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 April 3, 1999
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.)
5500 FELTL ROAD, MINNETONKA, MINNESOTA 55343-7902
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER: 1-800-248-0158 OR (612) 979-1700
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 May 3, 1999 was
2,591,422.
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
April 3, 1999 and January 2, 1999............................... 3
Condensed Consolidated Statements of Operations
for the Three Months ended April 3, 1999
and April 4, 1998............................................... 4
Condensed Consolidated Statements of Cash Flows
for the Three Months ended April 3, 1999
and April 4, 1998............................................... 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 2. Change in Securities and Use of Proceeds........................ 13
Item 6. Exhibits and Reports on Form 8-K................................ 13
Exhibit 27 - Financial Data Schedule............................ 15
2
<PAGE>
PREMIUMWEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts unaudited and in thousands, except share data)
<TABLE>
<CAPTION>
April 3, January 2,
1999 1999
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................... $ 256 $ 3,215
Accounts receivable, less allowances of $766 and $728 ........ 5,948 6,026
Inventories .................................................. 11,728 9,037
Deferred taxes ............................................... 944 944
Prepaid expenses and other ................................... 677 624
----------- -----------
Total current assets ................................... 19,553 19,846
----------- -----------
Property, plant and equipment, less accumulated
depreciation and amortization of $4,455 and $4,335 ........... 1,369 1,118
Deferred taxes .................................................. 1,556 1,556
Goodwill ........................................................ 2,376 --
----------- -----------
$ 24,854 $ 22,520
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit borrowings .................................... $ 665 $ --
Accounts payable ............................................. 3,530 3,061
Accrued payroll and employee benefits ........................ 1,085 1,552
Other accruals ............................................... 419 409
----------- -----------
Total current liabilities .............................. 5,699 5,022
----------- -----------
Postretirement benefits ......................................... 695 695
----------- -----------
Shareholders' equity:
Common stock, $.01 par value:
2,581,422 and 2,319,530 shares issued and outstanding .. 26 23
Additional paid-in capital ................................... 15,854 14,490
Retained earnings ............................................ 2,580 2,290
----------- -----------
Total shareholders' equity ............................. 18,460 16,803
----------- -----------
$ 24,854 $ 22,520
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
PREMIUMWEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts unaudited and in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended
April 3, 1999 April 4, 1998
------------- -------------
<S> <C> <C>
Net sales ..................................................... $ 9,047 $ 9,350
Cost of goods sold ............................................ 6,276 6,929
------------ ------------
GROSS MARGIN .................................................. 2,771 2,421
Selling, general and administrative ........................... 2,315 2,002
------------ ------------
OPERATING INCOME .............................................. 456 419
Net interest income ........................................... 39 17
Other ......................................................... (3) 1
------------ ------------
Income before taxes ........................................... 492 437
Provision for income taxes .................................... 202 181
------------ ------------
NET INCOME ................................................. $ 290 $ 256
============ ============
NET INCOME PER COMMON SHARE:
BASIC ................................................ $ 0.12 $ 0.11
============ ============
DILUTED .............................................. $ 0.12 $ 0.11
============ ============
Weighted average number of shares of common stock outstanding:
Basic ................................................ 2,366 2,319
Diluted, including common stock equivalents .......... 2,453 2,366
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
PREMIUMWEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts unaudited and in thousands)
<TABLE>
<CAPTION>
Three Months Ended
April 3, 1999 April 4, 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................................. $ 290 $ 256
Reconciling items:
Depreciation and amortization .................................... 122 121
Provision for losses on accounts receivable ...................... 22 27
Utilization of net operating loss carryforwards .................. 158 140
Changes in operating assets and liabilities, net of effects
of acquisition:
Receivables ................................................ 446 (2,449)
Inventories ................................................ (2,616) (101)
Prepaid expenses and other ................................. 32 (89)
Accounts payable ........................................... 170 1,438
Other current liabilities .................................. (527) (57)
------------ ------------
Net cash used in operating activities ............................ (1,903) (714)
------------ ------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment .............................. (187) (76)
Purchase of Klouda-Lenz, net of cash acquired .......................... (1,474) --
------------ ------------
Net cash used in investing activities ............................ (1,661) (76)
------------ ------------
FINANCING ACTIVITIES:
Net change in line of credit borrowings ................................ 605 --
Proceeds from exercise of stock options ................................ -- 1
------------ ------------
Net cash provided by financing activities ........................ 605 1
------------ ------------
Decrease in cash and cash equivalents ............................ (2,959) (789)
Cash and cash equivalents at beginning of period ....................... 3,215 2,870
------------ ------------
Cash and cash equivalents at end of period ............................. $ 256 $ 2,081
============ ============
Non-cash transaction:
Issuance of 241,892 shares of common stock in Klouda-Lenz
acquisition .......................................................... $ 1,209 $ --
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
PREMIUMWEAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 3, 1999
1. Basis of Financial Statement Presentation
The condensed consolidated financial statements for the three months
ended April 3, 1999 of PremiumWear, Inc. (the Company), formerly known
as Munsingwear, Inc., 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.
Results of operations for the three months ended April 3, 1999 are not
necessarily indicative of results for the full year.
These financial statements should be read in conjunction with the
Company's most recent audited financial statements included in its 1998
Annual Report to Shareholders and its 1998 Form 10-K.
2. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of:
April 3, January 2,
(In thousands) 1999 1999
- -------------- ---- ----
Raw materials ........................... $ 1,277 $ 632
Work in process ......................... 1,842 1,432
Finished goods .......................... 8,609 6,973
---------- ----------
$ 11,728 $ 9,037
========== ==========
3. Financing Arrangements
The Company has a bank line of credit under which up to $6,000,000 is
available for borrowings and letters of credit through February 2000.
Borrowings and letters of credit are limited to an aggregate amount
equaling approximately 80% of eligible receivables and 50% of eligible
finished goods inventories, and essentially all assets except property,
plant and equipment are pledged as collateral under the agreement. At
April 3, 1999, $4,357,000 was available under the line of credit.
Amounts utilized for borrowings and letters of credit were $605,000 and
$1,038,000 respectively.
6
<PAGE>
4. Net Income per Common Share
Net income per common share was computed as follows:
<TABLE>
<CAPTION>
Three Months Ended
April 3, 1999 April 4, 1998
------------- -------------
<S> <C> <C>
Basic Earnings Per Share:
Weighted average number of common shares
outstanding ........................................... 2,366,000 2,319,000
Net income ...................................... $ 290,000 $ 256,000
Net income per common share ..................... $ 0.12 $ 0.11
============ ============
Diluted Earnings Per Share:
Weighted average number of common shares
outstanding ........................................... 2,366,000 2,319,000
Common share equivalents from assumed exercise
of options ............................................ 87,000 47,000
------------ ------------
Total shares .................................... 2,453,000 2,366,000
Net income ...................................... $ 290,000 $ 256,000
Net income per common share and common
share equivalents ............................ $ 0.12 $ 0.11
============ ============
</TABLE>
5. Acquisition of Klouda-Lenz, Inc.
On March 25, 1999, the Company acquired Klouda-Lenz, Inc., its
independent sales representative agency for the advertising
specialty/promotional products market (ASI/PPAI). Klouda-Lenz, Inc.
merged into a wholly-owned acquisition subsidiary of the Company. The
purchase price consisted of $1,510,634 in cash and 241,892 newly issued
shares of common stock, which are subject to a two-year holding
restriction. Klouda-Lenz' 1998 revenues totaled approximately $4.4
million, about 44% of which represented commissions from the Company.
Goodwill totaling $2,379,000 from this transaction is being amortized
over 15 years. Results for Klouda-Lenz, Inc. from the date of
acquisition are included in the Company's consolidated results for the
first quarter of 1999 and were not significant. The Company accounted
for the acquisition as a purchase for accounting purposes.
6. Event Subsequent to April 3, 1999
On April 26, 1999, management announced the closing of its North
Carolina manufacturing and distribution facility. The Company expects
to record exit costs of $1,300,000 before income taxes, or
approximately $.30 per share, during the 1999 second quarter. Startup
expenses totaling $400,000 before income taxes are projected at the new
distribution center location during the last six months of 1999.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - FIRST QUARTER
NET SALES declined 3.2% vs. the first quarter of 1998 primarily due to
unseasonably high shipments to several key uniform customers during
last year's first quarter.
Order backlog totaled $3,000,000 vs. $3,800,000 at the same time last
year. The reduction was due to distributors now placing orders closer
to the time of need in order to reduce their inventory levels.
GROSS MARGIN in the quarter was 30.6% vs. 25.9% in the first quarter
last year. The improvement was due to lower unit costs as a result of
increased offshore sourcing and increased sales of higher margin Page &
Tuttle(R) brand goods to golf pro shop and ASI/PPAI customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE in the quarter increased to
25.6% of sales from 21.4% in the first quarter of last year. The
increase was due to additional staffing in customer service in order to
improve response time to customer orders and to startup expenses
related to the Page & Tuttle(R) golf line. In addition, management has
increased advertising expenditures.
NET INTEREST INCOME during the quarter was $39,000 compared to $17,000
in the first quarter of last year, the result of increased invested
funds during the period due to 1998 profitability and inventory
management practices.
At the beginning of 1999, the Company had net operating loss
carryforwards for federal income tax purposes of approximately
$19,000,000, which will begin to expire in 2005. Due to the adoption of
"Fresh Start Reporting" in 1991, the Company recognized no benefit from
operating loss carryforwards in its PROVISION FOR INCOME TAXES but
rather reflected such benefit as a direct credit to shareholders'
equity, which amount totaled $158,000 in the first quarter of 1999.
8
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
The financial condition of the Company is reflected in the following:
April 3, January 2,
(In thousands) 1999 1999
- -------------- ---- ----
Working capital................................... $ 13,854 $ 14,824
Current ratio..................................... 3.4:1 4.0:1
Shareholders' equity.............................. $ 18,460 $ 16,803
As reported in the Condensed Consolidated Statements of Cash Flows,
operating activities during the first three months of 1999 consumed
$1,903,000 of cash, primarily the result of a $2,616,000 increase in
inventories as a result of lower than planned first quarter sales and
in response to management's expectations of 1999 second quarter sales
volume. In late March 1999, the Company spent $1,474,000, net of
$37,000 cash acquired, to purchase Klouda-Lenz, Inc., its former
outside sales representative firm. (See Note 5 of notes to unaudited
financial statements).
LOOKING FORWARD
On April 26, 1999, management announced the closing of its North
Carolina manufacturing and distribution facility. Manufacturing will be
outsourced, primarily to offshore vendors, which comprised 65% of 1998
production and over 80% of 1999 first quarter production. As this ratio
continues to increase towards offshore sourcing, the Company expects to
experience higher gross margins as a result of lower unit costs.
However, not all cost reduction will benefit the Company's gross
margin, since some of the lower unit costs are being passed on to
customers through lower prices, the result of increased competition and
deflationary price practices that are prevalent in the ASI/PPAI market
place. The Company expects to complete its manufacturing transition by
the end of the 1999 third quarter, while distribution center activities
will not be completely transferred to a new leased facility until late
in the fourth quarter of 1999. The Company expects to record exit costs
of $1,300,000 before income taxes, or approximately $0.30 per share,
during the 1999 second quarter. Exit costs are primarily severance
benefits associated with the termination of approximately 180
employees. Additional expenses totaling $400,000 before income taxes
are projected at the new distribution center location during the last
six months of 1999. These costs will relate primarily to training at
the new location. Management estimates annual savings of $1,300,000 due
to the move of the manufacturing and distribution facility, primarily
the result of lower offshore costs vs. U.S. production.
Management is focusing on the following priorities:
- Improved customer service
- Sales growth
- Improved profitability
- Orderly shutdown of its North Carolina facility,
transition to additional offshore sourcing and
start-up of a new distribution center
9
<PAGE>
- Upgrade of management information systems
Management expects 1999 sales growth to slow vs. the rate of growth
experienced the past few years. Sales growth is expected to be in the
10% range and will come primarily from new golf market customers, the
introduction of its Page & Tuttle(R) brand to the ASI market and
additional sales to distributors. These increases are tempered by the
current conditions in the ASI/PPAI market place, where high inventory
levels and declining rates of sale are being experienced. As a result
of the costs associated with the exit from the North Carolina facility,
management expects the net income growth rate to approximate the sales
growth rate for 1999.
In addition to costs related to the shutdown of its North Carolina
facility, the Company will spend approximately $2,000,000 on capital
equipment and systems in 1999, primarily relating to outfitting the new
distribution center, replacing embroidery equipment and upgrading
management information systems. Funds for capital expenditures and the
plant closing will come from operations and the Company's bank line of
credit. In addition, management expects to pursue opportunities through
development of additional brands and products as well as through
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. The 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 identified, inventoried and cataloged information
technology (IT) systems and non-IT systems, equipment and processes
used by the Company and then researched each one to determine the
vulnerability to date-sensitive transactions. This process is
essentially completed. In addition, the Project Team assessed the risk
on the Company of any Year 2000 non-compliance by any key customer,
which could adversely affect the Company's future revenues, or supplier
of goods and services, which could adversely affect the Company's
future availability of product for sale. This assessment included
questionnaires sent to and other communications with each of the key
customers and suppliers. The Project Team is currently following up on
any non-responses to the questionnaires.
The Company uses primarily licensed software products in its operations
with a significant portion of processes and transactions centralized in
one particular software
10
<PAGE>
package. Internally developed systems are limited primarily to
management reporting systems and electronic data interface with a few
key customers and its sales representative organization. In early 1998
the Company began a project to upgrade to the most current version of
the core software package which, among other things, is Year 2000
compliant. Installation of the software in a test environment and
education and training started in the third quarter of 1998. Management
estimates the upgraded version of the software will be operational
during the second quarter of 1999, which is when the Company will begin
to encounter Year 2000 dates in its forecasting and inventory planning
activities. In addition, the Company will be upgrading other licensed
software products which interface with this central software package,
including warehouse and distribution operations and demand forecasting.
During the next several months, the Company is focusing the activities
of its information systems department on the Year 2000 issue,
maintaining existing systems and limiting any other systems
development. Significant additional outside resources are being
coordinated through the Company's core business systems software
vendor, who also has an assigned project team to assist the Company in
the systems upgrade.
Costs:
Approximately $400,000 of incremental costs are anticipated and will be
comprised primarily of outside consulting, programming and training
costs in addition to the purchase costs of software upgrades and the
installation of new hardware. Through 1999 first quarter, approximately
one-third of the anticipated costs had been incurred. Based on current
assessment, management does not expect any material adverse impact on
the Company's financial condition or results of operations as a result
of costs associated with Year 2000 compliance, and will follow
established Company policy in accounting for such costs as capital or
expense.
Risks:
The Company is exercising its best efforts to identify and remedy any
potential Year 2000 exposures within its control. It is directing
significant resources in manpower, services, and equipment to upgrade
its internal systems and to identify any potential Year 2000 problems
with key suppliers and customers. However, the Company relies heavily
on telecommunications and other essential utilities which, to a
significant extent, are beyond the immediate control of the Company.
Risks range from slight delays and inefficiencies in data processing
and business interruptions at small customers and suppliers to, in a
worst case scenario, extensive and costly inability to process data,
and business interruptions at certain key customers and suppliers,
which could result in lost sales and limited product availability,
respectively.
Primary risks to the Company are in the following areas:
* Implementation of the upgraded core business software prior to
the end of the second quarter of 1999, which is essential for
the Company to process data efficiently.
* Year 2000 non-compliance by certain key customers, which could
adversely affect the Company's revenues in the year 2000.
* Year 2000 non-compliance by certain key suppliers, which could
adversely affect the Company's availability of inventory for
sale in the year 2000.
11
<PAGE>
* Readiness of public utilities which supply essential services
such as telecommunications, electricity and gas.
Contingency Plans:
Contingency plans to protect the Company from Year 2000-related
interruptions are not final and will, to a large extent, depend on the
findings of the Year 2000 Project Team's identification, cataloging and
research activities and timely completion of the core business systems
upgrade. Contingency plans will likely include, but not be limited to,
identification of manual systems required for less critical
computerized systems and identification of alternate suppliers and
additional customers, where appropriate.
While the Company anticipates achieving Year 2000 compliance in a
timely manner, there can be no assurance that all processes will be
efficient, that no revenues will be lost, or that no sources of supply
will be interrupted. However, the Company believes that its planning
and action efforts to date will help to minimize any disruption.
CAUTIONARY STATEMENT
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, elsewhere in Form 10-Q
of which this is a part, 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) the inability to complete the closing of the Company's
North Carolina manufacturing and distribution center facilities on
schedule and successfully complete the transition to additional
offshore sourcing and a new distribution center facility could
adversely impact the Company's sales; (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 the licensee of the
Munsingwear(R) brand and maintaining a harmonious working relationship
with the licensor is important for continued successful development of
the special markets business; (v) as a licensee, the Company is
dependent on the licensor to adequately promote the brand and defend it
from trademark infringement; and (vi) the possible events described
above under Year 2000 as Risks could, if they materialize, adversely
impact financial performance.
12
<PAGE>
PREMIUMWEAR, INC.
PART II: OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds
On March 25, 1999, the Company issued an aggregate of 241,892 shares of
its common stock to acquire Klouda-Lenz, Inc. (See Note 5 to unaudited
financial statements in Part I hereof). The shares were issued to the
two shareholders of Klouda-Lenz, Inc. in reliance of exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
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: May 14, 1999 /s/Thomas D. Gleason
---------------- ---------------------------------------
Thomas D. Gleason
Chairman & CEO
/s/James S. Bury
---------------------------------------
James S. Bury
Vice President of Finance
Principal Accounting Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> APR-03-1999
<CASH> 256
<SECURITIES> 0
<RECEIVABLES> 5,948
<ALLOWANCES> 766
<INVENTORY> 11,728
<CURRENT-ASSETS> 19,553
<PP&E> 5,824
<DEPRECIATION> 4,455
<TOTAL-ASSETS> 24,854
<CURRENT-LIABILITIES> 5,699
<BONDS> 0
<COMMON> 26
0
0
<OTHER-SE> 18,434
<TOTAL-LIABILITY-AND-EQUITY> 24,854
<SALES> 9,047
<TOTAL-REVENUES> 9,047
<CGS> 6,203
<TOTAL-COSTS> 6,276
<OTHER-EXPENSES> 2,315
<LOSS-PROVISION> 22
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 492
<INCOME-TAX> 202
<INCOME-CONTINUING> 290
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 290
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
