UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
------------------------- ------------------
Commission file number 333-18755
----------
PLUMA, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1541893
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 Fieldcrest Road 27288
Eden, North Carolina (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (336) 635-4000
Securities registered pursuant to Section 12 (b) ofthe Act:
Title of Each Class Name of Each Exchange
on Which Registered
Common Stock, No par value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during he preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes x No .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock, no par value, held by
non-affiliates of the registrant, as of March 25, 1998, was approximately
$34,592,808.
As of March 31, 1998, there were 8,109,152 shares of Common Stock, no
par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Shareholders Report for the year ended December
31, 1997 are incorporated by reference into Part II of this report.
Portions of the Proxy Statement for the Annual Meeting of Shareholders
to be held on June 2, 1998 are incorporated by reference into Parts I and III of
this report.
PART I
ITEM 1. Business
GENERAL
Pluma (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 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 small 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 consumer markets and enables Pluma to balance its production more evenly
throughout the year, thereby improving sales and profitability.
Since its inception, the Company has been an innovator of new products and
styles and has focused on delivering higher quality products. The Company was
one of the first to introduce heavyweight, fuller cut fleece products at
attractive price points and fleecewear with higher cotton content. These
products were well received by consumers, and the Company rapidly increased
sales and profitability as it expanded its business across broad market
segments. In 1990, the Company began to produce heavyweight cotton jersey
products suitable for outerwear in order to diversify its product mix, more
efficiently utilize its manufacturing base and increase sales and profitability.
Today the Company continues to be an innovator of new products and has recently
introduced a thermal-lined hooded jacket with a synthetic shell which it will
sell for the first time in 1998.
In addition, the Company believes its ability to collaborate with customers in
developing new styles provides a distinct competitive advantage. As a result of
Pluma's flexible manufacturing capabilities, customers often select the Company
as their "manufacturer of choice" for its ability to develop specialized
products that meet customers' cost, quality and delivery criteria.
<PAGE>
Consistent with its strategy of distributing its products to a diverse customer
base, in December of 1997, Pluma initiated the creation of a national
distribution network by acquiring for cash, substantially all the assets and
properties of two nationally-recognized wholesale distributorships, Stardust
Corporation ("Stardust") and Frank L. Robinson Company ("FLR"), major customers
of the Company. Stardust is located in Verona, Wisconsin, has operated since
1988 and serves approximately 6,000 customers. It will distribute the Company's
products throughout the Midwestern United States. FLR is located in Los Angeles,
California, has operated since 1936 and serves approximately 3,000 customers. It
will distribute the Company's products in the Western United States. These
distributors have the experience and capability to distribute the Company's
products to smaller customers which the Company, as a manufacturer, finds
difficult to service efficiently. The management of Stardust and FLR have joined
the Pluma management team. The Company believes that this network will benefit
the company by bringing Pluma closer to the ultimate consumer and allow the
company to sell directly to retail customers, largely inaccessible in the past
except through wholesale distributors. Pluma will continue to service other
wholesale distributors not owned by the company.
To take advantage of lower production costs and remain responsive to customers'
demands for specialized products, in 1997 Pluma became a partner with a Mexican
corporation in a joint venture located in Aguascalientes, Mexico, which began
sewing a small portion of Pluma's products. Pluma also contracted with four
independent contractors in Mexico to sew some of its goods in 1997.
Approximately 3% of the Company's goods were sewn in Mexico in 1997. The Company
is currently negotiating with another Mexican company, and expects to complete
in early 1998, the formation of a joint venture with the company which will sew
a portion of the Company's goods in the State of Chihuahua, Mexico. These two
joint ventures, as well as independent contractors, will continue to assemble
component parts of the Company's products in 1998. The Company anticipates that
it may have up to 30% of its products sewn in Mexico in 1998.
PRODUCTS
Pluma's high quality fleece and jersey activewear meet consumer preferences for
heavier weights and higher cotton content. The Company's fleece products include
a variety of styles and colors of tops and bottoms in seven and one-half, nine,
ten, and eleven ounce weights in cotton/polyester blends ranging from 50%
cotton/50% polyester to 100% cotton. Pluma also manufacturers five and one-half
and seven ounce 100% jersey tops and bottoms designed for outerwear.
The Company believes that certain design and construction features enhance the
quality and appeal of its products relative to most competitors.
(bullet) Pluma's fleece and jersey tops are fuller cut and heavier weight.
(bullet) Pluma produces higher stitch count fabrics to reduce
shrinkage, provide a better printing surface and increase
softness.
(bullet) Pluma uses air jet spun yarn for its 50% cotton/50% polyester
fleece fabric to prevent pilling.
(bullet) All of Pluma's ribbed fabrics contain Spandex(TM) to retain shape.
(bullet) Pluma uses greater detail in its sewing processes to enhance
durability and appearance.
(bullet) Pluma utilizes advanced finishing techniques, including the
application of softeners and napping (brushing), to give its
fleece fabrics more bulk and softer texture.
The sales mix of fleece and jersey products for the three years ended December
31, 1997, in sales, gross dozens sold, excluding close-outs and irregulars, and
the average sales price per dozen is as follows:
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
In thousands ------------------ --------------- ------------------
Except average Gross Avg. Gross Avg. Gross Avg.
Sales price per dozen Dozens Sales Price/ Dozens Sales Price/ Dozens Sales Price/
Sales Sold Dozen Sales Sold Dozen Sales Sold Dozen
-------- ----- ------- -------- ----- -------- ----------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fleece $80,751 879 $91.88 $ 80,423 871 $ 92.41 $ 70,634 826 $ 85.50
Jersey 51,836 841 61.67 46,803 765 61.16 29,989 480 62.43
-------- ----- -------- ----- -------- -----
Total/Average $132,587 1,720 $77.10 $127,226 1,636 $ 77.79 $100,623 1,306 $ 77.01
======== ===== ======== ===== ======== =====
</TABLE>
Historically, the Company's sales have been derived predominantly from fleece
products. However, since introducing jersey products in 1990, the Company has
increased jersey sales in order to diversify its product mix, more efficiently
utilize its manufacturing base and reduce the impact of seasonality that is
inherent in the fleece industry. Generally, jersey products sell at lower price
points and generate lower profit margins than fleece.
As of December 31, 1997 and 1996, the Company had backlog orders of
approximately 645,475 dozens, or approximately $36,939,287 million, and 320,899
dozens or approximately $22,668,135 million, respectively. Backlogs are computed
from orders on hand at the last day of each fiscal period. The Company believes
that as a result of the seasonality and the just-in-time nature of its business,
order backlogs are not a reliable indicator of future sales volume.
CUSTOMERS
Pluma targets a diverse customer base which is comprised of five primary
markets: Branded, retailers, screenprinters and embroiderers, wholesale
distributors and entertainment. As a result of Pluma's ability to customize
products according to its customer's needs, it is focusing on increasing sales
to its branded and retail customers, which produce higher gross margins.
For the years ended December 31, 1997, 1996, and 1995, Pluma's top ten customers
accounted for 80.2%, 75.5% and 75.6%, respectively, of the Company's net sales
and 47.18%, 65.4% and 78.2%, respectively, of its accounts receivable. For the
year ended December 31, 1997, the Company's top three customers, Sam's Club,
adidas and FLR, accounted for 31.1%, 12.0% and 8.7%, respectively, of the
Company's net sales. For the year ended December 31, 1996, the Company's top
three customers, Sam's Club, adidas and FLR, accounted for 24.1%, 14.7% and
7.2%, respectively, of the Company's net sales. For the year ended December 31,
1995, the Company's top three customers, Sam's Club, FLR and Starter
accounted for 16.1%, 12.8% and 11.4%, respectively, of the Company's net sales.
Pluma provides products to its customers pursuant to purchase orders on an
as-needed basis.
BRANDED
Branded accounts consist of customers such as adidas and Starter. These accounts
require the manufacturer to meet exact specifications, such as styling, color,
screenprinting and embroidery. Products are labeled, packaged and shipped ready
for sale to consumers. The Company's ability to accommodate the specialized
nature of products manufactured for these customers often results in higher
margins. Branded accounts constituted approximately 23.0% of the Company's net
sales for the year ended December 31, 1997, 20.6% of the Company's net sales for
1996 and 20.6% for 1995.
RETAILERS
Retail customers include specialty, high-end and value-oriented retailers. The
Company's largest retail customer in 1997 was Sam's Club, which markets and
sells PLUMA[R] labeled products. Pluma's other retail customers include Miller's
Outpost, which sells its own private label products manufactured by Pluma or
products with Pluma's "SANTEE(R)" label. The Company believes that this market
segment holds significant opportunity for growth as other value-oriented retail
formats continue to grow in popularity. Retail customers constituted
approximately
2
<PAGE>
40.88% of the Company's net sales for the year ended December 31, 1997 and 33.7%
and 27.% for the same periods in 1996 and 1995, respectively. As a result of the
growth of the Company's business with Sam's Club, coupled with increased
consumer recognition of the "PLUMA"(R) brand name, the Company has granted a
license to Kayser Roth Corporation ("Kayser Roth") that allows it to manufacture
and distribute socks to Sam's Club under the "PLUMA"(R) brand name.
SCREENPRINTERS AND EMBROIDERERS
Screenprinters and embroiderers include Endless Design and Embroidery Services
among others. These customers typically purchase basic products to which they
add design and logos; they then resell these products to a wide variety of
retailers, ranging from small souvenir and resort stores to large, nationwide
department stores. Certain screenprinters and embroiderers resell under Pluma's
"SANTEE(R)" label. Screenprinters and embroiderers constituted approximately
11.3% of the Company's net sales for the year ended December 31, 1997 and 19.7%
and 26.7% for the same periods in 1996 and 1995, respectively.
WHOLESALE DISTRIBUTORS
Wholesale distributors have included FLR, Alpha and Stardust. These customers
generally purchase goods in large volume for further distribution to small
customers, which are typically more difficult for the Company to service. All
products sold to these customers contain Pluma's "SANTEE(R)" label, which is
becoming more recognizable by consumers. Wholesale distributors constituted
approximately 16.7% of the Company's net sales for the year ended December 31,
1997 and 17.5% and 22.8% for the same periods in 1996 and 1995, respectively.
The Company purchased Stardust and FLR in December 1997 and will continue to
operate these distributorships.
ENTERTAINMENT
Entertainment accounts consist of customers such as Busch Gardens, Hard Rock
Cafe and Walt Disney. This market segment demands a basic product on which
designs are printed or embroidered for souvenir sales. Demand for goods sold to
this market segment is relatively consistent throughout the year. Entertainment
accounts constituted approximately 8.1% of the Company's net sales for the year
ending December 31, 1997 and 8.4% and 12.9% for the same periods in 1996 and
1995 respectively.
MANUFACTURING
Pluma is a vertically integrated manufacturer. The Company's manufacturing
process consists of knitting, dyeing, finishing, cutting and sewing. Using
proprietary equipment and advanced manufacturing processes, Pluma has the
flexibility to shift its knitting, dyeing and sewing operations between various
fabric weights, blends and styles, as well as between fleece and jersey with
minimal downtime. These capabilities allow Pluma to service effectively and
efficiently its diverse customer base.
Pluma currently manufactures most of its products domestically at sites within
close proximity to each other and uses technologically advanced equipment and
sophisticated production scheduling systems. The Company recently chose to move
some of its production to Mexico to meet customer demands for value. The Company
believes that adding production from Mexico will improve the Company's ability
to service more of its customers' needs while maintaining their just-in-time
delivery requirements and minimizing transportation costs.
Pluma's vertically integrated manufacturing process includes the following:
KNITTING
The Company operates modern, high-speed circular knitting machines that produce
various types of fabric in its manufacturing facilities in Eden, North Carolina.
The circular knitting process eliminates the need for side- seaming, reduces
waste and consequently, lowers production costs. The Company also continues to
purchase new
3
<PAGE>
knitting equipment and components that should increase efficiency in its
knitting operations. Proprietary knitting processes enable the Company to change
its production with minimal downtime for setup. The Company can shift its
knitting processes between various fabric blends, weights and styles, as well as
between fleece and jersey fabrics, without significant loss of utilization.
Pluma uses Spandex(TM) in all of its ribbed fabrics to retain shape and produces
high stitch count fabrics, which results in lower shrinkage, a better printing
surface and a softer feel.
DYEING
The Company believes that its computer-controlled, pressurized dyeing operations
in Eden, North Carolina, are state-of-the-art. Computerized controls reduce
processing time and improve control of dyeing cycles, temperatures, water
pressure and chemical usage, thereby producing greater consistency and
minimizing waste. In addition, the Company's pressurized dyeing process
increases bulking, which reduces shrinkage and color bleeding of its fabrics.
FINISHING
The finishing process consists of extracting, drying, napping (brushing) and
compacting the fabric. The extraction process involves the addition of fabric
softeners to ensure that the fabric retains its softness during the drying
process. Fleece fabrics are then napped to produce a soft and heavy feel. Also,
fabrics are compacted to minimize shrinkage and increase stability. The Company
is currently adding new finishing processes to accommodate newly developed
fabrics.
CUTTING
Pluma's cutting operation in Eden, North Carolina, uses Bierrebi automatic
continuous-cutting machines with computer-controlled hydraulic die-cutting
heads. The Company also uses a Gerber cutting system which interfaces with its
computerized pattern design process. The Company utilizes these machines to
improve consistency and efficiency and generate less waste. Manual cutting is
used to provide flexibility to process low-volume orders.
SEWING
The Company's sewing facilities are located in Eden, North Carolina, and in
Martinsville, Rocky Mount, Chatham, Vesta and Altavista, Virginia. Pluma's
sewing operations begin with the preassembly of component parts utilizing
computerized sewing equipment. Preassembled parts are then sewn using the
Company's proprietary tandem sewing process or conventional sewing. Management
believes that its tandem sewing process is unique and gives the Company a
competitive advantage in sewing operations by enhancing product quality and
manufacturing flexibility.
Pluma's proprietary tandem sewing process utilizes the Company's patented tandem
sewing table. This proprietary equipment allows operations to move rapidly
between sewing steps to reduce further assembly time. The table is easily
adjustable to accommodate different operators' physical characteristics,
minimizing downtime between shifts and thereby facilitating multi-shift
operations.
The Company engages independent sewing contractors for low volume, special style
products that require specific equipment. These independent contractors also
assist the Company during peak manufacturing periods by providing additional
capacity. Approximately 15.0%, 16.0% and 14.9% of the Company's products were
sewn by independent contractors in 1997, 1996 and 1995, respectively. As stated
above, in 1997, approximately 3% of the Company's products were sewn in Mexico
by independent contractors and a joint venture of which the Company is a
partner. The Company anticipates that up to 30% of its products may be sewn in
Mexico in 1998 by the above-referenced joint venture, a new joint venture and
independent contractors.
The Company hires independent embroidery and screen printing subcontractors to
print or embroider special images on products ordered by certain of its
entertainment and branded accounts. The Company believes that it is more cost
effective to out-source these services.
<PAGE>
PACKAGING AND DISTRIBUTION
Pluma operates a three-building complex in Martinsville, Virginia, which serves
as its central packaging and distribution facility. The complex contains
approximately 462,950 square feet of packing and storage space.
The packaging process includes folding, tagging, bagging, packing and bar
coding. The Company's packaging operation employs automated folding machines and
other technologically advanced equipment that package products efficiently.
Pluma uses computers, scanners, radios, conveyor systems and order pickers to
track, locate and move products within its facilities and to the loading docks
for shipment. One conveyor system links two facilities, thereby significantly
reducing handling time.
The Company leases a fleet of eleven tractors and eighty-seven trailers and owns
seven trailers. It leases two trucks to transport materials between plants, as
necessary. It relies upon common carriers for delivery to its customers.
SOURCES OF RAW MATERIALS
Pluma purchases yarn, dye stuffs and chemicals that are the principal raw
materials used in its products. Management believes that there is sufficient
availability of raw materials from a number of suppliers at competitive prices
to satisfy current and anticipated needs of the Company.
The Company does not spin its own yarn. Yarn spinning is a capital intensive
operation in which there is substantial domestic and foreign competition. The
Company has stable relationships with its principal yarn suppliers and often
makes advance purchases of yarn based on projected demand. The Company has
contracted to purchase substantially all of its projected yarn needs for 1998.
However, should any or all of these suppliers be unable for any reason to
fulfill their obligations under these yarn contracts, the Company believes that
such an occurrence would not have a material adverse effect on the Company's
business as yarn is available to the Company from other suppliers at comparable
prices.
Pluma maintains a five- to ten-day supply of raw material inventories,
minimizing the need for storage space. During 1997, Pluma's principal yarn
suppliers included Parkdale Mills, Inc. and Mayo Yarns, Inc. and its principal
supplies of dye and chemicals included Clariant, DyStar and Ciba Specialty
Chemicals. The Company anticipates that these suppliers, as well as others, will
continue to supply the Company with raw material as needed.
SEASONALITY
The activewear business is seasonal. Typically, demand for fleece products is
much lower during the first and second quarters each year and is partially
offset by increased demand for jersey products in these periods.
Notwithstanding the Company's efforts to diversify its products and customer
base to create a more consistent demand for its products throughout the year,
the Company produces and stores fleece finished goods inventory during the first
half of each year. This practice enables the Company to meet the heavy demand
for delivery during the second half of the year.
COMPETITION
The fleece and jersey activewear industry is highly competitive. Pluma's major
competitors are vertically integrated manufacturers such as Fruit of the Loom,
Inc., Russell Corporation, Tultex Corporation, Sara Lee Corporation and VF
Corporation. Certain of these competitors have greater financial resources and
larger manufacturing, distribution and marketing capabilities than the Company;
however, no single manufacturer dominates the industry. Among other factors, the
Company's future success will depend to a significant extent upon its ability to
remain competitive in the areas of price, quality, marketing, product
development, manufacturing capabilities, distribution and order processing,
which are the principal methods of competing within the fleece and jersey
apparel industry.
In recent years, certain fleece and jersey apparel manufacturers have
overproduced inventory as a result of excess plant and equipment capacity.
This oversupply of inventory has on occasion led to inventory dumping,
resulting in price reductions for fleece and jersey apparel. Such lower prices
have had an adverse effect upon the Company's operating results. The Company
believes that continuation of this practice would have an adverse impact on
fleece and jersey apparel manufacturers, including the Company.
In general, wholesale distributors warehouse inventory longer than other
distribution channels. Consequently, manufacturers, including the Company,
have extended to wholesale customers longer payment terms. In addition,
certain manufacturers recently began a practice of consigning products to
wholesale distributors for competitive reasons. Should wholesale distributors
of fleece and jersey apparel demand and receive longer payment terms than
currently exist, or should consignment of inventory become common within the
industry, the Company could be adversely impacted by increased inventory
costs, delays in collecting receivables and return of inventory.
5
<PAGE>
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local environmental laws
and regulations governing, among other things, the discharge, storage, handling
and disposal of a variety of hazardous and nonhazardous substances and wastes
used in or resulting from its operations and potential remediation obligations
thereunder. At the Company's textile manufacturing facility in Eden, North
Carolina, the Company disposes of dye waste through the city's municipal
wastewater treatment system under a permit issued by state regulatory
authorities.
The Company's operations also are governed by laws and regulations relating to
employee safety and health, principally OSHA and regulations thereunder, which,
among other things, establish exposure limitations for cotton dust,
formaldehyde, asbestos and noise, and regulate chemical and ergonomic hazards in
the workplace.
LABOR
The Company had approximately 2,400 employees at December 31, 1997. Management
considers labor relations to be excellent. The Company is subject to one
collective bargaining agreement affecting approximately 24 of the company's
employees employed in Los Angeles, California. This agreement will be
renegotiated in September 1998. Some of the Company's competitors located in its
geographic area are unionized, and there can be no assurance that the Company
will not become a target for union organizing activity in the future. To the
extent that unionization increases the Company's cost of operations, the Company
would be impacted adversely from both an operating and financial standpoint.
TRADEMARKS AND LICENSES
Pursuant to an Assignment from Superba, Inc. recorded December 22, 1997, Pluma
became the owner of the registered trademark SANTEE(R), Registration No.
830,629. SNOWBANK(R) and PLUMA(R) are also registered trademarks owned by
Pluma, Registration No. 2,079,657 and Registration No. 2,139,902, respectively.
PLUMA(R), SANTEE(R) and SNOWBANK(R) are all utilized in connection with
marketing certain styles of the Company's activewear.
On October 24, 1995, the Company entered into a license agreement with Kayser
Roth granting to Kayser Roth a limited exclusive license to use the name
"PLUMA"(R) in connection with the manufacture and sale of socks in the United
States and Mexico to Sam's Club (the "Kayser Roth Agreement"). The Company
receives a royalty from Kayser Roth equal to 2.0% of net sales of socks bearing
the Pluma label up to $3,000,000 of such sales and 1.5% of all net sales of
socks thereafter (in each case, less customary trade discounts, shipping
charges, returns and allowances and sales taxes). The Kayser Roth Agreement
terminates on December 31, 1998, but is renewable by Kayser Roth for successive
one-year terms thereafter. The Company maintains appropriate quality control
standards in the Kayser Roth Agreement designed to ensure that only quality
products are distributed under the PLUMA(R) name.
On July 30, 1996, U.S. Patent No. 5,540,160 was issued by the USPTO for the
Company's tandem sewing table.
ITEM 2. Properties
All of the Company's facilities are located in North Carolina, Virginia,
Wisconsin and California. All buildings are well maintained and several of its
facilities have been expanded or are currently undergoing expansion since
operations commenced in 1987 to accommodate the Company's growth. The location,
approximate size, owned or
<PAGE>
leased status, year in which operations commenced and use of the Company's
principal facilities are summarized in the following table:
<TABLE>
<CAPTION>
Use
Location Square Footage Ownership Operations --------------------
- -------- -------------- --------- Commenced
----------
<S> <C> <C> <C> <C>
Eden, NC 170,900 Owned 1987 Executive offices,
dyeing, finishing
and cutting
Eden, NC 83,900 Owned 1993 Knitting and yarn
storage
Eden, NC 20,600 Leased 1996 Outlet store
Eden, NC 18,000 Leased 1987(1) Sewing
Martinsville, VA 198,000 Leased 1996 Distribution and
warehouse
Martinsville, VA 181,600 Leased 1988 Distribution,
packaging and
warehouse
Martinsville, VA 83,200 Leased 1994 Packaging,
warehouse and
management
information systems
Martinsville, VA 43,900 Owned 1988 Sewing
Martinsville, VA 15,600 Leased 1992 Storage
Martinsville, VA 11,500 Leased 1997 Product
Development and
Outlet store
Martinsville, VA 8,300 Owned 1997 Marketing and sales
office and some
executive offices
Rocky Mount, VA 82,000 Owned 1995 Sewing
Chatham, VA 52,000 Owned 1990 Sewing
Vesta, VA 24,000 Owned 1994 Sewing
Altavista, VA 12,000 Owned 1996(2) Sewing
Altavista, VA 2,200 Leased 1997 Outlet Store
Los Angeles, CA 139,500 Leased 1997 Distributor
Verona, WI 63,000 Owned 1997 Distributor
</TABLE>
(1) The Company leased this facility from 1987 through 1993 and subsequently
executed a new lease for this facility in December 1996.
(2) The Company exercised its option to purchase this property in October 1997.
<PAGE>
ITEM 3. Legal Proceedings
The Company is not a party to nor is any of its property the subject of
any legal proceedings, the result of which it believes could have a material
adverse impact on its business, properties, or financial condition.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
EXECUTIVE OFFICERS OF THE COMPANY
"Election of Directors' on pages 5 through 6 of the Proxy Statement for
the Annual Meeting of Share Owners to be held June 2, 1998, is incorporated
herein by reference.
Additional executive officers who are not directors are as follows:
Name Age Position
---- --- --------
Forrest H. Truitt, II 43 Executive Vice President, Treasurer
and Chief Financial Officer
Milton A. Barber, IV 37 Senior Vice President of Sales and
Marketing
David S. Green 48 Senior Vice President of Human
Resouces
Walter E. Helton 58 Senior Vice President of Operations
Douglas A. Shelton 41 Senior Vice President of Manufacturing
Raymond L. Rea 56 Vice President of Manufacturing
Nancy B. Barksdale 40 Vice President and Controller
Jeffrey N. Robinson 35 Vice President of Sales and President
of Frank L. Robinson, Inc.
James E. Beale 44 Vice President of Wholesale Distribution
and President of Stardust Corporation
John R. Beale 50 Executive Vice President of Stardust
Corporation
<PAGE>
FORREST H. TRUITT, II became Vice President, Treasurer and Chief Financial
Officer in March 1996 and became an Executive Vice President in January 1997.
From February 1994 until he joined the Company, Mr. Truitt was a self-employed
financial consultant. Prior to that time, he served as the Chief Financial
Officer of Mayo Yarns from September 1993 to February 1994, and Vice President
of Finance and Secretary/Treasurer of Vintage Yarns, Inc. from 1982 until 1993.
Milton A. Barber IV became Senior Vice President of Sales and Marketing in
October 1997. Mr. Barber has been Vice President of Sales and Marketing since
January 1986. From July 1991 until December 1995, Mr. Barber served as an
Assistant Vice President of Sales & Marketing for Box & Company. Mr. Barber
was employed by Bassett-Walker, Inc. from 1987 until 1991.
DAVID S. GREEN became Senior Vice President of Human Resources in October 1997.
Mr. Green has served the company as Vice President of Human Resources since
1993. Prior to joining the Company, Mr. Green had been employed by Sara Lee for
17 years where his most recent title was Director of Employee Relations at the
Martinsville, Virginia knitwear division.
WALTER E. HELTON became Senior Vice President of Operations in October 1997. Mr.
Helton is Vice President of Operations responsible for management information
systems and distribution. Before joining the Company in January 1992, Mr. Helton
was employed by Sara Lee as Director of Information Systems.
DOUGLAS A. SHELTON is Senior Vice President of Manufacturing. Mr. Shelton joined
the company in May 1996 as Director of Cutting. He was employed previously by
Sara Lee as Plant Manager from August 1989 until May 1996.
RAYMOND L. REA is Vice President of Manufacturing responsible for all sewing
operations. Prior to his employment with the Company in 1987, Mr. Rea had been
employed by Basset-Walker, Inc. for 25 years.
<PAGE>
Nancy B. Barksdale is Vice President and Controller. From 1979 to 1983, Ms.
Barksdale was a staff accountant of Deloitte & Touche LLP. She received her CPA
certification from the Commonwealth of Virginia in 1983. From 1983 until 1987,
Ms. Barksdale was employed by Bassett-Walker, Inc. as Assistant Controller.
Since 1987, Ms. Barksdale has served as Controller for Pluma, and served as
Treasurer from August 1993 until March 1996. She was promoted to Vice President
in January 1986.
JEFFREY N. ROBINSON is Vice President of Marketing & Sales and President of
Frank L. Robinson, Inc., a division of Pluma, Inc. Prior to joining the
Company in 1997, Mr. Robinson was employed as a partner in Frank L. Robinson
Company, a wholesale distributor, since 1985.
JAMES E. BEALE is Vice President of Wholesale Distribution and President of
Stardust Corporation, a division of Pluma, Inc. Mr. Beale served as General
Manager of Stardust Corporation, wholesale distributor since 1988. Mr. Beale is
the brother of John R. Beale, an executive officer of Stardust Corporation.
JOHN R. BEALE is Executive Vice President of Stardust Corporation, a division of
Pluma, Inc. Mr. Beale was President and founder of Stardust Corporation in 1988.
He is the brother of James A. Beale, an executive Officer of the Company.
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
"Dividend and Market Information" on page 32 of the Annual Shareholders Report
for the year ended December 31, 1997 are incorporated herein by reference.
The approximate number of holders of the Company's common stock at
March 26, 1998 was 1,929, which includes record and beneficial holders.
ITEM 6. Selected Financial Data
"Selected Financial and Operating Data" on pages 10 and 11 of the Annual
Shareholders Report for the year ended December 31, 1997 is incorporated herein
by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" on page 12 of the Annual Shareholders Report for the year ended
December 31, 1997 is incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the registrant and its
subsidiaries, included in the Annual Shareholders Report for the year ended
December 31, 1997 are incorporated herein by reference:
Balance Sheets - December 31, 1997 and December 31, 1996
Statements of Operations - years ended December 31, 1997,
December 31, 1996 and December 31, 1995
Statements of Cash Flows - years ended December 31, 1997,
December 31, 1996 and December 31, 1995
Statements of Shareholders' Equity - years ended December 31,
1997, December 31, 1996 and December 31, 1995
Notes to Financial Statements - years ended December 31, 1997,
December 31, 1996 and December 31, 1995
Report of Independent Auditors
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The sections entitled "Nominees for Election Term Expiring 2001," "Incumbent
Directors Term Expiring 2000," and "Incumbent Directors Term Expiring 1999" on
pages 2 and 3 of the Proxy Statement for the Annual Meeting of Share Owners to
be held June 2, 1998, are incorporated herein by reference.
"Executive Officers of the Company" on page 10 of this report is incorporated
herein by reference.
ITEM 11. Executive Compensation
"Compensation Committee Report on Executive Compensation," "Performance Graph,"
"Executive Compensation," "Stock Options and Stock Appreciation Rights" and
"Aggregated Opinion/SAR Exercises in the Last Fiscal Year and Year End Option
Values" on pages 7 through 12 of the Proxy Statement for the Annual Meeting of
Share Owners to be held June 2, 1998, are incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
(a) Information concerning security ownership of management set forth
in the Proxy Statement for the Annual Meeting of Share Owners to be held June 2,
1998, under the caption "Ownership of Equity Securities in the Company" on page
5 is incorporated herein by reference.
(b) "Principal Share Owners" on page 7 of the Proxy Statement for the
Annual Meeting of Share Owners to be held June 2, 1998 is incorporated herein by
reference.
(c) There are no arrangements known to the registrant the
implementation on consummation of which may result in a change in control of the
registrant.
ITEM 13. Certain Relationships and Related Transactions
"Compensation Committee Interlocks and Insider Participation" and "Certain
Relationships and Related Transactions Involving Directors not on the
Compensation Committee" on pages 4 and 5 of the Proxy Statement for the Annual
Meeting of Share Owners to be held June 2, 1998 are incorporated herein by
reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List of Documents filed as part of this report:
(1) Financial Statements
All financial statements of the registrant as set forth under
Item 8 of this report on Form 10-K.
(2) Financial Statement Schedules
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Exhibit Page Number or
Number Description Incorporation by
- ------ ----------- Reference to
-----------------
<S> <C> <C>
3.1 Amended and Restated Articles of Exhibit 3.1 to Registration
Incorporation Statement No. 333-18755, filed
December 24, 1996
3.2 By-Laws Exhibit 3.2 to Registration
Statement No. 333-18755, filed
December 24, 1996
4.1 Specimen Common Stock Certificate Exhibit 4.1 to Registration
Statement No. 333-18755, filed
December 24, 1996
10.1 Lease Agreement dated June 10, 1989, Exhibit 10.1 to Registration
by and between North Bowles Statement No. 333-18755, filed
Partnership and Pluma, Inc. and December 24, 1996
amendment thereto date December 1,
1990
10.2.1 Lease Agreement dated February 1, Exhibit 10.2.1 to Registration
1996, by and between North Bowles Statement No. 333-18755, filed
Partnership and Pluma, Inc. December 24, 1996
10.2.2 Lease Agreement dated December 1, Exhibit 10.2.2 to Registration
1995, by and between North Bowles Statement No. 333-18755, filed
Partnership and Pluma, Inc. December 24, 1996
10.3 License Agreement dated December 4, Exhibit 10.3 to Registration
1990, by and between Superba, Inc. Statement No. 333-18755, filed
and Pluma, Inc. December 24, 1996
10.4 Loan and Security Agreement dated Exhibit 10.4 to Registration
May 25, 1995, between First Union Statement No. 333-18755, filed
National Bank of North Carolina and December 24, 1996
Pluma, Inc.
<PAGE>
10.5 Promissory Note in the principal Exhibit 10.5 to Registration
amount of $55,000,000 dated May 25, Statement No. 333-18755, filed
1995 by Pluma, Inc. in favor of First December 24, 1996
Union National Bank of North Carolina
10.6 Promissory Note in the principal Exhibit 10.6 to Registration
amount of $10,000,000 dated April 16, Statement No. 333-18755, filed
1996 in favor of First Union National December 24, 1996
Bank of North Carolina
10.7 Trademark License Agreement dated Exhibit 10.7 to Registration
July 2, 1996, by and between Pluma, Statement No. 333-18755, filed
Inc. and Kayser Roth Corporation December 24, 1996
10.8 Lease Agreement dated April 1, 1995, Exhibit 10.10 to Registration
by and between Tultex Corporation and Statement No. 333-18755, filed
Box & Company, Inc. December 24, 1996
10.9 Adoption Agreement #005 Exhibit 10.11 to Registration
Nonstandardized Codess.401(k) Profit Statement No. 333-18755, filed
Sharing Plan by Pluma, Inc. to First December 24, 1996
Union National Bank of North Carolina
dated November 30, 1993 and
Amendments thereto
10.10 1995 Stock Option Plan of Pluma, Inc. Exhibit 10.12 to Registration
Statement No. 333-18755, filed
December 24, 1996
10.11 Form of Incentive Stock Option Exhibit 10.13 to Registration
Agreement by and among Pluma, Inc. Statement No. 333-18755, filed
and the Named Officers December 24, 1996
10.12 Form of Nonstatutory Stock Option Exhibit 10.14 to Registration
Agreement by and among Pluma, Inc. Statement No. 333-18755, filed
and its Directors December 24, 1996
10.13 Pluma, Inc. Non-Qualified Deferred Exhibit 10.15 to Registration
Compensation Plan Statement No. 333-18755, filed
December 24, 1996
10.14 Pluma, Inc. Senior Executive Bonus Exhibit 10.16 to Registration
Plan Statement No. 333-18755, filed
December 24, 1996
10.15 Pluma, Inc. Sales Incentive Plan Exhibit 10.17 to Registration
Statement No. 333-18755, filed
December 24, 1996
10.16.1 License Agreement dated October 9, Exhibit 10.18.1 to Registration
1996 between SAP America, Inc. and Statement No. 333-18755, filed
Pluma, Inc. for license to utilize SAP December 24, 1996
R/3 Software
<PAGE>
10.16.2 Professional Services Agreement dated Exhibit 10.18.2 to Registration
October 9, 1996, between SAP Statement No. 333-18755, filed
America, Inc. and Pluma, Inc. for December 24, 1996
installation of R/3 Software
10.17.1 Consulting Agreement dated January Exhibit 10.19 to Registration
17, 1996, between Philpott Ball & Statement No. 333-18755, filed
Company and Pluma, Inc. December 24, 1996
10.17.2 Consulting Agreement dated
December 6, 1996, between Philpott Ball &
Company and Pluma, Inc.
<PAGE>
10.18 Form of Sale and Purchase Agreement Exhibit 10.20 to Registration
dated May 10, 1995, by and between Statement No. 333-18755, filed
Sara Lee Corporation and Pluma, Inc. December 24, 1996
for approximately 42 acres of improved
real estate located in Rocky Mount,
Virginia
10.19 Form of Employment Agreement by Exhibit 10.21 to Registration
and among Pluma, Inc. and R. Duke Statement No. 333-18755, filed
Ferrell, G. Walker Box, George G. December 24, 1996
Wade, C. Monroe Light, David S.
Green, Walter Helton, Raymond Rea,
Nancy Barksdale, Forrest H. Truitt, II;
Milton A. Barber and Jeffrey D. Cox
10.20 Form of Asset Purchase Agreement Exhibit 1 to Form 8-K filed
among Pluma, Inc., Stardust December 22, 1997
Corporation and John Beale and Linda
Beale dated December 22, 1997
10.21 Form of Asset Purchase Agreement Exhibit 1 to Form 8-K filed
among Pluma, Inc., Frank L. Robinson January 12, 1998
Company and the Partners of Frank L.
Robinson Company dated December
30, 1997
10.22 Form of Credit Agreement dated
December 22, 1997, by and between
Pluma, Inc., and NationsBank, N.A.
11 Statement re: Computation of Per Set forth in Company's Annual
Share Earnings Report attached hereto as
Exhibit 13
13 1997 Annual Report to Shareholders
24 Power of Attorney (included as the
signature page hereto)
</TABLE>
(b) Reports on Form 8-K.
PHILPOTT, BALL & COMPANY
INVESTMENT BANKERS
212 South Tryon Street, Suite 1050 Telephone: (704) 358-8094
Charlotte, North Carolina 28281 Facsimile: (704) 358-0021
December 6, 1996
Personal & Confidential
-----------------------
Mr. R. Duke Ferrell, Jr.
President & Chief Executive Officer
Pluma, Inc.
801 W. Fieldcrest Road
Eden, NC 27288
Dear Duke:
Philpott, Ball & Company ("PB&C") has enjoyed working with Pluma, Inc. ("Pluma"
or the "Company") during the last five years. This letter is a proposal for PB&C
to continue to act as a financial advisor for Pluma during 1997.
The following is a list of the services that we would propose to perform next
year for Pluma:
ADVICE AND ASSISTANCE ON INITIAL PUBLIC OFFERING
PB&C will advise and assist you in conducting Pluma's initial public offering.
We will assist your management team in dealing with all phases of the offering
process including:
1. Preparing "road show" presentations and assisting with scheduling,
2. Coordinating efforts with managing underwriters and negotiating with
them when necessary,
3. Dealing with directors and selling shareholders, particularly on
issues related to "who get to sell" and "how much to sell",
4. Size and pricing negotiations,
5. "Coaching" management on dealing with both institutional and retail
investors as well as the press and other parties who may take an
interest in the offering,
6. Advice on issues related to terminating the Shareholder's Agreement,
and
7. Assisting management with the "logistics" of scheduling meetings of
the underwriting group and other key meetings.
<PAGE>
PLUMA ENGAGEMENT FOR 1997
DECEMBER 6, 1996
PAGE 2
STRATEGIC PLANNING TO EXPAND AND IMPROVE PLUMA'S POSITION IN THE MARKETPLACE
PB&C proposes to conduct systematic research into potential future targets for
acquisition by Pluma. We would identidy companies, subsidiaries, divisions and
facilities which might prove to be attractive additions to Pluma's existing
business or give Pluma entries into new markets. We would perform these services
in conjunction with the Strategic Planning Committee and would assist Pluma in
making acquisitions when they arise.
EXECUTIVE COMPENSATION AND BENEFITS
PB&C will assist Pluma's Compensation Committee by providing the Company with
advice and industry data relating to base salaries, bonuses and benefits for
textile and apparel executives. We will also work with you and the Compensation
Committee on the mirror plan and on additional retirement benefits for Pluma's
executives and directors.
EMPLOYEE BENEFITS AND STOCK OWNERSHIP
We will continue to assist you in improving the employee benefits in Pluma
including ownership for employees.
VALUATIONS
If necessary, we will value the common stock of Pluma in 1997 to prepare for
shareholder exchanges if the IPO is delayed, or if valuations are needed for
other reasons.
EXCHANGES OF SHARES BETWEEN SHAREHOLDERS
If the IPO is delayed, PB&C will assist Pluma in conducting shareholder
exchanges including advising the board, assisting management and counsel in
drafting disclosure documents, polling shareholders and using our exchange model
to facilitate rapid calculation of the exchange results.
ACQUISITION INQUIRIES
We will investigate acquisition inquiries for the Company in 1996.
FINANCIAL FORECASTING MODELS
We will assist you in building a new monthly projection model.
ASSISTANCE IN RAISING CAPITAL IF IPO IS DELAYED
We will advise and assist you in raising additional debt and private equity in
1997, if necessary.
<PAGE>
PLUMA ENGAGEMENT FOR 1997
DECEMBER 6, 1996
PAGE 3
GENERAL ADVICE AND COUNSULTING FOR EXECUTIVES, THE BOARD, AND SHAREHOLDERS
We will continue to provide you with general advice related to financial,
personnel and other matters which will have an impact on shareholder value.
PROPOSED FEES TO BE PAID BY PLUMA TO PB&C IN 1997
We will perform all of the advisory services listed above for retainer fees of
$10,000 per month. In addition, Pluma will pay PB&C "success" fees associated
with long-term capital (equity or debt) raised by Pluma in 1997. The amount of
such "success" fees will be negotiated once Pluma and PB&C have decided upon the
type and amount of capital to be raised.
In addition to these fees, we would ask that you pay our out-of-pocket expenses
incurred due to the engagement. These are normally related to travel and
communications (mailings, faxes, etc.) and they should be no greater than those
you incurred in 1996. All retainer fees and reimbursable expenses will be due
and payable as of the last day of each month following the date of this
agreement. Fees for capital financing will be due at the closing of such
transactions.
In order to conduct this assignment in an expedient manner, we would ask that
you agree that Pluma will freely and promptly provide information regarding the
Company to PB&C. You and Pluma understand that PB&C will use and rely on
information furnished by or on behalf of the Company without investigation, in
providing service or advice.
During the period of this engagement, the Company agrees that PB&C will be
acting as its exclusive advisors with respect to a sale of all or any part of
the Company. If you or any other employee of Pluma are contacted by a party who
expresses interest in acquiring or investing in Pluma or any assets controlled
by Pluma, the Company agrees to immediatley notify PB&C of such contact. Pluma
further agrees to utilize PB&C in any discussion or negotiations with such
contacts. If such a contact attempts to purcahse all or any part of Pluma, Pluma
agrees that it will retain PB&C to advise it in negotiations with the contact,
and PB&C's compensation for such advise will be covered under a separate
agreement negotiated in good faith with Pluma.
Since we will be acting on your behalf in connection with this matter, it is
agreed that the Company will indemnify and hold PB&C (including any of PB&C's
officers, directors, employees, or controlling or affiliated persons) harmless
from and against any losses, damages, liabilities and claims arising out of
PB&C's role in this work. In addition, the Company will reimburse PB&C for legal
or other expnese reasonably incurred in connection with the defense of such
losses, damages, liabilities or claims. The previously described indemnification
shall not apply to the extent such losses, damages, liabilities, or claims or
determined to constitute the negligence or intentional wrongdoing by PB&C. This
indemnification will survive the payment of any fees to PB&C and the termination
of this agreement.
<PAGE>
PLUMA ENGAGEMENT FOR 1997
DECEMBER 6, 1996
PAGE 4
Duke, if these terms are satisfactory to you, please indicate your acceptance of
them by signing below and returning an executed copy to us.
Sincerely,
PHILPOTT, BALL & COMPANY
By: /s/ J. Robert Philpott, Jr.
----------------------------
J. Robert Philpott, Jr.
President
Agreed and accepted this ________ day of _____________________, 1996
PLUMA, INC.
By: /s/ R. Duke Ferrell, Jr.
----------------------------------------
R. Duke Ferrell, Jr.
President and Chief Executive Officer
<PAGE>
A report on Form 8-K was filed on December 22, 1997, regarding the acquisition
by the Company of certain assets from Stardust Corporation and John Beale and
Linda Beale.
On December 22, 1997, Pluma acquired for cash from Stardust Corporation, a
Wisconsin Corporation having its corporate headquarters in Verona, Wisconsin
(the "Seller"), substantially all the assets and properties of the Seller, real
and personal, tangible and intangible, of every kind and description, wherever
located, used by the Seller in connection with the operation of its national
wholesale distributorship for undecorated sportswear.
In addition, on December 22, 1997, the Company acquired certain real estate
located in Dane County, Wisconsin leased by the Seller and used exclusively in
connection with the Business. The lessors/owners of the acquired real estate
were John Beale and Linda Beale, who also are the sole shareholders of the
Seller. The acquired real estate includes certain real property and all
buildings, other improvements, fixtures and appurtenances thereon.
The following financial statements were filed with the Form 8-K:
(i) Financial Statements of the business acquired
(A) Financial Statements of Stardust Corporation
(1) Balance Sheets dated December 31, 1996 and 1995
(2) Statements of Operations and Retained Earnings dated
December 31, 1996 and 1995
(3) Statements of Cash Flows dated December 31, 1996 and
1995
(4) Notes to Financial Statements dated December 31, 1996
and 1995
(B) Report of Independent Certified Public Accountants
(ii) Proforma Financial Information
(A) Unaudited ProForma Combined Financial Statements
(1) Pro Forma Combined Balance Sheet Unaudited as of
September 10, 1997
(2) Pro Forma Combined Statement of Operations Unaudited
as of December 31, 1996
(3) Pro Forma Combined Statement of Operations (unaudited)
as of
8
<PAGE>
September 31, 1997
(4) Notes to ProForma Combines Financial Statements
(unaudited)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunder duly authorized.
PLUMA, INC.
By: _____________________
R. Duke Ferrell, Jr.,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
- ------------------------------------- ---------------------
R. Duke Ferrell, Jr., Chief Executive Date
Officer, President and Director
- ------------------------------------- ---------------------
Forrest H. Truitt, II Executive Date
Vice President, Treasurer and
Chief Financial Officer
- ------------------------------------- ---------------------
G. Walker Box, Chairman Date
- ------------------------------------- ---------------------
Kemp D. Box, Executive Vice President Date
and Director
- ------------------------------------- ---------------------
C. Monroe Light, Director Date
- ------------------------------------- ---------------------
William K. Mileski, Director Date
- ------------------------------------- ---------------------
R. Stephens Pannill, Director Date
- ------------------------------------- ----------------------
J. Robert Philpott, Jr., Director Date
- -------------------------------------- ---------------------
George G. Wade, Secretary and Director Date
- ------------------------------------- ---------------------
Barry A. Bowles, Director Date
<PAGE>
CREDIT AGREEMENT
Dated as of December 22, 1997
between
PLUMA, INC.
AND
NATIONSBANK, N.A.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
SECTION 1 DEFINITIONS.............................................................................................1
1.1 Definitions..........................................................................................1
1.2 Computation of Time Periods..........................................................................6
1.3 Accounting Terms.....................................................................................7
SECTION 2 CREDIT FACILITIES.......................................................................................7
2.1 Revolving Loans......................................................................................7
SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITIES..........................................................8
3.1 Default Rate.........................................................................................8
3.2 Voluntary Prepayments................................................................................8
3.3 Reductions in Commitments and Mandatory Prepayments..................................................8
3.4 Commitment Fee.......................................................................................9
3.5 Additional Costs.....................................................................................9
3.6 Payments, Computations, Etc..........................................................................9
SECTION 4 CONDITIONS.............................................................................................10
4.1 Conditions to Closing...............................................................................10
4.2 Conditions to All Extensions of Credit..............................................................12
SECTION 5 REPRESENTATIONS, WARRANTIES AND COVENANTS..............................................................12
5.1 Incorporation.......................................................................................12
5.2 Additional Representations..........................................................................13
5.3 Additional Covenants................................................................................13
SECTION 6 EVENTS OF DEFAULT......................................................................................15
6.1 Events of Default...................................................................................15
6.2 Acceleration; Remedies..............................................................................16
SECTION 7 MISCELLANEOUS..........................................................................................17
7.1 Notices.............................................................................................17
7.2 Right of Set-Off....................................................................................18
7.3 Benefit of Agreement................................................................................18
7.4 No Waiver; Remedies Cumulative......................................................................18
7.5 Payment of Expenses, etc............................................................................19
7.6 Amendments, Waivers and Consents....................................................................19
i
<PAGE>
<CAPTION>
<S> <C>
7.7 Counterparts........................................................................................19
7.8 Headings............................................................................................20
7.9 Survival............................................................................................20
7.10 Governing Law; Submission to Jurisdiction; Venue...................................................20
7.11 Severability.......................................................................................21
7.12 Entirety...........................................................................................21
7.13 Conflict...........................................................................................21
</TABLE>
SCHEDULES
Schedule 1.1(a) Properties
Schedule 2.1(b)(i) Form of Notice of Borrowing
Schedule 2.1(e) Form of Revolving Note
Schedule 5.1(e)(v) Form of Officer's Certificate
EXHIBITS
Exhibit A Prior Credit Agreement
ii
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT dated as of December 22, 1997 (the "Credit
Agreement"), is by and between PLUMA, INC., a North Carolina corporation (the
"Borrower") and NATIONSBANK, N.A., (the "Bank").
W I T N E S S E T H
WHEREAS, the Borrower has requested that the Bank provide a $100
million revolving credit facility for the purposes hereinafter set forth;
WHEREAS, the Bank has agreed to make the requested credit facility
available to the Borrower on the terms and conditions hereinafter set forth.
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
SECTION 1
DEFINITIONS
1.1 DEFINITIONS.
As used in this Credit Agreement, the following terms shall
have the meanings specified below unless the context otherwise requires, and
provided that terms used but not otherwise defined shall have the meanings
provided in the Prior Credit Agreement; provided, that any reference to the
"Lender" in the terms of the Prior Credit Agreement incorporated herein, shall
be deemed a reference to the Bank for purposes hereof:
"Acquired Assets" means, collectively, those assets acquired
pursuant to the Stardust Purchase Agreement.
"Borrower" means the Person identified as such in the heading
hereof, together with any permitted successors and assigns.
"Business Day" means a day other than a Saturday, Sunday or
other day on which commercial banks in Charlotte, North Carolina are
authorized or required by law to close, except that, when used in
connection with a Libor Loan, such day shall also be a day on which
dealings between banks are carried on in U.S. dollar deposits in
London, England and Charlotte, North Carolina.
"Capital Lease" means any lease of any property (whether real
personal or mixed) by that Person as lessee which, in accordance with
GAAP, is or should be accounted for as capital lease on the balance
sheet of the Borrower.
<PAGE>
"Closing Date" means the date hereof.
"Collateral" means all the collateral referred to in the
Security Agreement and the Mortgages.
"Commitment Fee" shall have the meaning given such term in
Section 3.5.
"Commitment Period" means the period from and including the
Closing Date to but not including the earlier of (i) the Maturity Date,
or (ii) the date on which the Revolving Commitment terminates in
accordance with the provisions of this Credit Agreement.
"Credit Documents" means a collective reference to this Credit
Agreement, the Note, the Security Agreement, the Mortgages and all
other related agreements and documents issued or delivered hereunder or
thereunder or pursuant hereto or thereto.
"Default" means any event, act or condition which with notice
or lapse of time, or both, would constitute an Event of Default.
"Dollars" and "$" means dollars in lawful currency of the
United States of America.
"EBITDA" means, for any period, with respect to the Borrower,
the sum of (a) Net Income for such period plus (b) an amount which, in
the determination of Net Income for such period has been deducted for
(i) Interest Expense for such period, (ii) total Federal, state,
foreign or other income taxes for such period and (iii) all
depreciation, amortization and other non-cash charges for such period,
all as determined in accordance with GAAP.
"Environmental Laws" means any and all lawful and applicable
Federal, state, local and foreign statutes, laws, regulations,
ordinances, rules, judgments, orders, decrees, permits, concessions,
grants, franchises, licenses, agreements or other governmental
restrictions relating to the environment or to emissions, discharges,
releases or threatened releases of pollutants, contaminants, chemicals,
or industrial, toxic or hazardous substances or wastes into the
environment including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport,
or handling of pollutants, contaminants, chemicals, or industrial,
toxic or hazardous substances or wastes.
"Event of Default" means such term as defined in Section 7.1.
"Extension of Credit" means the making of a Loan by the Bank.
"Funded Debt" means, without duplication, the sum of (a) all
Indebtedness of the Borrower for borrowed money, (b) all purchase money
Indebtedness of the Borrower, (c) the principal portion of all
obligations of the Borrower under Capital Leases, (d)
2
<PAGE>
commercial letters of credit and the maximum amount of all performance
and standby letters of credit issued or bankers' acceptance facilities
created for the account of the Borrower, including, without
duplication, all unreimbursed draws thereunder, (e) all Guaranty
Obligations of the Borrower with respect to Funded Debt of another
person, (f) all Funded Debt of another entity secured by a Lien on any
property of the Borrower whether or not such Funded Debt has been
assumed by the Borrower, (g) all Funded Debt of any partnership or
unincorporated joint venture to the extent the Borrower is legally
obligated or has a reasonable expectation of being liable with respect
thereto, net of any assets of such partnership or joint venture and (h)
the principal balance outstanding under any synthetic lease, tax
retention operating lease, off-balance sheet loan or similar
off-balance sheet financing product pursuant to which the Borrower is
the obligor where such transaction is considered borrowed money
indebtedness for tax purposes but is classified as an operating lease
in accordance with GAAP.
"GAAP" means generally accepted accounting principles in the
United States applied on a consistent basis and subject to the terms of
Section 1.3 hereof.
"Guaranty Obligations" means, with respect to any Person,
without duplication, any obligations (other than endorsements in the
ordinary course of business of negotiable instruments for deposit or
collection) guaranteeing or intended to guarantee any Indebtedness,
leases, dividends or other obligations of any other Person in any
manner, whether direct or indirect, and including without limitation
any obligation, whether or not contingent, (a) to purchase any such
Indebtedness or other obligation or any property constituting security
therefor, (b) to advance or provide funds or other support for the
payment or purchase of such indebtedness or obligation or to maintain
working capital, solvency or other balance sheet condition of such
other Person (including, without limitation, maintenance agreements,
comfort letters, take or pay arrangements, put agreements or similar
agreements or arrangements) for the benefit of the holder of
Indebtedness of such other Person, (c) to lease or purchase property,
securities or services primarily for the purpose of assuring the owner
of such Indebtedness or obligation, or (d) to otherwise assure or hold
harmless the owner of such Indebtedness or obligation against loss in
respect thereof. The amount of any Guaranty Obligation hereunder shall
(subject to any limitations set forth therein) be deemed to be an
amount equal to the outstanding principal amount (or maximum principal
amount, if larger) of the Indebtedness in respect of which such
Guaranty Obligation is made.
"Incorporated Covenants" means such term as defined in Section
5.1.
"Incorporated Representations" means such term as defined in
Section 5.1.
"Indebtedness" of any Person means, without duplication, (a)
all obligations of such Person for borrowed money, (b) all obligations
of such Person evidenced by bonds, debentures, notes or similar
instruments, or upon which interest payments are customarily made, (c)
all obligations of such Person under conditional sale or other title
retention agreements relating to property purchased by such Person to
the extent of the
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value of such property (other than customary reservations or retentions
of title under agreements with suppliers entered into in the ordinary
course of business), (d) all obligations, including without limitation,
intercompany items, of such Person issued or assumed as the deferred
purchase price of property or services purchased by such Person which
would appear as liabilities on a balance sheet of such Person, (e) all
Indebtedness of others secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien on, or payable out of the proceeds of production
from, property owned or acquired by such Person, whether or not the
obligations secured thereby have been assumed, (f) all Guaranty
Obligations of such Person, (g) the principal portion of all
obligations of such Person under (i) Capital Leases and (ii) any
synthetic lease, tax retention operating lease, off-balance sheet loan
or similar off-balance sheet financing product of such Person where
such transaction is considered borrowed money indebtedness for tax
purposes but is classified as an operating lease in accordance with
GAAP, (h) all obligations of such Person in respect of interest rate
protection agreements, foreign currency exchange agreements, or other
interest or exchange rate or commodity price hedging agreements, (i)
the maximum amount of all performance and standby letters of credit
issued or bankers' acceptances facilities created for the account of
such Person and, without duplication, all drafts drawn thereunder (to
the extent unreimbursed), (j) all preferred stock issued by such Person
and required by the terms thereof to be redeemed, or for which
mandatory sinking fund payments are due, by a fixed date and (k) the
aggregate amount of uncollected accounts receivable of such Person
subject at such time to a sale of receivables (or similar transaction)
regardless of whether such transaction is effected without recourse to
such Person or in a manner that would not be reflected on the balance
sheet of such Person in accordance with GAAP. The Indebtedness of any
Person shall include the Indebtedness of any partnership or
unincorporated joint venture in which such Person is legally obligated
or has a reasonable expectation of being liable with respect thereto.
"Interest Expense" means, for any period, with respect to the
Borrower, all interest expense, including the interest component under
Capital Leases, as determined in accordance with GAAP.
"Leverage Ratio" means, as of the end of each fiscal quarter
of the Borrower, the ratio of (a) Funded Debt on such date to (b)
EBITDA for the twelve month period ending on such date.
"Libor Rate" means, the fluctuating interest rate per annum
obtained by dividing (i) the one month Libor rate quoted in the "Money
Rates" section of The Wall Street Journal by (ii) an amount equal to 1
minus the Libor Reserve Requirement for such day. The Libor Rate shall
be adjusted on a monthly basis and each adjustment shall be effective
on the date the change occurs.
"Libor Reserve Requirement" means the rate at which reserves
(including without limitation, any marginal, supplemental, or emergency
reserve) are required to be maintained by the Bank by any applicable
governmental regulatory authority on the date
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for which interest is being calculated, against U.S. Dollar
non-personal time deposits in the United States with a term equal to
one (1) month, expressed as a decimal.
"Loan" or "Loans" means the Revolving Loans.
"Material Adverse Effect" means a material adverse effect on
(a) the operations, financial condition, business or prospects of the
Borrower, (b) the ability of the Borrower to perform its obligations
under this Credit Agreement or any of the other Credit Documents or (c)
the validity or enforceability of this Credit Agreement, or any of the
other Credit Documents, or the rights and remedies of the Bank
hereunder or thereunder.
"Materials of Environmental Concern" means any gasoline or
petroleum (including crude oil or any fraction thereof) or petroleum
products or any hazardous or toxic substances, materials or wastes,
defined or regulated as such in or under any Environmental Laws,
including, without limitation, asbestos, polychlorinated biphenyls and
urea-formaldehyde insulation.
"Maturity Date" means April 30, 1998.
"Mortgages" means the fully executed and notarized mortgages
or deeds of trust encumbering the fee interest of the Borrower in each
real property asset owned by the Borrower set forth on Schedule 1.1(a)
(each a "Property" and collectively the "Properties").
"Net Income" means, for any period, the net income after taxes
for such period of the Borrower, as determined in accordance with GAAP.
"Net Worth" means, as of any date, shareholders' equity or net worth of
the Borrower.
"Notice of Borrowing" means a written notice of borrowing in
substantially the form of Schedule 2.1(b)(i), as required by Section
2.1(b)(i).
"Person" means any individual, partnership, joint venture,
firm, corporation, limited liability company, association, trust or
other enterprise (whether or not incorporated), or any Governmental
Authority.
"Prior Credit Agreement" means that certain Loan and Security
Agreement dated as of May 25, 1995 among the Borrower and First Union
National Bank (f/k/a First Union National Bank of North Carolina), as
amended and modified, a copy of which is attached hereto as Exhibit A.
"Property" has the meaning set forth in the definition of Mortgages.
"Purchased Assets" shall have the meaning given to such term in the
Robinson Purchase Agreement.
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"Revolving Commitment" means, the commitment of the Bank to
make Revolving Loans in an aggregate principal amount at any time
outstanding of up to the Revolving Committed Amount.
"Revolving Committed Amount" means, ONE HUNDRED MILLION
DOLLARS ($100,000,000) or such lesser amount as the Revolving Committed
Amount may be reduced from time to time.
"Revolving Loans" shall have the meaning assigned to such term
in Section 2.1(a).
"Revolving Note" means the promissory note of the Borrower in
favor of the Bank evidencing the Revolving Loans in substantially the
form attached as Schedule 2.1(e), individually or collectively, as
appropriate, as such promissory note may be amended, modified,
supplemented, extended, renewed or replaced from time to time.
"Robinson Purchase Agreement" means that certain Asset
Purchase Agreement among the Borrower, Frank L. Robinson Company, a
California general partnership, Harold Robinson, Carole Robinson,
Jeffrey N. Robinson and James H. Robinson to be entered into subsequent
to the date hereof.
"Security Agreement" means the Security Agreement dated as of
the date hereof entered into by the Borrower and the Bank, as amended
and modified.
"Stardust Purchase Agreement" means that certain Asset
Purchase Agreement among the Borrower, Stardust Corporation, a
Wisconsin corporation, John Beale and Linda Beale dated as of December
22, 1997.
"Tangible Net Worth" means, as of any date, shareholders'
equity or net worth of the Borrower minus goodwill, patents,
tradenames, trademarks, copyrights, franchises, organizational
expenses, deferred expenses and other assets in each case as are shown
as "intangible assets" on a balance sheet of the Borrower, as
determined in accordance with GAAP.
"Total Capitalization" means, at any date of determination
calculated for the Borrower, the sum of (i) Net Worth plus (ii) Funded
Debt.
1.2 COMPUTATION OF TIME PERIODS.
For purposes of computation of periods of time hereunder, the
word "from" means "from and including" and the words "to" and "until" each mean
"to but excluding."
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1.3 ACCOUNTING TERMS.
Except as otherwise expressly provided herein, all accounting
terms used herein shall be interpreted, and all financial statements and
certificates and reports as to financial matters required to be delivered to the
Bank hereunder shall be prepared, in accordance with GAAP applied on a
consistent basis. All calculations made for the purposes of determining
compliance with this Credit Agreement shall (except as otherwise expressly
provided herein) be made by application of GAAP applied on a basis consistent
with the most recent annual or quarterly financial statements delivered pursuant
to Section 7.3 of the Incorporated Covenants; provided, however, if (a) the
Company shall object to determining such compliance on such basis at the time of
delivery of such financial statements due to any change in GAAP or the rules
promulgated with respect thereto or (b) the Bank shall so object in writing
within 30 days after delivery of such financial statements, then such
calculations shall be made on a basis consistent with the most recent financial
statements delivered by the Borrower to the Bank as to which no such objection
shall have been made.
SECTION 2
CREDIT FACILITIES
2.1 REVOLVING LOANS.
(a) Revolving Commitment. During the Commitment Period,
subject to the terms and conditions hereof, the Bank agrees to make revolving
credit loans (the "Revolving Loans") to the Borrower from time to time for the
purposes hereinafter set forth; provided that the sum of the aggregate principal
amount of Revolving Loans outstanding at any time shall not exceed the lesser of
(A) the Revolving Committed Amount and (B) the Borrowing Base. Revolving Loans
may be repaid and reborrowed in accordance with the provisions hereof.
(b) Revolving Loan Borrowings.
(i) Notice of Borrowing. Unless the Borrower elects
to request a Revolving Loan borrowing in accordance with the terms of
the next succeeding sentence, advances of the Revolving Loans shall be
made in accordance with the provisions of any agreement between the
Bank and the Borrower establishing an "Auto Borrow" plan for, among
other things, the automatic advance to the Borrower for deposit into an
account of the Borrower with the Bank. The Borrower may also request a
Revolving Loan Borrowing by delivery of a Notice of Borrowing (or
telephone notice promptly confirmed in writing) substantially in the
form of Schedule 2.1(b)(i) to the Bank not later than 12:00 Noon
(Charlotte, North Carolina time) on the date of the requested borrowing
(which shall be a Business Day). Each such request shall specify (A)
that a Revolving Loan is requested, (B) the date of the requested
borrowing and (C) the aggregate principal amount to be borrowed.
(c) Repayment. The principal amount of all Revolving Loans,
together with any accrued but unpaid interest, shall be due and payable
in full on the Maturity Date.
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(d) Interest. Subject to the provisions of Section 3.1, the
Revolving Loans shall bear interest at a per annum rate equal to the
Libor Rate plus one and one-half percent (1.5%).
Interest on Revolving Loans shall be payable in arrears on the first
(1st) day of each month beginning on February 1, 1998 and continuing on
the first (1st) day of each month thereafter (or at such other times as
may be specified herein).
(e) Revolving Note. The Revolving Loans shall be evidenced by
a duly executed Revolving Note in favor of the Bank.
SECTION 3
OTHER PROVISIONS RELATING TO CREDIT FACILITIES
3.1 DEFAULT RATE.
Upon the occurrence, and during the continuance, of an Event
of Default, the principal of and, to the extent permitted by law, interest on
the Loans and any other amounts owing hereunder or under the other Credit
Documents shall bear interest, payable upon written demand by the Bank, at a per
annum rate 4% greater than the rate which would otherwise be applicable (or if
no rate is applicable, whether in respect of interest, fees or other amounts,
then 4% greater than the Libor Rate).
3.2 VOLUNTARY PREPAYMENTS.
Revolving Loans may be repaid in whole or in part without
premium or penalty. Amounts prepaid hereunder may be reborrowed in
accordance with the provisions hereof.
3.3 REDUCTIONS IN COMMITMENTS AND MANDATORY PREPAYMENTS.
(a) Voluntary Reduction in Revolving Commitment. The Revolving
Commitment may be terminated or permanently reduced in whole or in part upon
three (3) Business Days' prior written notice to the Bank, provided that (i)
after giving effect to any voluntary reduction the aggregate amount of Revolving
Loans shall not exceed the lesser of (A) the Revolving Committed Amount, as
reduced, and (B) the Borrowing Base, and (ii) partial reductions shall be in
minimum principal amounts of $5,000,000, and in integral multiples of $1,000,000
in excess thereof.
(b) Mandatory Prepayments. If at any time the aggregate
principal amount of Revolving Loans hereunder shall exceed the lesser of (A) the
Revolving Committed Amount and (B) the Borrowing Base, the Borrower shall
immediately make payment on the Revolving Loans hereunder in an amount
sufficient to eliminate the deficiency.
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(c) Mandatory Commitment Termination. The Revolving Commitment
hereunder shall terminate on the Maturity Date.
3.4 COMMITMENT FEE.
In consideration of the Revolving Commitment hereunder, the
Borrower agrees to pay to the Bank a commitment fee (the "Commitment Fee") equal
to two-tenths of one percent (.20%) per annum on the average daily unused amount
of the Revolving Committed Amount for the applicable period from the Closing
Date. The Commitment Fee shall be payable quarterly in arrears on the 1st day
following the last day of each calendar quarter for the immediately preceding
quarter (or portion thereof) beginning on April 1, 1998.
3.5 ADDITIONAL COSTS.
The terms and provisions contained in Section 2.11 and 2.12 of
the Prior Credit Agreement are incorporated herein by reference with the same
effect as if stated at length. The Borrower covenants and agrees that Section
2.11 and 2.12 of the Prior Credit Agreement shall be binding on the Borrower as
if set forth herein; provided that (i) such provisions as incorporated herein
shall reflect that they are delivered to and run in favor of the Bank and
references therein to "LIBOR Contract Rate" shall be deemed references to "Libor
Rate" for purposes hereof and all references to "CD Contract Rate" are deleted
for purposes hereof.
3.6 PAYMENTS, COMPUTATIONS, ETC.
Except as otherwise specifically provided herein, all payments
hereunder shall be made to the Bank in Dollars in immediately available funds,
without offset, deduction, counterclaim or withholding of any kind, at the
Bank's office specified in Section 7.1 not later than 2:00 P.M. (Charlotte,
North Carolina time) on the date when due. Payments received after such time
shall be deemed to have been received on the next succeeding Business Day. The
Borrower shall, at the time it makes any payment under this Credit Agreement,
specify to the Bank the Loans, interest or other amounts payable by the Borrower
hereunder to which such payment is to be applied (and in the event that it fails
so to specify, or if such application would be inconsistent with the terms
hereof, the Bank shall apply such payment as the Borrower may determine to be
appropriate in respect of obligations owing by the Borrower hereunder. Whenever
any payment hereunder shall be stated to be due on a day which is not a Business
Day, the due date thereof shall be extended to the next succeeding Business Day
(subject to accrual of interest and Fees for the period of such extension).
Except as expressly provided otherwise herein, all computations of interest and
fees shall be made on the basis of actual number of days elapsed over a year of
360 days. Interest shall accrue from and include the date of borrowing, but
exclude the date of payment.
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SECTION 4
CONDITIONS
4.1 CONDITIONS TO CLOSING.
The obligations of the Bank to enter into this Credit
Agreement and make the initial Revolving Loans is subject to satisfaction of the
following conditions precedent:
(a) Execution of Credit Agreement and Credit Documents.
Receipt of (i) multiple counterparts of this Credit Agreement, (ii) the
Revolving Note, (iii) multiple counterparts of the Security Agreement, each of
the Mortgages and UCC financing statements relating thereto, in each case
executed by a duly authorized officer of and in each case conforming to the
requirements of this Credit Agreement.
(b) Financial Information. Receipt of financial information
regarding the Borrower, as may be requested by, and in each case in form and
substance satisfactory to the Bank.
(c) Material Adverse Effect. There shall not have occurred a
change since December 31, 1996 that has had or could reasonably be expected to
have a Material Adverse Effect.
(d) Absence of Legal Proceedings. The absence of any action,
suit, investigation or proceeding pending in any court or before any arbitrator
or governmental instrumentality which could reasonably be expected to have a
Material Adverse Effect on the Borrower.
(e) Legal Opinions. Receipt of multiple counterparts of
opinions of counsel for the Borrower relating to the Credit Documents and the
transactions contemplated herein, in form and substance satisfactory to the
Bank.
(f) Corporate Documents. Receipt of the following with respect
to the Borrower:
(i) Articles of Incorporation. Copies of the
certificate of incorporation or charter documents certified to be true
and complete as of a recent date by the appropriate governmental
authority of the State of North Carolina.
(ii) Resolutions. Copies of resolutions of the Board
of Directors approving and adopting the Credit Documents, the
transactions contemplated therein and authorizing execution and
delivery thereof, certified by a secretary or assistant secretary as of
the Closing Date to be true and correct and in force and effect as of
such date.
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(iii) Bylaws. Copies of the bylaws certified by a
secretary or assistant secretary as of the Closing Date to be true and
correct and in force and effect as of such date.
(iv) Good Standing. Copies, where applicable, of
certificates of good standing, existence or its equivalent certified as
of a recent date by the appropriate governmental authorities of the
state of incorporation and each other state in which the failure to so
qualify and be in good standing would have a Material Adverse Effect.
(v) Officer's Certificate. An officer's certificate
for the Borrower dated as of the Closing Date substantially in the form
of Schedule 5.1(e)(v).
(g) Fees. Receipt of all fees owing by the Borrower to the
Bank.
(h) Insurance. Receipt by the Bank of copies of insurance
policies or certificates of insurance evidencing liability and casualty
insurance satisfactory to the Bank, including, but not limited to, naming the
Bank as mortgagee and loss payee.
(i) Payoff Letter. Receipt by the Bank of a payoff letter
acceptable to the Bank in connection with the replacement of the First Union
National Bank credit facility.
(j) Collateral. Receipt of the following in form and substance
satisfactory to the Bank:
(i) searches of Uniform Commercial Code ("UCC")
filings in the jurisdiction of the chief executive office of the
Borrower and each jurisdiction where any Collateral is located or where
a filing would need to be made in order to perfect the Bank's security
interest in the Collateral, copies of the financing statements on file
in such jurisdictions and evidence that no Liens exist other than
Permitted Liens; and
(ii) duly executed UCC financing statements for each
appropriate jurisdiction as is necessary, in the Bank's sole
discretion, to perfect the Bank's security interest in the Collateral.
(k) Borrowing Base Report. Receipt by the Bank of a borrowing
base report accompanied by a certificate in favor of the Bank in a form similar
to that attached as Exhibit H to the Prior Credit Agreement.
(l) Stardust Purchase Agreement. The acquisition of the
Acquired Assets shall have been consummated in accordance with the terms of the
Stardust Purchase Agreement and all applicable law. Receipt by the Bank of the
final Stardust Purchase Agreement, together with all exhibits and schedules
thereto, certified by an officer of the Borrower.
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(m) Additional Matters. All other documents and legal matters
in connection with the transactions contemplated by this Credit Agreement shall
be reasonably satisfactory in form and substance to the Bank.
4.2 CONDITIONS TO ALL EXTENSIONS OF CREDIT.
The obligation of the Bank to make any Extension of Credit hereunder
(including the initial Extension of Credit to be made hereunder) is subject to
the satisfaction of the following conditions precedent on the date of making
such Extension of Credit:
(a) Representations and Warranties. The representations and
warranties made by the Borrower herein or in any other Credit Documents
(including specifically without limitation the Incorporated Representations) or
which are contained in any certificate furnished at any time under or in
connection herewith shall be true and correct in all material respects on and as
of the date of such Extension of Credit as if made on and as of such date
(except for those which expressly relate to an earlier date).
(b) No Default or Event of Default. No Default or Event of
Default shall have occurred and be continuing on such date or after giving
effect to the Extension of Credit to be made on such date.
(c) No Material Adverse Effect. No circumstances, events or
conditions shall have occurred since December 31, 1996 which would have a
Material Adverse Effect.
(d) Additional Conditions to Revolving Loans. If a Revolving
Loan is made pursuant to Section 2.1, all conditions set forth therein shall
have been satisfied.
Each request for an Extension of Credit and each acceptance by the
Borrower of an Extension of Credit shall be deemed to constitute a
representation and warranty by the Borrower as of the date of such Extension of
Credit that the applicable conditions in paragraphs (a), (b), (c) and (d) of
this subsection have been satisfied.
SECTION 5
REPRESENTATIONS, WARRANTIES AND COVENANTS
5.1 INCORPORATION.
The representations and warranties contained in Sections 6, 9 and 10,
respectively, of the Prior Credit Agreement (other than Section 6.14) (the
"Incorporated Representations") and the affirmative and negative covenants
contained in Sections 7, 8 and 9, respectively, of the Prior Credit Agreement
(other than Sections 8.9, 8.10, 8.11 and 8.18) (the "Incorporated Covenants")
are incorporated herein by reference for the benefit of the Bank to the same
extent and with the same effect as if set forth fully herein (such incorporation
to include all other relevant provisions of the Prior Credit Agreement related
thereto, including without limitation the defined terms
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contained in Section 1 thereof which are used in the Incorporated
Representations and the Incorporated Covenants). The Borrower affirms and
represents and warrants to the Bank that the Incorporated Representations are
true and correct in all material respects as of the date hereof and covenants
and agrees that the Incorporated Covenants shall be as binding on the Borrower
as if set forth fully herein and notwithstanding the termination of the Prior
Credit Agreement, provided that (i) such Incorporated Representations and
Incorporated Covenants as incorporated herein shall reflect that they are
delivered to and run in favor of the Bank, rather than the lenders under the
Prior Credit Agreement as literally provided in the Prior Credit Agreement and
(ii) any references in the Prior Credit Agreement to the "Loan Documents" shall
be deemed a reference to the "Credit Documents" herein, and any references in
the Prior Credit Agreement to the "Agreement" shall be deemed a reference to the
"Credit Agreement" herein. Notwithstanding the incorporation of Section 8.2 of
the Prior Credit Agreement herein, the Bank agrees that the Borrower may acquire
the Acquired Assets pursuant to the Stardust Purchase Agreement and the
Purchased Assets pursuant to the Robinson Purchase Agreement. The Bank hereby
agrees that Section 8.14 of the Prior Credit Agreement, as incorporated herein,
shall not include the proviso at the end of such Section 8.14.
5.2 ADDITIONAL REPRESENTATIONS.
(a) Use of Proceeds. The proceeds of the Revolving Loans will
be used solely (i) to refinance on the Closing Date the indebtedness of the
Borrower under the Prior Credit Agreement, (ii) to pay the purchase price for
the Acquired Assets and the Purchased Assets, (iii) to pay related fees and
expenses in connection with the foregoing and (iv) for general corporate
purposes.
(b) Prior Credit Agreement. The copy of the Prior Credit
Agreement attached hereto, together with all schedules and exhibits attached
thereto, is a complete and correct copy of such agreement, including all
amendments and modifications thereto.
5.3 ADDITIONAL COVENANTS.
(a) Purpose of Revolving Loans. The Borrower will use the
proceeds of the Revolving Loans solely (i) to refinance on the Closing Date the
indebtedness of the Borrower under the Prior Credit Agreement, (ii) to pay the
purchase price for the Acquired Assets and the Purchased Assets, (iii) to pay
related fees and expenses in connection with the foregoing and (iv) for general
corporate purposes.
(b) Financial Covenants. The Borrower hereby covenants and
agrees that:
(i) Leverage Ratio. The Leverage Ratio, as of the end
of each fiscal quarter to occur through the Maturity Date, shall be
less than or equal to 5.0 to 1.0.
(ii) Funded Debt to Total Capitalization Ratio. The
Borrower shall maintain, as of the end of the each fiscal quarter to
occur through the Maturity Date, a ratio of Funded Debt to Total
Capitalization no greater than 0.60 to 1.0.
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(iii) EBITDA. The Borrower shall maintain, for each
fiscal quarter to occur through the Maturity Date, EBITDA of at least
$4,000,000.
(iv) Tangible Net Worth. At all times Tangible Net
Worth shall be no less than $32,000,000.
(c) Real Property Collateral.
Within forty-five (45) days after the Closing Date, with respect to
each of the Properties, the Borrower will provide the Bank with the following,
each in form and substance satisfactory to the Bank:
(i) Legal Opinions. An opinion of counsel in the
state in which each Property is located with respect to the
enforceability of the form of Mortgage and sufficiency of the form of
UCC-1 financing statements recorded or filed in such state and such
other matters as the Bank may request, in form and substance
satisfactory to the Bank.
(ii) Title Policies. ALTA or other appropriate form
mortgagee title insurance policies issued by a title insurer reasonably
satisfactory to the Bank (the "Title Insurance Company"), in an amount
satisfactory to the Bank with respect to each Property, assuring the
Bank that the applicable Mortgages create valid and enforceable first
priority mortgage liens on the respective Properties, free and clear of
all defects and encumbrances except Permitted Liens, all of the
foregoing in form and substance satisfactory to the Bank.
(iii) Surveys. An as-built survey of each of the
Properties certified to the Bank and the Title Insurance Company in a
manner satisfactory to them, dated a date satisfactory to the Bank and
the Title Insurance Company by an independent professional licensed
land surveyor reasonably satisfactory to the Bank and the Title
Insurance Company, which the surveys shall be made in accordance with
the Minimum Standard Detail Requirements for Land Title Surveys jointly
established and adopted by the American Land Title Association and the
American Congress on Surveying and Mapping in 1992 (or such alternative
standards as are satisfactory to the Bank and the Title Insurance
Company).
(iv) Flood Certificates. A current certification from
a registered engineer or land surveyor or other evidence acceptable to
the Bank with respect to each Property as to whether any of the
improvements on such Property are located within any area designated by
the Director of the Federal Emergency Management Agency as a "special
flood hazard" area and if any improvements on the Properties are
located within a "special flood hazard" area, evidence of a flood
insurance policy from a company and in an amount satisfactory to the
Bank for the applicable portion of the premises, naming the Bank, as
mortgagee.
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(v) Appraisals. A current appraisal of each Property
prepared for the benefit of the Bank by a qualified appraiser
satisfactory to the Bank and dated a date satisfactory to the Bank,
which shall indicate a fair market value for each Property acceptable to
the Bank and which shall otherwise be in form and substance satisfactory
to the Bank.
(vi) Environmental Reports. A current report of an
environmental assessment of each Property of such scope (including but
not limited to the taking of soil borings and air and groundwater
samples and other above and below ground testing) as the Bank may
request, which report shall (A) be certified to the Bank by a
consulting firm acceptable to the Bank, (B) dated a date satisfactory
to the Bank, (C) conform to the current minimum standards for the
American Society of Testing and Materials (ASTM), and (D) otherwise be
in form and substance satisfactory to the Bank.
(vii) Zoning Evidence. Evidence satisfactory to the
Bank that each Property, and the uses of each Property, are in
compliance in all material respects with all applicable laws,
regulations and ordinances including without limitation health and
environmental protection laws, erosion control ordinances, storm
drainage control laws, doing business and/or licensing laws, zoning
laws and laws regarding access and facilities for disabled persons
including, but not limited to, the federal Architectural Barriers Act,
the Fair Housing Amendments Act of 1988, the Rehabilitation Act of 1973
and the Americans with Disabilities Act of 1990.
(viii) Termination. UCC-3 termination statements,
mortgage releases and any other instruments, documents or statements
requested by the Bank in form and substance satisfactory to the Bank
necessary to terminate or otherwise to remove of record all notices of
security interest of the lenders under the Prior Credit Agreement.
(d) Robinson Acquisition. On or before January 9, 1998, the Borrower
hereby agrees that (i) the acquisition of the Purchased Assets shall be
consummated in accordance with the terms of the Robinson Purchase Agreement and
all applicable law and (ii) it will provide the Bank with the final Robinson
Purchase Agreement, together with all exhibits and schedules thereto, certified
by an officer of the Borrower.
SECTION 6
EVENTS OF DEFAULT
6.1 EVENTS OF DEFAULT.
An Event of Default shall exist upon the occurrence of any of the
following specified events (each an "Event of Default"):
(a) Payment. The Borrower shall
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(i) default in the payment when due of any principal of any of
the Revolving Loans, or
(ii) default, and such defaults shall continue for
five (5) or more Business Days, in the payment when due of any interest
on the Revolving Loans, or of any Fees or other reasonable fees and
amounts owing hereunder, under any of the other Credit Documents or in
connection herewith or therewith; or
(b) Representations. Any representation, warranty or statement
made or deemed to be made herein, in any of the other Credit Documents, or in
any statement or certificate delivered or required to be delivered pursuant
hereto or thereto shall prove untrue in any material respect on the date as of
which it was deemed to have been made; or
(c) Covenants.
(i) Default in the due performance or observance of any term,
covenant or agreement contained in Section 5.3(a), 5.3(b), 5.3(c) or
5.3(d), or
(ii) Default in the due performance or observance by it of any
term, covenant or agreement (other than those referred to in subsections
(a), (b) or (c)(i) of this Section 6.1) contained in this Credit
Agreement and such default shall continue unremedied for a period of at
least 30 days after the earlier of a Responsible Officer of the Borrower
becoming aware of such default, or the giving of notice thereof by the
Bank; or
(d) Other Credit Documents. (i) The Borrower shall default in
the due performance or observance of any term, covenant or agreement in any of
the other Credit Documents (subject to applicable grace or cure periods, if
any), or (ii) any Credit Document shall fail to be in full force and effect or
to give the Borrower any material part of the Liens, rights, powers and
privileges purported to be created thereby; or
(e) Other Event of Default. The occurrence of an event which
would constitute an Event of Default (as defined in the Prior Credit Agreement)
under the Prior Credit Agreement.
6.2 ACCELERATION; REMEDIES.
Upon the occurrence of an Event of Default, and at any time thereafter
during the continuance of an Event of Default, the Borrower may by written
notice to the Borrower take any of the following actions:
(i) Termination of Commitments. Declare the Revolving
Commitment terminated whereupon the Revolving Commitment shall be
immediately terminated.
(ii) Acceleration. Declare the unpaid principal of and any
accrued interest in respect of all Revolving Loans and all other
indebtedness or
16
<PAGE>
obligations of any and every kind owing by the Borrower to the Bank
hereunder to be due whereupon the same shall be immediately due and
payable without presentment, demand, protest or other notice of any
kind, all of which are hereby waived by the Borrower.
(iii) Enforcement of Rights. Enforce any and all rights and
interests created and existing under the Credit Documents and all rights
of set-off.
Notwithstanding the foregoing, if an Event of Default specified in Section
12.1(g) or 12.1(h) of the Prior Credit Agreement shall occur, then the Revolving
Commitment shall automatically terminate and all Loans, all accrued interest in
respect thereof, all accrued and unpaid fees and other indebtedness or
obligations owing to the Bank hereunder automatically shall immediately become
due and payable without presentment, demand, protest or the giving of any notice
or other action by the Bank, all of which are hereby waived by the Borrower.
SECTION 7
MISCELLANEOUS
7.1 NOTICES.
Except as otherwise expressly provided herein, all notices and other
communications shall have been duly given and shall be effective (i) when
delivered, (ii) when transmitted via telecopy (or other facsimile device) to the
number set out below, (iii) the day following the day on which the same has been
delivered prepaid to a reputable national overnight air courier service, or (iv)
the third Business Day following the day on which the same is sent by certified
or registered mail, postage prepaid, in each case to the respective parties at
the address set forth below or at such other address as any party may specify by
written notice to the other party hereto:
if to the Borrower:
Pluma, Inc.
P. O. Drawer 487
Eden, North Carolina 27289-0487
Attn: Forrest H. Truitt
Telephone: (910) 635-4000
Telecopy: (910) 635-1814
17
<PAGE>
if to the Bank:
NationsBank, N.A.
8 Lester Street
Martinsville, Virginia 24112
Attn: Carolyn Shough
Telephone: (540) 666-7031
Telecopy: (540) 666-7039
7.2 RIGHT OF SET-OFF.
In addition to any rights now or hereafter granted under applicable law
or otherwise, and not by way of limitation of any such rights, upon the
occurrence of an Event of Default, the Bank is authorized at any time and from
time to time, without presentment, demand, protest or other notice of any kind
(all of which rights being hereby expressly waived), to set-off and to
appropriate and apply any and all deposits (general or special) and any other
indebtedness at any time held or owing by the Bank (including, without
limitation branches, agencies or Affiliates of the Bank wherever located) to or
for the credit or the account of the Borrower against obligations and
liabilities of the Borrower to the Bank hereunder, under the Note, the other
Credit Documents or otherwise, irrespective of whether the Borrower shall have
made any demand hereunder and although such obligations, liabilities or claims,
or any of them, may be contingent or unmatured, and any such set-off shall be
deemed to have been made immediately upon the occurrence of an Event of Default
even though such charge is made or entered on the books of the Bank subsequent
thereto.
7.3 BENEFIT OF AGREEMENT.
(a) Generally. This Credit Agreement shall be binding upon and
inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; provided that the Borrower may not assign or
transfer any of its interests or obligations without prior written consent of
the Bank.
7.4 NO WAIVER; REMEDIES CUMULATIVE.
No failure or delay on the part of the Bank in exercising any right,
power or privilege hereunder or under any other Credit Document and no course of
dealing between the Bank and the Borrower shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or privilege hereunder
or under any other Credit Document preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder or
thereunder. The rights and remedies provided herein are cumulative and not
exclusive of any rights or remedies which the Bank would otherwise have. No
notice to or demand on the Borrower in any case shall entitle the Borrower to
any other or further notice or demand in similar or other circumstances or
constitute a waiver of the rights of the Borrower or the Bank to any other or
further action in any circumstances without notice or demand.
18
<PAGE>
7.5 PAYMENT OF EXPENSES, ETC.
The Borrower agrees to: (i) pay all reasonable out-of-pocket costs and
expenses (A) of the Bank in connection with the negotiation, preparation,
execution and delivery of this Credit Agreement and the other Credit Documents
and the documents and instruments referred to therein (including, without
limitation, the reasonable fees and expenses of Moore & Van Allen, PLLC, special
counsel to the Bank) and any amendment, waiver or consent relating hereto and
thereto including, but not limited to, any such amendments, waivers or consents
resulting from or related to any work-out, renegotiation or restructure relating
to the performance by the Borrower under this Credit Agreement and (B) of the
Bank in connection with enforcement of or preservation of rights under the
Credit Documents and the documents and instruments referred to therein
(including, without limitation, in connection with any such enforcement, the
reasonable fees and disbursements of counsel for the Bank); (ii) pay and hold
the Bank harmless from and against any and all present and future stamp and
other similar taxes with respect to the foregoing matters and save the Bank
harmless from and against any and all liabilities with respect to or resulting
from any delay or omission (other than to the extent attributable to the Bank)
to pay such taxes; and (iii) indemnify the Bank, its officers, directors,
employees, representatives from and hold each of them harmless against any and
all losses, liabilities, claims, damages or reasonable expenses incurred by any
of them as a result of, or arising out of, or in any way related to, or by
reason of (A) any investigation, litigation or other proceeding (whether or not
the Bank is a party thereto) related to the entering into and/or performance of
any Credit Document or the use of proceeds of any Loans (including other
extensions of credit) hereunder or the consummation of any other transactions
contemplated in any Credit Document, including, without limitation, the
reasonable fees and disbursements of counsel incurred in connection with any
such investigation, litigation or other proceeding or (B) the presence or
release of any Materials of Environmental Concern at, under or from any Property
owned, operated or leased by the Borrower, or the failure by the Borrower to
comply with any Environmental Law (but excluding, in the case of either of
clause (A) or (B) above, any such losses, liabilities, claims, damages or
expenses to the extent incurred by reason of gross negligence or willful
misconduct on the part of the Person to be indemnified).
7.6 AMENDMENTS, WAIVERS AND CONSENTS.
Neither this Credit Agreement nor any other Credit Document nor any of
the terms hereof or thereof may be amended, changed, waived, discharged or
terminated unless such amendment, change, waiver, discharge or termination is in
writing entered into by, or approved in writing by, the Bank and the Borrower.
7.7 COUNTERPARTS.
This Credit Agreement may be executed in any number of counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall constitute one and the same instrument. It shall not be necessary in
making proof of this Credit Agreement to produce or account for more than one
such counterpart.
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7.8 HEADINGS.
The headings of the sections and subsections hereof are provided for
convenience only and shall not in any way affect the meaning or construction of
any provision of this Credit Agreement.
7.9 SURVIVAL.
All indemnities set forth herein, including, without limitation, those
set forth in the Incorporated Covenants shall survive the execution and delivery
of this Credit Agreement, the making of the Loans, the repayment of the Loans
and other obligations under the Credit Documents and the termination of the
Revolving Commitment hereunder, and all representations and warranties
(including without limitation the Incorporated Representations) made by the
Borrower herein shall survive delivery of the Note and the making of the Loans
hereunder.
7.10 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE.
(a) THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND
THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE
GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NORTH CAROLINA. Any legal action or proceeding with respect to this
Credit Agreement or any other Credit Document may be brought in the courts of
the State of North Carolina in Mecklenburg County, or of the United States for
the Western District of North Carolina, and, by execution and delivery of this
Credit Agreement, the Borrower hereby irrevocably accepts for itself and in
respect of its property, generally and unconditionally, the nonexclusive
jurisdiction of such courts. The Borrower further irrevocably consents to the
service of process out of any of the aforementioned courts in any such action or
proceeding by the mailing of copies thereof by registered or certified mail,
postage prepaid, to it at the address set out for notices pursuant to Section
9.1, such service to become effective three (3) days after such mailing. Nothing
herein shall affect the right of the Bank to serve process in any other manner
permitted by law or to commence legal proceedings or to otherwise proceed
against the Borrower in any other jurisdiction.
(b) The Borrower hereby irrevocably waives any objection which
it may now or hereafter have to the laying of venue of any of the aforesaid
actions or proceedings arising out of or in connection with this Credit
Agreement or any other Credit Document brought in the courts referred to in
subsection (a) hereof and hereby further irrevocably waives and agrees not to
plead or claim in any such court that any such action or proceeding brought in
any such court has been brought in an inconvenient forum.
(c) TO THE EXTENT PERMITTED BY LAW, THE BANK AND THE BORROWER
HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE
OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY.
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7.11 SEVERABILITY.
If any provision of any of the Credit Documents is determined to be
illegal, invalid or unenforceable, such provision shall be fully severable and
the remaining provisions shall remain in full force and effect and shall be
construed without giving effect to the illegal, invalid or unenforceable
provisions.
7.12 ENTIRETY.
This Credit Agreement together with the other Credit Documents
represent the entire agreement of the parties hereto and thereto, and supersede
all prior agreements and understandings, oral or written, if any, including any
commitment letters or correspondence relating to the Credit Documents or the
transactions contemplated herein and therein.
7.13 CONFLICT.
To the extent that there is a conflict or inconsistency between any
provision hereof, on the one hand, and any provision of any Credit Document, on
the other hand, this Credit Agreement shall control.
[remainder of page intentionally left blank]
21
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Credit Agreement to be duly executed and delivered as of the date first
above written.
BORROWER: PLUMA, INC., a North Carolina corporation
By:_______________________________
Name:_____________________________
Title:______________________________
BANK: NATIONSBANK, N.A.,
By:_______________________________
Name:_____________________________
Title:______________________________
<PAGE>
EXHIBIT A
(to Credit Agreement)
=================================================================
LOAN AND SECURITY AGREEMENT
BETWEEN
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
AND
PLUMA, INC.
=================================================================
May 25, 1995
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<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS.
1.1 Defined Terms 1
1.2 Accounting Terms 16
1.3 Other Terms 17
2. THE LOANS; INTEREST; FEES; AND PURPOSES OF THE LOANS.
2.1 Revolving Line of Credit 17
2.2 Reduction of the Committed Amount 17
2.3 Interest Rate 18
2.4 Selection of Interest Rate 18
2.5 Unused Commitment Fee 18
2.6 Calculation of Interest 18
2.7 Late Charges 18
2.8 Maximum Lawful Rate of Interest 18
2.9 All Advances to Constitute One Loan 19
2.10 Loan Purposes 19
2.11 Additional Costs 19
2.12 Unavailability 19
2.13 Prepayment Fees 20
3. PAYMENTS.
3.1 Payments 20
3.2 Receipt of Payments 21
3.3 Collections; Lender's Right to Notify
Account Debtors and to Endorse
Borrower's Name 21
3.4 Application of Payments and Collections 21
3.5 Statement of Account 22
4. SECURITY FOR THE OBLIGATIONS.
4.1 Security Interest in the Collateral 22
4.2 Security Interest in the Realty 22
4.3 Disclosure of Security Interest 23
4.4 Supplemental Documentation 23
4.5 Inspection 23
4.6 Cross-Collateralization 23
5. CLOSING; CONDITIONS PRECEDENT.
5.1 Conditions Precedent to Closing 24
5.2 Conditions Precedent to All Loans 26
5.3 Waiver of Conditions Precedent 27
<PAGE>
6. REPRESENTATIONS AND WARRANTIES.
6.1 Corporate Organization and Power 27
6.2 Litigation; Government Regulation 27
6.3 Taxes 28
6.4 Enforceability of Loan Documents;
Compliance With Other Instruments 28
6.5 Governmental Authorization 29
6.6 Event of Default 29
6.7 Margin Securities 29
6.8 Full Disclosure 29
6.9 Principal Place of Business 29
6.10 ERISA 29
6.11 Financials 30
6.12 Title to Assets 30
6.13 Solvency 30
6.14 Use of Proceeds 30
6.15 Assets for Conduct of Business 30
6.16 Trade Relations 30
6.17 Compliance With Laws 31
7. AFFIRMATIVE COVENANTS.
7.1 Repayment of Obligations 31
7.2 Performance Under Loan Documents 31
7.3 Financial and Business Information as to
Borrower 31
7.4 Notice of Certain Events 33
7.5 Corporate Existence and Maintenance of
Properties 33
7.6 Payment of Indebtedness; Performance of
Other Obligations 33
7.7 Maintenance of Insurance 34
7.8 Maintenance of Books and Records;
Inspection 35
7.9 Comply with ERISA 36
7.10 Maintenance of Cash Management Agreement 36
7.11 Primary Accounts 36
8. NEGATIVE COVENANTS.
8.1 Merger and Dissolution 36
8.2 Acquisitions 37
8.3 Indebtedness and Capital Leases 37
8.4 Liens and Encumbrances 37
8.5 Disposition of Assets 37
8.6 Transactions With Related Persons 37
8.7 Restricted Investments 38
8.8 Restrictions on Dividends 38
8.9 Capital Expenditures 38
8.10 Tangible Net Worth 38
8.11 Liabilities to Equity Ratio 39
8.12 Fiscal Year 39
<PAGE>
8.13 Sale and Leaseback 39
8.14 New Business 39
8.15 Subsidiaries 39
8.16 Guaranties 39
8.17 Transactions Affecting the Collateral or
the Realty 39
8.18 Interest Coverage Ratio 39
9. PROVISIONS WITH RESPECT TO THE COLLATERAL AND THE REALTY.
9.1 Perfection and Priority; Location of
Collateral 40
9.2 Audit/Verification of Collateral 40
9.3 Assignments, Records and Schedules of
Accounts 40
9.4 Notice Regarding Disputed Accounts 41
9.5 Sale and Safekeeping of Inventory 41
9.6 Records and Schedules of Inventory 41
9.7 Returns of Inventory 41
9.8 Maintenance of Equipment 42
9.9 Evidence of Ownership of Equipment 42
9.10 Records and Schedules for Equipment 42
9.11 Lender's Payment of Claims Asserted
Against the Collateral or the Realty 42
9.12 Environmental Representations,
Warranties and Covenants 42
10. WARRANTIES WITH RESPECT TO ACCOUNTS AND INVENTORY.
10.1 Account Warranties and Representations 43
10.2 Inventory Warranties and Representations 44
10.3 Reaffirmation of Warranties and
Representations 45
10.4 Survival of Warranties and Representations 45
11. TERM OF AGREEMENT.
11.1 Term 45
11.2 Borrower's Right to Terminate 45
11.3 Lender's Right to Terminate 45
11.4 Effect of Termination 46
12. EVENTS OF DEFAULT.
12.1 Event of Default 46
12.2 Acceleration of the Obligations 48
12.3 Default Rate of Interest 48
13. RIGHTS AND REMEDIES AFTER EVENT OF DEFAULT.
13.1 Rights and Remedies 49
13.2 Application of Proceeds 50
<PAGE>
13.3 Appointment of Lender as Borrower's
Lawful Attorney 50
13.4 Rights and Remedies Cumulative;
Non-Waiver; Etc. 51
14. PAYMENT OF EXPENSES.
14.1 Fees and Expenses 51
14.2 Stamp Taxes 52
14.3 Brokerage Fees 52
14.4 Agent's Fee 52
15. MISCELLANEOUS.
15.1 Survival of Agreements 52
15.2 Governing Law; Waiver of Jury Trial; Etc. 53
15.3 Notice 53
15.4 Indemnification of Lender 54
15.5 Waivers by Borrower 55
15.6 Lawful Charges 55
15.7 Assignment 55
15.8 Amendment 55
15.9 Severability 55
15.10 Entire Agreement 56
15.11 Binding Effect 56
15.12 Captions 56
15.13 Disbursement of Loan Proceeds 56
15.14 Participant 56
15.15 Conflict of Terms 56
15.16 Injunctive Relief 56
15.17 Liens; Setoff by Lender 57
15.18 Acquisition of Rocky Mount, Virginia
Real Estate 57
15.19 Time of Essence 57
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT, made and entered into this 25th day
of May, 1995, by and between FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a
national banking association with its principal office at Charlotte, North
Carolina ("Lender"); and PLUMA, INC., a North Carolina corporation with its
principal office at 801 Fieldcrest Road, Eden, North Carolina 27288
("Borrower");
W I T N E S S E T H:
WHEREAS, Borrower and Lender are parties to a certain Fourth Amended
and Restated Loan and Security Agreement, dated March 11, 1994, as amended by
First Amendment thereto dated May 13, 1994, by Second Amendment thereto dated
July 1, 1994 and by Third Amendment thereto dated March 15, 1995 ("Existing Loan
Agreement") pursuant to which Lender agreed to make loans and advances to
Borrower; and
WHEREAS, Borrower has requested that Lender continue to extend
financial accommodations to it in order to provide funds for the refinancing of
the indebtedness owing by Borrower to Lender under the Existing Loan Agreement,
for working capital and for such other corporate purposes as are permitted
hereunder;
WHEREAS, Lender has agreed to extend financial accommodations for such
purposes to Borrower in the form of a $55,000,000 credit facility to be made in
accordance with, and subject to, the terms and conditions set forth below; and
WHEREAS, this Agreement shall supersede and replace in its entirety the
Existing Loan Agreement, and it shall represent the entire agreement between
Borrower and Lender with respect to the terms and conditions upon which Lender
is to make loans and advances to Borrower from and after the date hereof;
NOW, THEREFORE, in consideration of the terms and conditions contained
herein, and of any loan or other financial accommodation heretofore, now or
hereafter made by Lender to or on behalf of Borrower, the parties hereto hereby
agree as follows:
SECTION 1. DEFINITIONS.
1.1 Defined Terms. For purposes of this Agreement, in ad-
dition to the terms defined elsewhere in this Agreement, the
following terms shall have the meanings set forth below:
"Accounts" shall mean all accounts, accounts receivable, contract
rights, notes, bills, acceptances, choses in action, chattel paper, instruments,
documents, and other forms of obligations at any time owing to Borrower, the
proceeds thereof and
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<PAGE>
all of Borrower's rights with respect to any goods represented thereby, whether
or not delivered, goods returned by customers and all rights as an unpaid vendor
or lienor, including rights of stoppage in transit and of recovering possession
by proceedings including replevin and reclamation, together with all customer
lists, books and records, ledger and account cards, computer tapes, disks,
printouts and records, whether now in existence or hereafter created, relating
to Accounts.
"Account Debtor" shall mean any Person who is or who may become
obligated to Borrower under or on account of an Account.
"Affiliate" shall mean any Person which, (i) directly or indirectly,
owns or controls, on an aggregate basis, including all beneficial ownership and
ownership or control as a trustee, guardian or other fiduciary, at least five
percent (5%) of the outstanding Stock having ordinary voting power to elect a
majority of the board of directors (irrespective of whether, at the time, Stock
of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) of Borrower or any
Subsidiary , or (ii) which is controlled by or is under common control with any
Person defined as an Affiliate by (i) of this definition, or (iii) is controlled
by or is under common control with Borrower or any Subsidiary. For the purpose
of this definition, "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of management and policies, whether
through the ownership of voting securities, by contract or otherwise.
"Agreement" or "this Agreement" shall include all amendments,
modifications and supplements hereto and shall refer to this Agreement as the
same may be in effect at the time such reference becomes operative.
"Applicable Margin" shall have the following meaning at the times
indicated: (i) from the date hereof to the end of the Quarter ending June 30,
1995, in the case of CD Rate Loans, 123 Basis Points and in the case of LIBOR
Rate Loans, 110 Basis Points; and (ii) after June 30, 1995 as computed at the
end of each fiscal quarter in accordance with the following schedule:
Ratio of EBIT
for the previous
four consecutive
fiscal quarters
(including the
quarter then ending)
to Interest Expense Applicable Applicable
for such four Margin Margin
consecutive for for
fiscal quarters Libor Rate Loan CD Rate Loan
less than 3.0 130 Basis Points 143 Basis Points
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<PAGE>
3.0 to 3.99 110 Basis Points 123 Basis Points
4.0 to 4.99 90 Basis Points 103 Basis Points
5.0 or greater 70 Basis Points 83 Basis Points
"Assessment Rate" shall mean the actual, if known, or the estimated, if
the actual rate is not known, assessment rate percentage (expressed as a
decimal rounded upwards, if necessary, to the next higher 1/100 of one percent)
paid by Lender to the Federal Deposit Insurance Corporation (or any successor),
excluding any refund, insuring Lender's liability for time deposits as in effect
from time to time.
"Available Amount" shall mean at any time the lesser of (i) the
Committed Amount at such date, or (ii) the Borrowing Base.
"Bank" or "Lender" shall mean First Union National Bank of North
Carolina, a national banking association.
"Basis Point" shall mean one hundredth of one percent.
"Borrower" shall mean Pluma, Inc., a North Carolina corpo-
ration.
"Borrowing Base" shall mean the sum of (a) eighty-five per cent (85%)
of the face amount (less maximum discounts, credits and allowances which may be
taken by or granted to Account Debtors in connection therewith) of Borrower's
Eligible Accounts; plus (b) sixty percent (60%) of the value of Borrower's
Eligible Inventory calculated on the basis of the lower of cost or market, with
cost calculated on a first-in, first-out basis, plus (c) fifty percent (50%) of
the Net Book Value of Eligible Equipment; plus (d) eighty percent (80%) of the
Net Book Value of the Realty; minus (e) any write-up in the Net Book Value of
Eligible Equipment or the Net Book Value of the Realty resulting from a
revaluation thereof at any time subsequent to the Closing Date; and minus (f)
the amount of Permitted Liens. Lender, at any time or times hereafter, may
increase or decrease the ratio of its Loans against Eligible Accounts or
Eligible Inventory for any reason Lender reasonably shall deem necessary, based
upon Lender's usual and customary credit and collateral considerations, and each
such increase or decrease shall become effective immediately for purposes of
calculating new Loans hereunder.
"Business Day" shall mean any day on which Lender is open for the
transaction of business in the State of North Carolina.
"CD Base Rate" shall mean that rate per annum at which Lender can
obtain funds in the national certificate of deposit market in the amount of Five
Million and No/100 Dollars ($5,000,000.00) at approximately ten o'clock a.m.,
Charlotte,
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<PAGE>
North Carolina time, on the first Business Day of a month for a maturity period
equal to thirty (30) days.
"CD Contract Rate" shall mean the Cost-Adjusted CD Base Rate plus the
Applicable Margin.
"CD Rate Loans" shall mean Loans bearing interest at the CD Contract
Rate.
"CD Reserve Percentage" means for the purposes of computing the
Cost-Adjusted CD Base Rate, the reserve requirement percentage (expressed as a
decimal) applicable to Lender, including any supplemental, marginal or emergency
reserves as in effect from time to time, imposed by the Board of Governors of
the Federal Reserve System (or any successor).
"CERCLA" shall mean the Comprehensive, Environmental, Response,
Compensation and Liability Act of 1980, as amended from time to time, and all
rules and regulations from time to time promulgated thereunder.
"Capital Expenditures" shall mean, for any fiscal year of Borrower, the
aggregate cost (less the amount of trade-in allowance included in such cost) of
all capital assets acquired by Borrower during such fiscal year, plus all
Capital Lease Obligations with respect to any Capital Lease entered into,
renewed, assumed or guaranteed during such year.
"Capital Lease" shall mean any lease of any property which would, in
accordance with Generally Accepted Accounting Principles, be required to be
classified and accounted for as a capital lease on a balance sheet of the
lessee.
"Capital Lease Obligation" shall mean, with respect to any Capital
Lease, the amount of the obligation of the lessee thereunder which would, in
accordance with Generally Accepted Accounting Principles, appear on a balance
sheet of such lessee in respect of such Capital Lease.
"Chatham Deed of Trust" shall mean the Credit Line Deed of Trust and
Security Agreement , and all amendments, modifications and supplements thereto,
with respect to the Chatham Realty executed and delivered by Borrower to Lender
pursuant to Section 5.1(a) hereof as security for the Obligations.
"Chatham Realty" shall mean those certain tract(s) or parcel(s) of land
owned by Borrower and situated in Pittsylvania County, Virginia, which are more
particularly described in Exhibit F-2 attached to this Agreement, and all
buildings and improvements now or hereafter located thereon, and all additions
and substitutions thereto, whether now or hereafter existing.
"Closing Date" shall mean the date referred to in Section
5.1 hereof.
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<PAGE>
"Collateral" shall mean and include the assets, property or interests
in property of Borrower securing the Obligations pursuant to Sections 4.1(a),
(b), (c), (d) and (e), and all other property and interests in personal property
which shall, from time to time, secure the Obligations.
"Committed Amount" shall mean Fifty-five Million Dollars
($55,000,000.00) as such amount may be reduced from time to time pursuant to
Section 2.2 of this Agreement.
"Cost-Adjusted CD Base Rate" means a rate per annum (rounded upwards,
if necessary, to the next higher 1/100 of one percent) determined pursuant to
the following formula:
Cost-Adjusted = CD Base Rate + Assessment Rate
-----------------------
CD Base Rate 1-CD Reserve Percentage
"Deeds of Trust" shall mean collectively the Eden Deed of
Trust, the Chatham Deed of Trust, the Martinsville Deed of Trust,
and the Vesta Deed of Trust.
"Default" shall mean any event or condition, which, with the giving of
notice or the passage of time or both, would constitute an Event of Default if
Borrower took no action to correct the same.
"EBIT" shall mean the earnings (or loss) before provision for income
taxes and interest for such fiscal period, as reflected on the financial
statements of Borrower supplied to Lender pursuant to Section 7.3 of this
Agreement, but excluding (a) any gain or loss arising from the sale of capital
assets, (b) any gain arising from any writeup of assets, (c) earnings of any
Subsidiary of Borrower accrued prior to the date it became a Subsidiary, (d)
earnings of any corporation, substantially all of the assets of which have been
acquired in any manner by Borrower or any of its Subsidiaries, realized by such
corporation prior to the date of such acquisition, (e) the earnings of any
Person to which the assets of Borrower or any of its Subsidiaries shall have
been sold, transferred or disposed of, or into which Borrower or any of its
Subsidiaries shall have merged, or been a party to any consolidation or other
form of reorganization, prior to the date of such transaction, (f) any gain
arising from the acquisition of any securities of Borrower or any of its
Subsidiaries, and (g) any gain or loss arising from extraordinary or
non-recurring items.
"EBITDA" shall mean the earnings (or loss) before provision for income
taxes, interest, depreciation and amortization for such fiscal period, as
reflected on the financial statements of Borrower supplied to Lender pursuant to
Section 7.3 of this Agreement, but excluding (a) any gain or loss arising from
the sale of capital assets, (b) any gain arising from any writeup of assets, (c)
earnings of Subsidiary of Borrower accrued prior to the date it became a
Subsidiary, (d) earnings of any corporation,
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<PAGE>
substantially all of the assets of which have been acquired in any manner by
Borrower or any of its Subsidiaries, realized by such corporation prior to the
date of such acquisition, (e) the earnings of any Person to which the assets of
Borrower or any of its Subsidiaries shall have been sold, transferred or
disposed of, or into which Borrower or any of its Subsidiaries shall have
merged, or been a party to any consolidation or other form of reorganization,
prior to the date of such transaction, (f) any gain arising from the acquisition
of any securities of Borrower or any of its Subsidiaries, and (g) any gain or
loss arising from extraordinary or non-recurring items.
"EPA" shall mean the Environmental Protection Act, as amended from time
to time, and all rules and regulations from time to time promulgated thereunder.
"Eden Deed of Trust" shall mean the Deed of Trust and Security
Agreement, and all amendments, modifications and supplements thereto, with
respect to the Eden Realty executed and delivered by Borrower to Lender pursuant
to Section 5.1(a) hereof as security for the Obligations.
"Eden Realty" shall mean those certain tracts or parcels of land owned
by Borrower and situated in Rockingham County, North Carolina, which are more
particularly described in Exhibit F-l attached to this Agreement, and all
buildings and improvements now or hereafter located thereon, and all additions
and substitutions thereto, whether now or hereafter existing.
"Eligible Account" shall mean all Accounts created or acquired by
Borrower in the ordinary course of its business as presently conducted, which
Lender, in its sole discretion, deems to be Eligible Accounts. Lender may
determine, on a daily basis, whether any Account constitutes and continues to
constitute an Eligible Account. If an Eligible Account subsequently becomes
ineligible for failure to continue to satisfy each of the below listed
requirements, its ineligibility shall become effective immediately. If an
Eligible Account subsequently becomes ineligible even though it satisfies each
of the below listed requirements, its ineligibility shall become effective upon
five days notice from Lender to Borrower. Unless Lender shall determine
otherwise in its sole discretion, in order to be an Eligible Account, an Account
must satisfy and continue to satisfy the following requirements:
(a) The Account is a bona fide existing obligation of the
named Account Debtor arising from the sale and delivery of merchandise or the
rendering of services to such Account Debtor in the ordinary course of
Borrower's business and is actually and absolutely owing to Borrower and is not
contingent for any reason;
(b) The subject merchandise has been shipped or deliv-
ered on open account to the named Account Debtor on an absolute
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<PAGE>
sale basis and not on consignment, on approval or on a sale or return basis or
subject to any other repurchase or return agreement and no material part of the
subject goods has been returned;
(c) The Account is not evidenced by chattel paper or an
instrument of any kind, unless such chattel paper or instrument is duly endorsed
to and is in the possession of Lender;
(d) If the Account Debtor is located outside the United States
(including its territories and possessions), the Account is payable in the full
amount of the face value of the Account in United States dollars and is
supported by an irrevocable letter of credit issued by a United States financial
institution satisfactory to Lender and the letter of credit and all documents
required to draw thereon have been delivered to Lender or Lender's agent bank;
(e) The Account is a valid, legally enforceable obligation of
the Account Debtor and no offset or other defense on the part of such Account
Debtor or to any claim on the part of such Account Debtor denying liability
thereunder has been asserted; provided, however, that, if the Account is
subject to any such offset, defense or claim, or any Inventory related thereto
has been returned, such Account shall not be an Eligible Account only to the
extent of the maximum amount of such offset, defense, claim or return and the
balance of such Account, if it represents a valid, uncontested and legally
enforceable obligation of the Account Debtor and meets all of the other criteria
for eligibility set forth herein, shall be considered an Eligible Account;
(f) The Account is not subject to any lien or security
interest whatsoever, except for Lender's security interest and Permitted Liens,
and a currently effective UCC financing statement filed by Lender against
Borrower covering such Account is on file in all appropriate filing locations
for all of Borrower's places of business and records concerning such Account;
(g) The Account is evidenced by an invoice in form acceptable
to Lender and has not remained unpaid for a period exceeding ninety (90) days
(or, in the case of an Account owing by an account debtor located outside the
United States and which meets all of the other criteria for eligibility, such
longer period of time as may be acceptable to Lender) after the due date of
such invoice or one hundred twenty (120) days after the date of such invoice;
(h) The Account Debtor is not located in the State of New
Jersey or, if the Account Debtor is located in the State of New Jersey, Borrower
has either qualified as a foreign corporation authorized to transact business
in the State of New Jersey or has filed a Notice of Business Activities report
with the New Jersey Division of Taxation for the then current year;
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<PAGE>
(i) The Account Debtor is Solvent and not the subject of any
bankruptcy or insolvency proceeding of any kind and the creditworthiness of the
Account Debtor is, in all other respects, acceptable to Lender, in its sole
discretion, at the time in question;
(j) The Account does not arise out of transactions with
an employee, officer, agent, director, stockholder or Affiliate
of Borrower;
(k) The Account is not due from an Account Debtor whose
indebtedness to Borrower on Accounts which are more than ninety (90) days after
the invoice due date of the respective invoices exceeds fifty percent (50%) of
such Account Debtor's total indebtedness to Borrower;
(1) The Account does not arise out of a contract with the
United States of America, or any department, agency, subdivision or
instrumentality thereof, or if so, Borrower has complied with all requirements
of the Federal Assignment of Claims Act relative to the assignment of such
Account to Lender;
(m) There are no material regulatory administrative or
judicial obstacles to Lender's direct enforcement of the Account against the
Account Debtor or to Lender's intervention in any enforcement action which might
be brought by Borrower with respect thereto and Lender shall not be subjected
to any material adverse tax consequences (other than taxes measured by the
income of Lender) as a result of taking such enforcement action or lending
against such Account; and
(n) Each of the warranties and representations set forth in
Section 10.1 has been reaffirmed with respect thereto at the time the most
recent Schedule of Accounts was provided to Lender.
"Eligible Equipment" shall mean Equipment (i) which is located at
either the Realty or premises leased by Borrower provided landlord agreements
satisfactory to Lender have been provided to Lender with respect to such leased
premises and (ii) for which currently effective UCC financing statements filed
by Lender against Borrower are on record in all appropriate filing locations.
"Eligible Inventory" shall mean all Inventory created or acquired by
Borrower in the ordinary course of its business presently conducted, which
Lender, in its sole discretion, deems to be Eligible Inventory. Lender may
determine, on a daily basis, whether any Inventory constitutes and continues to
constitute Eligible Inventory. If Eligible Inventory subsequently becomes
ineligible for failure to continue to satisfy each of the below listed
requirements, its ineligibility shall become effective immediately. If Eligible
Inventory subsequently become ineligible even though it satisfies each of the
below listed
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<PAGE>
requirements, its ineligibility shall become effective upon five days notice
from Lender to Borrower. In making its determination of Eligible Inventory,
Lender will consider whether Inventory satisfies and continues to satisfy the
following requirements:
(a) The Inventory consists of raw materials or finished goods
Inventory created or acquired by Borrower in the ordinary course of its business
located at Borrower's places of business specified on Exhibit A hereto, or
consists of dyed fabric and greige cloth on rolls located at Borrower's main
manufacturing plant specified on Exhibit A hereto, but excluding in any event,
supplies, containers, work in process and lot fabric;
(b) The Inventory is deemed by Lender in its sole discretion
to be in good saleable condition, not deteriorating in quality or obsolete and
subject to satisfactory internal control and management procedures;
(c) The Inventory is in good condition, meets all standards
imposed by any governmental agency, or department or division thereof, having
regulatory authority over such Inventory, its use or sale and is either
currently usable or currently saleable in the normal course of Borrower's
business;
(d) The Inventory is not subject to any lien or security
interest whatsoever, except for Lender's security interest and Permitted Liens,
and a currently effective UCC financing statement filed by Lender against
Borrower covering such Inventory is on file in all appropriate filing locations
where such Inventory is located;
(e) The Inventory is not consigned Inventory; and
(f) Each of the warranties and representations set forth in
Section 10.2 below has been reaffirmed with respect thereto at the time the most
recent Schedule of Inventory was provided to Lender.
"Environmental Laws" shall mean CERCLA, EPA, RCRA, OPHSCA, OSHA, SARA
and all other federal, state, local and foreign laws and regulations relating to
pollution or protection of the environment, including laws relating to
emissions, discharges, releases or threatened releases of Hazardous Materials
into the environment (including, without limitation, ambient air, surface water,
ground water or land) or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
Hazardous Materials, and any and all regulations, codes, plans, orders, decrees,
judgments, injunctions, notices or demand letters issued, entered, promulgated
or approved thereunder.
"Equipment" shall mean all goods of Borrower, including without
limitation, all machinery, equipment, motor vehicles, parts, supplies,
apparatus, appliances, tools, patterns, molds,
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<PAGE>
dies, blueprints, fittings, furniture, furnishings, fixtures and articles of
tangible personal property of every description now or hereafter owned by
Borrower or in which Borrower may have or may hereafter acquire any interest,
located at, upon or about, or attached to, the principal place of business of
Borrower herein described or at any other location.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, and all rules and regulations from time to time
promulgated thereunder.
"Event of Default" shall have the meaning specified in Section 12
hereof.
"Financials" shall mean the audited balance sheet and statement of
income and retained earnings of Borrower for the fiscal years ended December 31,
1994 and December 31, 1993.
"General Intangibles" shall mean all general intangibles, now existing
or hereafter owned or acquired or arising or in which Borrower now has or
hereafter acquires any rights, including but not limited to, causes of action,
corporate or business records, inventions, designs, patents, patent
applications, trademarks, trademark registrations and applications therefor,
goodwill, trade names, trade secrets, trade processes, copyrights, copyright
registrations and applications therefor, licenses, permits, franchises,
customer lists, all claims under guaranties, tax refund claims, rights and
claims against carriers and shippers, leases, claims under insurance policies,
all rights to indemnification and all other intangible personal property of
every kind and nature.
"Generally Accepted Accounting Principles" shall mean those generally
accepted principles of accounting recognized as such by the American Institute
of Certified Public Accountants or the Financial Accounting Standards Board or
other similar accounting body of comparable standing consistently applied and
maintained on a basis for Borrower throughout the period indicated and
consistent with the prior financial practice of Borrower as reflected in the
Financials.
"Hazardous Material" shall mean any pollutants, contaminants,
chemicals, or industrial, toxic or hazardous substance or material defined as
such in (or for purposes of) the Environmental Laws, or any other
environmentally regulated substances, including without limitation, any
materials containing asbestos and any waste constituents coming within the
definition or list of hazardous substances in 40 C.F.R. ss.261.1 through 261.33.
"Indebtedness" shall mean all liabilities, obligations and indebtedness
of any and every kind and nature, including, without limitation, the Obligations
and all obligations to trade creditors, whether heretofore, now or hereafter
owing, arising, due or payable from Borrower to any Person and howsoever
evidenced,
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<PAGE>
created, incurred, acquired or owing, whether primary, secondary, direct,
contingent, fixed or otherwise. Without in any way limiting the generality of
the foregoing, Indebtedness specifically includes the following:
(a) All obligations or liabilities of any Person that are
secured by any lien, claim, encumbrance or security interest upon property owned
by Borrower, even though Borrower has not assumed or become liable for the
payment thereof;
(b) All obligations or liabilities created or arising under
any lease (including but not limited to leases required to be capitalized under
Generally Accepted Accounting Principles) of real or personal property, or
conditional sale or other title retention agreement with respect to property
used or acquired by Borrower, even though the rights and remedies of the lessor,
seller or lender thereunder are limited to repossession of such property;
(c) All unfunded pension fund obligations and liabili-
ties; and
(d) Deferred taxes.
"Interest Expense" shall mean with respect to any period of
determination the total payments of interest on Indebtedness required to be paid
by Borrower or any of its Subsidiaries during such period, determined in
accordance with Generally Accepted Accounting Principles.
"Interest Period" shall mean a calendar month.
"Inventory" shall mean all inventory of Borrower wherever located,
including without limitation, all goods manufactured or acquired for sale or
lease, and any piece goods, raw materials, work in process and finished
merchandise, bindings or component materials, and all supplies, goods,
incidentals, office supplies, packaging materials and any and all items used or
consumed in the operation of the business of Borrower or which may contribute to
the finished product or to the sale, promotion and shipment thereof, in which
Borrower now or at any time hereafter may have an interest, whether or not the
same is in transit or in the constructive, actual or exclusive occupancy or
possession of Borrower or is held by Borrower or by others for Borrower's ac-
count.
"LIBOR Contract Rate" shall mean the LIBOR Rate plus the Applicable
Margin.
"LIBOR Rate" shall mean that rate per annum (adjusted to reflect
reserve, deposit insurance or other similar requirements to which Lender may be
subject) at which deposits in United States dollars would be offered to Lender
for a period equal to thirty (30) days at 11:00 a.m., Greensboro, North Carolina
time,
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<PAGE>
two (2) Business Days prior to the first Business Day of an Interest Period for
settlement in immediately available funds by major banks in the London interbank
market, in an amount approximately equal to the outstanding principal amount of
the Loans at such time.
"LIBOR Rate Loans" shall mean Loans bearing interest at the LIBOR
Contract Rate.
"Liabilities" shall mean at any date the aggregate of the liabilities
of Borrower appearing on the liability side of its balance sheet prepared as of
such date in accordance with Generally Accepted Accounting Principles.
"Loans" shall mean and refer to the loans and advances made by Lender
to Borrower pursuant to the terms of this Agreement.
"Loan Documents" shall mean and collectively refer to this Agreement,
the Note, the Deeds of Trust, all Supplemental Documentation and any and all
agreements, instruments and documents, including, without limitation, notes,
guaranties, mortgages, deeds to secure debt, deeds of trust, chattel mortgages,
pledges, powers of attorney, consents, assignments, contracts, notices, security
agreements, trust account agreements and all other written matters whether
heretofore, now or hereafter executed by or in behalf of Borrower and/or
delivered to Lender or any Participant, with respect to this Agreement, or with
respect to the transactions contemplated by this Agreement.
"Martinsville Deed of Trust" shall mean the Credit Line Deed of Trust
and Security Agreement, and all amendments, modifications and supplements
thereto, with respect to the Martinsville Realty executed and delivered by
Borrower to Lender pursuant to Section 5.1(a) hereof as security for the
Obligations.
"Martinsville Realty" shall mean those certain tract(s) or parcel(s) of
land owned by Borrower and situated in Henry County, Virginia, which are more
particularly described in Exhibit F-3 attached to this Agreement, and all
buildings and improvements now or hereafter located thereon, and all additions
and substitutions thereto, whether now or hereafter existing.
"Net Book Value of Eligible Equipment" shall mean the historical cost
of Borrower's Eligible Equipment less accumulated depreciation to date, all as
determined in accordance with Generally Accepted Accounting Principles.
"Net Book Value of the Realty" shall mean the historical cost of the
Realty and of any real property of Borrower acquired after the Closing Date upon
which Lender has a duly perfected first priority deed of trust or mortgage, less
accumulated depreciation to date, all as determined in accordance with Generally
Accepted Accounting Principles.
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<PAGE>
"Note" shall mean the promissory note of Borrower in the original
principal amount of $55,000,000 executed by Borrower and delivered to Lender
pursuant to Section 2.1 hereof, together with any amendments, modifications and
supplements thereto, and any renewals or extensions thereof, in whole or in
part, evidencing Loans made by Lender to Borrower pursuant to this Agreement.
"OPHSCA" shall mean the Oil Pollution and Hazardous Substances Control
Act of 1978, N.C.G.S. ss.143-215.75 et seq., as amended from time to time, and
all rules and regulations from time to time promulgated thereunder.
"OSHA" shall mean the Occupational Safety and Health Act, as amended
from time to time, and all rules and regulations from time to time promulgated
thereunder.
"Obligations" shall mean and include the Loans and all other loans,
advances, debts, liabilities, obligations, covenants and duties owing, arising,
due or payable from Borrower to Lender of any kind or nature, present or future,
whether or not evidenced by any note, guaranty or other instrument, whether
arising under this Agreement, the Note, the Deeds of Trust, the other Loan
Documents or otherwise, whether direct or indirect (including those acquired by
assignment), absolute or contingent, primary or secondary, due or to become due,
now existing or hereafter arising and however acquired. The term includes, but
without limitation, all interest, charges, expenses, fees, attorney's and
paralegal's fees and any other sums chargeable to Borrower by Lender under this
Agreement or any of the other Loan Documents.
"Participant" shall mean any Person, now or any time hereafter,
participating with Lender in the Loans by Lender to Borrowers pursuant to this
Agreement.
"Permitted Liens" shall mean any of the following liens securing any
Indebtedness of Borrower on Borrower's property, real or personal, whether now
owned or hereafter acquired:
(a) Liens of carriers, warehousers, mechanics and materialmen
incurred in the ordinary course of business for sums not overdue or being
contested in good faith and with due diligence by appropriate proceedings;
(b) Liens incurred in the ordinary course of business in
connection with workers' compensation, unemployment insurance or other forms of
governmental insurance or benefits, or to secure the performance of letters of
credit, bids, tenders, statutory obligations, leases and contracts (other than
for borrowed funds) entered into in the ordinary course of business or to se-
cure obligations on surety or appeal bonds;
(c) Liens for current taxes, assessments or other gov-
ernmental charges which are not delinquent or remain payable without any penalty
or which are being contested in good faith
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and with due diligence by appropriate proceedings but do not in Lender's
judgement adversely affect Lender's rights or the priority of Lender's lien in
the Collateral or the Realty, and if reasonably requested by Lender, Borrower
shall establish reserves satisfactory to Lender with respect thereto;
(d) Liens placed upon fixed assets hereafter acquired at the
time of, or within ten (10) days after, the acquisition thereof to secure a
portion of the purchase price thereof or to secure a Capital Lease, provided (i)
any such lien shall not encumber any other property of Borrower, (ii) any such
lien shall not exceed 100% of the purchase price of such fixed assets, and (iii)
the aggregate amount of Indebtedness and Capital Leases secured by such liens
incurred as a result of such purchases during any fiscal year shall not exceed
$100,000.00;
(e) Liens existing on the date hereof with respect to
the Equipment and set forth on Exhibit B attached hereto; and
(f) Reservations, exceptions, encroachments, easements,
rights-of-way, covenants, conditions, restrictions, leases and other similar
title exceptions or encumbrances affecting the Realty, provided they do not in
the aggregate materially detract from the value thereof or materially interfere
with its use in the ordinary conduct of Borrower's business.
"Person" shall mean a corporation, an association, a partnership, an
organization, a business, an individual or a government or political
subdivision thereof or any government agency.
"Prime Rate" shall mean the interest rate publicly announced from time
to time by Lender to be its prime rate, which may not necessarily be its best
lending rate. In the event Lender shall abolish or abandon the practice of
announcing its Prime Rate or should the same be unascertainable, Lender shall
designate a comparable reference rate which shall be deemed to be the Prime Rate
under this Agreement and the other Loan Documents.
"Quarter" shall mean one of the four calendar quarters in
each calendar year.
"RCRA" shall mean the Resource Conservation and Recovery Act, as
amended from time to time, and all rules and regulations from time to time
promulgated thereunder.
"Realty" shall collectively mean the Eden Realty, the
Chatham Realty, the Martinsville Realty, and the Vesta Realty.
"SARA" shall mean the Superfund Reauthorization and Amendments Act of
1986, as amended from time to time, and all rules and regulations promulgated
thereunder.
"Schedule of Accounts" shall mean a Schedule of Accounts in the form
specified in Section 9.3 hereof.
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<PAGE>
"Schedule of Inventory" shall mean a Schedule of Inventory in the form
specified in Section 9.6 hereof.
"Solvent" shall mean, as to any Person, that such Person has capital
sufficient to carry on its business and transactions and all business and
transactions in which it is about to engage and is able to pay its debts as they
mature and owns property having a value, both at fair valuation and at present
fair saleable value, greater than the amount required to pay its debts.
"Stock" shall mean all shares, options, interests, partnerships or
other equivalents (howsoever designated) of or in a corporation, whether voting
or non-voting, including, without limitation, common stock, warrants, preferred
stock, convertible debentures and all agreements, instruments and documents
convertible, in whole or in part, into any one or more or all of the foregoing.
"Subordinated Debt" shall mean all Indebtedness for borrowed money or
the equivalent which is subordinated in right of payment to the Obligations owed
to Lender and the holder of such Subordinated Debt has executed and delivered
to Lender a subordination agreement in form and substance acceptable to Lender.
"Subsidiary" shall mean any corporation, more than fifty percent (50%)
of the outstanding Stock having ordinary voting power to elect a majority of the
board of directors of which is at the time, directly or indirectly, owned by
Borrower and/or one or more Subsidiaries (irrespective of whether, at the time,
Stock of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency).
"Supplemental Documentation" shall mean all agreements, instruments,
documents, financing statements, warehouse receipts, bills of lading, notices of
assignment of accounts, schedules of accounts assigned, mortgages, deeds of
trust, certificates of title and other written matter necessary or requested by
Lender to perfect and maintain perfected Lender's security interest in the
Collateral and the Realty and to consummate the transactions contemplated by
this Agreement and the other Loan Documents.
"Tangible Net Worth" shall mean at any date the total shareholder's
equity (including capital stock, additional paid-in capital and retained
earnings after deducting treasury stock) appearing on a balance sheet of
Borrower prepared as of such date in accordance with Generally Accepted
Accounting Principles, minus (a) the amount, if any, of Borrower's intangible
assets as reflected on such balance sheet of Borrower, including without
limitation, General Intangibles and any other asset which would be treated as an
intangible under Generally Accepted Accounting Principles; (b) any indebtedness
owed to Borrower by any Affiliate; (c) any write-up in the book value of any
fixed asset resulting from a revaluation thereof at any time subsequent to
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the Closing Date; and (d) the amount, if any, at which any shares of Stock of
Borrower appear on the asset side of its balance sheet.
"Unused Commitment Margin" shall be the applicable Basis Points as
computed at the end of each fiscal quarter in accordance with the following
schedule:
Ratio of EBIT for
the previous four
consecutive fiscal
quarters (including
the quarter then
ending) to Interest
Expense for such
consecutive fiscal
quarters Unused Commitment Margin
Less than 3.0 30 Basis Points
3.0 to 3.99 25 Basis Points
4.0 to 4.99 20 Basis Points
5.0 or greater 15 Basis Points
"Vesta Deed of Trust" shall mean the Credit Line Deed of Trust and
Security Agreement, and all amendments, modifications and supplements thereto,
with respect to the Vesta Realty executed and delivered by Borrower to Lender
pursuant to Section 5.1(a) hereof as security for the Obligations.
"Vesta Realty" shall mean those certain tract(s) or parcel(s) of land
owned by Borrower and situated in Patrick County, Virginia, which are more
particularly described in Exhibit F-4 attached to this Agreement, and all
buildings and improvements now or hereafter located thereon, and all additions
and substitutions thereto, whether now or hereafter existing.
1.2 Accounting Terms. Any accounting terms used in this Agreement which
are not specifically defined shall have the meanings customarily given them in
accordance with Generally Accepted Accounting Principles; provided, however,
that, in the event that changes in Generally Accepted Accounting Principles
shall be mandated by the Financial Accounting Standards Board, or any similar
accounting body of comparable standing, or shall be recommended by Borrower's
certified public accountants, to the extent that such changes would modify such
accounting terms or the interpretation or computation thereof, such changes
shall be followed in defining such accounting terms only from and after such
date as Borrower and Lender shall have amended this Agreement to the extent
necessary to reflect any such changes in the financial covenants and other terms
and conditions of this Agreement. Non cash changes, if any, to Borrower's
balance
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sheet, statement of income and retained earnings or statement of cash flows made
subsequent to the Closing Date because of adjustments required by currently
existing Generally Accepted Accounting Principles shall be excluded from
financial covenant calculations under this Agreement until such date as Borrower
and Lender shall have amended this Agreement to the extent necessary to reflect
any such changes in the financial covenants and other terms and conditions of
this Agreement.
1.3 Other Terms. All other terms contained in this Agreement shall,
when the context so indicates, have the meanings provided for by the Uniform
Commercial Code of the State of North Carolina to the extent the same are used
or defined therein.
SECTION 2. THE LOANS; INTEREST; FEES; AND PURPOSES OF THE
LOANS.
2.1 Revolving Line of Credit. Subject to the provisions of Section 5
below and all of the other terms and conditions set forth in this Agreement and
the other Loan Documents, and provided there does not then exist a Default or
an Event of Default, upon Borrower's oral or written request therefor, Lender
shall make a revolving line of credit available for Borrower's use from time to
time during the term of this Agreement (until May 30, 2000 unless extended in
accordance herewith) in an aggregate amount at any one time outstanding of up to
the Available Amount. All Loans to Borrower shall be less such reserves as
Lender, based upon Lender's usual and customary credit and collateral
considerations may deem proper and necessary, shall be evidenced by the Note
and, subject to the provisions of Section 12.3 below, shall be payable at the
interest rate set forth in Section 2.4 hereof. Borrower may borrow, repay and
reborrow up to the limits of the Available Amount all in accordance with the
provisions of this Agreement and the other Loan Documents. All requests for
Loans shall be irrevocable and binding upon Borrower if made by any of the
Persons set forth on Exhibit G attached hereto or any other Person authorized in
writing by Borrower to do so.
2.2 Reduction of the Committed Amount. Borrower shall have the right,
upon at least fifteen (15) days written notice given to Lender in the manner set
forth in Section 15.3 below, and upon payment of the prepayment fee set forth in
Section 2.13 below, to reduce the Committed Amount effective upon the beginning
of the following Interest Period. Any such reduction of the Committed Amount
shall be in the amount of One Million and No/100 Dollars ($1,000,000.00) or any
integral multiple thereof and shall be effective for all times during the term
of this Agreement. In the event that Borrower elects to reduce the Committed
Amount during the term of this Agreement, the Committed Amount shall not
thereafter be increased without Lender's prior written consent, which consent
may be withheld in Lender's sole discretion.
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2.3 Interest Rate. Subject to the provisions of Sections 2.8 and 12.3
below, Borrower shall pay to Bank interest on the principal amount of the Loans
outstanding at a rate per annum equal to one of the following three rates:
(i) the Prime Rate minus twenty-five Basis Points;
(ii) CD Contract Rate; or
(iii) LIBOR Contract Rate.
2.4 Selection of Interest Rate. Borrower may select the interest rate
which will apply for a particular Interest Period by notice to Lender before one
o'clock p.m., Charlotte, North Carolina time, on the second Business Day prior
to the first day of the Interest Period if the LIBOR Base Rate is selected, and
otherwise before one o'clock p.m., Charlotte, North Carolina Time, on the last
Business Day prior to the first day of the Interest Period. For any Interest
Period in which the Prime Rate applies, changes in the rate of interest payable
by Borrower due to a change in the Prime Rate shall take effect on the same day
on which the Prime Rate changes. For any Interest Period in which the CD
Contract Rate or the LIBOR Contract Rate applies, such interest rate will remain
constant throughout the Interest Period and will not fluctuate. If Borrower
fails to notify Lender of its selection of interest rate by the deadlines set
forth in this Section 2.4.2, Borrower will be deemed to have selected the Prime
Rate option for the applicable Interest Period.
2.5 Unused Commitment Fee. During the term of this
Agreement, Borrower agrees to pay to Lender each Quarter a per annum unused
commitment fee equal to the product of: (a) the Unused Commitment Margin times
(b) the difference between the Committed Amount during the prior Quarter and
the average daily balance of the Loans outstanding during such Quarter.
Such per annum unused commitment fee shall be calculated on the basis of a
three hundred sixty (360) day year consisting of four (4) ninety (90) day
quarters for the actual number of days elapsed and shall be payable quarterly
in arrears on the first day of each Quarter commencing on July 1, 1995.
2.6 Calculation of Interest. Interest will be calculated on a daily
basis and computed on the basis of actual days elapsed over a year of 360 days.
2.7 Late Charges. Borrower shall be obligated under the Note to pay
Lender a late charge equal to four percent (4%) of the amount of any installment
of principal or interest, or both, received by Lender more than fifteen (15)
days after the due date thereof.
2.8 Maximum Lawful Rate of Interest. In no contingency or
event whatsoever shall the interest rate charged pursuant to the
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terms of this Agreement or the Note exceed the highest rate permissible under
any law which a court of competent jurisdiction shall, in a final determination,
deem applicable hereto. In the event that such a court determines that Lender
has received interest herein in excess of the highest applicable rate, such ex-
cess interest shall be first applied to any unpaid principal balance owed by
Borrower, and if the then remaining excess interest is greater than any unpaid
principal balance, Lender shall promptly refund such excess interest to
Borrower.
2.9 All Advances to Constitute One Loan. All Loans by Lender to
Borrower under this Agreement and the other Loan Documents shall constitute one
general obligation of Borrower and shall be secured by Lender's security
interest in all of the Collateral and the Realty granted hereunder or under the
other Loan Documents, and by all other security interests, liens, claims and
encumbrances heretofore, now, or at any time or times hereafter granted by
Borrower to Lender.
2.10 Loan Purposes. Borrower shall use the proceeds of the initial Loan
hereunder to pay and satisfy the Indebtedness of Borrower owed to Lender under
the Existing Loan Agreement and Borrower shall use the proceeds of all
subsequent Loans for legal and proper corporate purposes (duly authorized by
Borrower's Board of Directors) which are consistent with all applicable laws and
statutes.
2.11 Additional Costs. If at any time a change in any law, regulation
or reserve requirement applicable to this Agreement or interpretation or
administration of the same by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
any reversal by such entities of an interpretation by the Lender as to
compliance with such law or regulation, shall impose, increase or modify any
reserve, and the result of any of the foregoing is to increase the cost to the
Lender of maintaining the Loans by an amount deemed by the Lender in its sole
discretion to be material, then within fifteen (15) days after demand by the
Lender, the Borrower agrees to pay to the Lender such additional amount or
amounts as will compensate the Lender for such increased costs.
2.12 Unavailability. With respect to any Interest Period for which
Lender is in the process of determining a CD Contract Rate or a LIBOR Contract
Rate, or if such CD Contract Rate or LIBOR Contract Rate is currently in effect,
and the Lender in its sole opinion determines that funds are not available to it
in the applicable markets, then in that event: (a) the Lender's obligation to
make, maintain or convert Loans at or into a CD Contract Rate or LIBOR Contract
Rate shall be suspended until such time as the Lender shall have concluded that
the circumstances giving rise to such a suspension no longer exists; and (b)
the Lender, upon a determination of unavailability of funds as set out above,
shall, until notice to the Borrower that the circumstances giving rise to the
suspension of the CD Contract
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Rate or LIBOR Contract Rate interest rates no longer exist, charge a rate of
interest and the Borrower agrees to pay a rate of interest based on the Prime
Rate.
2.13 Prepayment Fees. If Borrower shall reduce the Committed Amount
pursuant to Section 2.2 of this Agreement or if this Agreement shall be
terminated early pursuant to Section 11.2 or 11.3, then Borrower shall pay to
Lender a prepayment fee equal to (a) one quarter of one percent (1/4%) times (b)
the amount of (i) such reduction of the Committed Amount, or (ii) the Committed
Amount, at the time of early termination; provided, however, Borrower shall not
be required to pay a prepayment fee at such time as Borrower reduces the
Committed Amount pursuant to Section 2.2 or terminates the Agreement early
pursuant to Section 11.2 if, at such time, Borrower has raised funds through
sale of Borrower's common stock or preferred stock (excluding any form of
debenture, bond or other debt instrument) in a public or private stock offering
sufficient to reduce the Committed Amount or repay the Loans in full as
applicable.
SECTION 3. PAYMENTS.
3.1 Payments. All Obligations of Borrower to Lender shall be payable at
Lender's address set forth in Section 15.3 below or at such other place or
places as Lender may designate from time to time. That portion of the
Obligations consisting of:
(a) Principal, shall be payable by Borrower to Lender
immediately upon the earlier of (i) the termination of this Agreement by
Borrower or Lender pursuant to Sections 11.2 or 11.3 hereof, (ii) to the extent
of any collections with respect to any proceeds of any of the Collateral or the
Realty, the receipt of said collections, (iii) any time that the amount of the
Loans outstanding exceeds the Available Amount, the amount of such excess, or
(iv) the last day of the term of this Agreement (May 30, 2000 unless such date
is extended);
(b) Interest, payable on the Loans pursuant to this Agreement
or any of the other Loan Documents, shall be payable quarterly on each January
1, April 1, July 1 and October 1;
(c) Reasonable costs, fees and expenses payable pursuant to
this Agreement or the other Loan Documents shall be payable by Borrower to
Lender or to such other Person designated by Lender in writing on demand; and
(d) The balance of the Obligations, if any, shall be payable
by Borrower to Lender as and when provided in this Agreement or the other Loan
Documents, whichever is earlier.
With respect to any sums due and payable by Borrower to Lender pursuant
to subsection (b) above, Borrower authorizes and directs Lender, at its option,
to cause such sums to be paid on their respective due dates by charging such
payment as a Loan
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under this Agreement on Borrower's behalf as of such date. With respect to any
sums due and payable by Borrower to Lender pursuant to subsection (c) and
subsection (d) above, Borrower authorizes and directs Lender, at its option,
after notice to Borrower, to cause such sums to be paid on their respective due
dates by charging such payment as a Loan under this Agreement on Borrower's
behalf as of such date.
3.2 Receipt of Payments. In the event Borrower (or any of its
Affiliates, Subsidiaries, stockholders, directors, officers, employees or
agents) shall receive any monies, checks, notes, drafts or any other items of
payment relating to and/or proceeds of the Collateral or the Realty, Borrower
agrees with Lender that the deposit and application of all such items of payment
shall be governed by the Master Agreement between Borrower and Lender dated
September 27, 1993, as amended or modified from time to time (the "Cash
Management Agreement"). In the event that Borrower receives any such items of
payment, Borrower shall hold the same in trust for Lender and as the property of
Lender pursuant to the terms hereof, separate from the funds of Borrower. If
required by Lender in its sole discretion, Borrower shall forward the same to a
lockbox maintained by Lender pursuant to the Cash Management Agreement.
3.3 Collections; Lender's Right to Notify Account Debtors and to
Endorse Borrower's Name. Borrower hereby authorizes Lender, at any time or times
after the occurrence and during the continuance of an Event of Default, to (a)
open Borrower's mail and collect any and all amounts due to Borrower from
Account Debtors; (b) notify any or all Account Debtors that the Accounts have
been assigned to Lender and that Lender has a security interest therein; and (c)
direct such Account Debtors to make all payments due from them to Borrower upon
the Accounts directly to Lender. Lender shall promptly furnish Borrower with a
copy of any such notice sent and Borrower hereby agrees that any such notice, in
Lender's sole discretion, may be sent on Borrower's stationery, in which event
Borrower shall co-sign such notice with Lender. Borrower irrevocably makes,
constitutes and appoints Lender (and all Persons designated by Lender for that
purpose) as Borrower's true and lawful attorney (and agent-in-fact) to endorse
Borrower's name on any checks, notes, drafts or any other payment relating to
and/or proceeds of the Collateral or the Realty which come into Lender's
possession or Lender's control.
3.4 Application of Payments and Collections. Subject to the provisions
of Section 3.1 hereof and any other provisions herein expressly directing the
application of payments and collections, Borrower irrevocably waives the right
to direct the application of any and all payments and collections at any time or
times hereafter received by Lender from or on behalf of Borrower, and Borrower
does hereby irrevocably agree that Lender shall have the continuing exclusive
right to apply and to reapply any and all such payments and collections received
at any time or
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times hereafter by Lender or its agent against the Obligations, in such manner
as Lender, in its sole discretion, may determine, notwithstanding any entry by
Lender upon any of its books and records. Notwithstanding the foregoing, if no
Default or Event of Default has occurred and is continuing, all collections with
respect to the proceeds of Accounts received by Lender when there are no
outstanding Loans in excess of the minimum loan balance reasonably established
by Lender shall be remitted by Lender to Borrower.
3.5 Statement of Account. Lender shall provide Borrower with a
statement of account on a monthly basis and each statement of account which is
delivered by Lender to Borrower and which relates to the Obligations shall be
deemed correct and conclusively binding upon Borrower and Lender, unless
thereafter waived in writing by Lender or unless, within ninety (90) days after
Borrower's receipt of such statement, Borrower delivers to Lender, in the
manner set forth in Section 15.3 below, written objection thereto specifying
the error or errors, if any, contained in any such statements.
SECTION 4. SECURITY FOR THE OBLIGATIONS.
4.1 Security Interest in the Collateral. To secure the prompt payment
and performance of all of the Obligations, Borrower hereby pledges and assigns
to Lender and grants to Lender a continuing general security interest in and to
the following assets, property and interests in property of Borrower, whether
now owned or existing or at any time hereafter acquired, arising or created,
wherever located:
(a) The Equipment;
(b) The Accounts;
(c) The Inventory;
(d) The General Intangibles; and
(e) Proceeds and products of any and all of the fore-
going, including insurance proceeds thereof.
Such security interests shall give Lender a continuing lien in, on and
to all of the Collateral, and the proceeds and products thereof and thereto,
and any replacements, additions, accessions or substitutions thereof, including
without limitation, the proceeds of insurance covering the Collateral.
4.2 Security Interest in the Realty. In addition to the Collateral, the
Obligations shall be secured by the Deeds of Trust, conveying a first priority
security interest and lien in the Realty, subject only to the Permitted Liens
applicable thereto.
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4.3 Disclosure of Security Interest. Borrower shall make appropriate
entries upon its financial statements and its books and records disclosing
Lender's security interest in the Collateral and the Realty.
4.4 Supplemental Documentation. At Lender's request, Borrower shall
execute and/or deliver to Lender, at any time or times hereafter, all
Supplemental Documentation that Lender may reasonably request, in form and
substance acceptable to Lender, and pay all charges, expenses and fees Lender
may reasonably incur in filing any of the Supplemental Documentation, and all
taxes relating thereto. Borrower hereby irrevocably makes, constitutes and
appoints Lender (and all Persons designated by Lender for that purpose) as
Borrower's true and lawful attorney (and agent-in-fact) to sign the name of
Borrower on any of the Supplemental Documentation which Borrower fails to
execute and deliver to Lender within ten (10) days of written request therefor
and to deliver any of the Supplemental Documentation to such Persons as Lender,
in its sole discretion, may elect. Borrower ratifies and approves all acts of
such attorney other than actions that increase the amount of the outstanding
Loans or the Obligations owing by Borrower to Lender and agrees that such power
is irrevocable so long as any Obligations of Borrower are outstanding. Borrower
agrees that a carbon, photographic, photostatic, or other reproduction of this
Agreement or a financing statement is sufficient as a financing statement and
may be filed by Lender in any filing office.
4.5 Inspection. Lender (by any of its officers, employees and agents)
shall have the right, at any time or times during Borrower's usual business
hours, to inspect the Collateral, all records related thereto (and to make
extracts from such records), and the premises upon which any of the Collateral
is located, to discuss Borrower's affairs and finances with any director,
officer, employee or agent of Borrower and to verify the amount, quality,
quantity, value and condition of, or any other matter relating to, the
Collateral with any Person having knowledge thereof. Lender may, at any time
upon and after the occurrence of an Event of Default and during the continuance
thereof, employ and maintain in Borrower's premises custodians selected by
Lender who shall have full authority to do all acts necessary to protect
Lender's interest. All expenses incurred by Lender by reason of the employment
of such custodians shall be paid by Borrower, added to the Obligations and
secured by the Collateral.
4.6 Cross-Collateralization. The Collateral, the Realty and all other
collateral which Lender may at any time acquire from any other source in
connection with the Obligations of Borrower to Lender shall constitute
cross-collateral for all Obligations of Borrower without apportionment or
designation as to particular Obligations, and all Obligations, howsoever and
whensoever incurred, shall be secured by all of the Collateral and the Realty,
howsoever and whensoever acquired, and Lender shall have the right, in its sole
discretion, to determine the
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order in which Lender's rights in or remedies against the Collateral or the
Realty are to be exercised and which types of the Collateral and the Realty or
which portions of the Collateral or the Realty are to be proceeded against and
the order of application of proceeds of the Collateral and the Realty as
against particular Obligations of Borrower.
SECTION 5. CLOSING; CONDITIONS PRECEDENT.
5.1 Conditions Precedent to Closing. The closing hereunder shall be
held on the date of this Agreement ("Closing Date") at the offices of Tuggle
Duggins & Meschan, P.A., Lender's counsel, in Greensboro, North Carolina or at
such other place as Borrower and Lender may select. Notwithstanding any other
provision of this Agreement or the other Loan Documents, and without limiting in
any manner the rights of Lender under the other sections of this Agreement, it
is understood and agreed that Lender shall have no obligation to make the Loans
on or after the Closing Date under this Agreement unless and until the following
conditions have been and continue to be satisfied:
(a) Documentation. Lender shall have received the
following documents, each to be in form and substance satisfac-
tory to Lender and it counsel;
(i) Certified copies or certificates of Borrower's casualty
insurance policies, together with loss payable endorsements on
Lender's standard form of loss payee endorsement naming Lender as loss
payee, and certified copies or certificates of Borrower's liability
insurance policies, together with endorsements naming Lender as an
additional insured thereunder, as required to be maintained by Borrower
pursuant to Section 7.7 hereof;
(ii) Copies of all filing receipts or acknowledgements issued
by any governmental authority to evidence any filing or recordation
necessary to perfect the security interests of Lender in the Collateral
and evidence in a form acceptable to Lender that such security
interests constitute valid and first priority perfected security
interests, subject only to Permitted Liens;
(iii) Certificate of the Secretary or an Assistant Secretary
of Borrower certifying (a) that attached thereto is a true and complete
copy of the Bylaws of Borrower as in effect on the date of such
certification, (b) that attached thereto is a true and complete copy of
Resolutions adopted by the Board of Directors of Borrower, authorizing
the execution, delivery and performance of this Agreement and the
other Loan Documents, and the consummation of the transactions
contemplated hereby and thereby and (c) as to the incumbency and
genuineness of the signature of each officer of Borrower executing this
Agreement or any of the other Loan Documents;
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(iv) Copies of the Articles of Incorporation of Borrower, and
all amendments thereto, certified by the Secretary of State of North
Carolina;
(v) Good standing certificates for Borrower issued by the
Secretary of State or other appropriate official of the States of North
Carolina and Virginia and of each other jurisdiction where the conduct
of Borrower's business activities or the ownership of its properties
necessitates qualification;
(vi) A certificate signed by an officer of Borrower, dated as
of the Closing Date, stating that: (a) the representations and
warranties set forth in Section 6 hereof are true and correct on and as
of such date, (b) Borrower is on such date in compliance with all of
the terms and provisions set forth in this Agreement and the other Loan
Documents, and (c) on such date no Default or Event of Default has oc-
curred and is continuing;
(vii) The acceptable written opinion of counsel to
Borrower as to such matters as Lender and its counsel may
require;
(viii) The duly executed Note;
(ix) The duly executed Deeds of Trust;
(x) Agreements duly executed by each warehouseman, bailee or
other Person in possession of the Collateral, waiving each of their
respective liens and claims in the Collateral;
(xi) Landlord agreements satisfactory to Lender with respect
to all premises leased by Borrower at which Collateral is located;
(xii) Policies of title insurance (including revolving credit
and zoning endorsements) in standard ALTA form, in such amounts as
required by Lender, issued by a title insurance company selected by
Borrower and acceptable to Lender insuring that the Deeds of Trust
constitute valid, enforceable first priority liens on the Realty, free
and clear from all title defects and encumbrances whatsoever except for
and subject to Permitted Liens applicable thereto and other exceptions
as shall be acceptable to Bank in its sole discretion, and receipt of
satisfactory evidence of the payment of all premiums thereon;
(xiii) Such UCC financing statements, in addition to
existing filed UCC financing statements, as Lender may
request; and
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(xiv) Such other documents, opinions, certificates and
agreements as Lender shall reasonably request in connection with the
transactions contemplated by this Agreement or with any of the
foregoing matters; and
(b) Pending Action, Etc. No action, proceeding, in-
vestigation, regulation or legislation shall have been instituted, threatened
or proposed before any court, governmental agency or legislative body to enjoin,
restrain or prohibit, or to obtain substantial damages in respect of, or which
is related to or arises out of this Agreement or the consummation of the
transactions contemplated hereby, or which, in Lender's sole discretion, would
make it inadvisable to consummate the transactions contemplated by this
Agreement.
(c) Payment at Closing. There shall have been paid to the
respective parties thereto the amounts specified in Section 14 to the extent any
such amounts are or have been billed to Lender at or prior to the Closing Date,
and in addition Borrower shall have paid to Lender a non-refundable facility fee
of $50,000.00.
(d) Governmental Approval. All necessary approvals,
authorizations and consents, if any be required, of all governmental bodies
(including courts) having jurisdiction with respect to the Collateral, the
Realty and the transactions contemplated by this Agreement, shall have been
obtained.
(e) Proceedings and Documents. All opinions, certificates and
other instruments and all proceedings in connection with the closing of the
transactions contemplated by this Agreement shall be satisfactory in form and
substance to Lender and its special counsel, and Lender shall have received
copies of all other instruments and other evidence as Lender may reasonably
request with respect to the transactions contemplated by this Agreement and the
taking of all actions in connection herewith.
5.2 Conditions Precedent to All Loans. Notwithstanding any other
provisions of this Agreement or any of the other Loan Documents, and without
affecting in any manner the rights of Lender under the other sections of this
Agreement, it is understood and agreed that Lender shall have no obligation
under Section 2 of this Agreement to make any Loans, unless and until, in
addition to each of the conditions set forth in Sections 5.1 hereof, the
following conditions have been and continue to be satisfied:
(a) No Material Adverse Change. There shall not have occurred
any material adverse change in the financial condition, results of operations or
business of Borrower, or any event, condition or state of facts which would be
expected materially and adversely to affect the financial condition, results of
operations, business or prospects of Borrower, as determined by Lender in its
reasonable discretion.
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(b) Delivery of Documents. Lender shall have received copies
of all documents required to be delivered to Lender pursuant to the terms of
this Agreement and the other Loan Documents and all other reports and
information required to be delivered to Lender hereunder.
(c) Representations and Warranties. The representations and
warranties contained in this Agreement and the other Loan Documents shall
continue to be true and correct in all material respects on and as of such date
as though made on and as of such date.
(d) No Default or Event of Default. No Default or Event of
Default, nor any event or condition which with the making of any Loan would
constitute a Default or an Event of Default, shall have occurred and be
continuing.
(e) Performance of Agreement. All covenants and agreements on
the part of Borrower to be performed hereunder shall have been performed, and,
unless otherwise expressly agreed in writing by Lender, any conditions precedent
set forth herein shall have been fulfilled.
5.3 Waiver of Conditions Precedent. If Lender makes any Loan hereunder
prior to the fulfillment of any of the conditions precedent set forth in
Sections 5.1 and 5.2 hereof, the making of such Loan shall constitute only an
extension of time for the fulfillment of such condition and not a waiver
thereof, and Borrower shall thereafter use its best efforts to fulfill each such
condition promptly.
SECTION 6. REPRESENTATIONS AND WARRANTIES.
In order to induce Lender to enter into this Agreement and to make the
Loans, Borrower makes the following warranties and representations to Lender:
6.1 Corporate Organization and Power. Borrower (a) is a corporation
duly organized, validly existing and in good standing under the laws of the
State of North Carolina; (b) is qualified to do business and is in good standing
in Virginia and in every other jurisdiction where the nature of its business or
the ownership of its properties requires it to be so qualified; (c) has the
power to own and give a lien on and security interest in the Collateral and the
Realty and to engage in the transactions contemplated hereby; and (d) has the
full power, authority and legal right to execute and deliver this Agreement and
the other Loan Documents and to perform and observe the terms and provisions
thereof. Except as set forth in Exhibit C attached hereto, Borrower has not,
during the preceding five (5) years, been known as or used any other corporate,
fictitious or trade names.
6.2 Litigation; Government Regulation. Except as set forth
on Exhibit D attached hereto, there are no actions, suits or
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proceedings pending or, to the knowledge of Borrower, threatened against or
affecting Borrower at law or in equity before any court or administrative
officer or agency which might result in a material adverse change in the
business or financial condition of Borrower or impair Borrower's ability to
perform its obligations under the Loan Documents. To the best of its knowledge,
Borrower is not in violation of, or in default under, any applicable statute,
rule, order, decree, writ, injunction or regulation of any governmental body
(including any court) where such violation would have a materially adverse
effect upon the Collateral, the Realty or Borrower's business, property, assets,
operations or condition, financial or otherwise.
6.3 Taxes. Borrower is not delinquent in the payment of any taxes which
have been levied or assessed by any governmental authority against it or its
assets. Borrower has timely filed all tax returns which are required by law to
be filed, and has paid all taxes shown on said returns and all other assessments
or fees levied upon Borrower or upon its properties to the extent that such
taxes, assessments or fees have become due. To the knowledge of Borrower, no
material controversy in respect of income taxes is pending or threatened.
6.4 Enforceability of Loan Documents; Compliance With Other
Instruments. The Loan Documents are the legal, valid and binding obligations of
Borrower, and are enforceable against Borrower in accordance with their
respective terms except as stated in the written opinion of Borrower's counsel
delivered pursuant to Section 5.1(a) hereof. Borrower is not subject to any
corporate or other restriction or to any order, rule, regulation, writ,
injunction or decree of any court or governmental authority or to any statute
(other than those statutes of general application which may affect Borrower's
operations in the ordinary course of its business) which materially and
adversely affects its business, property, assets or financial condition.
Borrower is not a party to any labor dispute, there are no strikes or walkouts
relating to any labor contracts and no labor contract is scheduled to expire
during the term of this Agreement. Borrower is not in default with respect to
any indenture, loan agreement, mortgage, lease, deed or similar agreement
related to the borrowing of monies to which Borrower is a party or by which it
is bound. Neither the execution, delivery or performance of the Loan Documents,
nor compliance therewith: (a) conflicts or will conflict with or results or will
result in any breach of, or constitutes or will constitute with the passage of
time or the giving of notice or both, a default under, (i) the Articles of
Incorporation or Bylaws of Borrower, (ii) any law, order, writ, injunction or
decree of any court or governmental authority, or (iii) any agreement or
instrument to which Borrower is a party or by which Borrower, the Realty or the
Collateral is bound or (b) results or will result in the creation or imposition
of any lien, charge or encumbrance upon its properties pursuant to any such
agreement or instrument, except the liens and security interests created by the
Loan Documents and Permitted Liens.
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6.5 Governmental Authorization. No authorization, consent or approval
of any governmental authority is required for the execution, delivery and
performance of the Loan Documents or the consummation of the transactions
contemplated thereby. To the best of its knowledge, Borrower has, and is in good
standing with respect to, all governmental approvals, permits, certificates,
inspections, consents and franchises necessary to continue to conduct its
business as heretofore conducted and to own or lease and operate its properties
as now owned or leased by it. None of such approvals, permits, certificates,
consents, or franchises contains any term, provision, condition or limitation
more burdensome than such as are generally applicable to Persons engaged in the
same or similar business as Borrower.
6.6 Event of Default. No event has occurred and is continuing which
constitutes an Event of Default or would constitute a Default.
6.7 Margin Securities. None of the transactions contemplated by this
Agreement (including, without limitation thereof, the use of the proceeds of the
Loans) will violate or result in a violation of Section 7 of the Securities
Exchange Act of 1934, as amended, or any regulations issued pursuant thereto.
Borrower does not own or intend to carry or purchase directly or indirectly any
margin securities. None of the proceeds of the Loans will be used to purchase or
carry (or refinance any borrowing, the proceeds of which were used to purchase
or carry) any "margin security" within the meaning of the Securities Exchange
Act of 1934, as amended.
6.8 Full Disclosure. To the best of Borrower's knowledge, none of the
Loan Documents, nor any statements furnished by or on behalf of Borrower to
Lender in connection with the Loan Documents, contain any untrue statement of a
material fact or omit a material fact necessary to make the statements contained
therein or herein not misleading. To the best of Borrower's knowledge, there is
no fact which Borrower has not disclosed to Lender in writing which materially
affects adversely or, to the best of Borrower's knowledge, will materially
affect adversely the Collateral, the Realty, other assets, business, profits or
conditions (financial or otherwise) of Borrower or the ability of Borrower to
perform its Obligations.
6.9 Principal Place of Business. Borrower's chief executive office and
principal place of business, and the place where Borrower maintains all records
relating to its Accounts, is at the address set forth on page one of this
Agreement.
6.10 ERISA. No fact, including but not limited to, any Reportable Event
(as defined in section 4043 of ERISA) exists in connection with any employee
benefit plan or other plan for Borrower's employees which is covered by ERISA,
which might constitute grounds for the termination of any such plan by the
Pension Benefit Guaranty Corporation or for the appointment by the ap-
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propriate United States district court of a trustee to administer any such plan.
6.11 Financials. The Financials delivered to Lender have been prepared
in accordance with Generally Accepted Accounting Principles, contain no
misstatement or omission, and fairly present the financial position, assets and
liabilities of Borrower as of the respective dates thereof and the results of
operations of Borrower for the respective periods then ended. Except for the
transactions contemplated by this Agreement, since the date of the last of the
Financials, there has been no material adverse change in the assets,
liabilities or financial position of Borrower or in the results of Borrower's
operations, and Borrower has not incurred any obligation or liability which
would materially and adversely affect its financial condition, business
operations, the Collateral or the Realty.
6.12 Title to Assets. Borrower has good, indefeasible and merchantable
title to and ownership of the Collateral, the Realty and all of its other
assets, including without limitation, the assets reflected in the Financials,
free and clear of all liens, claims, security interests and encumbrances except
those in favor of Lender and Permitted Liens.
6.13 Solvency. Borrower is Solvent.
6.14 Use of Proceeds. Borrower's use of the proceeds of any Loans made
by Lender to Borrower pursuant to this Agreement are, and continue to be, legal
and proper corporate uses (duly authorized by Borrower's Board of Directors, if
such authorization is required) and such uses are and will be consistent with
all applicable laws and statutes, as in effect from time to time.
6.15 Assets for Conduct of Business. Borrower possesses adequate
assets, licenses, patents, patent applications, copyrights, trademarks and
tradenames to conduct its business as heretofore conducted and all such
licenses, patents, patent applications, copyrights, trademarks and trade names
are listed on Exhibit E attached hereto and made a part hereof.
6.16 Trade Relations. To the best of Borrower's knowledge, there exists
no actual or threatened termination, cancellation or limitation of, or any
modification or change in, the business relationship of Borrower or any customer
or any group of customers whose purchases individually or in the aggregate are
material to the business of Borrower, or with any material supplier, and there
exists no present condition or state of facts or circumstances which would
materially adversely affect Borrower or prevent Borrower from conducting such
business after the consummation of the transaction contemplated by this
Agreement in substantially the same manner in which it has heretofore been con-
ducted.
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6.17 Compliance With Laws. Borrower has duly complied with, and the
Collateral, the Realty and its business operations and leaseholds are in
compliance in all material respects with, the provisions of all federal, state
and local laws, rules and regulations applicable to Borrower, the Collateral,
the Realty or the conduct of Borrower's business, including, without limita-
tion, all Environmental Laws, and there have been no citations, notices or
orders of noncompliance issued to Borrower under any such law, rule or
regulation.
SECTION 7. AFFIRMATIVE COVENANTS.
Until payment in full of all Obligations of Borrower to Lender,
Borrower covenants and agrees that, unless Lender consents in writing:
7.1 Repayment of Obligations. Borrower will repay the Obligations
according to the terms of this Agreement and the other Loan Documents.
7.2 Performance Under Loan Documents. Borrower will perform all
Obligations required to be performed by it under the terms of this Agreement and
the other Loan Documents and any other agreements now or hereafter existing or
entered into between Borrower and Lender.
7.3 Financial and Business Information as to Borrower.
Borrower shall deliver to Lender:
(a) Within thirty (30) days after the end of each Quarter,
beginning with the current Quarter ending, a balance sheet of Borrower as of the
close of such Quarter, a statement of cash flows for the Quarter, and statements
of income and retained earnings for that portion of the fiscal year to date then
ended, prepared in accordance with Generally Accepted Accounting Principles,
applied on a basis consistent with that of the preceding period or containing
disclosure of the effect on the financial position or results of operations of
any change in the application of accounting principles and practices during the
period, and certified by the treasurer of Borrower or his designee;
(b) Within ninety (90) days after the close of each fiscal
year of Borrower: (i) a balance sheet of Borrower as of the close of such fiscal
year and statements of income and retained earnings and cash flows for the
fiscal year then ended, prepared in accordance with Generally Accepted
Accounting Principles, applied on a basis consistent with the preceding year or
containing disclosure of the effect on financial position or results of
operation of any change in the application of accounting principles and
practices during the year, and accompanied by a report thereon, containing an
unqualified opinion, without scope limitations imposed by Borrower, from a firm
of independent certified public accountants selected by Borrower and acceptable
to Lender;
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(c) Concurrently with the delivery of the financial statements
described in subsection (b) above, a certificate from the independent certified
public accountants that in making their examination of the financial statements
of Borrower, they obtained no knowledge of the occurrence or existence of any
condition or event which constitutes or would constitute, upon the giving of
notice or lapse of time or both, any Event of Default, or a statement specifying
the nature and period of existence of any such condition or event disclosed by
their examination;
(d) Concurrently with the delivery of the financial statements
described in subsections (a) and (b) above, a certificate from the treasurer of
Borrower certifying to Lender that to the best of his knowledge, Borrower has
kept, observed, performed and fulfilled each and every covenant, obligation and
agreement binding upon Borrower contained in this Agreement or the other Loan
Documents, and that no Default or Event of Default has occurred or specifying
any such Default or Event of Default, together with a financial covenant
compliance worksheet, in form satisfactory to Lender, reflecting the computation
of the financial covenants set forth in Section 8 as of the end of the period
covered by such financial statements;
(e) As soon as possible, but not later than the twentieth
(20th) day of each month, a monthly borrowing base and loan report accompanied
by a certificate in the form attached hereto as Exhibit H, which shall be signed
by the treasurer of Borrower, which shall include as of the last day of the
preceding month: (i) an aged trial balance of all then existing Accounts,
specifying the names, face value and due dates of each Account Debtor obligated
on an Account listed therein, (ii) a Schedule of Inventory owned by Borrower and
valued at the lower of cost or market with cost calculated on a first-in,
first-out basis, (iii) the outstanding principal balance of the Loans and (iv)
such other information about the Accounts or the Inventory as Lender may
reasonably request;
(f) As soon as possible, but not later than the thirtieth
(30th) day after the end of a Quarter, a quarterly report, which shall include,
as of the last day of such Quarter: (i) an aged trial balance of all then
existing Indebtedness of Borrower, specifying the names, amounts, and payment
due dates of each Indebtedness listed therein and (ii) such other information
about the Indebtedness as Lender may reasonably request;
(g) Immediately upon issuance, each report, notice, proxy
statement, or financial statement which Borrower shall from time to time render
to its stockholders and each financial report or notice which Borrower shall
file with any governmental agency or authority;
(h) As soon as possible, but not later than December 1 of each
year, a budget of Borrower's Capital Expenditures for Borrower's next fiscal
year; and
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(i) Upon Lender's written request, such other information
about the Collateral, the Realty, or the financial condition and operations of
Borrower as Lender may from time to time reasonably request.
7.4 Notice of Certain Events. Borrower shall promptly, but in no event
later than three (3) Business Days after obtaining knowledge thereof, give
written notice to Lender of: (a) any material litigation or proceeding brought
against Borrower, whether or not the claim is considered by Borrower to be
covered by insurance, and Borrower shall, if requested by Lender, set up such
reserves for claims not covered by insurance or claims not within the coverage
limits of any such insurance as Lender reasonably determines as are necessary
to protect Borrower against loss; (b) any written notice of a violation received
by Borrower from any governmental regulatory body or law enforcement authority
which, if such violation were established, might have a materially adverse
effect on the business of Borrower or the value of the Collateral or the Realty;
(c) any labor controversy which has resulted in a strike or other work action
materially affecting Borrower; (d) any attachment, judgment, lien, levy or
order which may be placed on or assessed against or threatened against Borrower,
the Collateral or the Realty; (e) any Event of Default or any event which, after
notice or lapse of time or both, would become an Event of Default; (f) any
material delay in Borrower's performance of any of its obligations to any
Account Debtor; (g) any material adverse information relating to any Account
Debtor; and (h) any other matter which has resulted in a material adverse change
in the financial condition or operations of Borrower.
7.5 Corporate Existence and Maintenance of Properties. Borrower shall
maintain and preserve its corporate existence and all rights, privileges and
franchises now enjoyed; and Borrower shall conduct its business in an orderly,
efficient and customary manner, keep its properties in good working order and
condition, and from time to time make all needed repairs to, renewals of or
replacements of its properties (except to the extent that any of such properties
is obsolete or is being replaced) so that the efficiency of such property shall
be fully maintained and preserved. Borrower shall file or cause to be filed in
a timely manner all reports, applications and licenses which shall be required
by any governmental authority and which, if not timely filed, would have a
material adverse effect on Borrower, the Collateral or the Realty.
7.6 Payment of Indebtedness; Performance of Other Obligations.
Borrower shall pay all Indebtedness for borrowed money at maturity, all taxes,
assessments and other governmental charges which may be levied or assessed upon
Borrower, the Realty or the Collateral when due and all other obligations in
accordance with customary trade practices, and comply with all acts, rules,
regulations and orders of any legislative, administrative or judicial body or
official applicable to the Collateral, the Realty or any part thereof or to the
operation of Borrower's business;
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provided, however, that Borrower may in good faith by appropriate proceedings in
good faith and with due diligence contest any such taxes, assessments,
governmental charges, acts, rules, regulations, orders and directions that do
not in Lender's judgment materially adversely affect the value of the
Collateral, the Realty or the priority of Lender's lien in the Collateral or
the Realty, and if requested by Lender, shall establish reserves reasonably
satisfactory to Lender. Borrower shall also observe and remain in compliance
with all laws, ordinances, governmental rules and regulations to which it is
subject and obtain all licenses, permits, franchises or other governmental
authorizations necessary to the ownership of its properties or the conduct of
its business, and all covenants and conditions of all agreements and instruments
to which Borrower is a party, which failure to comply or failure to obtain would
materially and adversely affect the business, prospects, profits, properties or
condition (financial or otherwise) of Borrower.
7.7 Maintenance of Insurance. Borrower shall maintain and pay for
insurance upon all Collateral and Realty, wherever located, covering casualty,
hazard, public liability and such other risks and in such amounts and with such
insurance companies as shall be reasonably satisfactory to Lender, and deliver
such certificates of insurance to Lender with satisfactory Lender's Loss Payable
Endorsements naming Lender as loss payee thereunder. Borrower also agrees to
maintain and pay for insurance in such amount, with such companies and in such
form as shall be satisfactory to Lender insuring Borrower against any claims,
suits, loss or damages suffered by any Person on any property owned or leased by
Borrower, and against such other casualties and contingencies as is customary
in the business in which Borrower is engaged, and deliver such certificates of
insurance to Lender with satisfactory endorsements naming Lender as additional
insured thereunder. Each policy of insurance shall contain a clause requiring
the insurer to give not less than thirty (30) days prior written notice to
Lender before any cancellation of the policies for any reason whatsoever and a
clause that the interest of Lender shall not be impaired or invalidated by any
act or neglect of Borrower or the owner of the property nor by the occupation of
the premises wherein such property is located for purposes more hazardous than
are permitted by said policy. Borrower hereby directs all insurers under such
policies of insurance on the Collateral and Realty to pay all proceeds payable
thereunder directly to Lender. After deducting from such proceeds any expenses
incurred by Lender in the collection or handling of such funds, the net
proceeds received by Lender shall be applied as follows:
(a) If a Default or Event of Default shall have occurred and
is continuing, the entire net proceeds of any insurance claim received by
Lender shall, at Lender's option, be applied to the Obligations in such order
and against such particular Obligations as Lender, in its sole discretion, may
determine; or
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(b) If no Default or Event of Default shall have occurred and
be continuing, then the net proceeds of any claim of less than $100,000.00 shall
be released to Borrower to be used solely by Borrower for repairing, replacing
or restoring the damaged Collateral or Realty to the equivalent of its original
condition, and the net proceeds of any claim of more than $100,000.00 shall be
held by Lender in an interest bearing account for Borrower's benefit (subject to
the lien and security interest of Lender therein as security for the
Obligations) and, for so long as no Default or Event of Default shall occur,
advanced to Borrower from time to time, but not more often than monthly, against
such requisition or other evidence of repair, replacement or restoration of the
damaged Collateral or Realty as Lender may reasonably require. Upon the
occurrence of a Default or Event of Default, all monies held by Lender in such
interest bearing account shall, at Lender's option, be applied to the
Obligations in such order and against such particular Obligations as Lender, in
its sole discretion, may determine.
Borrower hereby irrevocably makes, constitutes and appoints Lender (and
all officers, employees or agents designated by Lender) as Borrower's true and
lawful attorney (and agent-in-fact) for the purpose of making, settling and
adjusting claims under such policies of insurance, endorsing the name of
Borrower on any check, draft, instrument or other item or payment for the
proceeds of such policies of insurance and for making all determinations and
decisions with respect to such policies of insurance; provided, however, so
long as no Default or Event of Default shall have occurred and be continuing,
Lender shall consult with Borrower before making any determinations and
decisions with respect to such policies of insurance. If Borrower fails to
obtain and maintain any of the policies of insurance or to pay any premium in
whole or in part, then Lender may, at Borrower's expense, without waiving or
releasing any obligation or default by Borrower hereunder, procure the same, but
shall not be required to do so. All sums so disbursed by Lender, including
reasonable attorney's fees, court costs, expenses and other charges related
thereto, shall be payable on demand by Borrower to Lender and shall be
additional Obligations hereunder secured by the Collateral. Borrower shall
deliver to Lender, promptly as rendered, true copies of all monthly reports made
in any reporting forms to insurance companies. Not less than thirty (30) days
prior to the expiration date of the insurance policies required to be
maintained by Borrower hereunder, Borrower shall deliver to Lender one or more
certificates of insurance evidencing renewal of the insurance coverage required
hereunder plus such other evidence of payment of premiums therefor as Lender
may request.
7.8 Maintenance of Books and Records; Inspection. Borrower shall
maintain adequate books, accounts and records, and prepare all financial
statements required under this Agreement in accordance with Generally Accepted
Accounting Principles and in compliance with the regulations of any
governmental regulatory body
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having jurisdiction over it; and permit employees or agents of Lender at any
reasonable time to inspect Borrower's properties, and to examine or audit
Borrower's books, accounts and records and make copies and memoranda of them.
Borrower shall permit any representative of Lender to visit and inspect any of
the properties of Borrower, to examine all books of accounts, records, reports
and other papers, to make copies and extracts therefrom, and to discuss the
affairs, finances and accounts of Borrower with its officers, employees and
independent public accountants (and by this provision Borrower authorizes said
accountants to discuss the finances and affairs of Borrower), all at such rea-
sonable times and as often as may be reasonably requested.
7.9 Comply with ERISA. Borrower shall at all times make prompt payment
of contributions required to meet the minimum funding standards set forth in
ERISA with respect to any employee benefit plan; promptly after the filing
thereof, furnish to Lender copies of any annual report required to be filed
under ERISA in connection with each employee benefit plan; not withdraw from
participation in, permit the termination or partial termination of, or permit
the occurrence of any other event with respect to any employee benefit plan
that could result in liability to the Pension Benefit Guaranty Corporation;
notify Lender as soon as practicable of any Reportable Event and of any
additional act or condition arising in connection with any employee benefit plan
which Borrower believes might constitute grounds for the termination thereof by
the Pension Benefit Guaranty Corporation or for the appointment by the
appropriate United States district court of a trustee to administer such plan;
and furnish to Lender upon Lender's request, such additional information about
any employee benefit plan as may be reasonably requested.
7.10 Maintenance of Cash Management Agreement. Borrower shall maintain
in full force and effect the Cash Management Agreement with Lender and perform
and comply with all provisions under such Cash Management Agreement.
7.11 Primary Accounts. Borrower shall maintain its primary
depository accounts and its cash management accounts with Lender.
SECTION 8. NEGATIVE COVENANTS.
Until payment in full of all Obligations of Borrower to Lender,
Borrower covenants and agrees that, unless Lender consents in writing, Borrower
will not:
8.1 Merger and Dissolution. Liquidate or dissolve, or enter into any
consolidation, merger, syndicate or other combination or sell, lease or dispose
of its business or assets as a whole or in such part, as in the opinion of
Lender, constitutes a substantial portion of its business or assets.
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8.2 Acquisitions. Acquire the business or all or a
substantial portion of the assets of any Person, whether by purchase
of stock, assets or otherwise.
8.3 Indebtedness and Capital Leases. Create, incur or suffer to exist
any Indebtedness for money borrowed or the equivalent or enter into any Capital
Leases except for: (a) the Obligations ; (b) Indebtedness secured by Permitted
Liens; (c) Indebtedness to trade creditors incurred in Borrower's ordinary
course of business; (d) Subordinated Debt existing on the Closing Date; and (e)
unsecured Indebtedness which when added to the Indebtedness secured by Permitted
Liens shall not exceed $1,000,000 in the aggregate at any time.
8.4 Liens and Encumbrances. Create, assume or suffer to exist any deed
of trust, mortgage, encumbrance or other lien (including a lien of attachment,
judgment or execution which is not dismissed, discharged or bonded within thirty
(30) days) or security interest (including the interest of a conditional seller
of goods), securing a charge or obligation, on or of any of its property, real
or personal, whether now owned or hereafter acquired, except (i) for liens and
security interests in favor of Lender and (ii) Permitted Liens.
8.5 Disposition of Assets. Sell, lease, transfer, convey or otherwise
dispose of any of its assets or property except for (i) sales of Inventory in
the ordinary course of business; (ii) dispositions of Equipment which, in the
aggregate during any consecutive twelve (12) month period, have a fair market
value of not more than $500,000.00, and (iii) replacements of Equipment that is
substantially worn, damaged or obsolete with Equipment of like kind and function
having a value, as determined by Lender, of no less than the value of the
Equipment disposed of, provided that the replacement Equipment shall be acquired
prior to the date on which a disposition is to be made of the Equipment that is
to be replaced, and the replacement Equipment shall be free and clear of liens
and security interests, except for Permitted Liens.
8.6 Transactions With Related Persons. Directly or indirectly, make
any loan or advance, purchase, assume or guarantee any note to or from any of
its officers, directors, stockholders or Affiliates, or to or from any member of
the immediate family of any of its officers, directors, shareholders or
Affiliates, or subcontract any operations to any Affiliate, except for travel or
other reasonable expense advances to employees in the ordinary course of
business; or, except as permitted by Section 8.8 below, enter into, or be a
party to, any transaction with any Affiliate or stockholder of Borrower, except
in the ordinary course of and pursuant to the reasonable requirements of
Borrower's business and upon fair and reasonable terms which are fully disclosed
to Lender and are no less favorable to Borrower than would obtain in a
comparable arm's length transaction with a Person not an Affiliate or
stockholder of Borrower.
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8.7 Restricted Investments. Make any loans, advances or extensions of
credit to, or any investment in cash or by delivery of property in, any Person,
whether by acquisition of stock, indebtedness or other obligation or security,
or by loan, advance or capital contribution, or otherwise, except for (a) travel
or other reasonable expense advances to employees in the ordinary course of
business, (b) investments in readily marketable, direct obligations of the
Government of the United States of America, maturing not more than one (1) year
after the date of the purchase thereof, (c) investments representing stock or
obligations issued to Borrower in settlement of claims against any other Person
by reason of a composition or readjustment of debt or a reorganization of any
debtor of Borrower, and (d) certificates of deposit, having terms of less than
thirty (30) days, with a bank or trust company organized under the laws of the
United States or any state thereof having combined capital, surplus and
undivided profits of no less than $500,000,000.
8.8 Restrictions on Dividends. Declare or pay any dividends (other
than dividends payable solely in its own Stock) upon any of its Stock, or
purchase, redeem or otherwise acquire, directly or indirectly, any shares of
its Stock, or make any distribution of cash, property or assets among the
holders of shares of its Stock, or make any material change in its capital
structure; provided, however, in any fiscal year Borrower may pay dividends on
the Stock of Borrower and may purchase or redeem shares of its Stock if no
Default or Event of Default exists and, if after giving effect to such dividend,
purchase or redemption, no Default or Event of Default will exist.
8.9 Capital Expenditures. Make any Capital Expenditure , if, after
giving effect to such Capital Expenditure, the aggregate amount of all such
Capital Expenditures made by Borrower during any fiscal year shall exceed the
greater of: (i) two hundred percent (200%) of Borrower's depreciation expense
for the preceding fiscal year or (ii) Borrower's budget for Capital Expenditures
for such fiscal year as submitted to Lender pursuant to Section 7.3(h) of this
Agreement and approved by Lender in its sole discretion.
8.10 Tangible Net Worth. Permit Tangible Net Worth to be
less than the following amounts at the following times:
(i) $25,000,000 from the Closing Date through December 31,
1995;
(ii) for all times after December 31, 1995 the greater of (a)
$25,000,000 plus an annual increase of $2,000,000 effective each January 1
beginning January 1, 1996 or (b) Tangible Net Worth as of the immediately
preceding December 31 less $4,000,000 but such amount shall not be less than any
amount previously computed under this Section 8.10(ii)(b).
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8.11 Liabilities to Equity Ratio. Permit the ratio of
Liabilities to Tangible Net Worth to be greater than the
following ratios at the following times:
(i) 2.5 to 1 from January 1 through November 30 in any
year; and
(ii) 2.0 to 1 from December 1 through December 31 in any
year.
8.12 Fiscal Year. Change its fiscal year.
8.13 Sale and Leaseback. Enter into any arrangement with any Person
providing for the leasing by Borrower of any asset which has been sold or
transferred by Borrower to such Person.
8.14 New Business. Engage in any business other than the business in
which Borrower is currently engaged or a business reasonably related thereto or
make any material change in any of its business objectives, purposes and
operations which might in any way adversely affect the repayment of the
Obligations; provided however, Borrower may open one retail store to sell
merchandise manufactured by Borrower in addition to the outlet store currently
operated by Borrower at the Martinsville Realty.
8.15 Subsidiaries. Create any Subsidiary or transfer any
assets to a Subsidiary.
8.16 Guaranties. Guarantee or otherwise, in any way, be come liable
with respect to the obligations or liabilities of any Person except (a) an
Affiliate's obligations to Lender, and (b) by endorsement of instruments or
items of payment for deposit to the general account of Borrower or for delivery
to Lender on account of the Obligations.
8.17 Transactions Affecting the Collateral or the Realty. Borrower
shall not enter into any transaction which materially and adversely affects the
Collateral, the Realty or Borrower's ability to repay any Indebtedness, and
Borrower shall not permit or agree to any extension, compromise or settlement or
make any change or modification of any kind or nature with respect to any
Account, including any of the terms relating thereto, other than discounts and
allowances in the ordinary course of business which shall be reflected in the
Schedule of Accounts submitted to Lender pursuant to Section 9.3.
8.18 Interest Coverage Ratio. Permit at any time the ratio of EBITDA
for the previous four consecutive fiscal quarters of Borrower to Interest
Expense payable during such four consecutive fiscal quarters to be less than 3.5
to 1.0.
SECTION 9. PROVISIONS WITH RESPECT TO THE COLLATERAL AND
THE REALTY.
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9.1 Perfection and Priority; Location of Collateral. Borrower warrants
and represents that: (a) none of the Collateral or the Realty is subject to any
lien, security interest or other encumbrance, other than those in favor of
Lender and Permitted Liens; (b) the addresses specified on Exhibit A include and
designate Borrower's chief executive office, principal place of business and
other offices and places of business; and (c) the offices and/or locations where
Borrower now or hereafter may keep the Collateral and books and records,
including, without limitation, computer programs, printouts and other computer
materials and records concerning the Collateral, are at the locations set forth
on Exhibit A attached hereto and made a part hereof, and Borrower shall not
remove such books and records and/or the Collateral therefrom, except for sales
of Inventory or transfers of Inventory from one such location to another in the
ordinary course of business, and shall not keep any of such books and records
and/or the Collateral at any other offices or locations unless (i) Borrower
gives Lender written notice of such removal and the new location of said books
and records and/or the Collateral at least thirty (30) days prior thereto, (ii)
the other office or location is within the continental United States of America,
(iii) Borrower prepares, executes and files appropriate financing statements
with respect to the Collateral showing Borrower, as debtor, and Lender, as
secured party, and after filing, conducts a search of all filings made against
Borrower in all jurisdictions in which the Collateral to be removed or trans-
ferred is to be located and delivers to Lender copies of the results of all
searches, (iv) such searches confirm that Lender's security interest in the
Collateral, including the Collateral to be removed or transferred to the new
location, shall be first and prior on the Collateral, except for Permitted
Liens, and (v) Borrower causes the lessor, bailee, warehouseman or similar
Person of the Collateral to be removed or transferred to execute and deliver to
Lender an agreement waiving in favor of Lender such person's liens and security
interests in the Collateral and containing such other assurances as may be
requested by Lender.
9.2 Audit/Verification of Collateral. Any of Lender's officers,
employees, or agents shall have the right, at any time or times hereafter, in
Lender's name or in the name of Borrower, to verify the validity, amount, value,
condition or any other matter relating to any Collateral or the Realty by mail,
telephone, telegraph, field audit or otherwise. Unless waived by Lender in its
discretion, field audits shall be performed by Lender or its agents in January
and July of each year and may be performed at other intervals if Lender so
requires.
9.3 Assignments, Records and Schedules of Accounts. From time to time
at intervals designated by Lender, Borrower shall provide Lender with Schedules
of Accounts describing all Accounts created or acquired by Borrower and shall
execute and deliver written assignments of such Accounts to Lender; provided,
however, that Borrower's failure to execute and deliver such Schedules of
Accounts or assignments shall not affect or limit
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Lender's security interest or other rights in and to any Accounts. If requested
by Lender, Borrower shall furnish Lender with copies of proof of delivery and
the original copy of all documents, including, without limitation, repayment
histories and present status reports, relating to the Accounts so scheduled and
such other matter and information relating to the status of then existing
Accounts as Lender shall reasonably request.
9.4 Notice Regarding Disputed Accounts. In the event any amounts due
and owing in excess of $250,000.00 are in dispute between any Account Debtor
and Borrower (which shall include, without limitation, any dispute in which an
offset, claim or counterclaim may result), Borrower shall notify Lender of the
same immediately, explaining in detail the reason for the dispute, all claims
relating thereto and the amount in controversy.
9.5 Sale and Safekeeping of Inventory. Until an Event of Default
occurs, Borrower may sell Inventory in the ordinary course of its business
(which does not include a transfer in partial or total satisfaction of
Indebtedness). Borrower shall be responsible for the safekeeping of Inventory,
and in no event shall Lender have any responsibility for: (a) any loss or damage
to Inventory or destruction thereof occurring or arising in any manner or
fashion from any cause; (b) any diminution in the value of Inventory; or (c) any
act or default of any carrier, warehouseman, bailee or forwarding agency
thereof or other Person in any way dealing with or handling Inventory.
9.6 Records and Schedules of Inventory. Borrower shall keep correct and
accurate daily records, itemizing and describing the kind, type, location,
quality and quantity of Inventory, Borrower's cost therefor and selling price
thereof, and the daily withdrawals therefrom and additions thereto, and shall
furnish to Lender from time to time at reasonable intervals designated by
Lender, a current Schedule of Inventory based upon its most recent physical
inventory and its inventory records. Borrower shall conduct a physical inventory
no less frequently than annually, and more often if reasonably requested by
Lender, and shall furnish to Lender such other documents and reports as Lender
shall request with respect to the Inventory, including, without limitation,
copies of invoices relating to Borrower's purchase of Inventory. Borrower shall
keep its inventory records on a perpetual basis for all inventory other than
dyes, yarns and supplies.
9.7 Returns of Inventory. If any Account Debtor returns any Inventory
to Borrower after shipment thereof, and such return generates a credit in excess
of $250,000.00, in the aggregate, on any Account or Accounts of such Account
Debtor, Borrower shall notify Lender of the same immediately, specifying the
reason for such return, the amount of such credit and the location and con-
dition of the returned Inventory.
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9.8 Maintenance of Equipment. Borrower shall keep and maintain its
Equipment in good operating condition and repair and shall make all necessary
replacements thereof so that the value and operating efficiency thereof shall at
all times be maintained and preserved. Borrower shall not permit any such items
to become a fixture to real estate (other than the Realty while the Deeds of
Trust are in effect) or accessions to other personal property.
9.9 Evidence of Ownership of Equipment. Borrower immediately on demand
therefor by Lender, shall deliver to Lender any and all evidence of ownership,
if any, of any of the Equipment (including, without limitation, certificates of
title and applications for title).
9.10 Records and Schedules for Equipment. Borrower shall maintain
accurate, itemized records itemizing and describing the kind, type, quality,
quantity and value of its Equipment and shall furnish Lender with a current
schedule containing the foregoing information on at least an annual basis and
more often if requested by Lender.
9.11 Lender's Payment of Claims Asserted Against the Collateral or the
Realty. Lender may, after consulting with Borrower, at any time or times
hereafter, in its sole discretion, without waiving or releasing any obligation,
liability or duty of Borrower under this Agreement or the other Loan Documents,
or any Event of Default, pay, acquire and/or accept an assignment of, any
security interest, lien, claim or encumbrance asserted by any Person against the
Collateral or the Realty, including without limitation, any Permitted Liens. All
sums paid by Lender in respect thereof and all costs, fees and expenses,
including, without limitation, attorneys' fees, court costs, expenses and other
charges relating thereto, which are incurred by Lender on account thereof, shall
be payable, upon demand, by Borrower to Lender and shall be additional
Obligations hereunder secured by the Collateral and the Realty.
9.12 Environmental Representations, Warranties and Cove-
nants. With respect to Hazardous Material, Borrower represents,
warrants and covenants as follows:
(a) The Realty is now and at all times hereafter will
continue to be in full compliance with Environmental Laws;
(b) (i) as of the date hereof there are no Hazardous Materials
located on, in or under the Realty or used in connection therewith other than
in compliance with Environmental Laws, and (ii) Borrower will fully disclose to
Lender in writing within fifteen (15) days of the date of this Agreement the
existence, extent and nature of any Hazardous Materials, which Borrower is
legally authorized and empowered to maintain on, in or under the Realty or use
in connection therewith, and Borrower has obtained and will maintain all
licenses, permits and approvals required
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with respect thereto, and is in full compliance with all of the
terms, conditions and requirements of such licenses, permits and
approvals;
(c) Borrower shall promptly, but in no event later than three
(3) Business Days after obtaining knowledge thereof, give written notice to
Lender of any change in the nature or extent of any Hazardous Materials
maintained on, in or under the Realty or used in connection therewith, and will
transmit to Lender copies of any citations, orders, notices or other
governmental or other communication received with respect to any Hazardous
Materials affecting the Realty;
(d) Borrower shall indemnify and hold Lender and its
directors, officers, shareholders and employees harmless from and against any
and all damages, penalties, fines, claims, liens, suits, liabilities, costs
(including clean-up costs) judgments and expenses (including attorneys',
consultants' or experts' fees and expenses) of every kind and nature suffered by
or asserted against Lender as a direct or indirect result of any warranty or
representation made by Borrower in this Section 9.12 being false or untrue in
any material respect or any requirement under any Environmental Law, which
requires the elimination or removal of any Hazardous Materials by Lender,
Borrower or any transferee of Borrower or Lender;
(e) Without limitation of Lender's rights under this
Agreement, Lender shall have the right, but not the obligation, to enter onto
the Realty or to take such other actions as it deems necessary or advisable to
clean up, remove, resolve or minimize the impact of, or otherwise deal with, any
of the events for which Borrower has agreed to indemnify Lender pursuant to
Section 9.12(d) above, or any event which, in the sole opinion of Lender, could
jeopardize Lender's security interest under the Deeds of Trust. All costs and
expenses incurred by Lender in the exercise of any such right shall constitute
part of the Obligations under this Agreement and shall be secured by the
Collateral and the Realty and shall be payable by Borrower upon demand; and
(f) Borrower's obligations under this Section 9.12 shall
continue, survive and remain in full force and effect notwithstanding payment
in full of the Obligations and the termination of this Agreement or any
foreclosure under the Deeds of Trust or delivery of a deed to the Realty in lieu
of foreclosure.
SECTION 10. WARRANTIES WITH RESPECT TO ACCOUNTS AND INVENTORY.
10.1 Account Warranties and Representations. With respect to its
Accounts, Borrower represents and warrants to Lender that Lender may rely, in
determining which Accounts listed on any Schedule of Accounts are Eligible
Accounts, on all statements or representations made by Borrower on or with
respect to any such Schedule of Accounts, and, unless otherwise indicated in
writing
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by Borrower, that each Account listed on the Schedule of Accounts: (a) will
cover a bona fide sale and delivery of Inventory usually dealt in by Borrower,
or the rendition by Borrower of services, to an Account Debtor in the ordinary
course of business; (b) will be genuine and in all respects what it purports to
be, will not be evidenced by an instrument or document, or if so, will be only
evidenced by one original instrument or document which has been duly delivered
to Lender; (c) will be for a liquidated amount maturing as stated in the
Schedule of Accounts and in the duplicate invoice covering said sale; (d)
Lender's security interest therein will not be subject to any offset, deduction,
counterclaim, lien or other adverse condition; (e) there are no discounts,
allowances, claims, setoffs, counterclaims or disputes of any kind or
description existing or asserted with respect thereto except as may be stated in
the Schedule of Accounts and in the duplicate invoice covering said sale; (f)
there are, to Borrower's knowledge, no facts, events or occurrences which would
in any way impair the validity or enforcement thereof; (g) the goods giving rise
thereto are not, and were not at the time of the sale thereof, subject to any
lien, claim, encumbrance or security interest except those held by Lender and
Permitted Liens; and (h) to Borrower's knowledge, each Person obligated on an
Account is Solvent and will continue to be fully able to pay all Accounts on
which it is obligated in full when due. If any warranty is breached as to any
Account, or if any Account is not paid in full within ninety (90) days after its
due date or one hundred twenty (120) days after its invoice date, then Lender
may deem such Account to be an ineligible Account, but Lender shall retain its
security interest in all Accounts, eligible and ineligible, until all
Obligations to Lender have been paid and satisfied in full.
10.2 Inventory Warranties and Representations. With respect to its
Inventory, Borrower represents and warrants to Lender that Lender may rely on
all statements or representations made by Borrower on or with respect to any
such Schedule of Inventory, and, unless otherwise indicated in writing by
Borrower and consented to by Lender that all Inventory listed on the Schedule of
Inventory: (a) will be located on the premises listed in Exhibit A attached
hereto; (b) shall not at any time be stored with a bailee, warehouseman or
similar party without Lender's prior written consent, and if Lender gives such
consent, Borrower will concurrently therewith cause any such bailee,
warehouseman or similar party to issue and deliver to Lender in form and
substance acceptable to Lender, warehouse receipts therefor in Lender's name;
and (c) will be new Inventory of good and merchantable quality, substantially
free from defects. If the requirements set forth in paragraphs (a), (b) and (c)
of this Section 10.2 are not met, then Lender may deem ineligible such
Inventory, but Lender shall retain its security interest in all Inventory,
eligible or ineligible, until all Obligations to Lender have been paid and
satisfied in full.
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10.3 Reaffirmation of Warranties and Representations. Each request for
a Loan, by Borrower pursuant to this Agreement shall constitute (a) an automatic
warranty and representation by Borrower to Lender that there does not then exist
a Default or an Event of Default or if an Event of Default has occurred, such
Event of Default has been waived in writing by Lender and (b) a reaffirmation as
of the date of said request of all of the representations and warranties of
Borrower contained in this Agreement and the other Loan Documents.
10.4 Survival of Warranties and Representations. Borrower covenants,
warrants and represents to Lender that all representations and warranties of
Borrower contained in this Agreement and the other Loan Documents shall be true
at the time of Borrower's execution of this Agreement and the other Loan
Documents and shall survive the execution, delivery and acceptance thereof by
the parties thereto and the closing of the transactions described therein or
related thereto.
SECTION 11. TERM OF AGREEMENT.
11.1 Term. Subject to Lender's right to cease making Loans to Borrower
upon or after the occurrence of any Default or Event of Default, this Agreement
shall be in effect through May 30, 2000, and for such periods thereafter as may
be requested by Borrower and agreed to in writing by Lender in the exercise of
its discretion, unless sooner terminated as provided in Section 11.2 and Section
11.3 hereof. Such requests for extension by Borrower, if made, shall be made in
June of each year beginning in June, 1996 and shall be in each case for an
additional one year extension. In no event shall Borrower be entitled to
request, or Lender be obligated to consider a request, for an extension of the
term of the Agreement to a date after May 1, 2010.
11.2 Borrower's Right to Terminate. Borrower may terminate the
financing arrangements under this Agreement and the other Loan Documents at any
time by giving Lender not less than ninety (90) days written notice of
Borrower's intention to terminate this Agreement in the manner set forth in
Section 15.3 below; provided, however, that in order for any such notice of
termination by Borrower pursuant to this Section 11.2 to become effective,
Borrower, on or before such termination date, shall pay the Obligations to
Lender in full in immediately available funds and shall pay the prepayment fee
specified in Section 2.13 of this Agreement.
11.3 Lender's Right to Terminate. Lender may terminate the financing
arrangements under this Agreement and the other Loan Documents at any time,
without demand, notice or legal process of any kind, upon the occurrence of an
Event of Default; provided, however, that Lender shall retain the right to
payment of the Obligations in accordance with Section 3.1 above; and provided
further that all of Lender's rights and remedies under this
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Agreement and the other Loan Documents shall survive such termination until all
of the Obligations have been paid in full. On or before the termination date,
Borrower shall pay the Obligations to Lender in full in immediately available
funds together with the prepayment fee specified in Section 2.13 of this Agree-
ment.
11.4 Effect of Termination. Upon the effective date of termination, all
Obligations to Lender, whether or not incurred under this Agreement, and
notwithstanding any term or credit allowed by the Note or by any other
instrument evidencing the Obligations, shall become immediately due and payable
without notice, demand, presentment, protest or notice of any kind, all of
which are hereby waived by Borrower. Notwithstanding any termination, until all
Obligations to Lender of every nature whatsoever shall have been fully paid and
satisfied, Lender shall be entitled to retain its security interest in the
Collateral and the Realty, and Borrower shall continue to comply fully with the
terms of this Agreement and shall turn over all proceeds of the Collateral and
the Realty to Lender, and Lender shall retain all of its other rights and
remedies hereunder.
SECTION 12. EVENTS OF DEFAULT.
12.1 Event of Default. The occurrence of any one or more
of the following events shall constitute an "Event of Default":
(a) Borrower fails to pay any portion of the Obligations when
due and payable or declared due and payable, or fails to remit or deposit items
or funds as required by the terms of this Agreement;
(b) Borrower fails or neglects to observe, perform or comply
with any other term, provision, condition, covenant, warranty or representation
contained in this Agreement or the other Loan Documents or in any other
agreement now existing or hereafter executed evidencing, securing or relating
in any way to the Obligations of Borrower, which is required to be observed, per
formed or complied with by Borrower and the same is not cured to Lender's
satisfaction within ten (10) days after the earlier of (i) Borrower's having
knowledge thereof or (ii) Lender's giving Borrower written notice thereof;
(c) If any representation or warranty made in writing by or on
behalf of Borrower in this Agreement or in the other Loan Documents or in any
other agreement now existing or hereafter executed between Borrower and Lender,
or in connection with the transactions contemplated hereby or thereby, shall
prove to have been false or incorrect in any material respect at the time as of
which such representation or warranty was made;
(d) The occurrence of any default or event of default on the
part of Borrower (including specifically, but without limitation, due to
non-payment) under the terms of any agreement,
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document or instrument pursuant to which Borrower has incurred any Indebtedness
(other than the Obligations), which default is not cured within the time, if
any, permitted therefor in the agreement governing such Indebtedness;
(e) There shall occur any material uninsured damage to
or loss, theft or destruction of any of the Collateral or the
Realty;
(f) The filing by Borrower of any voluntary petition seeking
liquidation, reorganization, arrangement, readjustment of debts or for any other
relief under the Bankruptcy Code or under any other act or law pertaining to
insolvency or debtor relief, whether state, federal or foreign, now or hereafter
existing;
(g) The filing against Borrower of any involuntary petition
seeking liquidation, reorganization, arrangement, readjustment of debts or for
any other relief under the Bankruptcy Code or under any other act or law
pertaining to insolvency or debtor relief, whether state, federal or foreign,
now or hereafter existing, and such petition is not dismissed within forty-five
(45) days of the filing thereof or within such forty-five (45) day period an
order for relief under the Bankruptcy Code or any other applicable act or law
shall be entered;
(h) Borrower ceases to be Solvent, or Borrower ceases to
conduct its business as now conducted or is enjoined, restrained or in any way
prevented by court order from conducting all or any material part of its
business affairs;
(i) A notice of lien, levy or assessment is filed of record to
all or any portion of Borrower's assets by the United States, or any department,
agency or instrumentality thereof, or by any state, county, municipal or other
governmental agency, including, without limitation, the Pension Benefit Guaranty
Corporation, or if any taxes or debts owing at any time or times hereafter to
any one of them becomes a lien or encumbrance upon the Collateral, the Realty or
any other asset of Borrower and the same is not dismissed, released or
discharged within thirty (30) days after the same becomes a lien or encumbrance
or, in the case of ad valorem taxes, prior to the last day when payment may be
made without penalty;
(j) The entry of a judgment or the issuance of a warrant of
attachment, execution or similar process against Borrower or any of its assets,
which shall not be dismissed, discharged or bonded within thirty (30) days;
(k) If a custodian, trustee, receiver or assignee for the
benefit of creditors is appointed or takes possession of the Collateral, the
Realty or any of Borrower's other assets;
(1) The occurrence of any of the following events: (i)
the happening of a Reportable Event with respect to any profit
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sharing or pension plan of Borrower governed by ERISA; (ii) the termination of
any such plan; (iii) the appointment of a trustee by an appropriate United
States District Court to administer any such plan; (iv) the institution of any
proceedings by the Pension Benefit Guaranty Corporation to terminate any such
plan or to appoint a trustee to administer any such plan; (v) the failure of
Borrower to furnish to Lender a copy of each report which is filed by Borrower
with respect to each such plan promptly after the filing thereof with the
Secretary of Labor or the Pension Benefit Guaranty Corporation; (vi) the failure
of Borrower to notify Lender promptly upon receipt by Borrower of any notice of
the institution of any proceeding or any other actions which may result in the
termination of any such plan; or (vii) the failure of Borrower to acquire and
maintain, when available, the contingent employer liability coverage insurance
provided for under section 4023 of ERISA, such insurance to be satisfactory to
Lender in coverage and amount; or
(m) There shall occur any material adverse change in the
Collateral, the Realty or in the business of Borrower or its operations, conduct
or prospects thereof, which, individually or in the aggregate, would have a
material adverse effect on Borrower's ability to repay the Obligations.
(n) There shall occur a change of 50% or more in the ownership
or control of Borrower's outstanding voting Stock after the Closing Date.
12.2 Acceleration of the Obligations. Without in any way limiting the
right of Lender to demand payment of any portion of the Obligations pursuant to
Section 3.1 of this Agreement, (a) upon and after an Event of Default (other
than an Event of Default specified in Section 12.1(f) or (g) hereof), all of
the Obligations may, at the option of Lender, and without demand, notice or
legal process of any kind, be declared, and immediately shall become, due and
payable, and (b) upon the occurrence of an Event of Default specified in Section
12.1(f) or (g) hereof, all of the Obligations shall automatically become due and
payable, without demand, notice or legal process of any kind, anything in the
Note or other contract evidencing any such Obligation or in the Loan Documents
or in any other agreement to the contrary notwithstanding.
12.3 Default Rate of Interest. Upon the occurrence and during the
continuance of an Event of Default, at the election of Lender, the Loans
outstanding shall bear interest at a rate per annum equal to the Prime Rate plus
two percent (2%) per annum (hereinafter called the "Default Rate"), until either
such Event of Default is cured to Lender's satisfaction or otherwise waived in
writing by Lender or the Obligations are paid in full and this Agreement is
terminated.
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SECTION 13. RIGHTS AND REMEDIES AFTER EVENT OF DEFAULT.
13.1 Rights and Remedies. Upon and after the occurrence of any Event of
Default, Lender shall have, in addition to all other rights and remedies which
Lender may have under this Agreement, the other Loan Documents, and applicable
law, the following rights and remedies, all of which may be exercised with or
without further notice to Borrower: (a) all of the rights and remedies of a
secured party under the Uniform Commercial Code of the State of North Carolina,
or any other state where such rights and remedies are asserted; (b) to foreclose
the liens and security interests created under this Agreement and the other Loan
Documents or under any other agreement relating to the Collateral or the
Realty, by any available judicial procedure or without judicial process; (c) to
enter any premises where the Collateral may be located, through self-help and
without judicial process, without first obtaining a final judgment or giving
Borrower notice and opportunity for a hearing on the validity of Lender's
claim, for the purpose of taking possession or removing the same, or require
Borrower to assemble the Collateral and make it available to Lender at a place
to be designated by Lender; and (d) to sell, assign, lease, or otherwise dispose
of the Collateral or any part thereof, either at public or private sale, in
lots or in bulk, for cash, on credit or otherwise, with or without
representation or warranties, and upon such terms as shall be acceptable to
Lender, in its sole discretion, and Lender may bid or become the purchaser at
any such public sale, free from any right of redemption which is hereby
expressly waived by Borrower, and Lender shall have the option to apply or be
credited with the amount of all or any part of the Obligations owing to Lender
against the purchase price bid by Lender at any such sale. Lender may, if it
deems it reasonable, postpone or adjourn any sale of the Collateral from time to
time by an announcement at the time and place of such postponed or adjourned
sale, without being required to give a new notice of sale. Borrower agrees that
Lender has no obligation to preserve rights to the Collateral or the Realty
against prior Persons or to marshall any Collateral or the Realty for the
benefit of any Person. Lender is hereby granted a license or other right to use,
without charge, Borrower's labels, patents, copyrights, rights of use of any
name, trade secrets, trade names, trademarks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and Borrower's
rights under all licenses and franchise agreements shall inure to Lender's bene-
fit. In addition, Borrower agrees that in the event notice is necessary under
applicable law, written notice mailed to Borrower in the manner specified in
Section 15.3 hereof five (5) days prior to the date of public sale of any of the
Collateral or prior to the date after which any private sale or other disposi-
tion of the Collateral will be made shall constitute commercially reasonable
notice to Borrower.
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13.2 Application of Proceeds. The net cash proceeds resulting from the
collection, liquidation, sale, lease or other disposition of the Collateral or
the Realty shall be applied first to the expenses (including all reasonable
attorneys' fees) of retaking, holding, storing, processing and preparing for
sale, selling, collecting, liquidating and the like, and then to the
satisfaction of all Obligations, application as to particular Obligations or
against principal or interest to be in Lender's absolute discretion. Borrower
shall be liable to Lender and shall pay to Lender on demand any deficiency which
may remain after such sale, disposition, collection or liquidation of the
Collateral or the Realty. Lender shall remit to Borrower or the Person entitled
thereto any surplus remaining after all Obligations have been paid in full. If
any of the Collateral or the Realty shall require repairs, maintenance,
preparation or the like, or is in process or other unfinished state, Lender
shall have the right, but shall not be obligated to perform such repairs,
maintenance, preparation, processing or completion of manufacturing for the
purpose of putting the same in such saleable form as Lender shall deem
appropriate, but Lender shall have the right to sell or dispose of the
Collateral or the Realty without such processing. Borrower will, at Lender's
request, assemble all the Collateral and make it available to Lender at places
which Lender may select, whether at premises of Borrower or elsewhere, and will
make available to Lender all premises and facilities of Borrower for the purpose
of Lender's taking possession of the Collateral or the Realty or of removing or
putting the Collateral in saleable form.
13.3 Appointment of Lender as Borrower's Lawful Attorney. Upon and
during the continuance of an Event of Default, Borrower irrevocably designates,
makes, constitutes and appoints Lender (and all Persons designated by Lender) as
Borrower's true and lawful attorney (and agent-in-fact) and Lender, or Lender's
agent, may, without notice to Borrower, and at such time or times thereafter as
Lender or said agent, in its sole discretion, may determine, in Borrower's or
Lender's name: (i) demand payment of the Accounts; (ii) enforce payment of the
Accounts, by legal proceedings or otherwise; (iii) exercise all of Borrower's
rights and remedies with respect to the collection of the Accounts; (iv) settle,
adjust, compromise, extend or renew the Accounts; (v) settle, adjust or
compromise any legal proceedings brought to collect the Accounts; (vi) if
permitted by applicable law, sell or assign the Accounts upon such terms, for
such amounts and at such time or times as Lender deems advisable; (vii)
discharge and release the Accounts; (viii) take control, in any manner, of any
item of payment relating to and/or proceeds of Collateral and the Realty; (ix)
prepare, file and sign Borrower's name on a proof of claim in bankruptcy or
similar document against any Account Debtor; (x) prepare, file and sign
Borrower's name on any notice of lien, assignment or satisfaction of lien or
similar document in connection with the Accounts; (xi) do all acts and things
necessary, in Lender's sole discretion, to fulfill Borrower's obligations under
this Agreement; (xii) endorse the name of
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Borrower upon any of the items of payment relating to and/or proceeds of
Collateral and the Realty and deposit the same to the account of Lender on
account of the Obligations; (xiii) endorse the name of Borrower upon any chattel
paper, document, instrument, invoice, freight bill, bill of lading or similar
document or agreement relating to the Accounts or Inventory; (xiv) use
Borrower's stationery and sign the name of Borrower to verifications of the
Accounts and notices thereof to Account Debtors; and (xv) use the information
recorded on or contained in any data processing equipment and computer hardware
and software relating to the Accounts and Inventory to which Borrower has
access. All acts of Lender or its designee taken pursuant to this Section 13.3
are hereby ratified and confirmed and Lender or its designee shall not be liable
for any acts of omission or commission nor for any error of judgment or mistake
of fact or law. This power, being coupled with an interest, is irrevocable by
Borrower until all Obligations of Borrower to Lender are paid in full.
13.4 Rights and Remedies Cumulative; Non-Waiver; Etc. The enumeration
of Lender's rights and remedies set forth in this Agreement is not intended to
be exhaustive and the exercise by Lender of any right or remedy shall not
preclude the exercise of any other rights or remedies, all of which shall be
cumulative, and shall be in addition to any other right or remedy given
hereunder, under the Loan Documents or under any other agreement between
Borrower or Lender or which may now or hereafter exist in law or in equity or by
suit or otherwise. No delay or failure to take action on the part of Lender in
exercising any right, power or privilege shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right, power or privilege
preclude other or further exercise thereof or the exercise of any other right,
power or privilege or shall be construed to be a waiver of any Event of Default.
No course of dealing between Borrower and Lender or its agents or employees
shall be effective to change, modify or discharge any provision of this
Agreement or to constitute a waiver of any Event of Default. Lender shall not,
under any circumstances or in any event whatsoever, have any liability for any
error, omission or delay of any kind occurring in the liquidation of the
Collateral or the Realty or for any damages resulting therefrom, except for
liability resulting from Lender's gross negligence or willful misconduct.
SECTION 14. PAYMENT OF EXPENSES.
Whether or not the transactions contemplated by this Agreement shall
be consummated, Borrower will:
14.1 Fees and Expenses. Pay or reimburse Lender and any Participant
upon demand for all expenses (including, without limitation, reasonable
attorneys' and paralegals' expenses) incurred or paid by Lender and any
Participant in connection with: (a) the preparation, execution, delivery,
interpretation, modification or amendment of this Agreement or the other Loan
Docu-
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ments; (b) reasonable charges for appraisers, examiners, auditors or
similar Persons (except salaries of Lender's regularly employed personnel) whom
Lender may engage with respect to rendering opinions concerning Borrower's
financial condition and the condition and value of the Collateral and the
Realty; (c) any litigation, contest, dispute, suit, proceeding or action
(whether instituted by Lender, Borrower or any other Person) in any way relating
to the Collateral and the Realty, this Agreement or the other Loan Documents, or
Borrower's affairs; provided, however, that if Borrower initiates any proceeding
or action against Lender arising out of or related to this Agreement or the
other Loan Documents and Borrower is the prevailing party, then Borrower shall
have no obligation to reimburse Lender for its attorneys' fees incurred in
Lender's defense thereof; (d) any attempt to enforce any rights of Lender or
any Participant against Borrower or any other Person which may be obligated to
Lender by virtue of this Agreement or the other Loan Documents, including
without limitation, the Account Debtors; (e) any attempt to inspect, verify,
protect, collect, sell, liquidate or otherwise dispose of the Collateral or the
Realty; (f) the filing and recording of all documents required by Lender to
perfect Lender's liens in the Collateral and the Realty, including without limi-
tation, any documentary stamp tax or any other taxes incurred because of such
filing or recording.
14.2 Stamp Taxes. Pay and save Lender harmless from and against any and
all liability and loss with respect to or resulting from the nonpayment or
delayed payment of any and all intangibles, documentary stamp and other similar
taxes, fees and excises, if any, including any interest and penalties, which may
be, or be determined to be, payable in connection with the transactions
contemplated by this Agreement or in any modification hereof or thereof.
14.3 Brokerage Fees. Hold Lender harmless from and against any and all
finder's or brokerage fees and commissions which may be payable in connection
with the transactions contemplated by this Agreement other than any fees or
commissions of finders or brokers engaged by Lender.
14.4 Agent's Fee. Borrower shall pay Lender an agent's fee of $5,000.00
each Quarter in which there is a Participant in the Loans, with such fee to be
payable on the first day of each such Quarter.
SECTION 15. MISCELLANEOUS.
15.1 Survival of Agreements. All agreements, representations and
warranties contained herein or made in writing by or on behalf of Borrower in
connection with the transactions contemplated hereby shall survive the
execution and delivery of this Agreement and the other Loan Documents. No
termination or cancellation (regardless of cause or procedure) of this
Agreement shall in any way affect or impair the powers, obligations, du-
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<PAGE>
ties, rights and liabilities of the parties hereto in any way with respect
to (a) any transaction or event occurring prior to such termination or
cancellation, (b) the Collateral or the Realty, or (c) any of Borrower's
undertakings, agreements, covenants, warranties and representations contained
in this Agreement and the other Loan Documents and all such undertakings,
agreements, covenants, warranties and representations shall survive such
termination or cancellation. Borrower further agrees that to the extent Borrower
makes a payment or payments to Lender, which payment or payments or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside and/or required to be repaid to a trustee, receiver or any other party
under any bankruptcy, insolvency or similar state or federal law, common law or
equitable cause, then, to the extent of such payment or repayment, the
Obligation or part thereof intended to be satisfied shall be revived and
continued in full force and effect as if such payment had not been received by
Lender.
15.2 Governing Law; Waiver of Jury Trial; Etc.. THIS AGREEMENT HAS BEEN
EXECUTED, DELIVERED AND ACCEPTED AT, AND SHALL BE DEEMED TO HAVE BEEN MADE AT
GREENSBORO, NORTH CAROLINA, AND SHALL BE INTERPRETED, AND THE RIGHTS AND
LIABILITIES OF THE PARTIES HERETO DETERMINED, IN ACCORDANCE WITH THE INTERNAL
LAWS (AS OPPOSED TO CONFLICTS OF LAW PROVISIONS) OF THE STATE OF NORTH CAROLINA.
AS PART OF THE CONSIDERATION FOR NEW VALUE THIS DAY RECEIVED, BORROWER HEREBY
CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE
STATE OF NORTH CAROLINA, AND CONSENTS THAT ALL SERVICE OF PROCESS BE MADE BY
REGISTERED OR CERTIFIED MAIL DIRECTED TO BORROWER AT THE ADDRESS STATED IN
SECTION 15.3 BELOW AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON THE
EARLIER OF ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE UNITED
STATES MAILS, PROPER POSTAGE PREPAID. TO THE EXTENT PERMITTED BY LAW, BORROWER
AND LENDER WAIVE ANY RIGHT TO TRIAL BY JURY EITHER MAY HAVE IN ANY ACTION OR
PROCEEDING IN CONNECTION WITH THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR THE
TRANSACTIONS RELATED HERETO AND BORROWER WAIVES ANY OBJECTION WHICH BORROWER MAY
HAVE BASED ON LACK OF JURISDICTION OR IMPROPER VENUE OR FORUM NON CONVENIENS TO
THE CONDUCT OF ANY PROCEEDING INSTITUTED HEREUNDER AND CONSENTS TO THE GRANTING
OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE COURT. NOTHING
IN THIS SECTION 15.2 SHALL AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF LENDER TO BRING ANY
ACTION OR PROCEEDING AGAINST BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER
JURISDICTION WHICH HAS JURISDICTION OVER BORROWER OR ITS PROPERTY.
15.3 Notice. All notices and other communications hereunder shall be
made by telegram, telex, electronic transmitter or overnight air courier or
certified or registered mail, return receipt requested, and shall be deemed to
be received by the other party one (1) business day after sending, if sent by
telegram, telex, electronic transmitter or overnight air courier and
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<PAGE>
three (3) business days after mailing, if sent by certified or registered mail.
All notices shall be addressed to the party to be notified as follows:
If to Borrower: Pluma, Inc.
801 Fieldcrest Road
Eden, North Carolina 27288
Attn: President
Telecopier No. 910-635-3488
With a copy to: Allman Spry Leggett
& Crumpler, P.A.
Post Office Drawer 5129
Suite 700
380 Knollwood Street 27103-4152
Winston-Salem, North Carolina
27113-5129
Attn: Thomas T. Crumpler, Esq.
Telecopier No. 910-721-0414
If to Lender at: First Union National Bank of
North Carolina
Post Office Box 21965
300 N. Greene Street 27401
Greensboro, North Carolina 27420
Attn: City Executive
Telecopier No. 910-378-4043
With a copy to: Tuggle Duggins & Meschan, P.A.
Post Office Box 2888
228 West Market Street 27401
Greensboro, North Carolina 27402
Attn: Paul M. Dennis, Jr., Esq.
Telecopier No. 910-274-4339
or to such other address as each party may designate for itself
by like notice.
15.4 Indemnification of Lender. From and at all times after the date
of this Agreement, and in addition to all of Lender's other rights and remedies
against Borrower, Borrower agrees to hold Lender harmless from, and to indemnify
Lender against, all losses, damages, costs and expenses (including, but not lim-
ited to, reasonable attorneys' and paralegals' fees, costs and expenses)
incurred by Lender from and after the date hereof, whether direct, indirect or
consequential, as a result of or arising from or relating to any suit, action or
proceeding by any Person other than Borrower, whether threatened or initiated,
asserting a claim for any legal or equitable remedy against any Person under
any statute or regulation, including, but not limited to, any federal or state
securities laws, or under any common law or equitable cause or otherwise,
arising from or in connection with the negotiation, preparation, execution or
perfor-
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<PAGE>
mance of, or the financing transactions contemplated by, this Agreement
and the other Loan Documents, or Lender's furnishing of funds to Borrower
pursuant to this Agreement; provided, however, that the foregoing
indemnification shall not protect Lender from loss, damage, cost or expense
directly attributable to Lender's willful misconduct or gross negligence. All of
the foregoing losses, damages, costs and expenses of Lender shall be payable by
Borrower upon demand by Lender and shall be additional Obligations hereunder
secured by the Collateral and the Realty.
15.5 Waivers by Borrower. Except as otherwise provided for in this
Agreement, Borrower waives (a) presentment, demand and protest and notice of
presentment, protest, default, nonpayment, maturity and all other notices; (b)
notice prior to taking possession or control of the Collateral or the Realty or
any bond or security which might be required by any court prior to allowing
Lender to exercise any of Lender's remedies; and (c) the benefit of all
valuation, appraisement and exemption laws.
15.6 Lawful Charges. It being the intent of the parties that the rate
of interest and all other charges due from Borrower be lawful, if for any reason
payment of a portion of interest or charges as required by this Agreement would
exceed the limit established by applicable law, then the obligation to pay
interest or charges shall automatically be reduced to such limit and if any
amounts in excess of such limit shall have been paid, then such amounts shall be
applied to the unpaid principal amount of the Obligations of Borrower to Lender
or refunded so that under no circumstances shall interest or charges required
hereunder exceed the maximum rate allowed by law.
15.7 Assignment. Borrower may not sell, assign or transfer this
Agreement, or the other Loan Documents or any portion thereof, including without
limitation, Borrower's rights, title, interests, remedies, powers, and duties
hereunder or thereunder. Borrower hereby consents to Lender's participation,
sale, assignment, transfer or other disposition at any time or times hereafter
of this Agreement or the other Loan Documents, or of any portion hereof or
thereof, including without limitation, Lender's rights, title, interests,
remedies, powers and duties hereunder or thereunder; provided, however, that
promptly after any sale, assignment or transfer of this Agreement or the other
Loan Documents, Lender shall give Borrower written notice thereof in the manner
set forth in Section 15.3 above.
15.8 Amendment. This Agreement and the other Loan Documents cannot be
amended, changed, discharged or terminated orally, but only by an instrument in
writing signed by Lender and Borrower.
15.9 Severability. To the extent any provision of this
Agreement is prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition
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<PAGE>
or invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
15.10 Entire Agreement. This Agreement and the Loan Documents
constitute the entire agreement between the parties and supersede and rescind
any prior agreements relating to the subject matter hereof, including without
limitation, the commitment letter between Lender and Borrower dated March 15,
1995.
15.11 Binding Effect. All of the terms of this Agreement and the other
Loan Documents, as the same may from time to time be amended, shall be binding
upon, inure to the benefit of and be enforceable by the respective successors
and assigns of Borrower and Lender. This provision, however, shall not be deemed
to modify Section 15.7.
15.12 Captions. The captions to the various sections and subsections of
this Agreement have been inserted for convenience only and shall not limit or
affect any of the terms hereof.
15.13 Disbursement of Loan Proceeds. Borrower hereby authorizes and
directs Lender to disburse, for and on behalf of Borrower and for Borrower's
account, the proceeds of Loans made by Lender to Borrower pursuant to this
Agreement to such Person or Persons as Borrower shall direct, whether in writing
or orally.
15.14 Participant. If a Participant shall at any time participate with
Lender in making Loans hereunder or under any other agreement between Lender and
Borrower, Borrower hereby grants to such Participant (in addition to any other
rights which such Participant shall have) and such Participant shall have and is
hereby given a continuing lien and security interest in any money, securities or
other property of Borrower in the custody or possession of Participant,
including the right to setoff, to the extent of Participant's participation and
security interest in any money, securities or other property of Borrower in the
custody or possession of Participant, including the right of setoff, to the
extent of Participant in the Obligations of Borrower to Lender, as it would have
if it were a direct lender to Borrower.
15.15 Conflict of Terms. The provisions of the other Loan Documents and
any Schedule of Accounts or Inventory are incorporated in this Agreement by
this reference thereto. Except as otherwise provided in this Agreement and
except as otherwise provided in the other Loan Documents, if any provision
contained in this Agreement is in conflict with, or inconsistent with, any
provision of the other Loan Documents, the provision contained in this Agreement
shall control.
15.16 Injunctive Relief. Borrower recognizes that in the
event Borrower fails to perform, observe or discharge any of its
obligations or liabilities under this Agreement, any remedy of
law may prove to be inadequate relief to Lender. Borrower
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<PAGE>
therefor agrees that Lender, if Lender so requests, shall be entitled to
temporary and permanent injunctive relief in any such case, as the law may
allow, without the necessity of proving actual damages.
15.17 Liens; Setoff By Lender. As additional security for the
Obligations owed to Lender, Borrower hereby grants to Lender a continuing lien
upon any and all monies, securities and other property of Borrower and the
proceeds thereof, now or hereafter held or received by or in transit to, Lender
from or for Borrower, and also upon any and all deposits and credits of
Borrower, against Lender, at any time existing. Upon the occurrence of an Event
of Default, Lender is authorized at any time and from time to time, without
prior notice to Borrower, to setoff, appropriate and apply any and all items
hereinabove referred to against the Obligations owed to Lender.
15.18 Acquisition of Rocky Mount, Virginia Real Estate. Borrower, as
"Buyer," has entered into a Sale and Purchase Agreement with Sara Lee
Corporation, as "Seller," dated May 9, 1995, for the purchase by Buyer of
approximately 42 acres of real property in Rocky Mount, Virginia (the "Sara Lee
Contract"). Upon closing of the transactions under the Sara Lee Contract,
Borrower agrees that it promptly, upon Lender's request, will: (i) execute and
deliver for the benefit of Lender a first deed of trust securing the Obligations
upon the real property acquired by Borrower, with such deed of trust to be in
form and substance satisfactory to Lender; (ii) upon recordation of such deed of
trust, obtain a loan policy of title insurance in the amount of the purchase
price of the real property naming Lender as insured from a title insurance
company acceptable to Lender; (iii) provide Lender with copies of any surveys of
such real property and environmental assessments of such real property as are in
the possession of the Borrower; and (iv) as required by this Agreement, execute
any UCC financing statements or other Supplemental Documentation as Lender may
determine to be necessary in order to perfect a security interest in favor of
Lender in any personal property of Borrower located at such real property.
15.19 Time of Essence. Time is of the essence of this
Agreement and the other Loan Documents.
[Remainder of page Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their corporate names by their duly authorized corporate officers
and their seals to be affixed as of the date first above written.
ATTEST: PLUMA, INC.
/s/ George G. Wade By: /s/ R. Duke Ferrell, Jr.
_____________ Secretary Title: President
[CORPORATE SEAL]
FIRST UNION NATIONAL BANK
ATTEST: OF NORTH CAROLINA
/s/ By: /s/
Assistant Secretary Title: Vice President
[CORPORATE SEAL]
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<PAGE>
SCHEDULE OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description of Exhibits Section
<S> <C> <C>
A Places of Business and Locations 1.1,
of Collateral 9.1
B Permitted Liens 1.1
C Fictitious or Assumed Names 6.1
D Litigation 6.2
E Licenses, Patents and Trademarks 6.15
F-l Eden Realty 1.1
F-2 Chatham Realty 1.1
F-3 Martinsville Realty 1.1
F-4 Vesta Realty 1.1
G Authorized Persons 2.1
H Monthly Report 7.3(e)
</TABLE>
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<PAGE>
EXHIBIT A
Places of Business and Locations of Collateral
I. Borrower's chief executive office, principal place of
business and main manufacturing plant:
801 Fieldcrest Road
Eden, North Carolina 27288
II. Other Business Locations:
a. 750 Fieldcrest Road
Eden, North Carolina
(sewing facility)
b. State Road 714
Martinsville, Virginia
(sewing facility, distribution facility and
distribution annex facility)
c. Chatham Industrial Park
Chatham, Virginia
d. Lester Group Warehouses
617-A Liberty Street
Martinsville, Virginia
(warehouse)
e. U.S. 58 and State Route 639
Vesta, Patrick County, Virginia
(sewing facility)
f. MGM Warehouse
VC Drive
Martinsville, Virginia
(warehouse)
III. Other Locations of Collateral:
a. Knitcraft (knitting) in Belmont, Gaston County, North
Carolina.
b. Liberty Embroidery (embroidery) in Madison, Rockingham
County, North Carolina.
c. Liberty Printing (screen printing) in Madison,
Rockingham County, North Carolina.
d. Southprint (screen printing) in Martinsville, Henry
County, Virginia.
e. Bengle Manufacturing in Stuart, Patrick County,
Virginia.
f. Cedar Hill in Anson, Anson County, North Carolina.
g. Eagle Pointe in Huddleston, Bedford County, Virginia.
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<PAGE>
h. Ramseur Inter-Lock Knitting Co. in Ramseur, Randolph
County, North Carolina
i. T. L. Edwards in Statesville, Iredell County, North
Carolina
j. Galax Apparel in Galax, Carroll County, Virginia
k. Diversified Apparel in Pulaski, Pulaski County,
Virginia
l. Grassy Creek Apparel, Gate City, Scott County,
Virginia
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<PAGE>
EXHIBIT B
TO
LOAN AND SECURITY AGREEMENT
Permitted Liens
UCC Financing Statements filed in the Office of:
A. Secretary of State of North Carolina:
<TABLE>
<CAPTION>
Date of Collateral
Secured Party File No. Filing Description
<S> <C> <C> <C>
1. Toyota Motor Credit
Corporation 0973106 03/01/93 2 Toyota forklifts
2. Toyota Motor Credit 0973107 03/01/93 2 Toyota forklifts
Corporation
3. Toyota Motor Credit 013699 07/08/93 1 Toyota forklift
Corporation
4. Toyota Motor Credit 1117170 06/13/94 1 Toyota forklift
Corporation
5. Gaston Co. Dying 1195221 02/17/95 1 dyeing machine
Machine Co.
6. MJL Corporation 1143195 09/06/94 1 cutting system
7. MJL Corporation 1214404 04/13/95 1 cutting system
B. Register of Deeds of Rockingham County, North Carolina:
1. Toyota Motor Credit
Corporation 1467 03/01/93 2 Toyota forklifts
2. Toyota Motor Credit 1468 03/01/93 2 Toyota forklifts
Corporation
3. Toyota Motor Credit 2481 07/06/93 1 Toyota forklift
Corporation
4. Toyota Motor Credit 4605 06/13/94 1 Toyota forklift
Corporation
5. Gaston Co. Dyeing 6085 02/17/95 1 dyeing machine
Machine Co.
C. Clerk of Circuit Court of Henry County, Virginia:
1. Crown Credit Co. 000513 07/26/94 equipment
2. Crown Credit Co. 000612 09/07/94 equipment
</TABLE>
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<PAGE>
EXHIBIT C
TO
LOAN AND SECURITY AGREEMENT
Fictitious or Assumed Names
Pluma
Santee
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<PAGE>
EXHIBIT D
TO
LOAN AND SECURITY AGREEMENT
Litigation
None
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<PAGE>
EXHIBIT E
TO
LOAN AND SECURITY AGREEMENT
Licenses, Patents and Trademarks
Borrower has a license from Superba, Inc. to use the name
"Santee" in certain labels.
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<PAGE>
EXHIBIT F-l Page 1 of 2
TO
LOAN AND SECURITY AGREEMENT
Eden Realty
Eden
Rockingham County, North Carolina
TRACT 1:
Those certain parcels or tracts of land located in Rockingham County,
North Carolina, being more particularly
described as follows:
BEGINNING at an iron pin in the north line of Fieldcrest Road, being
the southeast corner of Parcel "E" as shown on the map hereinafter referred to,
said beginning point also being located a chord, courses and distance along a
curve to the right of South 71 deg. 17 min. 09 sec. West 172.14 feet from the
southwestern corner of the property of the First Baptist Church of Draper as
recorded in Book 660, Page 520, Rockingham County Registry, and running thence
from said point and place of BEGINNING along the northern right of way line of
Fieldcrest Road, on a curve to the right, chord, courses and distances: South 74
deg. 40 min. 25 sec. West 499.84 feet, and South 81 deg. 17 min. 28 sec. West
812.65 feet to an iron; thence leaving the right of way of Fieldcrest Road and
running with the eastern line of a private street, North 4 deg. 27 min. 30 sec.
West 491.28 feet to an iron located in the southeast line of the Norfolk and
Southern Railway, and being the northwestern most corner of the within described
property; running thence with the Norfolk and Southern Railway line, North 70
deg. 11 min. 58 sec. East 1,159.69 feet to an existing iron pin, being the
northeast corner of the herein described property and the northwest corner of
Parcel "F" as shown on the map hereinafter referred to; thence leaving said
railroad line in a southerly direction with the west line of Parcel "F", South
20 deg. 16 min. 56 sec. East 669.03 feet to the point and place of BEGINNING,
containing 17 acres, and being all of Parcels "D" and "E" as shown on the survey
entitled "As-Built Survey for North Bowles Partnership of Pluma Manufacturing,
Inc.," dated Mary 5, 1990, prepared by C. E. Robinson & Associates, Registered
Land Surveyor, Eden, North Carolina.
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<PAGE>
TRACT 2: Page 2 of 2
This being a 15.648 acre tract of land located on the south side of Fieldcrest
Road, west side of Eden Avenue, north side of a proposed street and east side of
Norfolk Southern Railway leading to Duke Power Steam Station.
Beginning at a point in the southern right-of-way of Fieldcrest Road said point
being in the eastern right-of-way (50' right-of-way) of Norfolk Southern Railway
spur line serving Duke Power Steam Station; thence from said beginning point
with the southern right-of-way of Fieldcrest Road South 88(degrees) 21' 02" East
828.48 feet to a point; thence with said right-of-way as it curves to the left a
chord bearing and distance North 89(degrees) 01' 08" East 527.48 feet chord,
527.67 feet arc. to a point in the western right-of-way of Eden Avenue said
street having a 100 foot right of way; thence with the western right of way of
Eden Avenue South 4(degrees) 27' 30" East 492.98 feet to a point; thence South
42(degrees) 07' 30" West 34.16 feet to a point in the northern right-of-way of a
pro posed street, said street being unnamed and having a 100' right-of-way;
thence with the northern right-of-way of proposed street South 88(degrees) 42'
30" West 766.00 feet to a point; thence North 71(degrees) 19' 10" West 44.40
feet chord, 45.32 feet arc. to a point; thence South 80(degrees) 12' 45" West
127.21 feet chord, 143.73 feet arc. to a point; thence leaving proposed street
North 58(degrees) 13' 40" West 629.83 feet to a point in the eastern
right-of-way of Norfolk Southern Railway; thence with said right-of-way North
23(degrees) 30' 22" East 245.00 feet chord, 245.72 feet arc. to the POINT OF
BEGINNING and containing 15.648 acres as shown on plat of survey for Fieldcrest
Cannon, Inc. by C. E. Robertson dated April 20, 1992.
(DL013)
The above-described property was conveyed to Grantor by Citizens Economic
Development, Inc., a North Carolina tax-exempt corporation by special warranty
deed dated June 22, 1992, and recorded on June 23, 1992, in Deed Book 866, page
2288, Rockingham County Registry.
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<PAGE>
EXHIBIT F-2
TO
LOAN AND SECURITY AGREEMENT
Chatham Realty
Located in Chatham Magisterial District, Pittsylvania County,
Commonwealth of Virginia:
Lot 2 containing 16.325 acres as shown on plat of survey showing Chatham North
Industrial Park by Dewberry & Davis, dated September 19, 1987, recorded in Map
Book 42, Page 210, in the Clerk's Office of the Circuit Court of Pittsylvania
County, Virginia.
And being the same property conveyed to Pluma, Inc., a North Carolina
corporation, from Industrial Development Authority of Pittsylvania County,
Virginia, by Deed dated November 13, 1989 recorded in Deed Book 862, Page 783,
in the aforesaid Clerk's Office.
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<PAGE>
EXHIBIT F-3 Page 1 of 2
TO
LOAN AND SECURITY AGREEMENT
Martinsville Realty
(Henry County, Virginia)
All of that certain tract or parcel of land, together with all
improvements thereon and all appurtenances thereunto appertaining, situated on
the East side of State Route 714, on the South side of a 50-foot access drive
and on the North side of a 45-foot access easement in the Collinsville (formerly
Martinsville) Magisterial District of Henry County, Virginia, being all of Tract
2 as shown on "Subdivision Plat of Bowles Industrial Park", of record in the
Henry County Circuit Court Clerk's Office in Map Book 84, Page 97, said Tract
containing 8.205 acres, more or less, and as shown on Plat of Survey for Pluma,
Inc., prepared by J. A. Gustin & Associates, P.E. & L.L.S., dated January 7,
1992, to be recorded contemporaneously herewith; and being more particularly
described thereon as follows, to-wit:
BEGINNING at a reinforcing rod set on the eastern margin of State Route
714, which rod is located 0.2 mile, plus or minus, north of the intersection
with State Route 714, thence along the eastern margin of State Route 714, and
with the chord of a curve to the left, having a centerline radius of 3839.72
feet and a delta of 4 degrees 11 minutes 47 seconds, bearing North 8 degrees 27
minutes 37 seconds East 281.16 to a reinforcing rod set; thence continuing along
the eastern margin of State Route 714, North 6 degrees 21 minutes 44 seconds
East 248.69 feet to a reinforcing rod; thence leaving the eastern margin of
State Route 714, North 69 degrees 45 minutes 29 seconds East 119.55 feet to a
reinforcing rod; thence South 79 degrees 43 minutes 51 seconds East 500.00 to a
reinforcing rod; thence South 10 degrees 16 minutes 09 seconds West 603.47 feet
to reinforcing rod; thence with the chord of a curve to the right, having a
centerline radius of 1570.00 feet and a delta of 6 degrees 56 minutes 30
seconds, bearing North 83 degrees 12 minutes 07 seconds West 190.10 feet to a
reinforcing rod set; thence North 79 degrees 43 minutes 51 seconds West 362.38
feet to a reinforcing rod; thence North 34 degrees 36 minutes 53 feet West 35.49
feet to the point of the beginning and containing 8.205 acres, plus or minus,
according to the aforesaid Plat of Survey for Pluma, Inc., dated January 7, 1992
(the subject property being hereinafter referred to as the "Grantor's Tract");
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<PAGE>
Page 2 of 2
TOGETHER WITH perpetual non-exclusive easements to and from the
Grantor's Tract over any portion of the easement areas described below for the
purposes of ingress and egress to and from the Grantor's Tract, with the
property constituting said access easements more particularly described as
follows:
Access Easement 1: Being known and designated as that 45-foot access
easement lying immediately south of the southern line of the Grantor's Tract,
and designated as such in the aforesaid plat dated January 7, 1992, to be
recorded in the Clerk's Office of the Circuit Court of Henry County, Virginia,
said access easement extending eastwardly from State Road No. 714.
Access Easement 2: Being known and designated as that 50-foot access
drive lying immediately north of the northern line of the Grantor's Tract, and
designated as such in the aforesaid plat dated January 7, 1992, to be recorded
in the Clerk's Office of the Circuit Court of Henry County, said access road
extending eastwardly from State Road No. 714; provided however, this easement
shall end at the eastern margin of Grantor's Tract.
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EXHIBIT F-4
TO
LOAN AND SECURITY AGREEMENT
Vesta Realty
(Patrick County, Virginia)
LYING AND BEING in the Blue Ridge Magisterial District, Patrick County,
Virginia, and BEGINNING at an iron pin located in the southeastern right of way
line of State Road 639, said iron being located at the northwestern corner of
the John Gordon Cruise property (now or formerly) as recorded in Deed Book 108,
Page 462, the Patrick County Clerk's Office; running thence from said point and
place of beginning with the southeastern right of way line of State Road 639;
thence North 37 degrees 02 minutes 17 seconds East 186.74 feet to an iron;
thence North 40 degrees 41 minutes 01 seconds East 324.30 feet to an iron;
thence North 43 degrees 39 minutes 02 seconds East 244.42 feet to an iron;
thence North 46 degrees 25 minutes 54 seconds East 352.46 feet to an iron, said
iron being located at the northwestern corner of the Herman Vaughn property as
described in Deed Book 238-286, Patrick County Registry; thence leaving State
Road 639 South 20 degrees 11 minutes 20 seconds East 264.81 feet to an iron;
thence South 36 degrees 25 minutes 42 seconds East 206.79 feet to an iron;
thence South 25 degrees 42 minutes 39 seconds East 72.30 feet to an iron in
Little Ivy Creek; thence South 76 degrees 13 minutes 17 seconds West 39.29 feet;
thence South 50 degrees 32 minutes 54 seconds West 44.68 feet; thence South 85
degrees 56 minutes 40 seconds West 44.34 feet; thence South 40 degrees 26
minutes 10 seconds West 55.19 feet; thence South 38 degrees 43 minutes 26
seconds West 61.19 feet; thence South 16 degrees 21 minutes 56 seconds West
48.17 feet; South 21 degrees 06 minutes 03 seconds East 48.24 feet; South 17
degrees 41 minutes 32 seconds West 59.16 feet; South 14 degrees 11 minutes 09
seconds East 94.53 feet; South 02 degrees 21 minutes 59 seconds East 48.70 feet;
South 09 degrees 44 minutes 31 seconds East 367.01 feet; thence North 63 degrees
01 minutes 59 seconds West 982.50 feet to the point and place of beginning and
containing 13.3309 acres as shown on a survey by Larry G. Rakes dated April 9,
1990.
-71-
<PAGE>
EXHIBIT G
TO
LOAN AND SECURITY AGREEMENT
Authorized Persons
George C. Wade Chairman of the Board/
Secretary
R. Duke Ferrell, Jr. President/Chief Executive
Officer
William Mileski Vice President
Nancy Barksdale Controller/Treasurer
C. Monroe Light Vice President
-72-
<PAGE>
EXHIBIT H
TO
LOAN AND SECURITY AGREEMENT
Monthly Borrowing Base and Loan Report
Date _____________, 19___
As of _____________, 19___
Report No. ___________________
Pursuant to Section 7.3(e) of that certain Loan and Security Agreement
("Loan Agreement") dated May 25, 1995 between PLUMA, INC. ("Borrower") and FIRST
UNION NATIONAL BANK OF NORTH CAROLINA ("Lender"), the undersigned on behalf of
Borrower hereby delivers this Monthly Borrowing Base and Loan Report to Lender
to induce Lender to make Loans to Borrower. All capitalized terms used herein
shall have the meanings ascribed to such terms in the Loan Agreement.
COLLATERAL STATUS
1. Total Accounts (as set
forth in the attached
aged trial balance) $_____________
2. Ineligible Accounts:
(a) Accounts unpaid more
than 90 days from due
date of invoice or
more than 120 days
after date of invoice $_____________
(b) Accounts arising on
other than an absolute
sale basis $_____________
(c) Accounts from Account
Debtors located out-
side the United States $_____________
(d) Accounts that are
subject to offset
or defense, including
counterclaims or contra-
accounts $_____________
(e) Accounts from Account
Debtors located in
New Jersey $_____________
(f) Accounts from
Affiliates $_____________
-73-
<PAGE>
(g) Accounts owed by
Account Debtors who
are not Solvent, or
are subject of a
bankruptcy or in-
solvency proceeding,
or are otherwise not
creditworthy $_____________
(h) Other ineligible
Accounts $_____________
Total Ineligible Accounts $_____________
3. Discounts, credits and
allowances $_____________
4. Total Eligible Accounts
(line 1 minus line 2
minus line 3) $_____________
5. Eligible Accounts portion
of Borrowing Base
(line 4 x 85%) $_____________
6. Total Inventory (as set
forth in attached Schedule
of Inventory) $_____________
7. Less ineligible Inventory
(a) Supplies, containers,
work in process, lot
fabric $_____________
(b) Inventory in possession
of or on premises of
third parties $_____________
(c) Other ineligible
inventory $_____________
Total Ineligible Inventory $_____________
8. Total Eligible Inventory
(line 6 minus line 7) $_____________
9. Inventory Portion of Borrowing
Base (line 7 x
60%) $_____________
10. Net Book Value of Eligible Equipment $_____________
-74-
<PAGE>
11. Equipment Portion of Borrowing
Base (line 10 x 50%) $_____________
12. Net Book Value of the Realty $_____________
13. Realty Portion of Borrowing Base
Base (line 12 x 80%) $_____________
LOAN STATUS
14. Borrowing Base (line 5 +
line 9 + line 11 + line 13) $_____________
15. Principal balance of
Loans Outstanding $_____________
16. Committed Amount $_____________
17. Available Amount (lesser of
line 14 or line 16) $_____________
18. Required payment pursuant
to Section 3.1(a)(iii)
(line 15 minus line 17) $_____________
The undersigned certifies to Lender on behalf of Borrower that: (a)
this Monthly Borrowing Base and Loan Report, including the attached schedules,
is true and correct in all respects, is in accordance with the books and records
of Borrower, and is prepared in accordance with the terms of the Loan Agreement;
(b) as of the date hereof, all of the representations and warranties of Borrower
contained in the Loan Agreement and the other Loan Documents are true and
correct (except to the extent that they are untrue or incorrect solely as a
result of occurrences permitted under the Loan Agreement); and (c) no Default
or Event of Default has occurred and is continuing.
-----------------------------
Treasurer
-75-
<PAGE>
[PLUMA LOGO APPEARS HERE]
801 Fieldcrest Road
Eden, North Carolina 27288
(336) 635-4000
www.pluma.com
<PAGE>
1997 ANNUAL REPORT
[PLUMA LOGO APPEARS HERE ROTATED 90 DEG. TO LEFT SIDE OF PAGE]
<PAGE>
[PLUMA LOGO APPEARS HERE]
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997(1)(2)(3) 1996(4)(9) 1995(4)(5)(6) 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
10
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------------
ASSETS 1997 1996
----------------------------------------
<S> <C> <C>
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
========================================
</TABLE>
See notes to financial statements.
16
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
-----------------------------------
<S> <C> <C>
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
===================================
</TABLE>
17
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C>
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
==============================================================
</TABLE>
See notes to financial statements.
18
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(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
================================================================================
</TABLE>
See notes to financial statements.
19
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
See notes to financial statements.
20
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
-------------------------------------------
<S> <C> <C>
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
-------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
26
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
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
=========================================================
</TABLE>
27
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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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
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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
