PLUMA
ANNUAL REPORT
1996
LETTER TO SHAREHOLDERS
April 28, 1997
Dear Fellow Shareholders:
In our first letter to you as a public company, we would like to highlight
some of our accomplishments over the past year and, more importantly, discuss
the outlook for 1997.
We were pleased with the Company's performance in 1996. Sales volume reached a
record level for the year with a 27% increase over 1995. After a slow start to
the year, primarily due to harsh winter weather hampering production and a
carryover of an industry-wide slowdown during the fourth quarter of 1995, we
were able to operate at higher capacity levels in the third and fourth quarters.
Although gross profit as a percentage of net sales decreased slightly to 16.9%
as compared to 19.1% a year ago due to higher raw material costs, harsh winter
weather and weak demand in the first quarter, we were able to reduce selling,
general and administrative costs by 36.4% in 1996. As a result, net income rose
dramatically to $5,818,000 in 1996 from $1,107,000 in 1995. With an improved
business environment in 1997, we expect gross profit margins to return to their
historical levels.
The balance sheet continued to improve in 1996 as inventories and receivables
were up slightly while long-term debt was down to $44.4 million at year end.
With our initial public offering of 2.8 million primary shares in March 1997, we
raised $30 million in net proceeds to significantly reduce long-term debt giving
us the resources to continue the growth of the Company.
During 1996, we doubled our distribution capacity with the opening of a second
distribution center and warehouse in Martinsville, Virginia. We also increased
sewing capacity with the opening of a new sewing facility in Altavista,
Virginia. These facilities will enable us to more efficiently accommodate the
Company's growth.
In addition to upgrading manufacturing and distribution facilities, we also
continued to upgrade our management information systems. We commenced the
implementation of a new financial and manufacturing controls system in 1996.
When fully operational by January 1998, we expect this system to enhance our
ability to more efficiently meet customer demands and better manage our growth.
Pluma will continue to focus on increasing sales and profitability by
producing high quality products, developing new products and styles and
diversifying our customer base. Recently introduced products such as pique
fleece, 100% cotton fleece and cotton/Spandex blend five-way stretch fleece have
been well received by our customers. We are optimistic that these new products
as well as increased demand for jersey products will lead to higher sales in
1997.
The initial public offering in March 1997 was a significant achievement for
Pluma, but we are already looking ahead to the rest of 1997 and beyond. We
appreciate your continued support and look forward to reporting our results to
you.
Sincerely,
/s/ G. Walker Box /s/ R. Duke Ferrell, Jr.
George WALKER BOX R. DUKE FERRELL, JR.
CHAIRMAN PRESIDENT AND CHIEF EXECUTIVE OFFICER
SELECTED FINANCIAL AND OPERATING DATA
Statement of Operations Data for each of the years in the three-year period
ended December 31, 1996, and the Balance Sheet Data as of December 31, 1996 and
1995 set forth below have been derived from the Company's audited financial
statements included elsewhere in this Annual Report. The Statement of Operations
Data for each of the years in the two-year period ended December 31, 1993, and
the Balance Sheet Data as of December 31, 1994, 1993 and 1992 are derived from
the Company's audited financial statements which are not included in this Annual
Report.
YEARS ENDED DECEMBER 31,
1996(1)(7) 1995(1)(2)(3) 1994 1993 1992
IN THOUSANDS, EXCEPT PER SHARE DATA
STATEMENT OF OPERATIONS DATA:
Net sales........................................................ $ 127,820 $ 100,710 $97,908 $86,645 $83,569
Cost of goods sold............................................... 106,247 81,429 81,409 72,762 69,421
Gross profit..................................................... 21,573 19,281 16,499 13,883 14,148
Selling, general and administrative expenses..................... 9,149 14,385 7,300 6,255 5,788
Income from operations........................................... 12,424 4,896 9,199 7,628 8,360
Other expenses, net.............................................. 3,251 3,130 2,255 1,633 774
Income before income taxes and cumulative effect of accounting
change......................................................... 9,173 1,766 6,944 5,995 7,586
Income taxes..................................................... 3,355 659 2,594 2,202 2,795
Income before cumulative effect of accounting change............. 5,818 1,107 4,350 3,793 4,791
Cumulative effect of accounting change........................... -- -- -- 74(4) --
Net income....................................................... $ 5,818 $ 1,107 $ 4,350 $ 3,867(4) $ 4,791
Earnings per common share and common equivalent -- primary and
fully diluted:
Income before cumulative effect of accounting change........... $ 1.09 $ .21 $ .83 $ .69 $ .87
Net income..................................................... $ 1.09 $ .21 $ .83 $ .70 $ .87
Supplemental (5)............................................... $ .91
Weighted average number of shares outstanding.................... 5,316 5,316 5,244 5,554 5,537
Cash dividends per common share.................................. $ .11 $ .11 $ .11 $ .11 $ .08
AS OF DECEMBER 31,
1996 1995 1994 1993 1992
IN THOUSANDS
BALANCE SHEET DATA:
Working capital........................................................ $49,901 $50,052 $31,926 $29,935 $24,735
Total assets........................................................... 89,218 88,613 68,554 61,941 52,442
Long-term debt, net of current portion................................. 44,420 50,120 30,465 28,684 22,169
Total shareholders' equity............................................. 32,143 26,902 26,373 25,110 21,946
YEARS ENDED DECEMBER 31,
1996(1)(7) 1995(1)(2)(3) 1994 1993 1992
DOLLARS IN THOUSANDS
OTHER DATA:
Gross profit as a percentage of net sales.............................. 16.9% 19.1% 16.9% 16.0% 16.9%
Income from operations as a percentage of net sales.................... 9.7% 4.9% 9.4% 8.8% 10.0%
Depreciation and amortization.......................................... $3,804 $ 3,440 $2,885 $2,292 $1,753
Capital expenditures................................................... 3,399 5,856 4,495 7,086 5,952
EBITDA (6)............................................................. 16,712 8,627 12,386 9,928 10,695
(1) In December 1995, the Company brought its sales and marketing functions
in-house in order to increase control and enhance profitability (the "Box
Transaction"). The Company had previously conducted its sales and marketing
activities through an exclusive sales agent, Box & Company ("Box &
Company"), under an arrangement (the "Sales & Marketing
1
Agreement") pursuant to which the Company paid a commission of 3.0% of net
sales plus an allowance for certain promotional material. Box & Company is a
corporation owned by G. Walker Box, a principal shareholder of the Company
and Chairman of the Board. The Company terminated the Sales & Marketing
Agreement as of December 31, 1995, and recorded a non-recurring charge of
$2.0 million, the amount of the termination payment. The Company's sales and
marketing expenses have decreased as a result of the Box Transaction. For
the year ended December 31, 1996, the Company's sales and marketing expenses
as a percent of net sales were 1.3% compared to 5.3% for the same period in
1995 including the non-recurring charge of $2.0 million for termination of
the Sales & Marketing Agreement.
(2) Includes a non-recurring charge of $3.3 million to increase the allowance
for doubtful accounts receivable primarily related to the bankruptcy of a
customer. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation."
(3) Had the Box Transaction occurred at the beginning of 1995, excluding the two
non-recurring charges mentioned in notes (1) and (2), for the year ended
December 31, 1995, selling, general and administrative expenses ("SG&A")
would have been $7.3 million compared to $14.4 million as reported. In
addition, Income from operations, Net income, Earnings per common share and
common equivalent -- primary and fully diluted and EBITDA would have been
$12.0 million, $5.5 million, $1.04 and $15.7 million, respectively.
(4) Includes $73,651 of income from the cumulative effect of a change in
accounting for the adoption of SFAS No. 109.
(5) Based upon earnings with adjusted interest expense and adjusted weighted
average number of shares after net proceeds from the Offering are used for
repayment of indebtedness.
(6) Represents earnings before interest expense, income taxes, depreciation and
amortization. EBITDA is commonly used to analyze companies on the basis of
operating performance, leverage and liquidity. EBITDA should not be
considered as a measure of profitability or liquidity as determined in
accordance with generally accepted accounting principles in the statements
of operations and cash flows.
(7) Includes $83,930 of expense from the change in the method of determining the
cost of inventories, except production supplies, from the FIFO method to the
LIFO method. The effect of the change was to decrease net income by $53,212
($0.01 per share).
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Pluma is a vertically integrated manufacturer of high quality fleece and
jersey activewear. The Company is focused on increasing sales and profitability
by offering high value products to a diverse customer base. Pluma sells its
products to companies such as adidas, Nike, Starter and Walt Disney. In
addition, the Company sells products under its own "Pluma," "SANTEE" and
"SNOWBANK" brand names to retail and wholesale customers such as Sam's Club and
Frank L. Robinson Company.
Since its inception, the Company has been an innovator of new products and
styles and has focused on delivering higher quality products. The Company was
one of the first to introduce heavyweight, fuller cut fleece products at
attractive price points and fleecewear with higher cotton content. These
products were well-received by consumers, and the Company rapidly increased
sales and profitability as it expanded its business across broad market
segments. In 1990, the Company began to produce heavyweight cotton jersey
products suitable for outerwear in order to diversify its product mix, more
efficiently utilize its manufacturing base and increase sales and profitability.
Today, the Company continues to be an innovator of new products and recently
introduced pique fleece, 100% cotton fleece and cotton/Spandex(TM) five-way
stretch fleece.
In December 1995, the Company brought its sales and marketing functions
in-house in order to increase control and enhance profitability (the "Box
Transaction"). The Company had previously conducted its sales and marketing
activities through an exclusive sales agent, Box & Company ("Box & Company"),
under an arrangement (the "Sales and Marketing Agreement") pursuant to which the
Company paid a commission of 3.0% of net sales plus an allowance for certain
promotional material. Box & Company is a corporation owned by G. Walker Box, a
principal shareholder of the Company and Chairman of the Board. The Company
terminated the Sales and Marketing Agreement as of December 31, 1995, and
recorded a non-recurring charge of $2.0 million, the amount of the termination
payment. Sales and marketing expenses have decreased as a result of the Box
Transaction. For the year ended December 31, 1996, the Company's sales and
marketing expenses as a percent of net sales were 1.3% as compared to 5.3% for
the same period in 1995 including the non-recurring charge of $2.0 million for
termination of the Sales & Marketing Agreement. In addition, in December 1995,
the Company incurred a non-recurring charge of $3.3 million to increase the
allowance for doubtful accounts receivable related to the bankruptcy of 20/20
Sport. Had the Box Transaction occurred as of the beginning of 1995, and
excluding the two non-recurring charges, for the year ended December 31, 1995,
SG&A as a percent of net sales would have been 7.3% as compared to 14.2%, as
reported.
The following table presents the major components of the Company's
Statements of Operations as a percentage of net sales:
YEARS ENDED DECEMBER 31,
1996 1995 1994
Net sales............................................................................... 100.0 % 100.0 % 100.0 %
Cost of goods sold...................................................................... 83.1 80.9 83.1
Gross profit............................................................................ 16.9 19.1 16.9
Selling, general and administrative expenses............................................ 7.2 14.2 7.5
Income from operations.................................................................. 9.7 4.9 9.4
Other expenses, net..................................................................... 2.5 3.1 2.3
Income before income taxes and cumulative effect of accounting change................... 7.2 1.8 7.1
Income taxes............................................................................ 2.6 .7 2.7
Net income.............................................................................. 4.6 % 1.1 % 4.4 %
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales increased 26.9% to $127.8 million in 1996 from $100.7
million in 1995, an increase of $27.1 million. Gross dozens sold of fleece and
jersey increased 25.2% to 1.6 million dozens in 1996 from 1.3 million dozens in
1995. The increase in net sales was principally attributable to increased sales
of jersey activewear, sales of new products and revenue from the addition of new
customers. Sales of jersey activewear increased by 56.1% to $46.8 million in
1996 from $30.0 million in 1995, an increase of $16.8 million. Sales of new
products accounted for 16.1% of 1996 net sales. Average
3
sales price per dozen for total products increased 1.0% in 1996 as a result of
an increased average sales price per dozen for fleece that was partially offset
by a slight decline in the average sales price per dozen for jersey products.
GROSS PROFIT. Gross profit was 16.9% of net sales in 1996 as compared to
19.1% in 1995. This decrease in gross profit was the result of increased sales
of jersey activewear as a percent of total sales, higher raw material costs,
harsh winter weather causing higher fuel costs, weak demand in the first quarter
of 1996, and increased medical and workers' compensation insurance costs due to
an increase in the labor force. As a result of the weak demand in the first
quarter and the harsh winter weather mentioned above, the Company experienced
lower than expected utilization of its plant facilities. There can be no
assurance that the factors discussed above will not occur again.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A decreased 36.4% to $9.1
million in 1996 from $14.4 million in 1995. SG&A as a percent of net sales for
1996 was 7.2% compared to 14.2% in 1995. This decrease in SG&A as a percentage
of net sales resulted primarily from bringing sales and marketing functions
in-house.
OTHER EXPENSES, NET. Other expenses, net, increased 3.9% to $3.3 million in
1996 from $3.1 million in 1995, an increase of $0.1 million. This increase was
primarily the result of an increase in interest expense as a result of
additional borrowings to fund higher inventories.
INCOME TAXES. The effective tax rate was 36.6% in 1996 compared to 37.3% in
1995.
YEAR ENDED DECEMBER 31, 1995, COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales increased 2.9% to $100.7 million in 1995 from $97.9
million in 1994, an increase of $2.8 million. Gross dozens sold of fleece and
jersey increased 9.5% to 1.3 million dozens in 1995 from 1.2 million dozens in
1994. The increase in net sales was principally attributable to increased sales
of jersey activewear, sales of new products and additional revenue from a major
customer. Sales of jersey activewear increased by 89.6% to $30.0 million in 1995
from $15.8 million in 1994, an increase of $14.2 million. Sales of new products
accounted for 12.5% of 1995 net sales. Sales to one major customer, Sam's Club,
increased by $8.7 million. This increase in net sales was offset by a 10.6%
decrease in sales of fleece activewear to $70.6 million in 1995 from $79.0
million in 1994. This decrease was primarily attributable to a general weakness
in demand for back-to-school and holiday seasonal purchasing. Average sales
price per dozen for total products decreased 3.1% in 1995 as a result of
increased sales of jersey products, which generally sell at lower price points
than fleece. However, average sales price per dozen for fleece and jersey each
increased.
GROSS PROFIT. Gross profit was 19.1% of net sales in 1995, as compared to
16.9% in 1994. This increase in gross profit was a result of efficiency
improvements resulting from computerized purchasing and scheduling controls and
higher utilization of capacity for the first three quarters. This increase in
gross profit was offset primarily by lower than expected utilization of the
Company's plant and equipment in the fourth quarter of 1995, increased sales of
jersey products and increased medical and workers' compensation insurance costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased 97.0% to $14.4
million in 1995 from $7.3 million in 1994, an increase of $7.1 million. SG&A as
a percent of net sales for 1995 was 14.2% compared to 7.5% in 1994. This
increase was due primarily to a non-recurring charge of $3.3 million to increase
the allowance for doubtful accounts receivable related to 20/20 Sport, a
customer that filed for bankruptcy protection in the U.S. Bankruptcy Court in
the Southern District of New York in February 1996 (such amount subsequently has
been written off), and a non-recurring charge of $2.0 million for termination of
the Sales and Marketing Agreement as a result of the Box Transaction. In
addition, compensation costs increased by $0.9 million. Had the Box Transaction
occurred as of the beginning of 1995, and excluding the two non-recurring
charges, for the year ended December 31, 1995, SG&A as a percent of net sales
would have been 7.3% as compared to 14.2%, as reported.
OTHER EXPENSES, NET. Other expenses, net, increased 38.9% to $3.1 million
in 1995 from $2.3 million in 1994, an increase of $0.9 million. This increase
was primarily the result of an increase in interest expense as a result of
additional borrowings to fund higher inventories and the absence of the $0.3
million insurance settlement recognized in 1994.
INCOME TAXES. The effective tax rate was 37.3% in 1995 compared to 37.4% in
1994.
4
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth quarterly unaudited financial information of
the Company for the eight quarters ended December 31, 1996. This information has
been prepared on the same basis as the annual information presented elsewhere in
this Annual Report and, in management's opinion, reflects all adjustments
necessary for a fair presentation of the information for the quarters presented
when read in conjunction with the Company's financial statements and the notes
thereto included elsewhere in this Annual Report. The operating results for any
quarter are not necessarily indicative of the results for any subsequent period
or for the entire fiscal year. The quarterly unaudited financial information
below differs from amounts previously reported by the Company as a result of
allocating certain year-end accruals, including the Company's change in
accounting for inventories, except production supplies, from the FIFO method to
the LIFO method in 1996, to the respective interim periods in which the related
charges were incurred. Except as otherwise indicated, any comparison discussed
below reflects a change from the comparable quarter of the prior year.
QUARTERS ENDED
1995 1996
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
IN THOUSANDS, EXCEPT PER SHARE DATA
Net sales............................ $ 19,220 $23,141 $ 31,817 $26,532 $ 21,932 $33,887 $ 39,719 $32,282
Cost of goods sold................... 15,351 18,461 26,204 21,413 19,022 29,759 32,126 25,340
Gross profit......................... 3,869 4,680 5,613 5,119 2,910 4,128 7,593 6,942
Selling, general and administrative
expenses........................... 1,893 2,202 2,557 7,733 2,025 2,298 2,356 2,470
Income (loss) from operations........ 1,976 2,478 3,056 (2,614) 885 1,830 5,237 4,472
Other expenses, net.................. 595 782 868 885 761 816 909 765
Income (loss) before income taxes.... 1,381 1,696 2,188 (3,499) 124 1,014 4,328 3,707
Income taxes (benefits).............. 508 624 805 (1,278) 46 373 1,593 1,343
Net income (loss).................... $ 873 $ 1,072 $ 1,383 $(2,221) $ 78 $ 641 $ 2,735 $ 2,364
Earnings per common share and
common equivalent -- primary and
fully diluted...................... $ .16 $ .20 $ .26 $ (.41) $ .01 $ .12 $ .51 $ .45
The activewear business is seasonal. Typically, demand for fleece products
is lower during the first and second quarters of each year, which is partially
offset by increased demand for jersey products in these periods.
Compared to first quarter sales in 1995, first quarter sales in 1996 were
$2.7 million higher. This increase was due, in part, to a carryover of
additional demand for jersey and fleece products the Company experienced in the
fourth quarter of 1995. Second quarter and third quarter sales increased $10.7
million and $7.9 million, respectively, over the prior year's second and third
quarters' sales. The increase in net sales was principally attributable to
increased sales of jersey activewear, sales of new products and revenue from the
addition of new customers. The first and second quarters' gross profit as a
percentage of net sales in 1995 was 20.1% and 20.2%, respectively. The first and
second quarters' gross profit as a percentage of net sales in 1996 decreased to
13.3% and 12.2%, respectively. This decrease in gross profit was the result of
increased sales of jersey activewear as a percent of total sales, higher raw
material costs, harsh winter weather causing higher fuel costs, lower than
expected utilization of the Company's plant and equipment during 1996 and sales
of higher cost inventory which was manufactured during the fourth quarter of
1995. In the third and fourth quarters of 1996, gross profit as a percentage of
net sales increased to 19.1% and 21.5%, respectively. This increase resulted
from improved utilization as the result of greater demand and higher average
sales price per dozen for fleece products.
During the fourth quarter of 1995, the Company incurred two non-recurring
charges: a $2.0 million termination charge as a result of the Box Transaction
and a $3.3 million increase in the allowance for doubtful accounts due to the
bankruptcy of 20/20 Sport.
The Company has experienced and expects to continue to experience
fluctuations in its quarterly results. The Company's revenues and operating
performance are affected by a number of factors, including, but not limited to,
changes in raw material prices, product mix and the general retailing
environment. Therefore, the Company believes that quarter-to-quarter comparisons
of its operating results are not necessarily indicative of future performance.
5
LIQUIDITY AND CAPITAL RESOURCES
PRINCIPAL SOURCES OF LIQUIDITY. Principal sources of liquidity have been
bank financing, cash generated from the Company's operations and private
placements of equity securities. Pursuant to a loan agreement executed on May
25, 1995 (the "Loan Agreement"), the Company entered into the Credit Facility
with FUNB in the amount of the lesser of $55.0 million or the Company's
"borrowing base" as defined in the Loan Agreement. As of December 31, 1996,
$43.6 million was outstanding, leaving $11.4 million available. The Loan
Agreement expires on May 30, 2000. The interest rate of the Credit Facility is
variable, and, on December 31, 1996, it was 6.86%.
The loan agreement evidencing the Credit Facility imposes certain operating
and financial restrictions on the Company including but not limited to
limitations on mergers or other consolidations, acquisition of assets,
indebtedness or incurrence of capital leases, the creation of liens and other
encumbrances on Company assets, the disposition of assets, the payment of
dividends (if such payment would create a default under such loan), capital
expenditures and investments and related party transactions. Further, the
Company is required under the Credit Facility to maintain specified financial
ratios and levels including (i) a minimum tangible net worth equal to the
greater of $25.0 million plus an annual increase of $2.0 million for each
calendar year beginning January 1, 1996 or its tangible net worth as of the
immediately preceding December 31 less $4.0 million; (ii) a debt to equity ratio
of no greater than 2.5 to 1 from January 1 through November 30 of each year and
2.0 to 1 during each December; and (iii) a requirement that the ratio of the
Company's EBITDA (earnings before interest expense, income taxes, depreciation
and amortization) to interest expense for any four consecutive quarters be no
less than 3.5 to 1. The Company's obligations under the Loan Agreement are
secured by substantially all of the Company's assets.
As of December 31, 1996, the Company's debt to equity ratio was
approximately 1.4 to 1. After applying the net proceeds of its Initial Public
Offering of its Common Stock which was completed on March 14, 1997, the
Company's debt to equity ratio was approximately 0.3 to 1.
In 1994, the Company conducted a private placement of Common Stock at
$10.686 per share pursuant to Regulation D promulgated under the Securities Act
of 1933. The Company received approximately $1.7 million for 161,920 shares as a
result of that offering. Proceeds from this private placement were used to
reduce outstanding indebtedness.
As of the date hereof, the Company owes $0.8 million on a promissory note
given in January 1994 to a former officer/shareholder of the Company, as a
portion of the purchase price paid to redeem all of his Pluma shares. The
principal balance of this note, plus interest at 5.0% per annum, is due in full
in January 1998. In the event the Company defaults on this obligation, it will
be required to issue shares of Common Stock to this former officer/shareholder
equal in value to the unpaid amount of the indebtedness plus any unpaid interest
at the time of default.
CASH FLOWS FROM OPERATING ACTIVITIES. For the year ended December 31, 1996,
the Company's operations provided $9.6 million of cash. The principal uses of
cash were repayment of the note payable issued in connection with the Box
Transaction for $2.0 million and additional investments of $1.9 million in
inventories and $0.6 million in accounts receivable. This use was offset by
increases of $2.6 million in accounts payable and accrued expenses, consisting
primarily of interest payable and reserves for medical and workers' compensation
claims. For the year ended December 31, 1995, the Company's operations used
$10.6 million of cash. The principal uses of cash were a $14.0 million increase
in inventories and a $2.4 million increase in tax-related assets. Inventories
increased primarily due to lower than expected demand in the fourth quarter of
1995. These uses were offset by increases in accrued expenses, primarily
interest payable and reserves for medical and workers' compensation claims. For
the year ended December 31, 1994, the Company's operations generated $4.0
million of cash. The principal use of cash was $5.6 million to fund accounts
receivable. Cash flows from operations are impacted by seasonality and changes
in product demand. In the past, in periods of weak demand, the Company has
relied on bank financing to fund operations. However, the Company believes that
cash flows from operations will be sufficient to cover operations and capital
requirements for the next twelve months.
CASH FLOWS FROM INVESTING ACTIVITIES. In each of the last three years the
Company has invested heavily in plant and equipment to grow its business.
Capital expenditures were $3.4 million for the year ended December 31, 1996.
Capital expenditures were $5.9 million and $4.5 million in 1995 and 1994,
respectively.
CASH FLOWS FROM FINANCING ACTIVITIES. For the year ended December 31, 1996,
the Company had net repayments of borrowings of $5.7 million and paid cash
dividends of $0.6 million. In 1995, the Company had net proceeds from borrowings
of $17.4 million to fund operations and investments and paid cash dividends of
$0.6 million. In 1994, the Company had net repayments of borrowings of $0.4
million and paid cash dividends of $0.6 million. In addition, in 1994, the
Company had proceeds of $1.7 million from the issuance of Common Stock and
repurchases of stock totaling $0.8 million.
CAPITAL EXPENDITURES. Additional capital expenditures are expected in
future years to meet continued growth expectations. The Company anticipates
expending approximately $3.0 million in 1997 for additional plant and equipment
as well as approximately $2.0 million for the purchase and implementation of a
new management information system to enhance the timing of financial reporting
and accuracy of its controls.
6
FORWARD LOOKING STATEMENTS
Information in this Annual Report may contain "forward-looking statements."
These statements involve risks and uncertainties that could cause actual results
to differ materially, including without limitation, the actual costs of
operating the Company's business, actual operating performance, the ability to
maintain large client contracts or to enter into new contracts, and the level of
demand for the Company's products. Additional factors that could cause actual
results to differ materially are discussed in the Company's recent filings with
the Securities and Exchange Commission.
7
INDEPENDENT AUDITORS' REPORT
SHAREHOLDERS AND BOARD OF DIRECTORS OF PLUMA, INC.:
We have audited the accompanying balance sheets of Pluma, Inc. as of
December 31, 1996 and 1995, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. 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, such financial statements present fairly, in all material
respects, the financial position of Pluma, Inc. at December 31, 1996 and 1995,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Winston-Salem, North Carolina
January 28, 1997
8
PLUMA, INC.
BALANCE SHEETS
DECEMBER 31,
1996 1995
ASSETS
Current assets:
Cash......................................................................................... $ 291,488 $ 596,429
Accounts receivable (less allowance -- 1996, $817,080; 1995, $4,069,763) (note 5)............ 22,545,795 21,939,763
Income taxes receivable...................................................................... -- 1,057,783
Deferred income taxes (note 9)............................................................... 1,509,535 2,296,429
Inventories (notes 3 and 5).................................................................. 34,025,895 32,169,247
Other current assets......................................................................... 627,576 148,130
Total current assets.................................................................... 59,000,289 58,207,781
Property, plant and equipment (note 5):
Land......................................................................................... 599,978 599,978
Land improvements............................................................................ 678,160 662,885
Buildings and improvements................................................................... 14,078,626 13,516,551
Machinery and equipment...................................................................... 31,753,681 28,966,411
Total property, plant and equipment....................................................... 47,110,445 43,745,825
Less accumulated depreciation................................................................ 17,468,062 13,682,273
Property, plant and equipment, net...................................................... 29,642,383 30,063,552
Other assets................................................................................... 575,662 341,787
TOTAL.......................................................................................... $89,218,334 $88,613,120
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (notes 5 and 16)........................................ $ 849,640 $ 849,640
Note payable -- related party sales agency (note 13)......................................... -- 1,999,000
Accounts payable............................................................................. 4,456,770 2,828,781
Income taxes payable......................................................................... 371,500 --
Accrued expenses, including related party sales agency -- 1995, $152,418 (notes 4
and 13)................................................................................... 3,421,181 2,478,081
Total current liabilities............................................................... 9,099,091 8,155,502
Long-term debt (notes 5 and 16)................................................................ 44,419,544 50,120,280
Deferred income taxes (note 9)................................................................. 3,556,806 3,435,020
Commitments and contingencies (notes 10 and 12)
Shareholders' equity (notes 7, 8 and 17):
Preferred stock, no par value, 1,000,000 shares authorized................................... -- --
Common stock, no par value, 15,000,000 shares authorized, shares issued and
outstanding -- 1996, 5,315,852; 1995, 5,315,852........................................... 7,222,550 7,222,550
Retained earnings............................................................................ 24,920,343 19,679,768
Total shareholders' equity.............................................................. 32,142,893 26,902,318
TOTAL.......................................................................................... $89,218,334 $88,613,120
See notes to financial statements.
9
PLUMA, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
Net sales including related party customers -- 1994, $2,313,230 (notes 13 and
14)........................................................................ $127,820,319 $100,710,495 $97,907,504
Cost of goods sold (notes 11 and 13)......................................... 106,247,340 81,429,370 81,408,677
Gross profit................................................................. 21,572,979 19,281,125 16,498,827
Selling, general and administrative expenses including related party sales
agency -- 1995, $3,327,307; 1994, $3,181,467 (notes 10, 13 and 15)......... 9,149,039 12,384,876 7,300,187
Termination fee (note 13).................................................. -- 2,000,000 --
Total selling, general and administrative expenses.................... 9,149,039 14,384,876 7,300,187
Income from operations....................................................... 12,423,940 4,896,249 9,198,640
Other income (expenses):
Interest expense (note 5).................................................. (3,735,468) (3,421,385) (2,556,134)
Other income (expenses).................................................... 484,058 291,261 (10,794)
Casualty gain (note 11).................................................... -- -- 312,733
Total other expenses, net............................................. (3,251,410) (3,130,124) (2,254,195)
Income before income taxes................................................... 9,172,530 1,766,125 6,944,445
Income taxes (benefit) (note 9):
Current.................................................................... 2,445,471 2,029,624 1,888,986
Deferred................................................................... 908,680 (1,370,488) 705,008
Total income taxes.................................................... 3,354,151 659,136 2,593,994
Net income................................................................... $ 5,818,379 $ 1,106,989 $ 4,350,451
Earnings per common share and common equivalent -- primary and fully
diluted................................................................. $ 1.09 $ .21 $ .83
Weighted average number of shares outstanding................................ 5,315,852 5,315,852 5,244,060
See notes to financial statements.
10
PLUMA, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
(NOTES 7 AND 17) PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
Balance, January 1, 1994.............................. 5,551,475 $3,771,345 $ 347,941 $20,990,301 $25,109,587
Sale of common stock.................................. 161,920 110,000 1,620,300 -- 1,730,300
Repurchase of common stock............................ (397,543) (270,070) (347,941) (3,630,190) (4,248,201)
Net income............................................ -- -- -- 4,350,451 4,350,451
Dividends ($.11 per share)............................ -- -- -- (569,004) (569,004)
Balance, December 31, 1994............................ 5,315,852 3,611,275 1,620,300 21,141,558 26,373,133
Stock split........................................... -- 3,611,275 (1,620,300) (1,990,975) --
Net income............................................ -- -- -- 1,106,989 1,106,989
Dividends ($.11 per share)............................ -- -- -- (577,804) (577,804)
Balance, December 31, 1995............................ 5,315,852 7,222,550 -- 19,679,768 26,902,318
Net income............................................ -- -- -- 5,818,379 5,818,379
Dividends ($.11 per share)............................ -- -- -- (577,804) (577,804)
Balance, December 31, 1996............................ 5,315,852 $7,222,550 $ -- $24,920,343 $32,142,893
See notes to financial statements.
11
PLUMA, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 5,818,379 $ 1,106,989 $4,350,451
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for depreciation and amortization............................... 3,804,481 3,439,559 2,885,179
Other, net................................................................ (105,154) 13,260 70,406
Increase in accounts receivable........................................... (606,032) (499,523) (5,629,265)
(Increase) decrease in income taxes receivable............................ 1,057,783 (1,057,783) 436,752
(Increase) decrease in deferred income taxes.............................. 908,680 (1,370,488) 705,008
Increase in inventories................................................... (1,856,648) (14,046,154) (523,378)
Increase (decrease) in accounts payable................................... 1,627,989 (1,577,237) 1,595,554
Increase in accrued expenses.............................................. 943,100 1,435,387 107,071
Increase (decrease) in note payable -- related party sales agency......... (1,999,000) 1,999,000 --
Net cash provided by (used in) operating activities.............................. 9,593,578 (10,556,990) 3,997,778
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................................ (3,398,804) (5,855,714) (4,494,511)
Other, net................................................................ (221,175) (17,342) (48,418)
Net cash used in investing activities............................................ (3,619,979) (5,873,056) (4,542,929)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................................. -- -- 1,926,223
Repayments of long-term debt.............................................. (849,640) (14,102,575) (1,997,132)
Borrowings from note payable -- Bank...................................... 20,000,000 5,000,000 4,418,133
Repayments of note payable -- Bank........................................ (20,000,000) (5,000,000) (4,418,133)
Net borrowings from (repayments of) revolving loan........................ (4,851,096) 31,557,000 (371,000)
Payment of dividends...................................................... (577,804) (577,804) (569,004)
Proceeds from sale of common stock........................................ -- -- 1,730,300
Repurchase of common stock................................................ -- -- (849,640)
Net cash provided by (used in) financing activities.............................. (6,278,540) 16,876,621 (130,253)
Net increase (decrease) in cash.................................................. (304,941) 446,575 (675,404)
Cash, beginning of period........................................................ 596,429 149,854 825,258
Cash, end of period.............................................................. $ 291,488 $ 596,429 $ 149,854
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................................... $ 3,860,064 $ 2,538,550 $2,556,134
Income taxes................................................................ $ 1,430,000 $ 3,212,641 $1,327,000
Noncash financing activities -- A subordinated promissory note was issued in
exchange for common stock of $3,398,561 during 1994 (notes 5 and 7).
See notes to financial statements.
12
PLUMA, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
Pluma, Inc. (the "Company") is a vertically integrated manufacturer of high
quality fleece and jersey activewear. The Company is focused on increasing sales
and profitability by offering high value products to a diverse customer base.
The Company sells its products, either directly or through its distributors, to
a number of highly recognized companies such as adidas, Nike, Starter Galt and
Walt Disney. In addition, it sells products under its own "Pluma," "SANTEE" and
"SNOWBANK" brand names to retail and wholesale customers such as Sam's Club and
Frank L. Robinson Company. The Company operates in a single business segment.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE -- Accounts receivable is reduced by an allowance to
the amount expected to be collected with a charge against net income. Specific
accounts that are considered to be uncollectible are written off by reducing
accounts receivable and the allowance.
INVENTORIES -- Beginning in 1996, raw materials, work-in-progress and
finished goods inventories are valued at the lower of cost, as determined by the
last-in, first-out ("LIFO") method, or market. Production supplies are valued at
the lower of cost, as determined by the first-in, first-out ("FIFO") method, or
market. Prior to 1996, all inventories were valued at the lower of cost, as
determined by the FIFO method, or market. Inventory cost includes material and
conversion costs.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is stated at
cost and is depreciated using the straight-line method for financial reporting
purposes and accelerated method for income tax purposes. Maintenance and repairs
are charged to income and betterments are capitalized.
The average estimated useful lives of property for purposes of computing
depreciation are:
Land improvements..................................................................15 years
Buildings and improvements.........................................................39 years
Machinery and equipment............................................................10 years
SELF-INSURANCE RESERVES -- Self-insurance reserves represent the estimated
liability on medical and workers' compensation claims reported to the Company
plus reserves for claims incurred but not yet reported and the estimated
settlement expenses related to these claims. The liabilities for claims and
related settlement expenses are determined using "case basis" evaluations and
statistical analysis and represent estimates of the ultimate net cost of all
losses incurred through the balance sheet date. The Company's policy is to
discount its workers' compensation reserves at a discount rate not to exceed a
risk-free rate of return on U.S. government securities of similar duration as
the reserves being discounted. Although considerable variability is inherent in
such estimates, management believes that the liabilities for unpaid claims and
related settlement expenses are adequate. The estimates are continually reviewed
by management and, as adjustments to these liabilities become necessary, such
adjustments are reflected in current operations. Self-insurance reserves are
included in accrued expenses.
INCOME TAXES -- Income taxes are provided on pre-tax earnings as reported
in the financial statements. Deferred income taxes result from temporary
differences between the amounts of assets and liabilities for financial
reporting purposes and such amounts as measured for income tax purposes.
STOCK OPTIONS -- In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 is
effective for transactions entered into in fiscal years that begin after
December 15, 1995. This statement adopts a "fair value based method" of
accounting for employee stock option plans or similar stock-based compensation
plans. Under the fair value based method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service or vesting period. The statement does allow entities to continue to
measure compensation using the "intrinsic value based method" of APB No. 25
provided that they make pro forma disclosures on net income and earnings per
common share as if the fair value based method of accounting had been applied.
The Company has elected to continue to follow APB No. 25 (note 8).
TREASURY STOCK -- Under the state laws of North Carolina, shares of stock
repurchased by the Company are considered authorized but unissued shares, and
are reflected as such in the financial statements.
13
PLUMA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
EARNINGS PER COMMON SHARE AND COMMON EQUIVALENT -- Primary earnings per
common share and common equivalent amounts are based on the weighted average
number of shares actually outstanding plus shares that would be outstanding
assuming exercise of dilutive stock options, all of which are considered to be
common stock equivalents. The number of shares that would be issued from the
exercise of stock options has been reduced by the number of shares that could
have been purchased from the proceeds at the average market price of the
Company's stock. The number of shares used in the computations were 5,315,852
for 1996, 5,315,852 for 1995 and 5,244,060 for 1994. The effect of fully
diluting earnings per share amounts is not material.
REVENUE RECOGNITION -- The Company recognizes the sale of goods when the
goods are shipped or ownership is assumed by the customer. Sales are recognized
net of estimated returns and allowances.
CAPITALIZED SOFTWARE COSTS -- The Company capitalizes certain computer
software costs which are amortized utilizing the straight-line method over the
economic lives of the related products not to exceed five years.
ACCOUNTING ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from these estimates.
For the year ended December 31, 1995, the statement of operations includes a
provision for doubtful accounts receivable which totals $3,250,071 principally
related to 20/20 Sport, a customer that filed for bankruptcy protection. The
Company wrote-off this account in 1996.
RECLASSIFICATIONS -- Certain 1995 and 1994 amounts have been reclassified
to conform with 1996 presentation.
NEW ACCOUNTING STANDARD -- In 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", which requires that long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and to
long-lived assets and certain identifiable intangibles to be disposed of, be
reported at the lower of carrying amount or fair value less cost to sell. An
entity shall review long-lived assets and certain identifiable intangibles to be
held and used for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss recognized in accordance with this standard shall be measured as
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Since adoption, no material impairment losses have been recognized.
(3) INVENTORIES
Inventories at December 31, 1996 and 1995 consist of the following:
DECEMBER 31,
1996 1995
At FIFO cost:
Raw materials.......................................................... $ 1,279,512 $ 695,225
Work-in-progress....................................................... 3,297,522 2,641,316
Finished goods......................................................... 30,037,951 28,718,963
Production supplies.................................................... 608,824 725,911
35,223,809 32,781,415
Excess of FIFO over LIFO cost.......................................... (83,930) --
35,139,879 32,781,415
Excess of cost over market............................................. (1,113,984) (612,168)
Total.................................................................. $34,025,895 $32,169,247
During 1996, the Company changed its method of determining the cost of
inventories, except production supplies, from the FIFO method to the LIFO
method. The Company believes the LIFO method more closely relates current costs
with current sales in periods of rising prices. The effect of the change was to
decrease net income for 1996 by $53,212 ($0.01 per
14
PLUMA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(3) INVENTORIES -- Continued
share). The change had no effect on prior years because inventories under the
FIFO method at December 31, 1995, as previously reported, were the amount of the
beginning 1996 inventories under the LIFO method. Accordingly, pro forma results
for prior years under the LIFO method are not applicable.
If the cost of all inventories had been determined by the FIFO method,
which approximates current cost, the cost of inventories would have been $83,930
greater at December 31, 1996.
(4) ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1995 consist of the following:
DECEMBER 31,
1996 1995
Salaries, commissions and bonuses......................................... $1,042,786 $ 663,672
Interest.................................................................. 758,239 882,835
Insurance................................................................. 1,369,549 738,172
Other..................................................................... 250,607 193,402
Total..................................................................... $3,421,181 $2,478,081
(5) LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 consists of the following:
DECEMBER 31,
1996 1995
Revolving loan......................................................... $43,569,904 $48,421,000
Subordinated debt...................................................... 1,699,280 2,548,920
Total.................................................................. 45,269,184 50,969,920
Less current maturities................................................ 849,640 849,640
Long-term debt......................................................... $44,419,544 $50,120,280
On May 25, 1995, the Company renegotiated the revolving loan in its
entirety. All term loans and the prior revolving loan were consolidated into one
revolving loan (the "Loan Agreement") with a maximum borrowing limit of
$55,000,000. The revolving line of credit is subject to defined borrowings based
on eligible assets as defined in the Loan Agreement. Interest is computed daily
and payable quarterly at the lowest borrower selected rate of (a) prime rate
minus 25 basis points, (b) certificates of deposit contract rate or (c) monthly
LIBOR contract rate. The selected rate of interest is determined monthly and is
subject to defined adjustments pursuant to the interest coverage ratio. At
December 31, 1996 and 1995, the interest rate was 6.86% and 7.04%, respectively.
A fee is payable quarterly based on the product of the unused commitment margin
times the difference between the committed amount during the prior quarter and
the average daily balance of the loans outstanding during such quarter.
Among the various provisions, limitations and restrictions contained in the
Loan Agreement, the Company must meet specified tangible net worth, debt to
equity ratio and interest coverage ratio requirements. Under the Loan Agreement,
the Company is restricted in the amount of its capital expenditures,
indebtedness to certain other parties, or redemption of its stock that would
create an event of default. In the event of default, unless a waiver is
obtained, the Company is prohibited from paying dividends. The Loan Agreement
may be terminated at any time upon the occurrence of an event of default. The
Company retains the right to remedy certain events of default within 10 days
after notice. The Company was in compliance with all covenants as of December
31, 1996. The Company was in violation of the indebtedness and capital leases,
transactions with related persons, capital expenditures, liabilities to equity
ratio, and interest coverage ratio covenants and obtained waivers for these
violations as of December 31, 1995. The Company was in compliance with all other
covenants.
Long-term debt is collateralized by substantially all accounts receivable,
inventories and property.
15
PLUMA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(5) LONG-TERM DEBT -- Continued
The Company issued a promissory note dated January 28, 1994 to a former
officer/shareholder in connection with the repurchase of his stock (see note 7).
This note matures on January 31, 1998 and requires annual payments of $849,640.
Interest on the unpaid principal balance is paid quarterly at an annual rate of
5.0%, since May 1, 1994. The promissory note is subordinated to the Loan
Agreement. The Company's obligations under the promissory note are secured by
the shares repurchased from the former officer/shareholder. In the event the
Company is in default under the terms of the promissory note, the former
officer/shareholder will be entitled to have the Company's Common Stock
re-issued to him. The number of shares to be re-issued in the event of default
will be determined by dividing the amount due under the note at the time of such
default by the fair value of the Company's Common Stock shares at such time.
Future aggregate annual payments on long-term debt are $849,640, $849,640,
and $43,569,904 for 1997, 1998 and 2000, respectively.
(6) NOTE PAYABLE -- BANK
On April 16, 1996, the Company borrowed $10,000,000 at the rate of monthly
LIBOR plus 150 basis points. During September 1996, the Company repaid the April
1996 note and borrowed $10,000,000 bearing interest at the rate of monthly LIBOR
plus 120 basis points. The principal was repaid during November 1996 (note 17).
(7) CAPITAL STOCK
On January 28, 1997, the Board of Directors declared a 0.736-for-one
reverse common stock split for shareholders of record on February 3, 1997. On
June 27, 1995, the Board of Directors declared a two-for-one common stock split
for shareholders of record on October 1, 1995. The shares were issued on
November 27, 1995. All references in the accompanying financial statements to
the number of common shares and per share amounts reflect the stock split and
reverse stock split.
On July 22, 1996, the Company amended its Articles of Incorporation
changing the par value of Common Stock from $1.00 per share to Common Stock
having no par value and authorizing 1,000,000 shares of no par value Preferred
Stock.
In December of 1995, the shareholders of the Company adopted an amendment
to the Articles of Incorporation to increase the Company's authorized shares of
Common Stock from 8,000,000 to 15,000,000, which was effective January 10, 1996.
During the years ended December 31, 1996, 1995 and 1994, the Company held
stock exchanges under the terms of its Stock Transfer and Redemption Agreement
adopted by the Company on June 10, 1991. Numerous transactions among authorized
parties (as defined in the agreement) took place under these exchanges. The
Company did not repurchase shares during 1996, 1995 and 1994 under the Stock
Transfer and Redemption Agreement.
On January 28, 1994, the Company repurchased 397,543 shares of Common Stock
owned by a former officer/shareholder at $10.686 per share. Approximately twenty
percent of the purchase price, or $849,640, was paid in cash with the balance to
be paid under terms of a promissory note (note 5).
During the year ended December 31, 1994, the Company conducted a private
placement of Common Stock. The Company received $1,730,300 (161,920 shares
issued at $10.686 per share) as a result of the stock offering.
(8) STOCK OPTIONS
In October 1995, the Company adopted the 1995 Stock Option Plan in which
515,200 shares of the Company's Common Stock may be issued. The exercise price
of the options may not be less than the fair value of the Common Stock on the
date of grant. The options granted become exercisable at such time or times as
shall be determined by the Compensation Committee of the Board of Directors (the
"Committee"). The Committee may at any time accelerate the exercisability of all
or any portion of any stock option. These options expire, if not exercised, ten
years from the date of grant. Participants in the Plan may be independent
contractors or employees of independent contractors, full or part-time officers
and other employees of the Company, or independent directors of the Company.
16
PLUMA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(8) STOCK OPTIONS -- Continued
In October 1995 and April 1996, the Company granted 379,776 and 32,384
options, respectively, to purchase Common Stock at an exercise price of $13.077
per share of which 117,171 and 58,880 options are exercisable as of December 31,
1996 and 1995, respectively. 29,440 options were forfeited as of December 31,
1995. The remaining 265,549 options become exercisable in 20% increments on the
anniversary dates of the grants as follows:
YEAR SHARES
1997............................................................... 64,768
1998............................................................... 64,768
1999............................................................... 64,768
2000............................................................... 64,768
2001............................................................... 6,477
Total............................................................ 265,549
The Company applies APB No. 25 and related interpretations in accounting
for the 1995 Stock Option Plan. Accordingly, no compensation cost has been
recognized since the exercise price approximates the fair value of the stock
price at the grant dates. Had compensation cost been determined based on the
fair value at the grant dates consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
YEARS ENDED DECEMBER 31,
1996 1995
Net income:
As reported............................................................. $5,818,379 $1,106,989
Pro forma............................................................... 5,679,877 444,500
Earnings per share:
As reported............................................................. $ 1.09 $ .21
Pro forma............................................................... 1.07 .08
A summary of the status of the Company's 1995 Stock Option Plan as of
December 31, 1996 and 1995, and changes during the years ending on those dates
is presented below:
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
Outstanding, January 1, 1995............................................. -- --
Granted................................................................ 379,776 $ 13.077
Forfeited.............................................................. (29,440) 13.077
Outstanding, December 31, 1995........................................... 350,336 13.077
Granted................................................................ 32,384 13.077
Outstanding, December 31, 1996........................................... 382,720 13.077
DECEMBER 31,
1996 1995
Options exercisable at year end................................................ $117,171 $58,880
Weighted average fair value of options granted during the year................. $ 6.60 $ 3.04
At December 31, 1996, the outstanding options have a weighted average
remaining contractual life of 8.9 years. All outstanding options and exercisable
options have an exercise price of $13.077.
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 used for grants in 1996 and 1995, respectively: dividend yield of
0.8% and 1.2%; expected volatility of 40.9% and 41.2%, risk-free interest rates
of 5.9% and 6.8%; and expected lives of 5 years for both years.
17
PLUMA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(9) INCOME TAXES
The provision for income tax expense for the years ended December 31, 1996,
1995 and 1994 consists of the following:
YEARS ENDED DECEMBER 31,
1996 1995 1994
Current federal income tax expense......................... $2,178,903 $ 1,808,190 $1,658,236
Current state income tax expense........................... 266,568 221,434 230,750
Total current income tax expense......................... 2,445,471 2,029,624 1,888,986
Deferred federal income tax expense (benefit).............. 809,689 (1,202,587) 637,156
Deferred state income tax expense (benefit)................ 98,991 (167,901) 67,852
Total deferred income tax expense (benefit).............. 908,680 (1,370,488) 705,008
Total income tax expense................................. $3,354,151 $ 659,136 $2,593,994
The provision for income taxes differs from the amount computed by applying
the U.S. federal income tax rate (34%) because of the effect of the following
items:
YEARS ENDED DECEMBER 31,
1996 1995 1994
Income taxes computed at U.S. federal statutory rate.......... $3,118,660 $600,482 $2,361,111
State income taxes, net of federal income tax effect.......... 243,027 47,473 196,862
Other, net.................................................... (7,536) 11,181 36,021
Total income tax expense...................................... $3,354,151 $659,136 $2,593,994
Deferred income taxes result from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Significant components comprising the Company's net deferred tax
assets and liabilities were as follows:
DECEMBER 31,
1996 1995
Deferred tax liabilities:
Current -- Prepaid insurance.......................................... $ (74,642) $ (54,287)
Long-term -- Property, plant and equipment............................ (3,556,806) (3,435,020)
Total deferred tax liabilities................................... (3,631,448) (3,489,307)
Deferred tax assets:
Current --
Bad debt reserve................................................... 196,951 1,328,963
Medical reserve.................................................... 170,823 73,276
Uniform capitalization............................................. 634,729 699,121
Returns reserve.................................................... 102,443 162,545
Workers' compensation reserve...................................... 220,585 86,811
LIFO market write-down............................................. 258,646 --
Total deferred tax assets........................................ 1,584,177 2,350,716
Net deferred tax liability............................................ $(2,047,271) $(1,138,591)
18
PLUMA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(10) LEASES
At December 31, 1996, the Company was committed to pay rentals under
various noncancelable operating leases with lease terms in excess of one year as
follows:
YEAR ENDING
DECEMBER 31,
1997........................................................... $ 1,875,457
1998........................................................... 1,390,164
1999........................................................... 1,066,478
2000........................................................... 1,006,990
2001........................................................... 929,884
Thereafter................................................... 5,257,869
Total..................................................... $11,526,842
Lease agreements frequently include renewal options and require that the
Company pay for utilities, taxes, insurance and maintenance expenses. Options to
purchase are also included in some lease agreements.
Rental expense under all leases accounted for as operating leases was
$2,145,061, $1,730,932 and $1,414,971 for the years ended December 31, 1996,
1995 and 1994, respectively (see note 13).
(11) INSURANCE SETTLEMENT
On August 17, 1994, a tornado partially destroyed one of the Company's
leased warehouses and substantially damaged finished goods inventory. The
inventory loss was covered by insurance. Insurance and salvage proceeds were
$1,763,431. Most of the proceeds are reflected as a reduction of cost of goods
sold ($1,450,698) to offset expense and inventory losses incurred as a result of
the storm. The proceeds in excess of inventory costs and miscellaneous expenses
are reflected in the financial statements as other income ($312,733).
(12) COMMITMENTS AND CONTINGENCIES
The Company has Employment Agreements with its senior executive officers,
the terms of which expire December 1998. Upon termination of an Employment
Agreement after a change of control in the Company, as defined, the Company
would be liable for a maximum of three times the eligible employee's, as
defined, (i) average annual salary, as defined, and (ii) any bonuses, as
defined. In addition, under the Employment Agreements, the senior executive
officers are entitled to annual incentive bonus payments if specified management
goals are attained under Pluma's Bonus Plan.
The Company maintains a Sales Incentive Plan payable to the sales staff if
specified sales volume is reached.
Arising out of the conduct of its business, on occasion, various claims,
suits and complaints have been filed or are pending against the Company. In the
opinion of management, all matters are adequately covered by insurance or, if
not covered, are without merit or are of such kind, or involve such amounts, as
would not have a material effect on the financial position or results of
operations of the Company if disposed of unfavorably.
(13) RELATED PARTY TRANSACTIONS
During the years ended December 31, 1995 and 1994, sales commissions of
$3,327,307 and $3,181,467, respectively, at a rate of 3.0% of the aggregate
sales price of orders shipped by the Company, plus marketing reimbursements,
were paid to the Company's sales agency, a company owned by a certain
shareholder and director of the Company. At December 31, 1995, $152,418 was due
the sales agency. During December 1995, the Company entered into an agreement
for the termination of the sales contract with the sales agency. Under the terms
of this agreement, the Company paid the sales agency $1,000 on December 29, 1995
and $1,999,000 with a promissory note that was paid in full in January 1996.
Since December 31, 1995, the Company has not paid commissions to the sales
agency for sales subsequent to December 31, 1995. Selling, general and
administrative expenses would have been $12,384,876 if the cost of terminating
the sales agreement were
19
PLUMA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(13) RELATED PARTY TRANSACTIONS -- Continued
excluded for the year ended December 31, 1995. The Company will be liable for
any returns or uncollectible accounts resulting from sales prior to December 31,
1995. The sales agency and the Company have released and discharged each other
from any and all past, present and future actions.
The Company has various operating leases from certain shareholders. The
leases have terms of approximately one to 14 years with aggregate monthly
payments of $98,751, $65,254 and $63,150 in the years ended 1996, 1995 and 1994,
respectively. Total operating lease expense for 1996, 1995 and 1994 was
$1,144,193, $773,600, and $507,120, respectively. As of December 31, 1996,
future minimum lease payments under these operating leases totaled $8,603,330.
The Company leased sewing equipment and accessories from relatives of an
officer/director. Lease payments under these leases were $28,650 in 1994.
Equipment under these leases was purchased by the Company for $98,384 during
1994 after the leases expired.
A contractor performed miscellaneous work totaling $478,646, $31,032 and
$40,358 for the years ended December 31, 1996, 1995 and 1994, respectively.
Certain shareholders of the Company are affiliated with the contractor.
The president of one of the Company's major customers was re-elected to the
Board of Directors at the annual shareholders' meeting in April 1995. The
Company had sales in 1994 of $2,313,230 to this customer. These sales were
consummated on terms equivalent to those that prevail in arm's-length
transactions.
During 1996 and 1995, the Company made payments totaling $223,338 and
$247,324, respectively, for contract services rendered to the Company for
packaging and preparing Company products for shipment. A director/shareholder is
affiliated with this contractor.
During 1996, the Company contracted for fabric dyeing totaling $42,776 with
a contractor owned by a director of the Company. The Company had sales to this
contractor in 1996 of $80,005 and had a balance due of $67,096 at December 31,
1996.
During 1996, the Company made payments to a contractor totaling $121,395
for advisory fees. A director/shareholder is affiliated with this contractor. At
December 31, 1996, $10,014 was due this contractor.
(14) SALES TO MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
A substantial amount of sales and receivables are to relatively few
customers. Credit limits, ongoing credit evaluations and account monitoring
procedures are utilized to minimize the risk of loss. Collateral is generally
not required.
In 1996, two customers accounted for approximately 24.1% and 14.7%,
respectively, of net sales. In 1995, three customers accounted for approximately
16.1%, 12.8% and 11.4%, respectively, of net sales. In 1994, three customers
accounted for approximately 13.2%, 10.4% and 10.1%, respectively, of net sales.
(15) 401(K) RETIREMENT SAVINGS PLAN
The Company maintains a 401(k) retirement savings plan for the benefit of
its employees who have completed at least one year of service and have attained
age 21. The amount of the Company's annual matching contribution is
discretionary, and the Company currently funds accrued profit sharing expenses.
During 1996, 1995 and 1994, the Company contributed $161,461, $129,378 and
$121,279, respectively, to the 401(k) retirement savings plan.
20
PLUMA, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(16) FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. The carrying amount of cash, accounts receivable and trade accounts
payable is a reasonable estimate of fair value. The fair value of long-term debt
is estimated based on quoted market prices. At December 31, 1996, the carrying
value and the fair value of long-term debt totaled $45,269,184 and $44,458,592,
respectively. All financial instruments are held for purposes other than
trading.
(17) EVENTS SUBSEQUENT TO DECEMBER 31, 1996
On January 28, 1997, the Board of Directors declared a 0.736-for-one
reverse common stock split for shareholders of record on February 3, 1997 (note
7).
21
EXECUTIVE OFFICERS AND DIRECTORS
DIRECTORS
George G. Wade
CHAIRMAN EMERITUS OF THE BOARD AND SECRETARY
Pluma, Inc.
G. Walker Box
CHAIRMAN OF THE BOARD; PRESIDENT
Box & Company
R. Duke Ferrell, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pluma, Inc.
C. Monroe Light
EXECUTIVE VICE PRESIDENT OF MANUFACTURING
Pluma, Inc.
Barry A. Bowles
CHAIRMAN OF THE BOARD
Stanley W. Bowles Corporation
Kemp D. Box
PRIVATE INVESTOR
Dr. David C. Jones
PRIVATE INVESTOR
William K. Mileski
FOUNDER
Meritage LLC
R. Stephens Pannill
PRIVATE INVESTOR
J. Robert Philpott, Jr.
PRESIDENT AND TREASURER
Philpott, Ball & Company
EXECUTIVE OFFICERS
George G. Wade
CHAIRMAN EMERITUS OF THE BOARD AND SECRETARY
G. Walker Box
CHAIRMAN OF THE BOARD
R. Duke Ferrell, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
C. Monroe Light
EXECUTIVE VICE PRESIDENT OF MANUFACTURING
Forrest H. Truitt, II
EXECUTIVE VICE PRESIDENT, TREASURER AND
CHIEF FINANCIAL OFFICER
Milton A. Barber, IV
VICE PRESIDENT OF SALES AND MARKETING
Nancy B. Barksdale
VICE PRESIDENT AND CONTROLLER
Jeffrey D. Cox
VICE PRESIDENT OF MANUFACTURING
David S. Green
VICE PRESIDENT OF HUMAN RESOURCES
Walter E. Helton
VICE PRESIDENT OF OPERATIONS
Raymond L. Rea
VICE PRESIDENT OF MANUFACTURING
CORPORATE INFORMATION
CORPORATE OFFICES
801 Fieldcrest Road
Eden, North Carolina 27288
(910) 635-4000
STOCK TRANSFER AGENT AND REGISTRAR
First Union National Bank
Customer Information Center
1525 West W.T. Harris Boulevard -- 3C3
Charlotte, North Carolina 28288-1153
(800) 829-8432
Shareholders seeking information concerning stock transfers, change of address,
and lost certificates should contact First Union directly.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Winston-Salem, North Carolina
INVESTOR RELATIONS
Investor Relations
Pluma, Inc.
P.O. Drawer 487
Eden, North Carolina 27289
(910) 635-4000
PUBLICATIONS
The Company's Annual and Interim Reports, Proxy Statement, Form 10-K and Form
10-Q reports will be available free of charge from our Investor Relations
Department at the Company's corporate address.
GENERAL COUNSEL
Allman Spry Leggett & Crumpler, P.A.
Winston-Salem, North Carolina
STOCK LISTING
New York Stock Exchange
Symbol: PLU
STOCK MARKET INFORMATION
Pluma, Inc. completed its initial public offering of common stock on March 14,
1997. At April 22, 1997, there were approximately 1,400 beneficial shareholders.
ANNUAL MEETING
The 1997 Annual Meeting of Shareholders will be held at 10:00 a.m. Eastern
Daylight Time on June 5, 1997, at Bassett Country Club, Bassett, Virginia.
DIVIDENDS
The Company paid quarterly cash dividends on its Common Stock in the amount of
$0.0272 per share for each quarter of 1995 and 1996. The Company does not
anticipate paying any cash dividends in the foreseeable future, and it intends
to retain future earnings for the development and expansion of its business.
PLUMA
PLUMA, INC. (Bullet) 801 FIELDCREST ROAD (Bullet) P.O. DRAWER 487 (Bullet) EDEN,
NC 27289-0487 (Bullet) TELEPHONE: (910) 635-4000 (Bullet) FAX: (910) 635-1814