effect at the Effective Time shall be the bylaws of the Surviving Corporation until amended in accordance with applicable law. (C) Directors. The directors of Acquisition Corp. at the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the articles of incorporation and bylaws of the Surviving Corporation until each such director's successor is duly elected or appointed. (D) Officers. The officers of Acquisition Corp. at the Effective Time shall be the initial officers of the Surviving Corporation, each to hold office in accordance with the articles of incorporation and bylaws of the Surviving Corporation until each such officer's successor is duly elected or appointed. 1.5 Facilitation of Closing. Between the date of this Agreement and the Closing Date, the parties to this Agreement must take all actions reasonably necessary to promptly facilitate the Closing, including, but not limited to working toward satisfying the conditions to Closing set forth in Sections 4.1 and 4.2 over which such party has control. In particular: (A) Conduct of Business. KLI will conduct its business only in the ordinary course and use its reasonable efforts to preserve intact its business organization and goodwill, keep available the services of its officers and employees and maintain satisfactory relations with suppliers, customers and others having a business relationship with KLI. (B) Negative Covenants. KLI will not (i) make any changes with respect to its management or supervisory personnel or its employment arrangements; (ii) create, incur or assume any debt without the written consent of PremiumWear; (iii) directly or indirectly encourage, solicit or initiate discussions or negotiations with any corporation, partnership, person or any other entity or group (other than PremiumWear) concerning any sale, merger or other transaction related to the sale of its business prior to April 5, 1999 and will not permit its officers, directors or 2 agents to do any of the foregoing; or (iv) take any action which would cause a breach of any of the representations in Section 2. (C) Director and Shareholder Vote. The Shareholders, as the only two shareholders and directors KLI, will vote their shares in favor of approval of the Merger and all transactions related to the completion of the Merger. (D) State Merger Filings. Upon approval of the Boards of Directors and the shareholders of KLI and Acquisition Corp., the officers of each corporation must file all appropriate documents with the Secretary of State of Minnesota necessary to consummate the Merger. (E) Due Diligence. KLI shall grant PremiumWear full access to the employees, properties, books, accounting and financial records, corporate records and other business files of KLI for purposes of examining the same in connection with the Merger. (F) Target Closing Date. The parties to this Agreement shall utilize their best faith efforts to complete the Merger prior to April 5, 1999. 2. Representations and Warranties of KLI and the Shareholders. KLI and the Shareholders, jointly and severally, make the following representations and warranties to PremiumWear and Acquisition Corp.: 2.1 Organization and Qualifications of KLI. KLI is a corporation lawfully existing and in good standing under the laws of Minnesota with full corporate power and authority to own and lease its properties and to conduct its business in the manner and in the places where such properties are owned or leased or such business is conducted by it. Except its ownership of 100,000 shares in Future Products, Inc., a Minnesota corporation (which will be divested by KLI prior to Closing), KLI does not have any subsidiaries or own any securities issued by any other entity, except for securities held for investment in publicly held companies representing less than one percent of the outstanding Common Stock of each such publicly held company. KLI is not a partner or joint venturer in any partnership or joint venture. 2.2 Capitalization of KLI. The authorized capital stock of KLI consists of 1,000,000 shares of common stock, no par value per share, of which 1,000,000 shares are issued and outstanding, fully paid and non-assessable. Schedule 2.2 attached hereto sets forth a complete and correct list of the shareholders of KLI and the number of shares of KLI's capital stock owned by each shareholder. None of the KLI Common Stock has been issued in violation of any federal or state securities laws or other applicable laws. There are no outstanding warrants, options, preemptive rights, or other rights to purchase or acquire shares of KLI Common Stock or any other KLI capital stock. No securities or other instruments of KLI are either directly or indirectly convertible into or exchangeable for shares of capital stock of KLI and there are no stock appreciation, phantom or similar rights based on the book value or any other attribute of any capital stock of KLI. No restrictions exist on the transfer of shares of KLI Common Stock. 3 2.3 Authority of KLI and the Shareholders. This Agreement is the valid and binding obligation of KLI and each of the Shareholders in accordance with its terms. The execution, delivery and performance by KLI of this Agreement and the consummation by KLI of the transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of KLI and no other corporate proceedings on the part of KLI are necessary to authorize the execution and delivery of this Agreement and to consummate the transactions so contemplated. The execution, delivery and performance of this Agreement by KLI and the Shareholders and the consummation of the transactions contemplated by this Agreement will not violate or result in a default under (A) any provision of the articles of incorporation or bylaws of KLI; (B) any provision of any agreement or obligation to which KLI or either Shareholder is party or by which any of KLI's property is bound; or (C) any laws, rules or regulations to which KLI, either Shareholder or any of their respective properties may be subject. 2.4 Title to Properties; Condition of Properties. Except as listed on Schedule 2.4, KLI has good and marketable title to all of the assets owned or used in its business, including, without limitation, all assets listed on the KLI Financial Statements (as defined in Section 2.6), free and clear of any lien, security interest, mortgage, pledge or other encumbrance of any kind (collectively, "Encumbrances"). All assets owned or used by KLI are in good working order, normal wear and tear excepted. All assets necessary for the continued operation of KLI's business as it is currently being conducted are owned by KLI. 2.5 Real Property. KLI owns no real property. 2.6 Financial Statements. KLI has delivered to PremiumWear the unaudited income statement and balance sheet of KLI for each of the preceding three years with the last one ended December 31, 1998 (the "KLI Financial Statements"). Except as disclosed on Schedule 2.6, all of the KLI Financial Statements referred to in this Section have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with KLI's past practices, are complete and correct and present fairly the financial condition of KLI as of the dates of said statements and the results of its operations for the periods covered. 2.7 Taxes. KLI filed an election to be treated as an S Corporation effective November 1, 1986, and from that date through the Closing has been and will be fully qualified as an S Corporation under the Internal Revenue Code (the "Code"). In the event that KLI's Subchapter S Corporation election and status under the Code is held invalid with respect to any period of time prior to the Closing Date and, as a result, Acquisition Corp. as a successor to KLI, or PremiumWear, is required to pay corporate Taxes with respect to any period of time prior to the Closing Date, the Shareholders shall promptly reimburse PremiumWear for any and all such Tax payments. Subject to the foregoing, KLI and the Shareholders have timely filed and will timely file all federal, state, county, local and foreign income, excise, property, franchise, and other tax returns which are required to be filed by it and them (in connection with income from KLI), respectively, with respect to any period of time ending 4 on or before the Closing Date and, subject to the foregoing, have paid or will pay all Taxes, if any, with respect to such periods which have or may hereafter become due so that Acquisition Corp. as a successor to KLI, or PremiumWear, will not have any tax deficiencies, including penalties and interest, assessed against them arising from any audit by any tax authority with respect to any period ending on or prior to the Closing Date. Such returns are true, complete and correct in all material respects. Neither KLI nor any Shareholder has received notice of any tax deficiency proposed or assessed against it or him which has not been paid through settlement or otherwise, and has not executed any waiver of any statute of limitations on the assessment or collection of any tax. None of KLI's or any Shareholder's tax returns has been audited by governmental authorities in or during the three most recent full fiscal years of KLI. Neither KLI nor any Shareholder has received any notice of any impending audit by any taxing authority. None of KLI or its Affiliates are subject to or bound by any agreement which imposes an actual or potential tax indemnification obligation on KLI. The terms "Tax" or "Taxes" shall mean any kind of tax imposed by a local, state, federal or foreign tax authority. 2.8 Absence of Undisclosed Liabilities. Except as reflected or reserved against on the KLI Financial Statements and except for liabilities (none of which individually or in the aggregate are material) incurred in the ordinary course of business since the date of the KLI Financial Statements, KLI has no liabilities of any nature, whether accrued, absolute or contingent. There are no agreements, judgments, decrees, orders or, to the best of KLI's and the Shareholders' knowledge, any facts which materially affect, or may in the future (so far as can now be reasonably foreseen) materially affect, the business, properties, operations or condition of KLI which have not been specifically disclosed in this Agreement. 2.9 Accounts Receivable. To the best of KLI's and the Shareholders' knowledge, all of the accounts receivable of KLI reflected on the KLI Financial Statements or thereafter acquired (including KLI Receivables) are valid and enforceable claims, fully collectible and subject to no setoff or counterclaim in the recorded amounts, subject only to the allowance for doubtful accounts maintained in accordance with KLI's past practices and reflected on the KLI Financial Statements. 2.10 Inventories. To the best of KLI's and the Shareholders' knowledge, the inventory of KLI consists of items of a quantity consistent with normal inventory levels of KLI and of a quality and condition that is usable and saleable in the ordinary course of business for the purposes for which the inventory is intended, reasonable wear and tear excepted. Such inventory is carried on KLI's books of account in accordance with generally accepted accounting principles consistently applied. 2.11 Conduct of Business in the Ordinary Course. KLI has conducted its business since December 31, 1998, only in the usual and ordinary course consistent with past practice and since such date, KLI has not (A) sold or transferred any of its assets, except inventory in the ordinary course of business; (B) changed any method of accounting or accounting practice; 5 (C) increased or promised to increase the compensation payable to any employee or independent contractor, other than in the ordinary course of business consistent with past practice; (D) except as otherwise expressly contemplated by this Agreement, made any direct or indirect payments, dividends, distributions, sales or transfers of assets, other than normal compensation consistent with past practices, to any officer, director, shareholder or employee of KLI or any of their affiliates; (E) changed its outstanding shares of capital stock or repurchased, redeemed or acquired any outstanding shares of capital stock or other ownership interest in securities of KLI; or (F) to the best of KLI's and the Shareholders' knowledge, suffered any damage or casualty to its assets. 2.12 Intellectual Property. KLI does not own any patents, copyrights, trademarks or tradenames, nor, to the best of KLI's and the Shareholders' knowledge, has it infringed upon any intellectual property rights owned, held or used by any person or entity. KLI has the right to use, free and clear of any claims or rights of any person or entity, all trademarks, service marks, tradenames, trade secrets and customer lists which KLI is using, to the best of KLI's and the Shareholders' knowledge. 2.13 Contracts and Loans. (A) Except for contracts, commitments, plans, agreements and licenses described on Schedule 2.13 ("Commitments"), KLI is not a party to or subject to any agreement: (1) creating any obligation of KLI to pay more than $1,000; (2) providing for the purchase of all or substantially all of KLI's requirements of a particular product or service from a supplier, or for periodic minimum purchases of a particular product or service from a supplier; (3) not terminable on 30 days notice without penalty to or additional consideration from KLI, other than sales and purchase commitments entered into in the ordinary course of business for less than $1,000 each; (4) with any sales agent or distributor; (5) other than as otherwise expressly provided in this Agreement, containing covenants limiting KLI's freedom to compete in any line of business, or with any person or entity, in any location; (6) for the licensure of any property (either as licensor or licensee); or 6 (7) with any present or former officer, director, employee, agent or shareholder of KLI or with any person or entity controlled by or affiliated with any of them. (B) True, correct and complete copies of the Commitments have been provided to PremiumWear prior to the execution of this Agreement. All Commitments are in full force and effect and have not been amended, extended or otherwise modified. Other than as disclosed on Schedule 2.13, neither KLI nor, to the best knowledge of KLI and each Shareholder, any other person or entity is in default under any Commitments. (C) Notwithstanding the foregoing, except with respect to the $100,000 line of credit with First Minnetonka City Bank ("Line of Credit"), KLI is not a party to, and none of the Commitments constitutes, a loan agreement, a promissory note or indebtedness for borrowed money which KLI has an obligation to repay whether in the form of bank borrowings, guarantee of indebtedness of a third party or otherwise. There is no outstanding balance or any other amounts due under the Line of Credit, except as may have been incurred in the ordinary course of business consistent with past practice. The Shareholders agree to pay any and all outstanding balance or other amounts due under the Line of Credit as of the Closing Date without regard to the indemnification limitation contained in Section 5.4(D), except as may have been incurred in the ordinary course of business consistent with past practice. 2.14 Litigation. There is no legal, administrative, arbitration or other proceeding or governmental investigation pending or, to the best knowledge of KLI or any Shareholder, threatened against KLI, or against any Shareholder relating to the business of KLI or the KLI Common Stock. 2.15 Compliance with Laws. Neither KLI, nor any Shareholder with respect to the business of KLI, has violated, and neither are violating, any statutes, regulations, ordinances or other laws. There has never been any citation, fine or penalty imposed or asserted against KLI, or any Shareholder relating to the business of KLI or the KLI Common Stock, under any foreign, federal, state or local law or regulation. 2.16 Insurance. Schedule 2.16 lists each insurance policy maintained by KLI with respect to its properties, assets and business and a brief description of their respective coverages, including coverage dates, deductibles, premiums and policy limits. 2.17 Permits. KLI holds all licenses, permits and franchises which are required to permit it to conduct its business, and all such licenses, permits and franchises are listed on Schedule 2.17. 2.18 Consents and Approvals. No consent, authorization, order, or approval of or filing with any governmental authority, person or entity, including, without limitation, consents from parties to the Commitments, is required for the execution and delivery of this Agreement or the consummation by KLI and the Shareholders of the transactions contemplated by this Agreement. 7 2.19 Warranty or Other Claims. To the best of KLI's and the Shareholders' knowledge, there are no existing claims against KLI for goods or services sold, transferred or marketed which are defective or fail to meet any product warranties or contract or industry standards and, to the best knowledge of KLI or each Shareholder, there are no threatened claims, or any facts upon which a claim could be based, against KLI for goods or services which are defective or fail to meet any product warranties or contract or industry standards. 2.20 Finder's Fee. Neither Shareholder nor KLI has incurred liability or will become liable for any broker's commission or finder's fee relating to or in connection with the transaction contemplated by this Agreement. 2.21 Employee Benefit Plans and Compensation. (A) All employee benefit plans (as that term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA")), as amended, which are maintained or contributed to by KLI for the benefit of its employees or former employees are described in Schedule 2.21, and KLI is in full compliance with the Code and ERISA with respect to all such employee benefit plans. (B) Other than claims for benefits by employees, beneficiaries or dependents arising in the normal course of the operation of such plans, no claim is currently pending or, to the best knowledge of KLI or any Shareholder, threatened against any such employee benefit plan. There are no unfunded obligations of KLI under any of its retirement, pension, profit-sharing and deferred compensation plans and programs. Except as disclosed in Schedule 2.21, each such plan or program can be terminated at any time by PremiumWear without penalty or material expense. The Shareholders agree to pay any and all required funding to KLI's pension plan for all periods before and after the Closing Date without regard to the indemnification limitations contained in Section 5.4(D). (C) KLI has filed all returns required under the Code with respect to its employee benefit plans, including returns required by the Department of Labor. (D) Schedule 2.21 sets forth the current compensation of each employee of KLI. 2.22 Bank Accounts. All of the bank accounts of KLI, and the individuals with signature authority, are listed on Schedule 2.22. 2.23 No Default. Neither KLI nor any Shareholder is in default or violation (and no event has occurred which with notice or the lapse of time or both would constitute a default or violation) of any term, condition or provision of (i) KLI's articles of incorporation or bylaws (or similar governing documents), (ii) any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which KLI, or a Shareholder with respect to the business of KLI, is now a party or by which either of them or any of their respective properties or assets may be bound or (iii) any order, writ, injunction, decree, law, statute, rule or regulation applicable to KLI, or to a Shareholder with respect to the business of KLI or any of their respective properties or assets. 8 2.24 Investment Intent of Shareholder and Two-Year Holding Period. Each Shareholder agrees, represents and warrants to PremiumWear with respect to the shares of PremiumWear Common Stock to be received in the Merger as follows: (A) Each Shareholder is acquiring beneficial ownership in the PremiumWear Common Stock for investment for his own account and not with a view to, or for resale in connection with, any distribution thereof. Each Shareholder understands that the shares of PremiumWear Common Stock to be acquired have not been registered under the Securities Act of 1933, as amended, (the "Act") by reason of a specific exemption from the registration provisions of the Act which depends upon, among other things, the bona fide nature of the investment intent as expressed herein; (B) Each Shareholder acknowledges that the shares of PremiumWear Common Stock must be held indefinitely unless subsequently registered under the Act or an exemption from such registration is available. More specifically, each Shareholder agrees to hold the shares of PremiumWear Common Stock received by the Shareholder in the Merger for a minimum holding period of two (2) years from the date of Closing. Nothing contained in this subsection (B) shall prevent the Shareholders from participating in a tender offer, merger or a similar transaction for the purchase of all outstanding shares of PremiumWear; (C) Each Shareholder has such knowledge and experience in financial and business matters that he is able to evaluate the merits and risks of an investment in the PremiumWear Common Stock and has determined to bear and can well afford to bear the economic risks of such investment; (D) Each Shareholder has had access to all material information concerning PremiumWear and its businesses, financial condition, and prospects for the future, and to all additional information each has deemed necessary to verify the accuracy of such information; (E) Each Shareholder has had the ongoing opportunity to ask questions of and receive answers from the officers of PremiumWear regarding the businesses, financial condition and future prospects of PremiumWear; and (F) Each Shareholder agrees that each certificate representing shares of PremiumWear Common Stock issued in the Merger shall be endorsed with substantially the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933." Each Shareholder further agrees that such certificates shall also be endorsed 9 with a legend with respect to the two-year holding period set forth in Section 2.24(B) above, which legend shall automatically expire at the end of such two-year period. 2.25 No Tax Advice. Each Shareholder has received his own independent advice with respect to the tax treatment of the transactions contemplated hereby under federal, state and local tax laws, and neither Shareholder has received or relied upon any tax advice from PremiumWear, Acquisition Corp. or their counsel in connection with such transactions. 2.26 Customer Relationships. To the best of KLI's and the Shareholders' knowledge, there has not occurred any material or significant change in KLI's customer or vendor relationships. 3. Representations and Warranties of PremiumWear and Acquisition Corp. PremiumWear and Acquisition Corp., jointly and severally, make the following representations and warranties to KLI and each Shareholder: 3.1 Organization and Qualifications of Acquisition Corp. Acquisition Corp. and PremiumWear are corporations lawfully existing and in good standing under the laws of the states of Minnesota and Delaware, respectively, with full corporate power and authority to own or lease their respective properties and to conduct their respective businesses in the manner and in the places where such properties are owned or leased or such businesses are conducted by them. 3.2 Authority of PremiumWear and Acquisition Corp. This Agreement is a valid and binding obligation of PremiumWear and Acquisition Corp. in accordance with its terms. The execution, delivery and performance by PremiumWear and Acquisition Corp. of this Agreement and the consummation by such parties of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of PremiumWear and Acquisition Corp., and no other corporate proceedings on the part of any of them are necessary to authorize the execution and delivery of this Agreement or to consummate the transactions so contemplated. The execution, delivery and performance of this Agreement by Acquisition Corp. and PremiumWear and the consummation of the transactions contemplated by this Agreement will not violate or result in a default under (A) any provision of the articles or certificate of incorporation or bylaws of Acquisition Corp. or PremiumWear; (B) any provision of any agreement or obligation to which Acquisition Corp. or PremiumWear is a party or by which any of their respective properties is bound; or (C) any laws, rules or regulations to which Acquisition Corp. or PremiumWear or any of their respective properties may be subject. 3.3 PremiumWear Common Stock. The shares of PremiumWear Common Stock to be issued and delivered to the Shareholders by PremiumWear pursuant to this Agreement will, on delivery of the certificates therefor in accordance with the terms hereof, be validly issued, fully paid, and nonassessable. 10 3.4 SEC Filings. PremiumWear has filed all reports required to be filed by it under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (the foregoing materials being collectively referred to herein as the "SEC Documents") on a timely basis, or has received a valid extension of such time of filing and has filed any such SEC Documents prior to the expiration of any such extension. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the Securities and Exchange Commission (the "Commission") promulgated thereunder. All material agreements to which PremiumWear is a party or by which the property or assets of PremiumWear is subject have been filed as exhibits to the SEC Documents in accordance with applicable law to the extent such documents were required to have been filed. The financial statements of PremiumWear included in the SEC Documents, including the notes thereto, (i) are true, complete and correct in all material respects, (ii) comply in all material respects with applicable accounting requirements and the published rules and regulations of the Commission with respect thereto, (iii) have been prepared in accordance with GAAP consistently maintained and applied throughout the periods indicated and consistent with past practices, except as may be otherwise indicated in such financial statements or the notes thereto, and (iv) present fairly and accurately in all material respects the financial position of PremiumWear and its wholly-owned subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal year-end audit adjustments, (v) are in accordance with the books and records of PremiumWear and its wholly-owned subsidiaries for the respective periods indicated, and (vi) do not omit to state or reflect any material fact concerning PremiumWear and its wholly-owned subsidiaries required by GAAP to be stated or reflected therein. 4. Conditions to Closing. 4.1 Conditions to Obligations of KLI and the Shareholders. The obligations of KLI and the Shareholders to consummate the transactions contemplated by this Agreement are subject to the fulfillment, prior to or at the Closing, of all of the following conditions: (A) Each of the representations and warranties of PremiumWear and Acquisition Corp. contained in Section 3 must be true and correct in all material respects as though made on and as of the Closing Date and PremiumWear and Acquisition Corp. must, on or before the Closing, have each performed all of their respective obligations under this Agreement which are to be performed on or before the Closing; (B) At the Closing, KLI shall have received a certificate of the Secretary of Acquisition Corp. certifying as to: (1) a copy of the resolutions of Acquisition Corp.'s board of directors which authorize the execution, delivery and performance of this Agreement as having been duly adopted and as being in full force and effect on the Closing Date; and 11 (2) a copy of the articles of incorporation and bylaws of Acquisition Corp. as in effect on the Closing Date; (C) At the Closing, KLI shall have received a certificate of the Secretary of PremiumWear certifying as to a copy of the resolutions of PremiumWear's Board of Directors which authorize the execution, delivery and performance of this Agreement as having been duly adopted and as being in full force and effect on the Closing Date; (D) At the Closing, the Shareholders shall have received the cash portion of the Merger consideration set forth in Section 1.3 and a copy of instructions to PremiumWear's transfer agent to promptly issue the stock portion of the Merger consideration set forth in Section 1.3; (E) The Articles of Merger shall have been filed in accordance with the MBCA; (F) There shall not have occurred any material adverse change in the business of PremiumWear subsequent to the date of this Agreement; (G) Each of the Shareholders and PremiumWear shall have executed an employment agreement in the form attached hereto as Exhibit B; (H) All agreements, documents and other instruments to be executed by the parties shall have been approved by KLI's legal counsel which approval shall not be unreasonably withheld; (I) KLI shall have completed its due diligence review of PremiumWear to its reasonable satisfaction; and (J) All material consents and approvals of third parties required under any contract to which KLI, any Shareholder or PremiumWear is a party shall have been received. 4.2 Conditions to Obligations of PremiumWear and Acquisition Corp.. The obligations of PremiumWear and Acquisition Corp. to consummate the transactions contemplated by this Agreement are subject to the fulfillment, prior to or at the Closing, of all of the following conditions: (A) Each of the representations and warranties of KLI and each Shareholder contained in Section 2 must be true and correct in all material respects as though made on and as of the Closing Date and KLI and each Shareholder must, on or before the Closing, have performed all of their respective obligations which are to be performed on or before the Closing; (B) At the Closing, PremiumWear shall have received a certificate of the Secretary of KLI certifying as to: 12 (1) a copy of the resolutions of KLI's board of directors and shareholders authorizing the execution, delivery and performance of this Agreement as having been duly adopted and as being in full force and effect on the Closing Date; and (2) a copy of the articles of incorporation and bylaws of KLI as in effect on the Closing Date; (C) At the Closing, PremiumWear shall have received all certificates and other instruments or documents representing shares of KLI Common Stock; (D) The Articles of Merger shall have been filed in accordance with MBCA; (E) There shall not have occurred any material adverse change in the business of KLI subsequent to the date of this Agreement; (F) Each of the Shareholders and PremiumWear shall have executed an employment agreement in the form attached hereto as Exhibit B; (G) KLI and each Shareholder shall have executed and delivered to PremiumWear such certificates as may be reasonably requested by PremiumWear; (H) All agreements, documents and other instruments to be executed by the parties shall have been approved by PremiumWear' legal counsel which approval shall not be unreasonably withheld; (I) PremiumWear shall have completed its due diligence investigation of KLI to its reasonable satisfaction; (J) All material consents and approvals of third parties required under any contract to which KLI, any Shareholder or PremiumWear is a party shall have been received; (K) The Shareholders shall have provided to PremiumWear assurances, in each case satisfactory to PremiumWear in its sole discretion, that the following current vendors of KLI will remain vendors of KLI follow the Merger: California Manufacturing; Nucom, Ltd./Burks' Bay; American Dry Goods; and Winona Knitting Mills; and (L) KLI shall have delivered PremiumWear with evidence satisfactory to PremiumWear that KLI shall have divested its ownership in Future Products, Inc. (identified as 100,000 shares of Common Stock of Future Products, Inc.) and, shall have transferred from KLI all accounts receivable and payable with respect to which Future Products, Inc. has the right to receive payment or has an obligation to make a payment and shall have transferred from KLI all of its employee receivables (identified to be $32,000 as of 12/31/1998), such that in each case, KLI shall have no further right or obligation with respect thereto. 13 5. Indemnification. 5.1 Indemnification of PremiumWear. Subject to the provisions of this Section 5, PremiumWear shall be indemnified by the Shareholders, jointly and severally, against any damages, claims, liabilities, losses and expenses, of any kind or nature whatsoever which may be sustained or suffered by PremiumWear as a result of any breach of any agreement, representation, warranty or covenant made by KLI or any Shareholder in this Agreement (each a "Loss" and collectively "Losses"). 5.2 Indemnification of the Shareholders. Subject to the provisions of this Section 5, the Shareholders shall be indemnified by PremiumWear, against any damages, claims, liabilities, losses and expenses, of any kind or nature whatsoever which may be sustained or suffered by the Shareholders as a result of any breach of any agreement, representation, warranty or covenant made by PremiumWear in this Agreement (each a "Loss" and collectively "Losses"). 5.3 Notice of Indemnification Claims. Promptly after the receipt by an indemnified party of notice of any Loss as to which such party may seek indemnification under this Agreement, the party receiving such notice shall notify the party or parties from whom it is seeking indemnification (the "Indemnifying Party"). In the case of a claim asserted by a third party, such Indemnifying Party shall have the right to defend at its own expense by its own counsel such matter to the extent of the potential indemnification liability of the Indemnifying Party. If the Indemnifying Party shall undertake to defend the matter, it shall promptly notify the other party or parties of such determination. 5.4 Limitations on Indemnification Claims. The right to indemnification under this Agreement shall be limited as follows: (A) No claims for indemnification shall be made more than two years after the Closing Date, and any such claims which have been made and remain outstanding two years after the Closing Date shall be processed to a conclusion. (B) Any proceeds from insurance paid to the party seeking indemnification as a result of the Loss shall constitute a reduction of the amount of the Loss for purposes of indemnification. (C) The calculation of the Loss shall take into account any tax liabilities and/or tax benefits attributable to the Loss. (D) No claim for indemnification shall be made unless the amount of the Loss for which the claim is made, after any reductions as provided in (B) and (C) above, exceeds a threshold of $5,000 and the claim shall be only for the amount of the Loss in excess of such $5,000 threshold, provided, however, that indemnification pursuant to Section 2.7 (taxes) of this Agreement shall not be subject to the threshold set forth above. 14 6. Termination. 6.1 Notwithstanding any provision in this Agreement to the contrary, this Agreement may be terminated, and the transactions contemplated by this Agreement abandoned, at any time on or prior to the Closing Date: (A) by mutual written consent of PremiumWear and KLI; (B) by PremiumWear if any of the conditions set forth in Section 4.2 have not been satisfied, or waived in writing by PremiumWear, on the Closing Date; (C) by KLI if any of the conditions set forth in Section 4.1 have not been satisfied, or waived in writing by KLI, on the Closing Date; or (D) by either PremiumWear or KLI in writing if the Closing does not occur by April 5, 1999. 7. Miscellaneous; Other Agreements. 7.1 Survival. All representations, warranties, agreements, covenants and obligations herein shall survive the execution and delivery of this Agreement and the Closing and the consummation of the transactions contemplated hereby and shall not be affected by any examination made for or on behalf of PremiumWear, Acquisition Corp. or KLI. Notwithstanding anything contained herein to the contrary, the representations and warranties of the parties shall survive the Closing for a period of two years after the Closing Date, except for the representations and warranties of KLI and Shareholder under Sections 2.7, 2.15 and 2.21, which shall survive for the period of the applicable statute of limitations. 7.2 Cash Distributions to Shareholders. There shall have been no cash distributions to the Shareholders since December 31, 1998 except for salaries and normal travel expense reimbursements. 7.3 Restrictions on Transactions in PremiumWear Common Stock. PremiumWear, KLI and each Shareholder agree not to effect any purchases or sales of PremiumWear Common Stock during the 10 trading days immediately prior to Closing and agree to use their best efforts to restrict such purchases and sales by their respective directors and officers during such 10-day period. 7.4 Directorship. After Closing, PremiumWear shall nominate and recommend that Mr. Klouda become a member of the Board of Directors of PremiumWear at the 1999 Annual Meeting of Shareholders; provided, however, if the Closing does not occur prior to the mailing of PremiumWear's proxy materials to its shareholders, the Board of Directors of PremiumWear shall appoint Mr. Klouda to the Board following the 1999 Annual Meeting of Shareholders and shall include him in management's slate of nominees to the Board at the 2000 Annual Meeting of Shareholders. 15 7.5 Shareholder and Shareholder Spouse Car Leases. (A) The Shareholders represent and warrant that as of the Closing, the following vehicle leases are the only vehicle leases to which KLI is a party: (1) Motor Vehicle Lease Agreement dated 9/6/1997 with respect to a 1997 Infiniti QX4 Truck; (2) Closed End Motor Vehicle Lease Agreement, as extended by the Matured Lease Extension Agreement dated 10/23/1998 with respect to a 1995 Toyota Sport Van; and (3) Closed End Motor Vehicle Lease Agreement dated 7/13/1998 with respect to a 1999 Lexus RX300. (B) Mr. Klouda agrees that Mr. Klouda, individually, shall be solely responsible for payments under and for complying with the terms and conditions of the vehicle leases set forth in section 7.5(A)(1) and 7.5(A)(3) above. Mr. Lenz agrees that Mr. Lenz, individually, shall be solely responsible for payments under and for complying with the terms and conditions of the vehicle lease set forth in section 7.5(A)(2) above. In addition, the responsible party for each lease shall be obligated to pay any and all amounts that are now due or may hereafter become due under the leases, adequate insurance for the operation of such vehicles, annual registration fees and any other fees and taxes that may be imposed by the vehicle lease or by the State of Minnesota for the operation of such vehicles. The obligations set forth above shall apply regardless of who operates or uses the vehicle. It is understood between the parties that the only payment or other obligation of PremiumWear or KLI with respect to the vehicles set forth above shall be those which arise from under the Employment Agreements between PremiumWear and each of Messrs. Klouda and Lenz. (C) Messrs. Klouda and Lenz shall indemnify and hold harmless PremiumWear and KLI (with respect to the vehicle lease with respect to which such party is responsible) against (i) any damages, claims, liabilities, losses and expenses, of any kind or nature whatsoever which may be sustained or suffered by PremiumWear or KLI as a result of any breach of any agreement, representation, warranty or covenant made by Messrs. Klouda and Lenz in this Section 7.5 and (ii) any cost, tax, expense, liability or obligation which may arise out of the lease agreements set forth in Section 7.5(A) above or arise out of the operation or use of the vehicle subject to the lease, including as a result of accidents, other moving violations or parking tickets. (D) Messrs. Klouda and Lenz further agree that they will not renew or extend the vehicle leases listed in Section 7.5(A) above in the name of KLI and shall not enter into new vehicle leases of any kind in the name of KLI. 7.6 Publicity and Confidentiality. KLI and PremiumWear shall consult each other prior to issuing any press release or otherwise making any public statements with respect to the transactions contemplated hereby, and neither shall issue any such press release or make any such public statement without the prior consent of the other, except as may be required by applicable law. 16 The parties have signed a Confidentiality Agreement dated January 18, 1999. Such Confidentiality Agreement shall continue in effect notwithstanding a termination of this Agreement. 7.7 Fees and Expenses. Each party will bear all of its own expenses in connection with the negotiation and the consummation of the transactions contemplated by this Agreement. Notwithstanding the foregoing, all such expenses incurred by KLI and the Shareholders subsequent to December 31, 1998 shall be paid by the Shareholders. Furthermore, if either PremiumWear on one hand, or KLI and the Shareholders, on the other hand, terminate this Agreement and fail to consummate the transactions contemplated hereby, and the other party is not then in material breach or default under this Agreement, the party terminating this Agreement and failing to consummate the transaction shall reimburse the other party for its out-of-pocket costs and expenses (including reasonable attorneys' fees) incurred in the preparation, negotiation and due diligence performed in connection with this Agreement and the transactions contemplated hereby. This Section shall survive the Termination of this Agreement. 7.8 Governing Law. This Agreement, and all ancillary documents related to this Agreement, is governed by the internal laws of the state of Minnesota, without regard to the conflict of laws provisions of any jurisdiction. KLI, THE SHAREHOLDERS, PREMIUMWEAR AND ACQUISITION CORP. HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE MINNESOTA STATE COURTS AND FEDERAL COURTS SITTING IN OR ENCOMPASSING HENNEPIN COUNTY, MINNESOTA, OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER ANCILLARY DOCUMENTS RELATED TO THIS AGREEMENT AND AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY ONLY BE HEARD AND DETERMINED IN ANY SUCH COURT. 7.9 Notices. All notices required or permitted to be given under this Agreement must be in writing and are deemed given when delivered in person (or three business days after being deposited in the United States mail, postage prepaid, registered or certified mail, addressed as set forth below, or on the next business day after being deposited with a nationally-recognized overnight courier service, addressed as set forth below, or upon dispatch if sent by facsimile with telephonic confirmation of receipt from the intended recipient to the facsimile number set forth below): To PremiumWear, PremiumWear, Inc. Acquisition Corp., 5500 Feltl Road or the Surviving Minnetonka, MN 55343 Corporation: Attention: James S. Bury Fax No.: (612) 979-1717 17 With a copy to: Lindquist & Vennum P.L.L.P. 4200 IDS Center 80 South Eighth Street Minneapolis, MN 55402 Attention: John R. Houston, Esq. Fax No.: (612) 371-3207 To either Shareholder: Timothy C. Klouda Dennis G. Lenz 5500 Feltl Road Minnetonka, MN 55343 Fax No.: (612) 979-1717 With a copy to: Standke, Greene & Greenstein, Ltd. 17717 Highway No. 7 Minnetonka, MN 55345 Attn: H. Kelsey Page, Esq. Fax No.: (612) 474-2575 7.10 Entire Agreement. This Agreement, including the Schedules and Exhibits, constitute the entire agreement between the parties with respect to its subject matter of this Agreement. 7.11 Assignability. This Agreement is enforceable by, and will inure to the benefit of, the parties to this Agreement and their successors and assigns, provided no party may assign its rights or obligations under this Agreement without the prior written consent of the other parties. 7.12 Counterparts. This Agreement may be executed in any number of counterparts, each of which, once delivered, shall be deemed an original and all of which, once delivered, shall constitute one agreement. 7.13 Headings. The descriptive headings in this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 7.14 Non-exclusivity. The rights, remedies, powers and privileges provided in this Agreement are cumulative and not exclusive and shall be in addition to any and all rights, remedies, powers and privileges granted by law, rule, regulation or instrument. 7.15 Amendments; Waivers. Any provision of this Agreement may be amended or waived prior to the Effective Time, only if such amendment or waiver is in writing and signed, in the case of an amendment, by both parties, or in the case of a waiver, by the parties against whom the waiver is to be effective. 18 IN WITNESS WHEREOF, this Agreement is executed effective as of the date first above written. KLI ACQUISITION CORP. By /s/ Thomas D. Gleason ----------------------------------- Its Chairman PREMIUMWEAR, INC. By /s/ Thomas D. Gleason ----------------------------------- Its Chairman and CEO ------------------------------- KLOUDA-LENZ, INC. By /s/ Timothy C. Klouda ----------------------------------- Its CEO ------------------------------- SHAREHOLDERS: /s/ Timothy C. Klouda -------------------------------------- Timothy C. Klouda /s/ Dennis G. Lenz -------------------------------------- Dennis G. Lenz 19 EX-13 4 1998 ANNUAL REPORT EXHIBIT 13 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 then-existing 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 1996 transactions, subsequent increased profit from operations and improved inventory management have significantly strengthened the Company's financial position. At January 2, 1999, working capital totaled $14,824,000 compared to $11,149,000 the previous year and the current ratio was 4.0:1 compared to 3.3:1 in 1997. During 1998 operating activities provided $888,000 of cash, primarily due to net earnings of $1,453,000, depreciation and amortization of $989,000 and $731,000 from the utilization of net operating loss carryforwards. These sources of cash were offset by a $2,089,000 increase in receivables due to higher sales in the fourth quarter of 1998 compared to the comparable 1997 quarter. Capital expenditures totaled $609,000, primarily for purchases of embroidery equipment, leasehold improvements and upgrading of the Company's information systems. At 1998 year-end cash and cash equivalents totaling $3,215,000 were essentially all invested in short-term government securities. At January 3, 1998, working capital totaled $11,149,000 compared to $21,266,000 the previous year and the current ratio was 3.3:1 compared to 3.9:1 in 1996. After giving effect, on a pro forma basis, to the $12,500,000 special cash distribution in early 1997, working capital at January 4, 1997 would have totaled $8,766,000 and the current ratio would have been 2.2:1. During 1997, operating activities provided $392,000 of cash, primarily due to a $1,214,000 decrease in inventories as a result of more effective inventory management practices, $837,000 of net 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. 1 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. 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 a new lender which provides up to $6,000,000 of funds available based on certain financial formulas. Management expects the Company's financial resources and liquidity to continue to improve through profitable development of the promotional products/advertising specialty ("special markets") and golf businesses. In addition, management will continue to focus effort on inventory control, where improved practices and forecasting procedures led to an increase in inventory turns from 2.7 in 1997 to 3.5 in 1998, generating significant positive cash flow. Finally, the Company has net operating loss carryforwards of approximately $19,000,000 for domestic federal income tax purposes, which will reduce cash outlays otherwise necessary for income taxes. Management expects to be able to finance working capital needs and capital expenditures, which will be at least $1,000,000 in fiscal 1999, through a combination of funds from operations and its bank line of credit. RESULTS OF OPERATIONS 1998 NET SALES increased 25% primarily due to a 22% increase in sales to special markets customers. Sales growth was due to both added customers and additional volume with existing customers. The remaining growth came from the introduction of the Page & Tuttle(R) brand into the golf market, where the Company opened nearly 500 accounts. Selling prices remained relatively constant from 1997 to 1998. 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 included 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. Following the 1996 sales of trademarks, the Company no longer receives income from ROYALTIES. As a result, no such income was realized in 1998 or 1997. 2 GROSS MARGIN increased to 25.2% in 1998 compared to 23.4% in 1997. The increase was due to increased offshore manufacturing, which comprised approximately two-thirds of 1998 production versus 40% in 1997. The improved gross margin ratio was even more dramatic when considering the Company recognized a charge of $472,000 to cost of goods sold, or 1.1% of net sales, related to asset impairment of its North Carolina production facility where production levels are less than half of year ago levels. This was the result of management's strategy to expand offshore sourcing in order to reduce costs and remain competitive in the marketplace. Golf market sales, while modest, helped gross margins. Gross margin of 23.4% for special market sales was relatively flat in 1997 compared to 23.6% the prior year. Lower unit costs achieved through additional off-shore sourcing were offset by increased sales to advertising specialty distributors who receive volume discounts on large quantity purchases. 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. SELLING, GENERAL AND ADMINISTRATIVE expenses increased $2,323,000 over the prior year and also reached 20.8% of sales versus 19.2% in 1997. Selling expenses accounted for $1,155,000 of the increase, primarily due to the volume affect on such variable costs as commissions, advertising and warehouse expenses. The bad debt reserve increased by $230,000 during the year, and management incentives and profit sharing covering all employees increased $507,000 versus 1997. Other administrative expenses increased $431,000 primarily due to costs related to various potential acquisition activities, public and shareholder relations expenses and accelerated depreciation on computer systems which will be retired in mid-1999 as a result of the Year 2000 project. Selling, general and administrative expenses for 1997 were 19.2% of net sales and were $4,923,000 lower than the prior year due to 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 spending 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. INTEREST EXPENSE dropped dramatically the past two years due to excess funds generated from the 1996 sale of trademarks and improved inventory management. 3 1996 interest expense was 33% below 1995's level due to payoff of the bank line of credit from proceeds generated from the sale of trademarks and collection of receivables from the retail-oriented business. INTEREST INCOME of $180,000 in 1998 was the result of excess funds invested in short-term government securities throughout the entire year. 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. In 1998, the Company recognized an additional $398,000 gain from these transactions due to remaining accruals that were no longer deemed necessary. PROVISION FOR INCOME TAXES represents federal, state, local and foreign taxes. At January 2, 1999, the Company had net operating loss carryforwards of approximately $19,000,000 for domestic federal income tax purposes. Due to the adoption of "Fresh Start Reporting" in 1991, the Company recognized no benefit from net operating loss carryforwards in its statement of operations, but rather reflected such benefit as a direct credit to shareholders' equity, which amount totaled $731,000 in 1998. LOOKING FORWARD In late 1995 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, and 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. In early 1998 the Company re-entered the golf-oriented apparel market under its internally developed Page & Tuttle(R) brand, following management's strategy to develop and/or acquire complementary brands, markets and products. Management expects to continue to pursue such opportunities through development of additional brands and products and potentially through acquisitions. In addition, management expects to increase off-shore production in 1999 in order to achieve lower unit costs which will help the Company to remain competitive in the apparel marketplace, where deflationary pricing practices are expected to be encountered. Such action will likely lead to further significant reductions in production levels at the Company's North Carolina manufacturing facility and could result in severance and other shutdown costs in 1999. However, there can be no assurance that these events will occur nor 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 4 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 plans to recover through improved margins and reduced costs in other areas. MARKET RISK Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates and commodity futures pricing. The Company is exposed to various market risks, including fluctuations in foreign currency exchange rates, interest rates and cotton prices. The Company does not enter into derivatives or other financial instruments for trading, speculative or hedging purposes. The Company follows certain practices to manage market risk. Contracts for the purchase of goods from Far East suppliers are negotiated in U.S. dollars, which tends to minimize the potential for short-term loss due to adverse changes in foreign currency exchange rates. The Company invests excess funds in U.S. government securities with maturities of 30 days or less, minimizing the effect of short-term interest rate changes on investments. The Company's products are made chiefly of cotton, the price of which is effected by world-wide commodity futures markets. The Company negotiates fabric purchases for twelve-month intervals which minimizes the effect of short-term fluctuations in the price of cotton. YEAR 2000 The Year 2000 issue is the result of computer programs using a two-digit format, as opposed to four digits, to indicate the year. Computer systems based on a two-digit format will be unable to interpret dates beyond the year 1999 which could cause a system failure or other computer errors, leading to disruption in operations. Readiness: The Company has a Year 2000 Project Team, whose objective is to determine and assess the risks of the Year 2000 issue and plan actions to minimize those risks. A project team leader reports directly to a corporate officer, who is a member of the Company's Management Information Systems Steering Committee, which is responsible for the overall direction and development of the Company's information systems strategy. The Project Team is comprised of a key member from each of the Company's organizational departments. The Project Team is identifying, inventorying and cataloging information technology (IT) systems and non-IT systems, equipment and processes used by the Company and then researching each one to determine the vulnerability to date-sensitive transactions. This process is expected to be complete in early 1999. In addition, the Project Team is assessing the risk on the Company of any Year 2000 non-compliance by any key customer, which could adversely affect the Company's future revenues, or supplier of goods and services, which could adversely affect the Company's future availability of product for sale. This assessment includes questionnaires sent to and other 5 communications with each of the key customers and suppliers and is also expected to be complete in early 1999. The Company uses primarily licensed software products in its operations with a significant portion of processes and transactions centralized in one particular software package. Internally developed systems are limited primarily to management reporting systems and electronic data interface with a few key customers and its sales representative organization. In early 1998 the Company began a project to upgrade to the most current version of the core software package which, among other things, is Year 2000 compliant. Installation of the software in a test environment and education and training started in the third quarter of 1998. Management estimates the upgraded version of the software will be operational during the second quarter of 1999, which is when the Company will begin to encounter Year 2000 dates in its forecasting and inventory planning activities. In addition, the Company will be upgrading other licensed software products which interface with this central software package and primarily include shop floor control management, warehouse and distribution operations and demand forecasting. During the next several months, the Company is focusing the activities of its information systems department on the Year 2000 issue, maintaining existing systems and limiting any other systems development. Significant additional outside resources are being coordinated through the Company's core business systems software vendor, who also has an assigned project team to assist the Company in the systems upgrade. Costs: Approximately $400,000 of incremental costs are anticipated and will be comprised primarily of outside consulting, programming and training costs in addition to the purchase costs of software upgrades and the installation of new hardware. At 1998 year-end, approximately one-fourth of the anticipated costs had been incurred. Based on current assessment, management does not expect any material adverse impact on the Company's financial condition or results of operations as a result of costs associated with Year 2000 compliance, and will follow established Company policy in accounting for such costs as capital or expense. Risks: The Company is exercising its best efforts to identify and remedy any potential Year 2000 exposures within its control. It is directing significant resources in manpower, services, and equipment to upgrade its internal systems and to identify any potential Year 2000 problems with key suppliers and customers. However, the Company relies heavily on telecommunications and other essential utilities which, to a significant extent, are beyond the immediate control of the Company. Risks range from slight delays and inefficiencies in data processing and business interruptions at small customers and suppliers to, in a worst case scenario, extensive and costly inability to process data, and business interruptions at certain key customers and suppliers, which could result in lost sales and limited product availability, respectively. Primary risks to the Company are in the following areas: 6 o Implementation of the upgraded core business software prior to the end of the second quarter of 1999, which is essential for the Company to process data efficiently. o Year 2000 non-compliance by certain key customers, which could adversely affect the Company's revenues in the year 2000. o Year 2000 non-compliance by certain key suppliers, which could adversely affect the Company's availability of inventory for sale in the year 2000. o Readiness of public utilities which supply essential services such as telecommunications, electricity and gas. Contingency Plans: Contingency plans to protect the Company from Year 2000-related interruptions are not final and will, to a large extent, depend on the findings of the Year 2000 Project Team's identification, cataloging and research activities and timely completion of the core business systems upgrade. Contingency plans will likely include, but not be limited to, identification of manual systems required for less critical computerized systems and identification of alternate suppliers and additional customers, where appropriate. While the Company anticipates achieving Year 2000 compliance in a timely manner, there can be no assurance that all processes will be efficient, that no revenues will be lost, or that no sources of supply will be interrupted. However, the Company believes that its planning and action efforts to date will help to minimize any disruption. 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 7 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; (vi) the possible events described above under Year 2000 as Risks could, if they materialize, adversely impact financial performance. 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. 8 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 1998 and 1997 market price high and low were as follows:
QUARTER - ------------------------------------------------------------------------------------------------------------------ 1ST 2ND 3RD 4TH - ------------------------------------------------------------------------------------------------------------------ 1998 - ------------------------------------------------------------------------------------------------------------------ High 5 7/8 5 9/16 7 13/16 7 5/8 Low 4 11/16 4 3/4 4 7/8 6 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 - ------------------------------------------------------------------------------------------------------------------
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. Otherwise, the Company has not paid dividends in the past two years. The Company's long-term bank line of credit restricts the payment of dividends. As of February 19, 1999, the Company had 854 shareholders of record. 9 CONSOLIDATED STATEMENTS OF OPERATIONS PremiumWear, Inc.
Year ended Year ended Year ended January 2, January 3, January 4, (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- REVENUES: Net sales $ 42,445 $ 33,820 $ 49,948 Royalties - - 2,969 - -------------------------------------------------------------------------------------------------------------- 42,445 33,820 52,917 - -------------------------------------------------------------------------------------------------------------- EXPENSES: Cost of goods sold 31,744 25,907 40,402 Selling, general and administrative 8,818 6,495 11,418 - -------------------------------------------------------------------------------------------------------------- 40,562 32,402 51,820 - -------------------------------------------------------------------------------------------------------------- OPERATING INCOME 1,883 1,418 1,097 - -------------------------------------------------------------------------------------------------------------- Interest expense (40) (91) (771) Interest income 180 114 247 Gain on sale of trademarks (See Note 2) 398 - 10,627 Other (57) 6 52 - -------------------------------------------------------------------------------------------------------------- Income before income taxes 2,364 1,447 11,252 Provision for income taxes 911 610 4,071 - -------------------------------------------------------------------------------------------------------------- NET INCOME $ 1,453 $ 837 $ 7,181 - -------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE: Basic $ .63 $ .36 $ 3.47 Diluted $ .60 $ .36 $ 3.37 - -------------------------------------------------------------------------------------------------------------- Weighted average shares of common stock outstanding: Basic 2,324 2,309 2,068 Diluted, including common stock equivalents 2,405 2,338 2,130 - --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 10 CONSOLIDATED BALANCE SHEETS PremiumWear, Inc.
January 2, January 3, (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) 1999 1998 - ------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,215 $ 2,870 Receivables: Trade, net of allowances of $728 and $538 5,670 4,155 Other 356 44 - ------------------------------------------------------------------------------------------------- 6,026 4,199 Inventories 9,037 8,590 Deferred taxes 944 - Prepaid expenses 624 279 - ------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 19,846 15,938 - ------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Land 15 15 Buildings and leasehold improvements 738 584 Machinery and equipment 4,700 4,343 - ------------------------------------------------------------------------------------------------- 5,453 4,942 Less accumulated depreciation and amortization 4,335 3,329 - ------------------------------------------------------------------------------------------------- 1,118 1,613 - ------------------------------------------------------------------------------------------------- DEFERRED TAXES, net of valuation allowance of $6,961 and $10,637 1,556 - - ------------------------------------------------------------------------------------------------- $22,520 $17,551 - ------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 3,061 $ 2,821 Accrued payroll and employee benefits 1,552 1,034 Liabilities related to sold assets - 578 Other accruals 409 356 - ------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 5,022 4,789 - ------------------------------------------------------------------------------------------------- LONG-TERM LIABILITIES: Postretirement benefits 695 709 - ------------------------------------------------------------------------------------------------- TOTAL LONG-TERM LIABILITIES 695 709 - ------------------------------------------------------------------------------------------------- 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, 2,339,530 and 2,319,330 shares issued) 23 23 Additional paid-in capital 14,490 11,193 Retained earnings 2,290 837 - ------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 16,803 12,053 - ------------------------------------------------------------------------------------------------- $22,520 $17,551 - -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 11 CONSOLIDATED STATEMENTS OF CASH FLOWS PremiumWear, Inc.
Year Year Year ended ended ended January 2, January 3, January 4, (AMOUNTS IN THOUSANDS) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income from operations $ 1,453 $ 837 $ 7,181 Reconciling items: Depreciation and amortization 989 439 847 Deferred taxes 731 463 3,507 Provision for losses on accounts receivable 262 74 75 Gain on sale of trademarks (398) - (10,627) Loss on sale of property, plant and equipment 64 - - Change in unearned royalty income - - (1,988) Changes in operating assets and liabilities: Receivables (2,089) (43) 3,456 Inventories (447) 1,214 3,236 Prepaid expenses (345) (151) 185 Accounts payable 240 (1,188) (1,129) Other accrued liabilities 377 (1,253) (2,548) - -------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 837 392 2,195 - -------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of property, plant and equipment (609) (435) (689) Proceeds from sale of property, plant and equipment 51 - - Proceeds from sale of trademarks - - 23,000 - -------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (558) (435) 22,311 - -------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net change in line of credit borrowings - - (10,890) Net change in restricted cash - 447 (447) Principal payments on long-term debt and capital lease obligations - (23) (20) Special cash distribution - (12,500) - Proceeds from exercise of stock options 66 959 819 - -------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 66 (11,117) (10,538) - -------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 345 (11,160) 13,968 Cash and cash equivalents at beginning of period 2,870 14,030 62 - -------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,215 $ 2,870 $ 14,030 - -------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid for taxes $ 69 $ 368 $ 390 - -------------------------------------------------------------------------------------------------------------- Cash paid for interest $ 40 $ 84 $ 728 - -------------------------------------------------------------------------------------------------------------- Cashless exercise of stock options $ - $ 112 $ - - --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 12 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY PremiumWear, Inc.
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) - ------------------------------------------------------------------------------------------------------ Common Stock Additional Retained Issued Paid-in Earnings Shares Amount Capital (Deficit) - ------------------------------------------------------------------------------------------------------ Balance at January 6, 1996 2,026,768 $ 21 $ 15,112 $ (2,149) Stock grant 3,500 - - - 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 - - (7,468) (5,032) Net income - - - 837 - ------------------------------------------------------------------------------------------------------ Balance at January 3, 1998 2,319,330 $ 23 $ 11,193 $ 837 - ------------------------------------------------------------------------------------------------------ Exercise of stock options 20,200 - 66 - Utilization of net operating loss carryforwards and adjustment of related valuation reserves - - 3,231 - Net income - - - 1,453 - ------------------------------------------------------------------------------------------------------ Balance at January 2, 1999 2,339,530 $ 23 $ 14,490 $ 2,290 - ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS PremiumWear, Inc. ("the Company") designs, sources and markets knit and woven shirts and other apparel to the promotional products/advertising specialty industry and to golf pro and resort shops utilizing its Page & Tuttle(R) brand and other licensed brands. Over 90% of all sales are to customers in the United States. Approximately one-third of the Company's products are manufactured in the United States in one company-owned facility. The remaining products are assembled or manufactured primarily in Central America, South America and the Far East. In 1996 the Company sold all rights to its Munsingwear(R) related trademarks. 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. 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 2, January 3, (IN THOUSANDS) 1999 1998 ------------------------------------------------------------------- Raw materials $ 632 $1,751 Work in process 1,432 1,825 Finished goods 6,973 5,014 ------------------------------------------------------------------- $9,037 $8,590 ------------------------------------------------------------------- 14 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. The Company provides for depreciation using the straight line method for financial reporting purposes and generally uses accelerated methods for income tax purposes. Estimated useful lives used in computing depreciation and amortization for financial reporting purposes range from five to forty years for buildings and leasehold improvements and from two to ten years for machinery and equipment. Assets recorded under leasehold improvements are amortized over the lease terms. The Company periodically reviews property, plant and equipment to determine that the carrying values have not been impaired (see Note 10). INCOME TAXES The Company accounts for income taxes under the liability method. In accordance with Fresh Start Reporting, any tax benefit associated with utilization of the net operating loss carryforwards which survived a 1991 reorganization is reflected as additional paid-in capital. REVENUES Net sales are recognized at the time of shipment and reserves are established for returns and allowances at that time. Sales to one customer in 1998 and 1997 totaled 17% and 15%, respectively, of total net sales. Sales to another customer in 1998 totaled 14% of total net sales. Sales to a third customer in 1998, 1997 and 1996 totaled 11%, 16% and 12%, respectively, of total net sales. 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. ADVERTISING COSTS Advertising costs are comprised primarily of cooperative advertising programs, catalogs and trade advertising. Cooperative advertising obligations are expensed at the time the related revenues are generated. Catalog and trade advertising costs are capitalized upon production and expensed ratably over the corresponding sales period. Advertising expense for the three fiscal years was $770,000, $537,000 and $1,371,000. 15 FISCAL YEAR The Company's fiscal year ends on the first Saturday following December 31. The 1998, 1997 and 1996 fiscal years ended January 2, 1999, January 3, 1998 and January 4, 1997, respectively. NEW ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," in 1998, which establishes standards of disclosure and financial statement display for reporting total comprehensive income and the individual components thereof. The adoption of SFAS No. 130 did not have an impact on the Company's disclosures as it has no items of other comprehensive income. The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," in 1998, which establishes new standards for segment reporting. The adoption did not affect the Company's disclosures as it operates in one segment. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," becomes effective for the years beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. Special accounting for qualifying hedges allow a derivative's gains or losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. Management believes the adoption of SFAS No. 133 will not have a material impact on the Company's financial position or results of operations since the Company has not historically entered into significant derivative transactions. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. RECLASSIFICATIONS Certain amounts in the 1997 financial statements have been reclassified to conform to 1998 presentation. These reclassifications had no effect on previously reported net income or shareholders' equity. 16 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 the last three fiscal years, 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 will become payable on all knit shirt sales. The Company pays license fees on all sales of other Munsingwear(R) products. There are no guaranteed minimum royalty payments on the license agreements. In 1998, $398,000 of liabilities established at the time of the trademark sales were deemed no longer required and were reversed. 17 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. Essentially all the assets of the Company except property, plant and equipment are pledged as collateral under the agreement. Borrowings under the facility bear interest at the bank's base rate of interest (7.75% at January 2, 1999). At January 2, 1999, $1,153,000 was utilized for letters of credit, resulting in unused availability of $4,847,000. The agreement contains a commitment fee of .5% per annum on the unused line of credit and also contains cross default provisions to other agreements and other covenants which, among other matters, require maintenance of certain financial ratios, restrict the sale of assets, restrict payment of dividends and restrict consolidation or merger of the Company with another entity. Additionally, the Company is limited in incurring additional indebtedness and liens on assets. At January 2, 1999 the Company was in compliance with all debt covenants. 18 4. INCOME TAXES The income tax provision for the past three years consisted of the following: (IN THOUSANDS) 1998 1997 1996 ---------------------------------------------------------------- Current $ 180 $ 147 $ 564 Deferred 731 463 3,507 ---------------------------------------------------------------- $ 911 $ 610 $ 4,071 ---------------------------------------------------------------- The current provision resulted from federal alternative minimum, state income, franchise and foreign taxes payable. As of January 2, 1999, the Company had net operating loss carryforwards for regular federal income tax purposes of approximately $19,000,000, which will begin to expire in 2005. The components of the net deferred tax asset were as follows: January 2, January 3, (IN THOUSANDS) 1999 1998 ----------------------------------------------------------------------- Net operating loss carryforwards $ 6,884 $ 7,852 Tax credit carryforwards 864 845 Deductible temporary differences 1,713 2,247 Taxable temporary differences - (307) ----------------------------------------------------------------------- 9,461 10,637 Valuation allowance (6,961) (10,637) ----------------------------------------------------------------------- $ 2,500 $ - ----------------------------------------------------------------------- A valuation allowance has been established to reduce the deferred tax asset to estimated realizable amounts. In 1998 the Company reversed previously established valuation reserves of $2,500,000 for the estimated realizable portion of the deferred tax asset and, in accordance with "Fresh Start Reporting", credited additional paid-in capital for the adjustment. A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows: 1998 1997 --------------------------------------------------------------------- Statutory federal income tax rate 34.0% 34.0% State income taxes, net of federal income tax benefits 4.0% 5.5% Other .5% 2.7% --------------------------------------------------------------------- 38.5% 42.2% --------------------------------------------------------------------- The effective tax rate was reduced by the result of certain state taxes which do not vary with income and by permanent differences that become less significant as income increases. 19 5. NET INCOME PER COMMON SHARE Net income per common share was computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted income per common share includes the dilutive effect of outstanding stock options using the treasury stock method.
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 --------------------------------------------------------------------------------------- Net income $1,453 $837 $7,181 --------------------------------------------------------------------------------------- Weighted average number of common shares outstanding 2,324 2,309 2,068 Dilutive effect of outstanding stock options after application of the treasury stock method 81 29 62 --------------------------------------------------------------------------------------- Common and common equivalent shares outstanding - diluted 2,405 2,338 2,130 --------------------------------------------------------------------------------------- Basic net income per common share $ .63 $ .36 $3.47 --------------------------------------------------------------------------------------- Diluted net income per common share $ .60 $ .36 $3.37 ---------------------------------------------------------------------------------------
20 6. SHAREHOLDERS' EQUITY At January 2, 1999, 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. In 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 which 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 February 19, 1997, using proceeds from the 1996 sales of trademarks. 21 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 Statement No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 ------------------------------------------------------------------------------------------------------------ Net income: As Reported $1,453 $837 $7,181 Pro Forma $1,410 $821 $6,750 ------------------------------------------------------------------------------------------------------------ Basic earnings per share: As Reported $0.63 $0.36 $3.47 Pro Forma $0.61 $0.36 $3.26 ------------------------------------------------------------------------------------------------------------ Diluted earnings per share: As Reported $0.60 $0.36 $3.37 Pro Forma $0.59 $0.35 $3.17 ------------------------------------------------------------------------------------------------------------
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:
1998 1997 1996 ----------------------------------------------------------------------------------------------------------- Risk free interest rate 4.28% to 5.66% 6.34% to 6.58% 5.84% to 7.55% Expected life of options granted 5 to 10 years 5 years 0 to 5 years Expected volatility of options granted 44% to 52% 48% 40% to 44% Expected dividend yield $0 $0 $0 to $5 ----------------------------------------------------------------------------------------------------------- Shares granted 261,600 131,950 75,000 Weighted average fair value of options granted $2.34 $1.73 $3.03 -----------------------------------------------------------------------------------------------------------
22 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 2, 1999 there were 13,304 shares available for future grants under this Plan. Information regarding the 1991 Stock Plan is summarized below:
1998 1997 1996 ----------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------------------------------------------------------------------------------------------------------- Options outstanding, beginning of year 153,750 $4.70 255,800 $7.73 318,485 $6.72 Granted 261,600 5.05 131,950 3.31 75,000 7.80 Canceled (4,950) 7.56 (37,900) 8.61 (4,800) 8.90 Exercised (20,200) 3.25 (196,100) 6.86 (132,885) 6.17 ----------------------------------------------------------------------------------------------------------- Options outstanding, end of year 390,200 $4.99 153,750 $4.70 255,800 $7.73 ----------------------------------------------------------------------------------------------------------- Options exercisable, end of year 93,975 $6.49 64,815 $6.67 255,800 $7.73 -----------------------------------------------------------------------------------------------------------
In 1996, under another agreement, options to purchase 10,000 shares of common stock, at a price of $7.50 per share were granted to a non-employee director. All 10,000 options were exercised in 1997. 23 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 $289,000, $164,000 and $216,000 for 1998, 1997 and 1996, respectively. 24 9. POSTRETIREMENT MEDICAL AND LIFE INSURANCE PLANS The Company sponsors postretirement benefit plans for certain retirees. The Company has adopted SFAS No. 132 "Employer's Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 is intended to standardize certain footnote disclosure requirements for pension and other retirement benefits. The Company has unfunded plans providing certain medical and life insurance benefits to specific retiree groups. Future retirees are not covered by these plans. The Company accounts for these plans under the accrual method of accounting. Information concerning these plans is as follows:
(IN THOUSANDS) 1998 1997 ------------------------------------------------------------------------------------ CHANGE IN BENEFIT OBLIGATIONS: Benefit obligation at beginning of year $ 869 $ 792 Service cost - - Interest cost 55 59 Actuarial (gains)/losses (7) 87 Benefits paid (73) (69) ------------------------------------------------------------------------------------ Benefit obligations at end of year $ 844 $ 869 ------------------------------------------------------------------------------------ FUNDED STATUS RECONCILIATION: Funded status $(844) $(869) Unrecognized actuarial losses 90 90 ------------------------------------------------------------------------------------ Net accrued liability recognized $(754) $(779) ------------------------------------------------------------------------------------
The following table provides the components of net periodic benefit cost for the plans for the past three years:
(IN THOUSANDS) 1998 1997 1996 ------------------------------------------------------------------------------------------------- Interest cost on accumulated postretirement benefit obligation $55 $59 $59 Net amortization and deferral - 1 - Service cost - - 38 ------------------------------------------------------------------------------------------------- Annual net benefit expense $55 $60 $97 -------------------------------------------------------------------------------------------------
A 7.5% increase in the cost of covered medical benefits was assumed for 1998. This rate is assumed to decrease incrementally to 5.5% after 7 years and remain at that level thereafter. The discount rate used in determining the accumulated benefit obligation was 6.75% for 1998, 7% for 1997 and 7.5% for 1996. 25 Assumed health care cost trend rates have a significant effect on the amounts reported for the post retirement medical plans. A 1% change in assumed health care costs trend rates would have the following effects:
(In thousands) 1% Increase 1% Decrease ---------------------------------------------------- ----------- ----------- Effect on total service and interest cost components $ 3 $ (3) Effect on the accumulated benefit obligation $ 50 $ (48)
26 10. ASSET IMPAIRMENT During the last half of 1998 the Company reduced sewing production levels at its North Carolina facility to one-half the previous level. As a result, the Company recognized a $472,000 asset impairment charge to cost of goods sold to write-down the facility to net realizable value. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the carrying value was determined by projecting cash flows over the expected remaining useful productive life of the facility. 27 11. LEASES The Company is party to certain operating lease agreements covering office space and equipment through 2003. Minimum future obligations on operating leases in effect that have initial or remaining noncancelable lease terms in excess of one year as of January 2, 1999 are as follows: (IN THOUSANDS) -------------------------------------------------------------------- 1999 $ 308 2000 316 2001 193 2002 135 2003 114 -------------------------------------------------------------------- $1,066 -------------------------------------------------------------------- Total rent expense under operating leases was $443,000, $437,000 and $655,000 for 1998, 1997 and 1996, respectively. 28 12. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a condensed summary of actual quarterly results for 1998 and 1997.
(IN THOUSANDS, EXCEPT PER SHARE DATA) ------------------------------------------------------------------------------------------------------- Net income per Operating Net common share Quarter Net sales income income (Basic) (Diluted) ------------------------------------------------------------------------------------------------------- 1998: First $9,350 $ 419 $ 256 $.11 $.11 Second 12,938 736 460 .20 .19 Third 10,719 444 293 .13 .12 Fourth 9,438 284 444(1) .19 .18 ------------------------------------------------------------------------------------------------------- $42,445 $1,883 $ 1,453 $.63 $.60 ------------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------------
(1) Includes $472,000 and asset impairment charge and $398,000 gain from the reversal of liabilities related to sold assets, before income taxes. 29 13. EVENT SUBSEQUENT TO JANUARY 2, 1999 On March 25, 1999, the Company acquired Klouda-Lenz, Inc., its independent sales representative agency for the promotional products/advertising specialty market. Klouda-Lenz, Inc. merged into a wholly-owned acquisition subsidiary of the Company. The purchase price was $1,510,634 in cash and 241,892 newly issued shares of common stock, which are subject to a two-year holding restriction. Klouda-Lenz' 1998 revenues totaled approximately $4.4 million, about 44% of which represented commissions from the Company. 30 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 2, 1999 and January 3, 1998, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the three fiscal years in the period ended January 2, 1999. 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 2, 1999 and January 3, 1998 and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 2, 1999 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP --------------------------------- ARTHUR ANDERSEN LLP Minneapolis, Minnesota, February 19, 1999 31 FIVE YEAR FINANCIAL REVIEW
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------- FOR THE YEAR - ---------------------------------------------------------------------------------------------------------------------- Net sales $42,445 $33,820 $49,948 $51,512 $37,407 Royalty income - - 2,969 4,609 4,528 Cost of sales 31,744 25,907 40,402 42,714 30,029 Gross margin % 25.2% 23.4% 19.1% 17.1% 19.7% Interest expense 40 91 771 1,158 353 Income (loss) before income taxes and extraordinary item 2,364 1,447 11,252 (2,230) (304) Net income (loss) 1,453 837 7,181 (2,335) (573) Earnings per share before extraordinary item $0.60 $0.36 $3.37 ($1.13) ($0.20) Purchases of property, plant and equipment 609 435 689 1,201 865 Depreciation and amortization 989 439 847 782 712 Special cash distribution - 12,500 - - - AS OF THE END OF THE YEAR - ---------------------------------------------------------------------------------------------------------------------- Total assets $22,520 $17,551 $30,256 $33,653 $29,738 Current assets 19,846 15,938 28,639 24,244 20,716 Current liabilities 5,022 4,789 7,373 20,318 13,869 Working capital 14,824 11,149 21,266 3,926 6,847 Current ratio 4.0 3.3 3.9 1.2 1.5 Long-term debt - - - 22 38 Common shareholders' equity 16,803 12,053 22,182 12,984 15,319 Number of employees 265 261 312 343 348 - ---------------------------------------------------------------------------------------------------------------------- No dividends were declared or paid for the years listed.
32 EX-21 5 SUBSIDIARIES 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 6 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. /s/ Arthur Andersen LLP ------------------------- ARTHUR ANDERSEN LLP Minneapolis, Minnesota April 1, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JAN-02-1999 JAN-02-1999 3,215 0 6,026 728 9,037 19,846 5,453 4,335 22,520 5,022 0 23 0 0 16,780 22,520 42,445 42,445 31,000 25,907 8,818 262 40 2,364 398 1,453 0 0 0 1,453 .63 .60
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