SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Period Ended October 3, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________
-------------------------------------
COMMISSION FILE NUMBER 1-63
PREMIUMWEAR, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 41-0429620
(State of Incorporation) (I.R.S. Employer Identification No.)
7566 MARKET PLACE DRIVE, MINNEAPOLIS, MINNESOTA 55344-3629
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER: 1-800-248-0158 OR (612) 943-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ NO ___
The number of shares of common stock outstanding at November 2, 1998 was
2,339,530.
This Form 10-Q consists of 15 pages.
<PAGE>
PREMIUMWEAR, INC.
INDEX
Page No.
--------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
October 3, 1998 and January 3, 1998............................... 3
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months ended October 3, 1998
and October 4, 1997............................................... 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months ended October 3, 1998
and October 4, 1997............................................... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 8
PART II: OTHER INFORMATION
Item 5. Other Information................................................. 13
Item 6. Exhibits and Reports on Form 8-K.................................. 13
Exhibit 27- Financial Data Schedule............................... 15
2
<PAGE>
PREMIUMWEAR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts unaudited and in thousands, except share data)
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 2,553 $ 2,870
Accounts receivable, less allowances of $566 and $538 ..... 6,026 4,199
Inventories ............................................... 9,872 8,590
Prepaid expenses and other ................................ 432 279
--------- ---------
Total current assets ................................ 18,883 15,938
--------- ---------
Property, plant and equipment, less accumulated
depreciation and amortization of $3,660 and $3,329 ........ 1,412 1,613
--------- ---------
$ 20,295 $ 17,551
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 3,572 $ 2,821
Accrued payroll and employee benefits ..................... 1,558 1,034
Liabilities related to sold assets ........................ 401 578
Other accruals ............................................ 448 356
--------- ---------
Total current liabilities ........................... 5,979 4,789
--------- ---------
Postretirement medical benefits .............................. 709 709
--------- ---------
Shareholders' equity Common Stock $.01 par value:
2,319,530 and 2,319,330 shares issued and outstanding 23 23
Additional paid-in capital ................................ 11,738 11,193
Retained earnings ......................................... 1,846 837
--------- ---------
Total shareholders' equity .......................... 13,607 12,053
--------- ---------
$ 20,295 $ 17,551
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
PREMIUMWEAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts unaudited and in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Oct 3, Oct 4, Oct 3, Oct 4,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ......................... $ 10,719 $ 7,836 $ 33,007 $ 26,238
Cost of goods sold ................ 7,963 5,941 24,391 19,898
-------- -------- -------- --------
GROSS MARGIN ...................... 2,756 1,895 8,616 6,340
Selling, general and administrative 2,312 1,570 7,017 5,230
-------- -------- -------- --------
OPERATING INCOME .................. 444 325 1,599 1,110
Interest income (expense), net .... 47 (51) 94 27
Other ............................. 6 -- 7 6
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES ........ 497 274 1,700 1,143
Provision for income taxes ........ 204 115 691 475
-------- -------- -------- --------
NET INCOME ..................... $ 293 $ 159 $ 1,009 $ 668
======== ======== ======== ========
NET INCOME PER COMMON SHARE:
BASIC .................... $ 0.13 $ 0.07 $ 0.44 $ 0.28
======== ======== ======== ========
DILUTED .................. $ 0.12 $ 0.07 $ 0.42 $ 0.28
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
PREMIUMWEAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts unaudited and in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
October 3, 1998 October 4, 1997
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .............................................. $ 1,009 $ 668
Reconciling items:
Depreciation and amortization ..................... 349 322
Provision for losses on accounts receivable ....... 83 60
Deferred taxes .................................... 544 366
Changes in operating assets and liabilities:
Accounts receivable ......................... (1,910) (2,570)
Inventories ................................. (1,282) 1,221
Prepaid expenses and other .................. (153) (98)
Accounts payable ............................ 751 (1,831)
Other current liabilities ................... 439 (1,246)
---------- ----------
Net cash used in operating activities ............. (170) (3,108)
---------- ----------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment ............... (148) (354)
---------- ----------
FINANCING ACTIVITIES:
Net change in short-term borrowings ..................... -- 648
Principal payments on long-term debt and capital
lease obligations ................................. -- (23)
Special cash distribution ............................... -- (12,500)
Proceeds from exercise of stock options ................. 1 959
---------- ----------
Net cash provided by (used in) financing activities 1 (10,916)
---------- ----------
Decrease in cash and cash equivalents ............. (317) (14,378)
Cash and cash equivalents at beginning of period ........ 2,870 14,477
---------- ----------
Cash and cash equivalents at end of period .............. $ 2,553 $ 99
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
PREMIUMWEAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 3, 1998
1. Basis of Financial Statement Presentation
The condensed consolidated financial statements for the three months and
nine months ended October 3, 1998 of PremiumWear, Inc. (the Company), have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and reflect, in the
opinion of management, all normal recurring adjustments necessary to
present fairly the results of operations for the period. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although management believes the disclosures are adequate to
make the information presented not misleading.
These financial statements should be read in conjunction with the
Company's most recent audited financial statements included in its 1997
Annual Report to Shareholders and its 1997 Form 10-K.
2. Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation. These reclassifications had no effect on
previously reported net income or shareholders' equity.
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of:
October 3, January 3,
(000's omitted) 1998 1998
--------------- ---- ----
Raw materials........................... $ 2,132 $ 1,751
Work in process......................... 1,718 1,825
Finished goods.......................... 6,022 5,014
----- -----
$ 9,872 $ 8,590
===== =====
6
<PAGE>
4. Financing Arrangements
The Company has a long-term bank line of credit under which up to
$6,000,000 is available for borrowings and letters of credit through
February 2000. Borrowings and letters of credit are limited to an
aggregate amount equaling approximately 80% of eligible receivables and
50% of eligible finished goods inventories, and essentially all assets
except property, plant and equipment are pledged as collateral under the
agreement. At October 3, 1998 $367,000 was utilized for letters of credit
and an additional $5,633,000 was available under the line of credit.
5. Net Income per Common Share
Net Income per common share was computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Oct 3, Oct 4, Oct 3, Oct 4,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Weighted average number of
common shares outstanding ....... 2,320,000 2,319,000 2,319,000 2,306,000
Net income ................... $ 293,000 $ 159,000 $1,009,000 $ 668,000
Net income per common
share ...................... $ 0.13 $ 0.07 $ 0.44 $ 0.28
========== ========== ========== ==========
Diluted Earnings Per Share:
Weighted average number of
common shares outstanding ....... 2,320,000 2,319,000 2,319,000 2,306,000
Common share equivalents from
assumed exercise of options ..... 117,000 39,000 67,000 38,000
---------- ---------- ---------- ----------
Total shares ................. 2,437,000 2,358,000 2,386,000 2,344,000
Net income ................... $ 293,000 $ 159,000 $1,009,000 $ 668,000
Net income per common share
and common share equivalents $ 0.12 $ 0.07 $ 0.42 $ 0.28
========== ========== ========== ==========
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THIRD QUARTER
NET SALES for the quarter and nine month periods in 1998 increased 37% and
26%, respectively, compared to the like 1997 periods. The sales increase
was primarily due to the early 1998 addition of a wholesale distributor
customer and continued development of the Company's EDI capabilities with
certain distributors, which provides additional information for
forecasting purposes. Sales of the Company's new Page & Tuttle(TM) golf
line, which was introduced at the PGA Show in Orlando in January 1998,
were not significant during the quarter or first nine months of 1998.
The backlog of unfilled orders at the end of the 1998 third quarter was
approximately $2,900,000 compared to $2,500,000 at the same time last
year. The increase in order backlog was due primarily to increased orders
from distributors and other customers.
GROSS PROFIT increased from comparable 1997 period results. For the
quarter, gross margin improved from 24.2% last year to 25.7% this year,
primarily due to increased offshore sourcing which led to lower unit
costs. For the nine month period, gross margin increased from 24.2% last
year to 26.1% this year, also due to the increased offshore sourcing
during the entire period. Golf sales, while small, helped gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased 47% and 34%,
respectively, during the quarter and nine month periods of 1998 as a
result of the volume effect on certain sales related costs such as
commissions, advertising and distribution expenses. During 1998 third
quarter and nine month periods, the Company also experienced increased
costs for information systems, consulting fees and management incentives.
As a percent of sales, selling, general and administrative expenses were
21.6% and 21.3%, respectively, for the quarter and nine month periods of
1998. This compared to 20.0% and 19.9%, respectively, for the same periods
last year.
During the quarter, the Company realized NET INTEREST INCOME as a result
of excess funds invested throughout the period primarily due to effective
working capital management. The Company was in a borrowing position
throughout the third quarter of 1997.
At the beginning of 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $21,000,000, which will
begin to expire in 2005. $544,000 of the first nine months PROVISION FOR
INCOME TAXES was credited directly to shareholders' equity in accordance
with Statement of Position 90-7 (SOP 90-7), "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code", which was
implemented at the time of the Company's 1991 reorganization.
8
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
The financial condition of the Company is reflected in the following:
October 3, January 3,
(000's omitted) 1998 1998
--------------- ---- ----
Working capital........................... $ 12,904 $ 11,149
Current ratio............................. 3.2:1 3.3:1
Shareholders' equity...................... $ 13,607 $ 12,053
During the first nine months of 1998 operating activities used $170,000 of
cash, primarily due to increased receivables from higher sales levels and
increased inventory levels to support continued sales growth. These uses
of cash were partially offset by higher accounts payable due to increased
production and offshore sourcing levels as compared to the end of 1997.
The Company expects to incur additional expenses of approximately $401,000
related to the 1996 sale of trade names and trademarks, which amounts are
comprised of severance and other miscellaneous costs. The Company's
provision for income taxes included a non-cash charge of $544,000. In
accordance with SOP 90-7, as net operating loss carryforwards are
realized, the Company reports no benefit in its statement of operations,
but rather they are reported as a direct credit to shareholders' equity.
Capital expenditures were $148,000, primarily for production support
equipment, information systems equipment and software and market show
display equipment.
LOOKING FORWARD
Management continues to focus on the following priorities:
- Sales growth
- Improved profitability
- Re-entry into the golf apparel market using the new Page &
Tuttle(TM) line
Management expects sales growth for the balance of 1998 will generally be
comparable to that experienced in the first nine months when sales
increased 26% vs. the same period last year. Growth is expected to come
from the addition of new customers, increased volume with existing
customers and re-entry into the golf market with the introduction of the
Company's new Page & Tuttle(TM) line. Net income for the last quarter of
1998 is expected to grow at a rate similar to the rate of growth in
profits in the third quarter of this year. Gross margin will continue to
benefit from lower unit costs due to increased offshore sourcing and
higher margin Page & Tuttle(TM) sales. Capital expenditures for the year
are expected to be approximately $500,000 and will primarily be for
information systems improvements, installation of manufacturing equipment
and processes designed to lower production costs and reduce production
cycle times and leasehold improvements to the Company's new office space
to be occupied in late November. Funds for capital expenditures and an
increase in inventory level to meet anticipated sales demand and improve
customer order fulfillment are expected to come from operations and the
Company's bank line of credit and management believes alternative sources
of capital are
9
<PAGE>
available if additional resources are required. In addition, management
expects to continue to pursue opportunities through development of
additional brands and products as well as acquisitions.
YEAR 2000
The Year 2000 issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Computer systems
based on a two-digit format will be unable to interpret dates beyond the
year 1999 which could cause a system failure or other computer errors,
leading to disruption in operations.
Readiness:
The Company has a Year 2000 Project Team, whose objective is to determine
and assess the risks of the Year 2000 issue and plan actions to minimize
those risks. A project team leader reports directly to a corporate
officer, who is a member of the Company's Management Information Systems
Steering Committee, which is responsible for the overall direction and
development of the Company's information systems strategy. The Project
Team is comprised of a key member from each of the Company's
organizational departments.
The Project Team is identifying, inventorying and cataloging information
technology (IT) systems and non-IT systems, equipment and processes used
by the Company and then researching each one to determine the
vulnerability to date-sensitive transactions. This process is expected to
be complete in early 1999. In addition, the Project Team is assessing the
risk on the Company of any Year 2000 non-compliance by any key customer,
which could adversely effect the Company's future revenues, or supplier of
goods and services, which could adversely effect the Company's future
availability of product for sale. This assessment includes questionnaires
sent to and other communications with each of the key customers and
suppliers and is also expected to be complete in early 1999.
The Company uses primarily licensed software products in its operations
with a significant portion of processes and transactions centralized in
one particular software package. Internally developed systems are limited
primarily to management reporting systems and electronic data interface
with a few key customers and its sales representative organization. In
early 1998 the Company began a project to upgrade to the most current
version of the core software package which, among other things, is Year
2000 compliant. Installation of the software in a test environment and
education and training started in the third quarter of 1998. Management
estimates the upgraded version of the software will be operational during
the second quarter of 1999, which is when the Company will encounter Year
2000 dates in its forecasting and inventory planning activities. In
addition, the Company will be upgrading other licensed software products
which interface with this central software package and primarily include
shop floor control management, warehouse and distribution operations and
demand forecasting.
During the next several months, the Company is focusing the activities of
its information systems department on the Year 2000 issue, maintaining
existing systems and limiting
10
<PAGE>
any other systems development. Significant additional outside resources
are being coordinated through the Company's core business systems software
vendor, who also has an assigned project team to assist the Company in the
systems upgrade.
Costs:
Incremental costs are expected to be comprised primarily of outside
consulting, programming and training costs in addition to the purchase
costs of software upgrades and the installation of new hardware. The full
cost of Year 2000 compliance has not been fully determined at this time.
Based on current assessment, management does not expect any material
adverse impact on the Company's financial condition or results of
operations as a result of costs associated with Year 2000 compliance, and
will follow established Company policy in accounting for such costs as
capital or expense.
Risks:
The Company is exercising its best efforts to identify and remedy any
potential Year 2000 exposures within its control. It is directing
significant resources in manpower, services, and equipment to upgrade its
internal systems and to identify any potential Year 2000 problems with key
suppliers and customers. However, the Company relies heavily on
telecommunications and other essential utilities which, to a significant
extent, are beyond the immediate control of the Company. Risks range from
slight delays and inefficiencies in data processing and business
interruptions at small customers and suppliers to, in a worst case
scenario, extensive and costly inability to process data, and business
interruptions at certain key customers and suppliers, which could result
in lost sales and limited product availability, respectively.
Primary risks to the Company are in the following areas:
* Completion of the upgraded core business software prior to the end
of the second quarter of 1999, which is essential for the Company to
process data efficiently.
* Year 2000 non-compliance by certain key customers, which could
adversely effect the Company's revenues in the year 2000.
* Year 2000 non-compliance by certain key suppliers, which could
adversely effect the Company's availability of inventory for sale in
the year 2000.
* Readiness of public utilities which supply essential services such
as telecommunications, electricity and gas.
Contingency Plans:
Contingency plans to protect the Company from Year 2000-related
interruptions are not final and will, to a large extent, depend on the
findings of the Year 2000 Project Team's identification, cataloging and
research activities and timely completion of the core business systems
upgrade. Contingency plans will likely include, but not be limited to,
identification of manual systems required for less critical computerized
systems and identification of alternate suppliers and additional
customers, where appropriate.
While the Company anticipates achieving Year 2000 compliance in a timely
manner, there can be no assurance that all processes will be efficient,
that no revenues will be lost,
11
<PAGE>
or that no sources of supply will be interrupted. However, the Company
believes that its planning and action efforts to date will help to
minimize any disruption.
CAUTIONARY STATEMENT
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, and in future filings by
the Company with the Securities and Exchange Commission, in the Company's
press releases and in oral statements made with the approval of an
authorized executive officer which are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995 and are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of
the date made. The following important factors, among others, in some
cases have affected and in the future could affect the Company's actual
results and could cause the Company's actual financial performance to
differ materially from that expressed in any forward-looking statement:
(i) competitive conditions that currently exist, including the entry into
the market by a number of competitors with significantly greater financial
resources than the Company, are expected to continue, placing pressure on
pricing which could adversely impact sales and gross margins; (ii)
continued implementation of the North America Free Trade Agreement (NAFTA)
is expected to put competitive cost pressure on apparel wholesalers with
domestic production facilities such as the Company; (iii) the inability to
carry out marketing and sales plans would have a materially adverse impact
on the Company's projections; (iv) the Company is dependent on its license
for the Munsingwear(R) name for the sale of Munsingwear(R) labeled
products in the special markets business, (v) as a licensee, the Company
is dependent on the licensor to prosecute trademark infringements, and
(vi) the possible events described above under Year 2000 as Risks could,
if they materialize, adversely impact financial performance. The foregoing
list should not be construed as exhaustive, and the Company disclaims any
obligation subsequently to revise any forward-looking statements to
reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
12
<PAGE>
PREMIUMWEAR, INC.
PART II: OTHER INFORMATION
Item 5: Other Information
None.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule
(b) No reports on Form 8-K were filed during the period.
* * * * *
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PremiumWear, Inc.
----------------------------------
(Registrant)
Date: November 10, 1998 /s/ Thomas D. Gleason
----------------- ----------------------------------
Thomas D. Gleason
Chairman & CEO
/s/ James S. Bury
----------------------------------
James S. Bury
Vice President of Finance
(Principal Accounting Officer)
14
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27
PREMIUMWEAR, INC.
FINANCIAL DATA SCHEDULE
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> OCT-03-1998
<CASH> 2,553
<SECURITIES> 0
<RECEIVABLES> 6,026
<ALLOWANCES> 566
<INVENTORY> 9,872
<CURRENT-ASSETS> 18,883
<PP&E> 5,072
<DEPRECIATION> 3,660
<TOTAL-ASSETS> 20,295
<CURRENT-LIABILITIES> 5,979
<BONDS> 0
<COMMON> 23
0
0
<OTHER-SE> 13,584
<TOTAL-LIABILITY-AND-EQUITY> 20,295
<SALES> 10,719
<TOTAL-REVENUES> 10,719
<CGS> 7,618
<TOTAL-COSTS> 7,963
<OTHER-EXPENSES> 2,312
<LOSS-PROVISION> 83
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 497
<INCOME-TAX> 204
<INCOME-CONTINUING> 293
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 293
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.12
</TABLE>
