[PLUMA LOGO APPEARS HERE]
801 Fieldcrest Road
Eden, North Carolina 27288
(336) 635-4000
www.pluma.com
1997 ANNUAL REPORT
[PLUMA LOGO APPEARS HERE ROTATED 90 DEG. TO LEFT SIDE OF PAGE]
[PLUMA LOGO APPEARS HERE]
LETTER TO
OUR
SHAREHOLDERS
DEAR FELLOW SHAREHOLDERS:
1997 was a year full of challenges, opportunities and tough decisions. We
experienced a number of successes as well as some disappointments. This was also
a year of significant investment for the future. We focused on developing and
implementing strategies that would address our current operations and long-term
strategies which we believe will enhance the growth of the company and
ultimately shareholder value.
The year was highlighted by several significant accomplishments. In March, we
completed an initial public offering which raised $30 million in net proceeds
and we finished our first quarter with stronger than expected results. In June,
we finished the reconfiguration of our textile operations including knitting,
greige fabric storage, cutting and automated sewing operations in Eden, North
Carolina. In December, we acquired our two largest wholesale distributors,
Stardust Corporation (Stardust) in Verona, Wisconsin and Frank L. Robinson
Company (FLR) in Los Angeles, California. During the year, we began the process
of preparing for the implementation of a new management information system which
has been developed by SAP America ("SAP") and is designed to improve our
production planning, scheduling and distribution, as well as financial reporting
capabilities.
Net sales for 1997 increased 5.3% to $134,555,000 from $127,820,000 in 1996.
This increase was well below our expectations. Our gross profit margin was 12.1%
of net sales in 1997 compared with 16.9% in 1996. Net income was $2,043,000, or
$0.27 per common share, compared with $5,818,000, or $1.09 per common share, in
the prior year. The increase in costs and drop in gross profit was not expected
early in the year and was the result of a number of operational issues that
impacted us for five months, from June through October. During 1997, the Company
capitalized significant costs associated with the SAP implementation. With the
issuance of Emerging Issues Task Force ("EITF") Issue #97-13 in November 1997,
certain costs associated with software implementation were required to be
expensed as incurred; therefore, the Company expensed $2.1 million of such costs
in the fourth quarter which had previously been capitalized during 1997.
Although 1997 net income was lower than 1996, we believe Pluma is a much
stronger company now than we were a year ago. As we look to the future, each of
the accomplishments noted above have profoundly impacted our opportunities for
growth. With the proceeds from our IPO, we were able to significantly reduce
long-term debt which in turn provided a strong capital structure from which to
make our acquisitions at year end. The reconfiguration of our textile operations
has streamlined production processes and has provided us increased capacity to
expand our operations within the existing facilities. Our SAP project will allow
a significant increase in the degree of control we have over our business when
fully implemented. Over the past year, we have established a joint venture with
a Mexican partner and also established a number of contractor relationships in
Mexico that will improve the profitability of certain product types where cost
is critical. While our opportunities for the future are greater today than they
were one year ago, those opportunities did not come about without some
short-term disruption in our operations.
Handling our greige fabric inventory from two locations during the
reconfiguration of the knitting area combined with a new inventory control
system created inefficiencies in our dyeing operations late in the second
quarter. These inefficiencies caused delays and ultimately resulted in shipments
scheduled for the second quarter to occur in the third and fourth quarters.
Additionally, our late deliveries during the second half of the year caused some
of our customers to place orders with other manufacturers, resulting in a loss
of business that was originally intended for Pluma.
1
LETTER TO
OUR
SHAREHOLDERS
PRE-SHRUNK 100% COTTOM
Since Pluma was incorporated in 1986, customer relationships have been an
important part of our success. Because of the value Pluma places on these
relationships, we work hard to maintain the trust of our customers. There were
any number of things that could have been done during the year that would have
resulted in more efficient production and lower costs, but we have always
believed in living up to our commitments to our many loyal customers. Meeting
shipment dates, even at a higher cost, was consistently a topic of conversation
as we worked our way through the year. It would have been very easy to cut
corners or ship inferior goods just to meet some of our short-term objectives.
Instead, we took some short-term hits to keep our customers for the long term.
The fact that we did not incur any significant order cancellations during the
year is a testimonial to the fact that we were successful in maintaining our
customers' trust.
With an extraordinary effort from our employees, we were able to improve on our
deliveries during the third and fourth quarter, but not without some associated
inefficiencies, production bottlenecks and a greater than usual reliance on
outside contracted production. While the outside contracted production helped us
catch up on our deliveries, we experienced some higher than normal quality
problems with some of the subcontracted goods, as well as, with some of our raw
materials, further compounding our problems. Midway through the fourth quarter
as our deliveries were returning to normal, we were able to solve the production
and supplier problems and normalize our operating levels. Although the
situations encountered during the second and third quarters were challenging,
they resulted in some positive changes in our company. During the third quarter,
we promoted Doug Shelton to the position of Senior Vice President of
Manufacturing to monitor all facets of our manufacturing operations on a daily
basis. We have already seen a positive impact on our operations as a result. We
have reduced our dependency on subcontracted goods to more normal levels and
will continue to do so by expanding our internal capacity. We have also
instituted initiatives to control our labor-related costs such as off-standard
pay and indirect labor costs, which impacted us to a large extent in the third
and fourth quarters as we worked to catch up on orders.
We ended the year with the acquisitions of Stardust and FLR, which will have
perhaps the greatest impact on our business going forward. In addition to
establishing a national distribution network, these acquisitions will help us
create a platform for launching new products and developing new product sources.
These acquisitions will also bring us closer to the ultimate consumer and will
allow us to reach more new customers. Similar to the textile reconfiguration,
the long-term benefits of this strategy are clear, although in the short-run the
integration of the two distributors into our overall business will be a
challenge.
The successful completion of the acquisitions during the fourth quarter was a
significant accomplishment for our management team. However, the mechanics of
the acquisition agreements encouraged Stardust and FLR to aggressively manage
their inventories throughout the fourth quarter of 1997 which resulted in lower
than expected shipments to both distributors during the quarter. The upside to
this was that we ended the year with lower inventories at both Pluma and the
distributors, which should be a significant advantage to us in 1998.
WE
WORK HARD
TO MAINTAIN THE
TRUST OF OUR
CUSTOMERS.
2
Another short-term impact from these acquisitions arose during planning
discussions with the distributors during the fourth quarter. In those
discussions we identified certain redundant products in our SANTEE(R) product
line. We elected to take advantage of the Fall selling season by selling some
inventory at reduced margins that would have been closed out following the
acquisitions. We are now planning a complete re-introduction of the SANTEE(R)
product line in late 1998 and will continue to be very proactive in managing the
current inventory to minimize close-outs later in the year. Our reserve for
close-outs was increased significantly at the end of 1997 to allow for any
increase in close-outs that result from changes in the product line.
It will take at least the first half of 1998 for us to sell through the acquired
inventory and integrate Stardust and FLR into our overall operations. As a
result, we do not expect to begin to realize any material increase in earnings
from the acquisitions until the second half of 1998. Additionally, we will have
the added interest expense and amortization as we move forward. The amortization
of goodwill from these acquisitions, which had a minimal impact on us during
1997, is expected to be approximately $0.21 per share in 1998.
Over the past few years certain market channels in our industry have become more
competitive due to the increase in the volume of lower cost production outside
of the United States, particularly Mexico. While Pluma has been somewhat
insulated from the impact of NAFTA due to the smaller percent of our business
dedicated to commodity oriented products, we have been increasing the use of
non-U.S. based sewing production to lower the cost on products where cost is
critical. At the present time, Pluma has a joint venture as well as a number of
contractor relationships in Mexico that are dedicated to sewing these types of
products, and we are seeking additional similar arrangements to handle the
continued growth of the Company's business. We began the implementation of our
new SAP computer system on January 1, 1998. The system should be fully
operational during the second quarter of 1998, and we expect to realize
significant benefits as we move forward. Obviously, there are short-term costs
associated with this implementation, and most of those costs for 1998 will be
realized during the first and second quarter. However, by the beginning of the
third quarter, we should have realized almost all of the costs associated with
the implementation process and will begin to fully utilize the system and enjoy
some of the long-term benefits that we expect from the system.
We did not meet the goals set for our company in 1997. We did, however, resolve
some short-term problems and complete a number of initiatives that place us in a
strong position for 1998. We plan to complete some significant initiatives
during 1998, and by 1999, we hope to fully realize their benefits. We believe
Pluma is now a much stronger, fundamentally different company and in a better
position to move forward, and that we have made the right choices for the
long-term growth of our company.
Sincerely,
/s/ G. Walker Box /s/ R. Duke Ferrell, Jr.
G. WALKER BOX R. DUKE FERRELL, JR.
Chairman President and Chief Executive Officer
PLUMA
IS NOW A MUCH
STRONGER,
FUNDAMENTALLY
DIFFERENT
COMPANY
3
A BRIGHT
FUTURE
FOR PLUMA
PRE-SHRUNK 100% COTTOM
Our performance during 1997 and our strategic initiatives for 1998 have raised
several questions from analysts and investors. Our responses to some frequently
asked questions are highlighted below.
WHY DID PLUMA NOT PERFORM AS EXPECTED IN 1997?
We started the year with strong results, record sales and earnings and the
successful completion of our initial public offering. Beginning late in the
second quarter, we experienced an unusual combination of manufacturing and
supplier problems that impacted our ability to deliver on a timely basis the
high quality products that our customers associate with the Pluma name. These
problems plagued us from June through the third quarter with some related costs
carrying over into the fourth quarter. During the fourth quarter, we incurred
some charges and higher than expected expenses related to acquisitions and
implementation of new software, but we were still able to exceed our sales goal
for the quarter. While we would be the first to admit that we did not meet our
goals for 1997, we are pleased with our sales performance and inventory position
at year end and believe Pluma is a much stronger and fundamentally different
company than it was a year ago.
WHAT IMPROVEMENTS ARE PLANNED FOR 1998?
Following a year like 1997, some of our greatest concerns are the relationships
we have with our customers, employees and shareholders. By the end of the year,
deliveries and operating levels had returned to normal and, as a result, our
relationships with our customers continue to remain strong as we enter 1998. Our
order backlog was larger at the beginning of the year than it was one year ago,
allowing us to concentrate on producing goods early in the year that are on
order as opposed to just making inventory.
Our employees worked very hard during 1997 as we dealt with a difficult year.
While there was plenty of stress and frustration, there were also successes. Our
employee morale and relations are strong as we move into 1998. We do not foresee
the kind of issues that we experienced in 1997 being repeated in 1998, and there
is a growing spirit of enthusiasm about the many possibilities for the coming
year.
Improvements in 1998 and beyond will come from our ability to build on the trust
and confidence shown by our existing customers, our employees, and the
successful execution of four other initiatives that present the greatest
challenges and opportunities for Pluma: (1) integrating and exploiting the
synergies of our recent acquisitions, Stardust Corporation in Verona, Wisconsin
and
OUR EMPLOYEE
MORALE AND
RELATIONS ARE
STRONG AS WE
MOVE INTO
1998.
4
Frank L. Robinson Company in Los Angeles, California; (2) completing the
implementation of SAP in our financial and manufacturing systems; (3)
introducing an improved SANTEE(R) line; and (4) expanding the manufacture and
procurement of product from sources outside the United States. We believe that
we are ready to move forward with the completion of these initiatives which are
intended to increase our shareholder value.
WHAT WAS THE RATIONALE FOR ACQUIRING STARDUST AND FLR?
Consistent with our vertical integration strategy, we wanted to gain control of
the distribution of our products through the wholesale distributor market. As
our two largest wholesale distributors, Stardust and FLR represented the means
to best accomplish this goal. By combining FLR's strong presence on the West
Coast with that of Stardust in the Midwest and our existing operations in the
East, we expect to be able to establish a national distribution network. A
national distribution capability will be a significant advantage for us in the
competitive marketplace and allow us to better serve our existing customers.
Stardust and FLR have been in operation since 1988 and 1936, respectively. We
feel that they will complement our sales, marketing and distribution personnel
as we continue to build and promote our product lines and increase our market
share.
By combining the operations of both distributors, there are synergies that we
expect to achieve. We will merge the catalog and trade show presence of both
companies to reduce costs and eliminate duplication of efforts. We are in the
process of implementing the same computer systems at FLR that are currently
being used at Stardust and expect to be utilizing compatible systems and methods
at both operations by mid-year. Although Pluma plans to manufacture a portion of
their products, we do not expect to manufacture every product the distributors
sell. The company will remain focused on the expansion of Pluma's national
distribution network which we expect to be a self-supporting profit center and a
strong force within the wholesale distributor marketplace. Over the long term,
we see the
[THREE GRAPHICS APPEAR ON THE RIGHT SIDE OF PAGE WITH THE FOLLOWING INFO:]
OUR GENEROUS CUT, PRESHRUNK
FABRICS FIT EVERY MEMBER
OF THE FAMILY.
'95 $100.7
'96 $127.8
'97 $134.6
NET SALES (IN MILLIONS)
OUR POPULAR 11 OZ.
HEAVYWEIGHT FLEECE SHIRT IS SOFT,
YET HEAVY AND DURABLE.
5
A BRIGHT
FUTURE
FOR PLUMA
PRE-SHRUNK 100% COTTOM
potential to consolidate some of the telemarketing, purchasing, administration
and credit functions to maximize the efficiency of each operation.
WHAT IMPACT WILL THESE ACQUISITIONS HAVE ON RESULTS GOING FORWARD?
There will be some short-term impact to the bottom line, mostly from
amortization of goodwill and higher interest expense, but long term, these
acquisitions should increase our profitability by expanding our customer base
and significantly increasing the distribution of our products. Although we
experienced lower sales volume the latter part of 1997 due to the mechanics of
the acquisition agreements encouraging Stardust and FLR to aggressively manage
their inventories, our resulting inventories at year-end were in much better
shape. The lower inventories should provide a significant advantage for us in
1998 as we continue to sell through the acquired inventories and integrate the
acquisitions into our other operations. We believe the full earnings potential
of these acquisitions will begin to be realized in mid-1998.
Based upon discussions with and substantial input from our distributors, we
assessed the makeup of our inventory and decided to introduce a new SANTEE(R)
line in late 1998 and early 1999. The revamping of this product line will
involve some close-outs in 1998 as we continue to reduce the number of SKU's. We
believe that we have adequately prepared for this expense through the proper
management of our inventory reserves, and long term, this new line will enable
us to better address what the consumer wants and should lead to increased sales
and market share. The input we have received and the corresponding actions we
have taken in revamping the SANTEE(R) product line reflect the key role that
Stardust and FLR have already played in determining the future growth of our
company. We believe these benefits reinforce the validity of our acquisition
strategy.
DOES PLUMA HAVE PLANS FOR ADDITIONAL ACQUISITIONS?
The opportunities for growth that the Stardust and FLR acquisitions offer are
significant enough in the short-run that we are very focused on maximizing their
results at this time. Our success in leveraging this national distribution
capability may include significant internal growth. Once they are integrated
into our existing operations, we will be able to rapidly expand and diversify
our product offerings through new product development or additional
acquisitions. We expect to spend at least the first half of 1998 integrating
these acquisitions and will then look ahead to additional possibilities in late
1998 or 1999.
STARDUST AND
FLR OFFER
SIGNIFICANT
GROWTH
OPPORTUNITIES.
6
WHERE DOES PLUMA STAND ON IMPLEMENTING SAP AND WHAT ARE THE BENEFITS?
We would first like to point out that we have always invested in advanced
technologies. This commitment has produced manufacturing and distribution
processes that we believe are among the most modern in the industry. We have
extended this willingness to invest in the future by upgrading our production
planning, scheduling, sales, distribution and financial systems with a new
system from SAP America. SAP software is highly portable, operates on the newest
client-server platforms and can be utilized internationally. SAP enhances our
ability to manage an increasingly complex business with operations in various
parts of the country as well as internationally.
We began operating the first phase of our SAP systems on January 1, 1998, and
are moving ahead with the remaining phases. We expect to be fully operational
under our new systems during 1998. While the planned implementation should be
complete by then, there are additional systems available from SAP that could be
added in the future. As is to be expected from a re-engineering and
implementation effort like SAP, there have been some delays and inefficiencies
in the early stages and there may be more as we convert the remainder of our
systems during the second quarter.
WHAT OTHER FACTORS COULD IMPACT PROFITABILITY DURING 1998?
The higher interest expense and goodwill amortization related to the
acquisitions and any temporary negative impact associated with the
implementation of SAP are costs which were not borne in prior years. Once SAP
becomes fully operational, we will have incurred most of the costs associated
with the implementation, and the system should begin to have a positive impact
on costs. The higher interest expense and goodwill amortization should be offset
by higher sales volume and earnings later in the year.
[THREE GRAPHICS APPEAR ARE RIGHT SIDE OF PAGE WITH THE FOLLOWING INFO:]
STYLE, VARIETY, DURABILITY -
IT'S GOTTA BE SANTEE(R).
FLEECE JERSEY
------ ------
'95 70% 30%
'96 63% 37%
'97 61% 39%
REVENUES BY PRODUCT
SPECIAL FEATURES LIKE
DOUBLE-NEEDLE STITCHING AND
COVERSEAMING MAKE OUR
PRODUCTS BETTER.
7
A BRIGHT
FUTURE
FOR PLUMA
PRE-SHRUNK 100% COTTOM
We believe 1997 included a lot of unusual isolated occurrences that impacted
profits, and we do not expect to see them repeated during 1998. We believe that
we are in a much better position to handle challenges going forward.
WHAT ABOUT RAW MATERIAL COSTS?
We expect raw material costs to remain relatively stable throughout 1998.
IS PLUMA LOOKING TO EXPAND ITS INTERNATIONAL OPERATIONS?
The nature of our business is different from most of our competitors in that not
all of our products can be manufactured outside the United States. We have some
customers who insist upon our goods being one hundred percent domestically
produced. We believe that our ability to produce goods domestically offers Pluma
an advantage over some of our competitors who can no longer offer goods "Made in
USA." Flexible manufacturing operations, new technology and the ability to
develop new products with unique styles and fabric weights that generally carry
higher margins have enabled us to maintain our cost competitiveness with goods
produced outside the United States, allowing us to maintain a sizable portion of
our business here.
We also have segments of our customer base which are more price sensitive and
necessitate the use of lower cost non-domestic production. To meet these needs,
we presently have a sewing operation in Aguascalientes, Mexico that is operated
through a joint venture. We are also in the process of establishing additional
arrangements to accommodate some of our present growth plans. We also have
developed additional contract sewing resources that will supplement our internal
capabilities. As part of our acquisitions of Stardust and FLR, we will target
international sources of new product as well as domestic sources. We see
tremendous potential in expanding our operations in Latin America, and we will
continue to selectively pursue partnerships in this area.
WHAT SETS PLUMA APART FROM OTHER ACTIVEWEAR MANUFACTURERS?
The $40 billion activewear market is very competitive and fragmented.
Promotional activity has increased over the last couple of years in areas where
price is used to win new business, especially in the lower price commodity
products. Although general trends in the activewear market will certainly affect
us, we have carved a niche in this market that to date has insulated us somewhat
from the pricing wars of some of our competitors. Our strategy has been to win
market share from smaller companies who still account for almost half of the
market, with our high quality products, flexible manufacturing capabilities, and
new product and style innovations.
WE HAVE SET
THE STAGE OF
AN EXCITING
FUTURE.
8
With the ability to switch between domestic and non-domestic production, we can
accommodate a much broader range of customers. We will compete to some degree in
the commodity products market by using our Latin American operations where cost
is critical, but we will also be able to use our domestic operations for
"just-in-time" situations and to produce customized goods that we have designed
exclusively for individual clients. These customized goods usually carry higher
margins and often allow us to get a portion of the more commodity-oriented
business without having to compete only on price.
Our diverse customer base plays an important role in the growth of our company
and gives us a competitive advantage. We sell to screenprinters and
embroiderers, wholesale distributors, and to entertainment, retail and branded
accounts. Our product exposure to many consumer markets helps to balance
production more evenly throughout the year. Without being totally at the mercy
of any one market or distribution channel, we can generally avoid the negative
impact of individual market downturns that have always been a part of our
industry. The acquisitions of Stardust and FLR will further diversify our
customer base and will give us more control over our business in that market
segment.
We are confident that our results for 1998 will speak for themselves. The many
initiatives we have been working on should be complete during the first half of
1998, and as we enter the busiest part of our year, we expect to begin to enjoy
some of the fruits of our hard work. We believe we have set the stage for an
exciting future for our company.
[THREE GRAPHICS APPEAR ON RIGHT SIDE OF PAGE WITH THE FOLLOWING INFO:]
OUR POPULAR 100% COTTON JERSEY
HENLEY SHIRT LOOKS GOOD FOR
ANY OCCASION.
RETAIL 41%
BRANDED 23%
WHOLESALE DISTRIBUTORS 17%
SCREENPRINT-EMBROIDERS 11%
ENTERTAINMENT 8%
1997 NET SALES BY
DISTRIBUTION CHANNEL
OUR MANUFACTURING PROCESSES
GIVE OUR GARMENTS A NEW SPIN ON
SOFTNESS AND COMFORT.
9
SELECTED FINANCIAL AND OPERATING DATA
Statement of Operations Data for each of the years in the three-year period
ended December 31, 1997, and the Balance Sheet Data as of December 31, 1997 and
1996 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, 1994 and
the Balance Sheet Data as of December 31, 1995, 1994 and 1993 are derived from
the Company's audited financial statements which are not included in this Annual
Report.
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997(1)(2)(3) 1996(4)(9) 1995(4)(5)(6) 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
In thousands, except per share data
STATEMENT OF OPERATIONS DATA:
Net sales $134,555 $127,820 $100,710 $ 97,908 $ 86,645
Cost of goods sold 118,279 106,247 81,429 81,409 72,762
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 16,276 21,573 19,281 16,499 13,883
Selling, general & administrative expenses 10,949 9,149 14,385 7,300 6,255
- ---------------------------------------------------------------------------------------------------------------------------
Income from operations 5,327 12,424 4,896 9,199 7,628
Other expenses, net 1,809 3,251 3,130 2,255 1,633
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES & CUMULATIVE
effect of accounting change 3,518 9,173 1,766 6,944 5,995
Income taxes 1,475 3,355 659 2,594 2,202
- ---------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 2,043 5,818 1,107 4,350 3,793
Cumulative effect of accounting change - - - - 74(7)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 2,043 $ 5,818 $ 1,107 $ 4,350 $ 3,867(7)
Earnings per common share - basic and diluted:
Net income before cumulative effect of
accounting change $ 0.27 $ 1.09 $ 0 .21 $ 0 .83 $ 0 .69
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 0.27 $ 1.09 $ 0 .21 $ 0 .83 $ 0 .70
Weighted average number of shares outstanding 7,554 5,316 5,316 5,244 5,554
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends per common share $ 0.02 $ 0.11 $ 0.11 $ 0.11 $ 0.11
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997(1)(2)(3) 1996(4)(9) 1995(4)(5)(6) 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
In thousands
BALANCE SHEET DATA:
Working capital $ 32,975 $ 49,901 $ 50,052 $ 31,926 $ 29,935
Total assets 165,987 89,218 88,613 68,554 61,941
Long-term debt, net of current portion 40,000 44,420 50,120 30,465 28,684
Total shareholders' equity 63,668 32,143 26,902 26,373 25,110
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997(1)(2)(3) 1996(4)(9) 1995(4)(5)(6) 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
In thousands
OTHER DATA:
Gross profit as a percentage of net sales 12.1% 16.9% 19.1% 16.9% 16.0%
Income from operations as a
percentage of net sales 4.0% 9.7% 4.9% 9.4% 8.8%
Depreciation & amortization $ 4,057 $ 3,804 $ 3,440 $ 2,885 $ 2,292
Capital expenditures 9,782 3,399 5,856 4,495 7,086
EBITDA (8) 9,914 16,712 8,627 12,386 9,928
10
SELECTED FINANCIAL AND OPERATING DATA
(1) In March 1997, the Company completed its initial public offering of
2,500,000 shares of common stock at $12.00 per share. Upon the exercise of
the over-allotment option in April 1997, the Company issued an additional
293,300 shares at $12.00 per share. The $29.6 million in net proceeds from
the issuance of common stock was used to reduce debt.
(2) During 1997, the Company capitalized significant costs associated with the
implementation of a new management information system by SAP America ("SAP")
designed to improve the company's production planning, scheduling and
distribution, as well as, its financial reporting capabilities. In November
1997, the Emerging Issues Task Force released EITF Issue No. 97-13 requiring
certain costs associated with software implementation to be expensed as
incurred. The Company subsequently expensed $2.1 million of such costs which
had previously been capitalized during 1997.
(3) In December 1997, the Company purchased certain assets and assumed certain
liabilities of Stardust Corporation ("Stardust") and Frank L. Robinson
Company ("FLR"), former customers of the Company. The Company paid $51.5
million in cash for these assets, including related acquisition costs and
assumed liabilities in the amount of $16.7 million. The acquisitions have
been accounted for as purchases. Accordingly, the assets and liabilities of
the acquired businesses are included in the balance sheet as of December 31,
1997. The results of Stardust's and FLR's operations from the dates of the
acquisitions to December 31, 1997 did not have a material impact on the
Company's results of operations. The acquisitions were financed through
additional debt.
(4) In December 1995, the Company brought its sales and marketing functions
in-house in order to increase control and enhance profitability (see the
"Box Transaction"). The Company had previously conducted its sales and
marketing activities through an exclusive sales agent, Box & Company ("Box &
Company"), under the arrangement (the "Sales & 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 & 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 selling and marketing
expenses have decreased as a result of the Box Transaction. For the year
ended December 31, 1996, the Company's selling 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.
(5) 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 Operations."
(6) Had the Box Transaction occurred at the beginning of 1995, excluding the two
non-recurring charges mentioned in notes (4) and (5), 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-basic and diluted and EBITDA would have been $12.0 million, $5.5
million, $1.04 and $15.7 million, respectively.
(7) Includes $73,651 of income from the cumulative effect of a change in
accounting for the adoption of SFAS No. 109.
(8) 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.
(9) 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).
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Pluma is a vertically integrated manufacturer and distributor 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 across
multiple markets and distribution channels. Currently, Pluma's material
customers include branded customers such as adidas and Starter, retailers such
as Miller's Outpost and Sam's Club and entertainment customers such as Busch
Gardens, Hard Rock Cafe and Walt Disney. The Company sells products under its
own "PLUMA(R)", "SANTEE(R)" and "SNOWBANK(R)" brand names to retail and
wholesale customers. In addition, Pluma sells to screenprinters and embroiderers
who sell the Company's products to a wide variety of retailers, ranging from
souvenir and resort stores to large nationwide department stores. Pluma seeks to
grow both by increasing sales to existing customers and by adding new customers.
This diverse customer base provides product exposure to many customer markets
and enables Pluma to balance its production more evenly throughout the year,
thereby improving sales and profitability.
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 equal to 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.
Selling and marketing expenses have decreased as a result of the Box
Transaction. For the year ended December 31, 1996, the Companyis selling 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 and 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.
During 1997, the Company capitalized significant costs associated with the
implementation of a new management information system designed by SAP America
("SAP") to improve the Company's production planning, scheduling and
distribution, as well as, its financial reporting capabilities. In November
1997, the Emerging Issues Task Force released EITF Issue No. 97-13 requiring
certain costs associated with software implementations to be expensed as
incurred. The Company subsequently expensed $2.1 million of such costs which had
previously been capitalized during 1997.
In December 1997, the Company purchased certain assets and assumed certain
liabilities of Stardust Corporation ("Stardust") and Frank L. Robinson Company
("FLR"), former customers of the company. The Company paid $51.5 million in cash
for these assets, including related acquisition costs and assumed liabilities in
the amount of $16.7 million. The acquisitions have been accounted for as
purchases. Accordingly, the assets and liabilities of the acquired businesses
are included in the balance sheet as of December 31, 1997. The results of
Stardust's and FLR's operations from the dates of the acquisitions to December
31, 1997 did not have a material impact on the Company's results of operations.
The acquisitions were financed through additional debt.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the major components of the Company's Statements of
Operations as a percentage of net sales:
Years Ended December 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 87.9 83.1 80.9
Gross profit 12.1 16.9 19.1
Selling, general and administrative expenses 8.1 7.2 14.2
Income from operations 4.0 9.7 4.9
Other expenses, net 1.4 2.5 3.1
Income before income taxes and
cumulative effect of accounting change 2.6 7.2 1.8
Income taxes 1.1 2.6 .7
Net income 1.5% 4.6% 1.1%
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. Net sales increased 5.3% to $134.6 million in 1997 from $127.8
million in 1996. Gross dozens sold of fleece and jersey increased 5.1% to 1.7
million dozens in 1997 from 1.6 million dozens in 1996. The increase in net
sales was primarily attributable to increased sales of jersey activewear and
revenue from the addition of new customers. Sales of jersey activewear increased
by $5.0 million to $51.8 million in 1997, a 10.8% increase over the $46.8
million of jersey product sold in 1996. The average sales price per dozen for
total products sold declined by 1.0% primarily due to the increase in volume of
jersey activewear sold. Jersey products generally carry a lower sales price than
fleece products.
Gross Profit. Gross profit was 12.1% of net sales in 1997 compared to 16.9% in
1996. This decline in gross profit was the result of lower manufacturing
efficiencies and increased labor costs. Manufacturing efficiencies were
adversely impacted during the second and third quarters of 1997 by the
reconfiguration of the Company's textile facilities and product quality issues
resulting from changes in the Company's manufacturing processes and the
utilization of defective yarns. Labor costs increased in order to recapture a
loss of production which resulted from the Company's manufacturing
inefficiencies. The Company has corrected these inefficiencies.
Selling, General and Administrative Expenses. SG&A increased 19.7% to $10.9
million in 1997 from $9.1 million in 1996, an increase of $1.8 million. This
increase was due primarily to the expensing of $2.1 million of SAP software
implementation costs in compliance with EITF Issue No. 97-13. This increase in
SG&A expense was partially offset by a decline in management bonuses.
Other Expenses, Net. Other expenses, net, decreased 44.4% to $1.8 million in
1997 from $3.3 million in 1996. This decrease was primarily the result of a
decrease in interest expense. Average borrowings were lower due to the
application of the net proceeds of the Company's March 1997 initial public
offering.
Income Taxes. The effective tax rate was 41.9% in 1997 compared to 36.6% in
1996.
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
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Average sales price per dozen for total products sold 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.
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 decease 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.
LIQUIDITY AND CAPITAL RESOURCES
Principal Sources of Liquidity. Principal sources of liquidity have been bank
financing, the net proceeds from the Company's initial public offering, and cash
generated from the Company's operations. In March 1997, the Company completed
its initial public offering of 2,500,000 shares of common stock at $12.00 per
share. Upon the exercise of the over-allotment option in April 1997, the Company
issued an additional 293,300 shares at $12.00 per share. The $29.6 million in
net proceeds from the issuance of common stock was used to reduce debt.
The Company entered into a credit agreement on December 22, 1997 (the "Credit
Agreement") with NationsBank, N.A. for the purpose of funding the acquisitions
of the assets of Stardust and FLR and to refinance its existing debt. The
Company can borrow the lesser of $100.0 million or the Company's borrowing base,
as defined in the Credit Agreement. As of December 31, 1997, $83.3 million was
outstanding under the Credit Agreement. The annual interest rate set by the
Credit Agreement is variable, and, on December 31, 1997, was 7.19%. The Credit
Agreement imposes certain operating and financial restrictions on the Company,
including, but not limited to, limitations on mergers or other consolidations,
acquisition of assets, further indebtedness, the creation of liens or other
encumbrances on the Company's assets, the disposition of assets, the payment of
dividends (if such payment would create a default under such loan), and capital
expenditures. In addition, the Company is required to maintain specified
financial ratios and levels. The Company's obligations under the Credit
Agreement are secured by substantially all of the Company's assets. The Credit
Agreement expires on April 30, 1998. Although the Company has no firm commitment
to replace this existing credit facility when it expires, NationsBank has agreed
to utilize its best efforts to syndicate with other lenders a $120.0 million
replacement credit facility and has committed to loan $40.0 million of this
amount. The Company is confident NationsBank will succeed in these efforts;
however, no assurance can be given regarding the success of the syndication
efforts.
Cash Flows from Operating Activities. For the year ended December 31, 1997, the
Company's operations used $5.0 million in cash. The principal uses of cash were
the increase in accounts receivable in the amount of $7.0 million due to higher
sales volume in the fourth quarter of 1997 compared to the same period for 1996,
an increase in other receivables of $1.9 million, and an increase in income
taxes receivable of $2.0 million. These uses of cash were offset primarily by a
reduction of inven-
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
tories of $1.5 million. For the year ended December 31, 1996, the net cash
provided by operations totaled $9.6 million. The principal uses of cash were the
repayment of the note payable issued in connection with the Box Transaction for
$2.0 million and increases of $1.9 million in inventories and $0.6 million in
accounts receivable. These uses were 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.
Cash Flows from Investing Activities. Cash expended in investing activities
totaled $61.8 million for the year ended December 31, 1997. During 1997, the
Company invested $51.5 million upon the acquisition of certain assets from
Stardust and FLR. Furthermore, the Company invested $9.8 million in purchases of
plant and equipment, primarily to enhance manufacturing and management
information system capabilities. Capital expenditures for year ended December
31, 1996 were $3.4 million.
Cash Flows from Financing Activities. For the year ended December 31, 1997, the
Company had net borrowings of $38.9 million, primarily related to the
acquisition of certain assets of Stardust and FLR, had net proceeds of $29.6
million from the issuance of Common Stock, and paid $0.1 million in cash
dividends. In 1996, the Company had net repayments of borrowings of $5.7 million
and paid $0.6 million in cash dividends.
Capital Expenditures. Additional capital expenditures are expected in future
years to meet continued growth expectations. The Company anticipates expending
approximately $7.0 million in 1998 for property, plant and equipment as well as
approximately $1.5 million to complete the implementation of the SAP management
information system.
Management believes that funding available to the Company through operations and
bank financing will be sufficient to meet its anticipated capital expenditure,
working capital and other financial needs.
YEAR 2000 COMPLIANCE
The Company recognizes that the arrival of the Year 2000 poses a unique
worldwide challenge to the ability of all systems to recognize the date change
from December 31, 1999 to January 1, 2000 and, like other companies, has
assessed its computer applications and business processes to provide for their
continued functionality.
The Company believes that its current management information systems will
consistently and properly recognize the Year 2000. As stated above, the Company
is in the process of implementing its new SAP America management information
systems to improve its production planning, scheduling and distribution, as well
as its financial reporting capabilities. This new management information system
will be Year 2000 compliant. Many of the Company's other systems include new
hardware and packaged software recently purchased from large vendors who have
represented that these systems are Year 2000 compliant. The Company is in the
process of obtaining assurances from vendors that timely updates will be made
available to make all remaining purchased software Year 2000 compliant. The
Company does not believe anticipated expenditures to assure Year 2000 compliance
will be material.
In addition, the Company plans to communicate with others with whom it does
significant business to determine their Year 2000 compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that a failure to convert by another company
would not have a material adverse effect on the Company.
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.
15
BALANCE SHEETS
December 31,
----------------------------------------
ASSETS 1997 1996
----------------------------------------
Current assets:
Cash $ 1,875,992 $ 291,488
Accounts receivable (less allowance -
1997, $2,353,577; 1996, $817,080)
(Notes 5 and 16) 32,001,332 22,545,795
Income taxes receivable 1,952,796 -
Other receivables 1,906,178 -
Deferred income taxes (Note 9) 1,539,385 1,509,535
Inventories (Notes 3 and 5) 51,177,900 34,025,895
Other current assets 1,168,663 627,576
----------------------------------------
Total current assets 91,622,246 59,000,289
----------------------------------------
Property, plant and equipment: (Note 5)
Land 929,689 599,978
Land improvements 719,699 678,160
Buildings and improvements 16,663,608 14,078,626
Machinery and equipment 36,420,561 30,850,877
Construction in progress 4,762,235 902,804
----------------------------------------
Total property, plant and equipment 59,495,792 47,110,445
Less accumulated depreciation 21,496,857 17,468,062
----------------------------------------
Property, plant and equipment, net 37,998,935 29,642,383
----------------------------------------
Other assets: (Notes 5 and 11)
Goodwill (less accumulated amortization - 1997, $26,655) 34,831,646 -
Other 1,533,840 575,662
----------------------------------------
Total other assets 36,365,486 575,662
----------------------------------------
TOTAL $165,986,667 $89,218,334
========================================
See notes to financial statements.
16
BALANCE SHEETS
December 31,
-----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
-----------------------------------
Current liabilities:
Current maturities of long-term debt (Notes 5 and 16) $ 44,117,982 $ 849,640
Accounts payable (Notes 13 and 16) 12,057,069 4,456,770
Income taxes payable - 371,500
Accrued expenses (Note 4) 2,472,458 3,421,181
-----------------------------------
Total current liabilities 58,647,509 9,099,091
-----------------------------------
Long-term debt (Notes 5 and 16) 40,000,000 44,419,544
-----------------------------------
Deferred income taxes (Note 9) 3,671,301 3,556,806
-----------------------------------
Commitments and contingencies (Notes 10, 12 and 13)
Shareholders' equity: (Notes 5, 7 and 8)
Preferred stock, no par value, 1,000,000 shares authorized
Common stock, no par value, 15,000,000
shares authorized, shares issued and outstanding -
1997, 8,109,152; 1996, 5,315,852 36,849,127 7,222,550
Retained earnings 26,818,730 24,920,343
-----------------------------------
Total shareholders' equity 63,667,857 32,142,893
-----------------------------------
TOTAL $165,986,667 $ 89,218,334
===================================
17
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
--------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------
Net sales (Note 14) $ 134,555,053 $127,820,319 $ 100,710,495
Cost of goods sold (Note 13) 118,279,362 106,247,340 81,429,370
--------------------------------------------------------------
Gross profit 16,275,691 21,572,979 19,281,125
--------------------------------------------------------------
Selling, general and administrative expenses,
including related party sales agency -
1995, $3,327,307 (Notes 10, 13 and 15) 8,859,529 9,149,039 12,384,876
Software implementation expenses (Note 6) 2,089,316 - -
Termination fee (Note 13) - - 2,000,000
--------------------------------------------------------------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 10,948,845 9,149,039 14,384,876
--------------------------------------------------------------
Income from operations 5,326,846 12,423,940 4,896,249
--------------------------------------------------------------
Other income (expenses):
Interest expense (Note 5) (2,338,930) (3,735,468) (3,421,385)
Other income 530,447 484,058 291,261
--------------------------------------------------------------
Total other expenses, net (1,808,483) (3,251,410) (3,130,124)
Income before income taxes 3,518,363 9,172,530 1,766,125
--------------------------------------------------------------
Income taxes (benefit): (Note 9)
Current 1,390,880 2,445,471 2,029,624
Deferred 84,645 908,680 (1,370,488)
--------------------------------------------------------------
Total income taxes 1,475,525 3,354,151 659,136
Net income $ 2,042,838 $ 5,818,379 $ 1,106,989
==============================================================
Earnings per common share - basic and diluted $ 0.27 $ 1.09 $ 0.21
==============================================================
Weighted average number of shares outstanding 7,553,782 5,315,852 5,315,852
==============================================================
See notes to financial statements.
18
STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
- ---------------------------------------------------------------------------------------------------------------------------
(Note 7)
BALANCE, JANUARY 1, 1995 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
DIVIDENDS ($.02 per share) - - - (144,451) (144,451)
ISSUANCE OF COMMON STOCK
IN PUBLIC OFFERING 2,793,300 29,626,577 - - 29,626,577
NET INCOME - - - 2,042,838 2,042,838
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 8,109,152 $ 36,849,127 $ - $ 26,818,730 $ 63,667,857
================================================================================
See notes to financial statements.
19
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
---------------------------------------------------------
1997 1996 1995
---------------------------------------------------------
Cash flows from operating activities:
Net income $ 2,042,838 $ 5,818,379 $ 1,106,989
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for depreciation and amortization 4,056,744 3,804,481 3,439,559
Other, net (440,856) (105,154) 13,260
Increase in accounts receivable (6,966,587) (606,032) (499,523)
(Increase) decrease in income taxes receivable (1,952,796) 1,057,783 (1,057,783)
Increase in other receivables (1,906,178)
(Increase) decrease in deferred income taxes 84,645 908,680 (1,370,488)
(Increase) decrease in inventories 1,483,055 (1,856,648) (14,046,154)
Increase (decrease) in accounts payable (380,638) 1,627,989 (1,577,237)
Increase (decrease) in accrued expenses (992,524) 943,100 1,435,387
Increase (decrease) in note payable
- related party sales agency - (1,999,000) 1,999,000
---------------------------------------------------------
Net cash provided by (used in) operating activities (4,972,297) 9,593,578 (10,556,990)
---------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (9,781,622) (3,398,804) (5,855,714)
Acquisitions (51,538,504) - -
Other, net (453,997) (221,175) (17,342)
---------------------------------------------------------
Net cash used in investing activities (61,774,123) (3,619,979) (5,873,056)
---------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 83,268,342 - -
Repayments of long-term debt (849,640) (849,640) (14,102,575)
Borrowings from note payable - Bank - 20,000,000 5,000,000
Repayments of note payable - Bank - (20,000,000) (5,000,000)
Net borrowings from (repayments of) revolving loan (43,569,904) (4,851,096) 31,557,000
Payment of dividends (144,451) (577,804) (577,804)
Proceeds from issuance of common stock 29,626,577 - -
---------------------------------------------------------
Net cash provided by (used in) financing activities 68,330,924 (6,278,540) 16,876,621
---------------------------------------------------------
Net increase (decrease) in cash 1,584,504 (304,941) 446,575
Cash, beginning of period 291,488 596,429 149,854
---------------------------------------------------------
Cash, end of period $ 1,875,992 $ 291,488 $ 596,429
=========================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,970,587 $ 3,860,064 $ 2,538,550
Income taxes $ 3,715,176 $ 1,430,000 $ 3,212,641
Details of acquisitions:
Fair value of assets $ 68,248,278
Liabilities $ 16,709,774
Cash paid $ 51,538,504
See notes to financial statements.
20
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Pluma, Inc. (the "Company") is a vertically integrated manufacturer and
distributor 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,
Starter and Walt Disney. In addition, the Company sells products under its own
"PLUMA(R)," "SANTEE(R)" and "SNOWBANK(R)" brand names to retail and wholesale
customers. The Company operates in a single business segment.
During 1997, the Company completed acquisitions of two of its distributor
customers, Stardust Corporation ("Stardust") and Frank L. Robinson Company
("FLR") (see note 11).
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 methods 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
Goodwill - Goodwill represents costs in excess of net assets of businesses
acquired (see note 11). Goodwill is amortized on a straight-line basis over 20
years. The Company continually reviews goodwill to assess recoverability from
estimated future results of operations and cash flows of the related operating
entities.
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 on
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.
Loan Fees - Loan fees are capitalized and amortized to interest expense using
the effective interest method over the term of the related debt.
21
NOTES TO FINANCIAL STATEMENTS
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 (see 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.
Earnings per Common Share - In February 1997, the Financial Accounting Standards
Board issued SFAS No. 128, "Earnings per Share." SFAS No. 128 is effective for
financial statements for periods ending after December 15, 1997 and early
adoption is not permitted. This statement changes the method of computing and
presenting earnings per common share. SFAS No. 128 requires the presentation of
basic earnings per common share and diluted earnings per common share ("EPS") on
the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. Basic EPS is computed by dividing the net income available to
common shareholders by the weighted average shares of outstanding common stock.
The calculation of diluted EPS is similar to basic EPS except that the
denominator includes dilutive common stock equivalents such as stock options and
warrants.
Options to purchase shares of common stock were outstanding during 1997, 1996
and 1995 (see note 8) but were not included in the computation of diluted EPS
because the options' exercise prices were greater than the average market prices
of the common shares during those years. Accordingly, there were no differences
in the numerators and denominators used in the basic EPS and diluted EPS
computations.
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.
Advertising - The Company expenses the costs of advertising as incurred.
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. As discussed in Note 6,
certain costs related to SAP software implementation are expensed.
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.
Reclassifications - Certain 1996 and 1995 amounts have been reclassified to
conform with 1997 presentation.
22
NOTES TO FINANCIAL STATEMENTS
New Accounting Standards - In June 1997, SFAS No. 130, "Comprehensive Income,"
was issued, establishing standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose financial statements.
The Company will be required to adopt SFAS No. 130 in the first quarter of
fiscal year 1998 and, based on current circumstances, does not believe the
effect of adoption will be material.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued, establishing standards for the way public
enterprises report information about operating segments in annual financial
statements. This statement also requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. The Company will be required to apply the provisions of this
statement beginning with the annual report issued for the year ending December
31, 1998.
3. INVENTORIES
Inventories at December 31, 1997 and 1996 consist of the following:
1997 1996
- --------------------------------------------------------------------------------
At FIFO cost:
Raw materials $ 1,429,371 $ 1,279,512
Work-in-progress 6,077,538 3,297,522
Finished goods 45,885,484 30,037,951
Production supplies 953,147 608,824
- --------------------------------------------------------------------------------
54,345,540 35,223,809
Excess of FIFO over LIFO cost (1,846,435) (83,930)
- --------------------------------------------------------------------------------
52,499,105 35,139,879
Excess of cost over market (1,321,205) (1,113,984)
- --------------------------------------------------------------------------------
Total $ 51,177,900 $ 34,025,895
================================================================================
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 $52,212 ($.01 per 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
used 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 $1,846,435
and $83,930 greater at December 31, 1997 and 1996, respectively.
4. ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1996 consist of the following:
1997 1996
- ----------------------------------------------------------------
Salaries, commissions and bonuses $ 702,186 $ 1,042,786
Interest 126,582 758,239
Insurance 888,309 1,369,549
Other 755,381 250,607
- ----------------------------------------------------------------
Total $ 2,472,458 $ 3,421,181
================================================================
23
NOTES TO FINANCIAL STATEMENTS
5. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consists of the following:
1997 1996
- -----------------------------------------------------------------------
Revolving loan $ 83,268,342 $ 43,569,904
Subordinated debt 849,640 1,699,280
------------ ------------
Total 84,117,982 45,269,184
Less current maturities 44,117,982 849,640
- -----------------------------------------------------------------------
Long-term debt $ 40,000,000 $ 44,419,544
=======================================================================
On December 22, 1997, the Company entered into a credit agreement with a bank
(the "Credit Agreement") under which it may borrow up to $100,000,000 on a
revolving loan. Proceeds from borrowings under the Credit Agreement were used to
pay in full the prior revolving loan and to consummate the acquisitions of
Stardust Corporation and Frank L. Robinson Company (see notes 1 and 11).
Borrowings under the Credit Agreement bear interest at a per annum rate equal to
the LIBOR rate plus 1.50%. At December 31, 1997, the per annum rate was 7.19%.
The Credit Agreement also requires a commitment fee equal to 0.20% on the
average daily unused amount of the revolving loan. Borrowings under the Credit
Agreement, together with any accrued interest, are due on April 30, 1998.
Among the various provisions, limitations and restrictions contained in the
Credit Agreement, the Company must meet specified tangible net worth, leverage
ratio, funded debt to total capitalization ratio and earnings before the effect
of interest expense, income taxes, depreciation and amortization requirements.
Under the Credit 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, payment of dividends by the Company is prohibited. The
Credit 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 30 days after notice. The Company was in compliance with or had obtained
waivers relating to all covenants as of December 31, 1997.
Long-term debt is collateralized by substantially all accounts receivable,
inventories, general intangibles and property.
The Company intends to refinance the Credit Agreement on a long-term basis prior
to its maturity date. The Company has a commitment from a bank to act as its
administrative agent in obtaining senior credit facilities (the "Senior Credit
Facilities") of up to $120,000,000 with a syndicate of financial institutions.
The bank has committed to loan $40,000,000 of the Senior Credit Facilities and
has agreed to utilize its best efforts to syndicate the remaining $80,000,000.
The Senior Credit Facilities include a revolving credit facility of up to
$70,000,000 (the "Revolving Credit Facility") and a term loan facility of up to
$50,000,000 (the "Term Loan Facility"). The amount under the Revolving Credit
Facility will be due five years after the closing date. The amount under the
Term Loan Facility will be due in specified quarterly installments beginning one
year after closing and concluding five years after closing. The Senior Credit
Facilities have similar restrictions to those contained in the Credit Agreement
and will bear interest at LIBOR plus 75 to 200 basis points, as defined.
In accordance with SFAS No. 6, "Classification of Short-Term Obligations
Expected to be Refinanced," the Company has classified $40,000,000 of the amount
due as of December 31, 1997 under the Credit Agreement as long-term debt.
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).
Interest on the unpaid principal balance is paid quarterly at an annual rate of
5.0%, since May 1, 1994.
24
NOTES TO FINANCIAL STATEMENTS
The promissory note is subordinated to the Credit 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 reissued to him. The number of shares to be
reissued 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. This note was paid in full on January 31,
1998.
Future annual payments on long-term debt during each of the next five years,
assuming the refinancing of the Credit Agreement with the committed portion of
the Senior Credit Facilities, are $44,117,982, $4,000,000, $9,000,000,
$10,000,000, $11,000,000 and $6,000,000 thereafter, respectively.
6. SOFTWARE IMPLEMENTATION EXPENSES
During 1997, the Company capitalized significant costs in connection with its
SAP software implementation. In November 1997, EITF Issue No. 97-13 was issued
requiring certain costs related to software implementation be expensed as
incurred. The Company has expensed $2,089,316 of such costs in 1997.
7. CAPITAL STOCK
In March 1997, the Company completed its initial public offering of 2,500,000
shares of Common Stock at $12.00 per share. In April 1997, the Underwriters'
over-allotment option for 293,300 shares of Common Stock at $12.00 per share was
exercised. The net proceeds of $29,626,577 were used to reduce debt.
On January 28, 1997, the Board of Directors declared a .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, and 1995, 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 1997, 1996 and 1995 under the Stock Transfer and
Redemption Agreement.
8. STOCK OPTIONS
In May 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.
25
NOTES TO FINANCIAL STATEMENTS
In April 1996 and October 1995, the Company granted 32,384 and 379,776 options,
respectively, to purchase Common Stock at an exercise price of $13.077 per share
of which 181,351 and 117,171 options are exercisable as of December 31, 1997 and
1996, respectively. 2,355 options, -0- options and 29,440 options were forfeited
in 1997, 1996 and 1995, respectively. The remaining 199,014 options become
exercisable in 20% increments on the anniversary dates of the grants as follows:
YEAR SHARES
1998 64,180
1999 64,180
2000 64,179
2001 6,475
---- -----
Total 199,014
=======
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:
1997 1996 1995
-------------------------------------------------------
Net income:
As reported $ 2,042,838 $ 5,818,379 $ 1,106,989
Pro forma 1,838,229 5,679,877 444,500
Earnings per share:
As reported $ 0.27 $ 1.09 $ 0.21
Pro forma 0.24 1.07 0.08
A summary of the status of the Company's 1995 Stock Option Plan as of December
31, 1997, 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
Forfeited (2,355) 13.077
-------------------------------------------
Outstanding, December 31, 1997 380,365 13.077
-------------------------------------------
1997 1996 1995
---------------------------------------------------
Options exercisable at year end 181,351 117,171 58,880
Weighted-average fair value of options
granted during the year $ - $ 6.60 $ 3.04
26
NOTES TO FINANCIAL STATEMENTS
At December 31, 1997, the outstanding options have a weighted-average remaining
contractual life of 7.9 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
.08% 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.
9. INCOME TAXES
The provision for income tax expense for the years ended December 31, 1997, 1996
and 1995 consists of the following:
1997 1996 1995
---------------------------------------------------------
Current federal income tax expense $ 1,254,831 $ 2,178,903 $ 1,808,190
Current state income tax expense 136,049 266,568 221,434
---------------------------------------------------------
Total current income tax expense 1,390,880 2,445,471 2,029,624
Deferred federal income tax expense (benefit) 78,638 809,689 (1,202,587)
Deferred state income tax expense (benefit) 6,007 98,991 (167,901)
---------------------------------------------------------
Total deferred income tax expense (benefit) 84,645 908,680 (1,370,488)
---------------------------------------------------------
Total income tax expense $ 1,475,525 $ 3,354,151 $ 659,136
=========================================================
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:
1997 1996 1995
---------------------------------------------------------
Income taxes computed at U. S. federal
statutory rate $ 1,196,243 $ 3,118,660 $ 600,482
State income taxes, net of federal
income tax effect 93,758 243,027 47,473
Other, net 185,524 (7,536) 11,181
---------------------------------------------------------
Total income tax expense $ 1,475,525 $ 3,354,151 $ 659,136
=========================================================
27
NOTES TO FINANCIAL STATEMENTS
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 at December 31:
1997 1996
--------------------------------
Deferred tax liabilities:
Current -
Prepaid insurance and other $ (115,838) $ (74,642)
Long-term -
Property, plant and equipment (3,669,607) (3,556,806)
Goodwill (3,246) -
--------------------------------
Total deferred tax liabilities (3,788,691) (3,631,448)
--------------------------------
Deferred tax assets:
Current -
Bad debt and returns reserves 244,324 299,394
Medical and workers' compensation reserves 205,575 391,408
Uniform capitalization 606,434 634,729
LIFO market write-down 408,905 258,646
Deferred compensation 165,485 -
Other 24,500 -
Long-term - miscellaneous 1,552 -
--------------------------------
Total deferred tax assets 1,656,775 1,584,177
--------------------------------
Net deferred tax liability $ (2,131,916) $ (2,047,271)
================================
10. LEASES
At December 31, 1997, 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:
1998 $ 1,925,038
1999 1,537,398
2000 1,482,934
2001 1,405,828
2002 1,034,026
Thereafter 5,048,750
-------------
Total $ 12,433,974
=============
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.
28
NOTES TO FINANCIAL STATEMENTS
Rental expense under all leases accounted for as operating leases was
$2,260,469, $2,145,061, and $1,730,932 for the years ended December 31, 1997,
1996 and 1995, respectively (see note 13).
11. ACQUISITIONS
In December 1997, the Company purchased certain assets and assumed certain
liabilities of Stardust Corporation ("Stardust") and Frank L. Robinson Company
("FLR") for $51,538,504 in cash, including related acquisition costs. The
acquisitions have been accounted for as purchases. Accordingly, the assets and
liabilities of the acquired businesses are included in the balance sheet as of
December 31, 1997. The results of Stardust's and FLR's operations from the dates
of the acquisitions to December 31, 1997 were not significant. The acquisitions
were financed through additional debt (see note 5).
The allocation of the acquisition costs resulted in intangibles, primarily
non-compete agreements of $500,000, and goodwill of $34,858,302. The non-compete
agreements and the goodwill are being amortized on a straight-line basis over 5
years and 20 years, respectively.
The pro forma unaudited results of operations as though Stardust and FLR had
been acquired as of the beginning of fiscal 1997 and 1996 are as follows:
1997 1996
---------------------------------------------
Net sales $ 221,960,415 $ 225,898,606
Net income 2,225,288 6,239,372
Earnings per common share 0.29 1.17
The pro forma results include amortization of the intangibles presented above
and interest expense on debt assumed to finance the acquisitions. The pro forma
results are not necessarily indicative of what actually would have occurred if
the acquisitions had been completed as of the beginning of each of the fiscal
periods presented, nor are they necessarily indicative of future results.
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 (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 taken as a whole if disposed of unfavorably.
13. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1995, sales commissions of $3,327,307, 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. During December
1995, the Company entered into an agreement for
29
NOTES TO FINANCIAL STATEMENTS
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 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
$100,623, $98,751 and $65,254 in 1997, 1996 and 1995, respectively. Total
operating lease expense for 1997, 1996 and 1995 was $1,197,186, $1,144,193 and
$773,600, respectively. As of December 31, 1997, future minimum lease payments
under these operating leases totaled $7,655,414.
A contractor performed miscellaneous work totaling $344,751, $478,646 and
$31,032 for the years ended December 31, 1997, 1996 and 1995, respectively.
Certain shareholders of the Company are affiliated with the contractor. At
December 31, 1997, $166,408 was due to this contractor.
During 1997, 1996 and 1995, the Company made payments totaling $118,345,
$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. At December 31, 1997, $22,466
was due to this contractor.
During 1997 and 1996, the Company contracted for fabric dyeing totaling $16,894
and $42,776, respectively, with a contractor owned by a director of the Company.
The Company had sales to this contractor in 1997 and 1996 of $871,958 and
$80,005, respectively, and had a net balance due of $419,774 at December 31,
1997.
During 1997 and 1996, the Company made payments to a contractor totaling
$361,472 and $121,395, respectively, for advisory fees. A director/shareholder
of the Company is affiliated with this contractor. At December 31, 1997,
$236,396 was due to this contractor.
An electrical contractor performed services totaling $333,104 during 1997. This
contractor is affiliated with a director/officer of the Company. At December 31,
1997, $101,056 was due to 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.
Certain customers have accounted for significant percentages of the Company's
net sales as follows:
1997 1996 1995
--------------------------------------------------
Customer A 31.1% 24.1% 16.1%
Customer B 12.0% 14.7% 9.1%
Customer C 8.7% 7.2% 12.8%
Customer D 6.5% 5.9% 11.4%
30
NOTES TO FINANCIAL STATEMENTS
15. EMPLOYEE BENEFIT PLANS
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 1997,
1996 and 1995, the Company contributed $172,983, $161,461 and $129,378,
respectively, to the 401(k) retirement savings plan.
On December 31, 1996, the Company established the Pluma, Inc. Deferred
Compensation Plan (the "Plan") for selected management employees. The purpose of
the Plan is to provide eligible employees with the opportunity to defer
compensation which might not otherwise be deferrable under the 401(k) retirement
savings plan. The Plan is unfunded and participants are 100% vested at all
times. The Company may make discretionary matching contributions to the Plan.
During 1997, the Company contributed $20,246 to the Plan.
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, 1997, the carrying
value of long-term debt is a reasonable estimate of fair value. All financial
instruments are held for purposes other than trading.
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, 1997 and 1996, and the related statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
The Company changed its method of capitalizing and expensing certain costs
related to software implementation in 1997 in accordance with EITF Issue No.
97-13 (see Note 6). As discussed in Note 3, the Company changed its method of
determining the cost of inventories in 1996.
Winston-Salem, North Carolina /s/ Deloitte & Touche LLP
February 11, 1998
31
CORPORATE INFORMATION
CORPORATE OFFICES
801 Fieldcrest Road
Eden, North Carolina 27288
(336) 635-4000
www.pluma.com
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
(336) 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. The following table represents the high and low closing sale price of the
Common Stock as listed on the New York Stock Exchange for each quarter of 1997.
Market Quotations
- -----------------------------------------------------
High Low
1997 Quarter Ended
March 31 $12.250 $12.000
June 30 $15.750 $11.750
September 30 $14.625 $10.000
December 31 $10.375 $ 8.438
ANNUAL MEETING
The 1998 Annual Meeting of Shareholders will be held at 10:00 a.m. Eastern
Daylight Time on June 2, 1998, at Bassett Country Club, Bassett, Virginia.
DIVIDENDS
The Company paid quarterly cash dividends on its Common Stock in the amount of
$.0272 per share for each quarter of 1995 and 1996 and $.02 per share in the
first quarter of 1997. 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.
32
EXECUTIVE OFFICERS AND DIRECTORS
DIRECTORS
GEORGE G. WADE
Chairman Emeritus of the Board
and Secretary
Pluma, Inc.
G. WALKER BOX
Chairman of the Board
Pluma, Inc.
R. DUKE FERRELL, JR.
President and Chief Executive Officer
Pluma, Inc.
C. MONROE LIGHT
Executive Vice President of Manufacturing Services
Pluma, Inc.
BARRY A. BOWLES
Chairman of the Board
Stanley W. Bowles Corporation
KEMP D. BOX
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 Services
FORREST H. TRUITT, II
Executive Vice President, Treasurer and Chief Financial Officer
MILTON A. BARBER, IV
Senior Vice President of
Sales and Marketing
DAVID S. GREEN
Senior Vice President
of Human Resources
WALTER E. HELTON
Senior Vice President of Operations
DOUGLAS A. SHELTON
Senior Vice President of Manufacturing
NANCY B. BARKSDALE
Vice President and Controller
JAMES E. BEALE
Vice President of Wholesale Distribution
President, Stardust Corporation
RAYMOND L. REA
Vice President of Manufacturing
JEFFREY N. ROBINSON
Vice President of Sales
President, Frank L. Robinson, Inc.
JOHN R. BEALE
Executive Vice President, Stardust Corporation