UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission File Number 333-18755
PLUMA, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1541893
- --------------------------------------------- -----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) (Identification Number)
801 Fieldcrest Road, Eden, North Carolina 27288
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (336) 635-4000
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
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
Requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date 8,109,152 shares of common
stock, no par value, as of August 19, 1999.
2
<PAGE>
PLUMA, INC.
INDEX TO FORM 10-Q
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
Balance Sheets - June 30, 1999 and December 31, 1998 4
Statements of Operations - Three Months and Six Months Ended June 30, 1999 and 1998 5
Statements of Cash Flows - Six Months Ended June 30, 1999 and 1998 6
Notes to Financial Statements 7
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
</TABLE>
3
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PLUMA, INC.
BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
(UNAUDITED)
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
CURRENT ASSETS:
Cash $ 8,248,821 $ 1,612,087
Accounts receivable (less allowance -
1999, $4,401,181; 1998, $6,845,714) 17,886,050 24,844,607
Income taxes receivable 330,320 3,039,390
Inventories, net 40,048,459 56,690,891
Other current assets 1,567,405 83,043
---------------- ---------------
Total current assets 68,081,055 86,270,018
---- ---------- -- ----------
PROPERTY, PLANT AND EQUIPMENT
Land 1,065,689 1,065,689
Land improvements 832,007 810,419
Buildings and improvements 17,800,549 18,916,761
Machinery and equipment 47,731,567 48,585,396
Construction in process 486,121
---------------- ---------------
Total property, plant and equipment 67,429,812 69,864,386
Less accumulated depreciation 29,004,438 26,046,667
----- ---------- ---- ----------
Property, plant and equipment, net 38,425,374 43,817,719
----- ---------- ---- ----------
OTHER ASSETS
Goodwill (less accumulated amortization-
1998, $1,412,700) 26,308,208
Other 494,621 2,147,465
------------- ------------
Total other assets 494,621 28,455,673
------------- ------------
TOTAL $ 107,001,050 $158,543,410
============= ============
(UNAUDITED)
JUNE 30, DECEMBER 31,
LIABIILITIES AND SHAREHOLDERS' EQUITY 1999 1998
CURRENT LIABILITIES:
Current maturities of
long-term debt $106,251,321 $108,723,716
Accounts payable 13,299,410 17,838,270
Accrued expenses 4,295,184 4,372,255
------------ ------------
Total current liabilities $123,845,915 $130,934,241
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, no par value,
1,000,000 shares authorized
Common stock, no par value,
15,000,000 shares authorized,
8,109,152 shares issued and
outstanding 36,849,127 36,849,127
Retained deficit (53,693,992) (9,239,958)
--------------- --- -----------
Total shareholders'
equity (deficit) (16,844,865) 27,609,169
----------- -----------
TOTAL $107,001,050 $158,543,410
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
PLUMA, INC.
STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NET SALES $36,854,247 $51,059,701 $74,512,206 $90,256,136
COST OF GOODS SOLD 38,777,545 46,428,171 76,401,278 81,610,435
------------ ------------ ---------- -----------
GROSS PROFIT (LOSS) (1,923,298) 4,631,530 (1,889,072) 8,645,701
----------- ------------ ----------- -------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,364,382 5,185,240 9,801,610 9,018,065
AMORTIZATION OF GOODWILL 346,512 435,729 693,023 871,457
WRITE-OFF OF GOODWILL 25,615,185 25,615,185
(GAIN) LOSS ON VALUATION AND DISPOSAL OF
ASSETS 768,751 (2,780) 2,243,324 (45,278)
------------ ------------- ------------- ------------
TOTAL OPERATING EXPENSES 31,094,830 5,618,189 38,353,142 9,844,244
------------ ------------- ------------- ------------
LOSS FROM OPERATIONS (33,018,128) (986,659) (40,242,214) (1,198,543)
------------ ------------ ------------ -----------
OTHER INCOME (EXPENSES):
Interest expense (1,193,393) (1,862,555) (3,768,152) (3,330,837)
Other income (expenses), net (217,688) 147,490 (443,667) 441,362
------------ ------------- ------------- ------------
Total other expenses, net (1,411,081) (1,715,065) (4,211,819) (2,889,475)
------------ ------------- ------------- ------------
LOSS BEFORE INCOME TAXES (34,429,209) (2,701,724) (44,454,033) (4,088,018)
INCOME TAX BENEFIT (983,428) (1,488,039)
----------- ------------- ------------- ------------
NET LOSS $(34,429,209) $(1,718,296) $(44,454,033) $(2,599,979)
============= ============ ============= ============
LOSS PER COMMON SHARE AND COMMON EQUIVALENT -
Basic and diluted
$ (4.25) $ (.21) $ (5.48) $ (.32)
============= ============ ========== =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 8,109,152 8,109,152 8,109,152 8,109,152
==== ======== ============= =========== ==========
</TABLE>
5
The accompanying notes are an integral part of these statements.
<PAGE>
PLUMA, INC.
STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss $(44,454,033) $ (2,599,979)
Adjustments to reconcile net income to net cash used
in operating activities:
Provision for depreciation 3,144,105 2,142,293
Provision for amortization 918,019 921,459
Write-off of goodwill 25,615,185
(Gain) loss on valuation and disposal of assets 2,243,324 (45,278)
(Increase) decrease in accounts receivable 6,958,557 (4,288,887)
Increase in deferred income taxes 499,338
(Increase) decrease in inventories 16,642,432 (13,102,572)
(Increase) decrease in other current assets (617,080) 248,184
Increase (decrease) in accounts payable (4,538,860) 6,752,357
(Increase) decrease in income taxes receivable 2,709,070 (626,048)
Increase (decrease) in other current liabilities (77,071) 1,917,876
------------ ------------
Net cash provided by (used in) operating activities 8,543,648 (8,181,257)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (99,436) (8,156,286)
Proceeds from disposal of property 104,352 54,900
Other, net 560,565 (195,418)
------------ ------------
Net cash provided by (used in) investing activities 565,481 (8,296,804)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVIES:
Repayment of long-term debt (58,000) (849,640)
Proceeds from issuance of long-term debt 58,727,000
Proceeds from D.I.P. loan 1,500,000
Net repayments of revolving loan (3,131,336) (41,268,342)
Loan fees (783,059) (772,693)
------------ ------------
Net cash provided by (used in) financing activities (2,472,395) 15,836,325
------------ ------------
NET INCREASE (DECREASE) IN CASH 6,636,734 (641,736)
CASH, BEGINNING OF PERIOD 1,612,087 1,875,992
------------ ------------
CASH, END OF PERIOD $ 8,248,821 $ 1,234,256
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 4,290,806 $ 2,591,774
Income taxes $ 8,309 $ 57,500
The accompanying notes are an integral part of these statements.
</TABLE>
6
<PAGE>
PLUMA, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 (UNAUDITED)
- -----------------------------------------------------------------------------
1. ACCOUNTING POLICIES
The accompanying unaudited financial statements of Pluma, Inc. (the
"Company") have been prepared in accordance with generally accepted
accounting principles for interim periods.
In the opinion of management, these financial statements include all
adjustments, including all normal recurring accruals, necessary for a
fair presentation of the financial position at June 30, 1999 and
December 31, 1998, the results of operations for the three months and
six months ended June 30, 1999 and 1998 and cash flows for the six
months ended June 30, 1999 and 1998.
The operating results for the three and six months ended June 30, 1999
are not necessarily indicative of the results to be expected for the
full year ending December 31, 1999.
On May 14, 1999 the Company filed a voluntary petition under Chapter 11
of the Bankruptcy Code in the United States Bankruptcy Court for the
Middle District of North Carolina. Pursuant to the provisions of
Sections 1107 and 1108 of the Bankruptcy Code, the Company will operate
as a debtor-in-possession during the pending reorganization proceeding.
As a result of the filing, the Company is no longer accruing interest
or other fees associated with the pre-petition debt.
2. INVENTORIES
Inventories consist of the following:
(UNAUDITED)
JUNE 30, DECEMBER 31,
1999 1998
At FIFO cost:
Raw materials $ 941,615 $ 986,561
Work-in-process 6,408,178 6,652,569
Finished Goods 42,025,853 64,207,881
Production supplies 623,610 870,382
--------- ----------
49,999,256 72,717,393
Excess of FIFO over LIFO cost (3,646,392) (2,804,528)
---------- ----------
46,352,864 69,912,865
Excess of cost over market (6,304,405) (13,221,974)
---------- ------------
Total $40,048,459 $ 56,690,891
=========== ============
Reserves have been recorded against inventory for the estimated excess
of cost over market related primarily to inventories to be liquidated
(see Note 12).
7
<PAGE>
3. LONG-TERM DEBT
On May 14, 1999, the Company filed for protection under Chapter 11 of
the U. S. Bankruptcy Code. The Company requested and was granted from
the Bankruptcy Court The Final Stipulation and Order for the Debtor's
Use of Cash Collateral and for Adequate Protection (the "Debtor's Use
of Cash Collateral") authorized the Company to use funds located in the
cash collateral account for operations. The cash collateral account was
created through an agreement with the lending agent on November 16,
1998 whereby funds remitted to this account by the Company's customers
were for use by the Company only in accordance with an operating budget
approved by the Company's lenders and filed with the Bankruptcy Court.
In order for the Company to be in compliance with this stipulation and
order, the Company must comply with certain covenants, including, but
not limited to, the following: (1) 85% of eligible receivables (as
defined) plus 60% of eligible inventory (as defined) plus cash retained
in the cash collateral account shall not fall below $41.85 million, (2)
expenditures will not be made, without prior written consent from the
agent or court, which vary any budget line item amount more than 15%
from the approved budget or, in the aggregate, exceed such aggregated
amounts set forth in the applicable budget by more than $50,000, (3)
aggregate cash receipts less aggregate cash disbursements (the "change
in cash") should not be less than ($1.8) million in any calendar week
and the change in cash shall not be negative for each of any four
consecutive calendar weeks, (4) reports of accounts receivable aging
will be provided to the agent each Thursday, and, (5) file a motion
with the applicable parties by June 14, 1999 to dispose of the Stardust
distributorship and/or its assets. As of June 30, 1999 the Company was
not in compliance with the stipulation and order authorizing the use of
cash collateral.
After the May 14, 1999 filing for bankruptcy protection, the Company
entered into a Debtor-in-Possession Financing and Security Agreement
(the "DIP") in order to continue operations without causing
irreparable damage to the organization. The interim DIP financing,
approved by the Bankruptcy Court on June 23, 1999, authorizes, but does
not require, the financial institutions which are party to the
syndicated credit agreement to give additional financing to the
Company of up to $2.0 million. The Company must comply with various
covenants in order to maintain the DIP financing. These covenants
include, but are not limited to, (1) refraining from obtaining any
future debt, (2) refraining from incurring any additional liens on any
of its property, (3) only investing in permissible investments, (4)
refraining from paying dividends on or purchasing its capital stock,
(5) restrictions on transactions with affiliates, and (6) limiting
capital expenditures to not more than $30,000 in any calendar month
and $78,000 through August 27, 1999. The final DIP financing agreement
was approved by the Bankruptcy Court on July 9, 1999 and increased the
amounts of funds which could be borrowed to up to $3.0 million. As of
June 30, 1999 the Company was not in compliance with the DIP agreement
and had not obtained waivers relating to its non-compliance. The
Company actually borrowed $1.5 million under the DIP financing. All
amounts borrowed are fully due and payable on August 27, 1999 at which
time the DIP facility will expire.
4. CAPITAL STOCK
Effective March 31, 1999, the Company reached an agreement with its
lenders whereby the lenders agreed to forbear from exercising their
rights and remedies under the Credit Agreement. Among the provisions of
the Forbearance Agreement, the lenders may request stock purchase
warrants to acquire 10% of the diluted common equity of the Company
(901,017 shares as of March 31, 1999). These warrants vest and become
exercisable as follows: 25% beginning March 31, 1999; 25% beginning
October 1, 1999; 25% beginning April 1, 2000; and 25% beginning October
1, 2000. If the debt under the Credit Agreement is paid in full, all
unvested warrants are forfeited. Furthermore, the Company may redeem
the warrants for a price of $5.00 per share through December 31, 1999
and $10.00 per share thereafter. The estimated fair value of these
warrants at the date of agreement was $0.50 per share using the
Black-Scholes option-pricing model with the following assumptions:
dividend yield of 0.0%, expected volatility of 243.7%, risk-free
interest rate of 4.6% and expected lives of 2 years. Subsequent to
March 31, 1999, the lenders have requested the Company to issue stock
purchase warrants totaling 688,513 shares. The warrants have an
exercise price of $0.01 per share.
Effective May 10, 1999, the Company entered into an employment contract
with a certain individual. As part of this employment contract, the
Company will grant to the individual 300,000 warrants to purchase the
Company's stock at a price equal to the closing price of the Company's
common stock on the New York Stock Exchange on May 10, 1999. The
closing price at May 10, 1999 was $.50 per share. The estimated fair
value of these warrants at the date of the employment contract was
$0.46 per share using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0.0%, expected volatility of
239.0%, risk-free interest rate of 5.2% and expected lives of 2 years.
8
<PAGE>
5. 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.
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 loss and loss per share
would have been as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Loss:
As Reported $ (34,429,209) $(1,718,296) $(44,454,033) $(2,599,979)
Pro forma (34,259,701) (1,746,466) (44,354,279) (2,658,740)
Loss per share - basic and dilutive:
As reported $(4.25) $(0.21) $(5.48) $(0.32)
Pro forma $(4.23) $(0.22) $(5.47) $(0.33)
</TABLE>
A summary of the status of the Company's Stock Option Plan as of June
30, 1999 and December 31, 1998 and changes during the periods ending on
those dates is presented below:
SHARES WEIGHTED-AVERAGE
EXERCISE PRICE
Outstanding, January 1, 1998 380,365 13.077
Granted 123,000 2.000
Forfeited (15,309) 13.077
-------
Outstanding, December 31, 1998 488,056 10.285
Forfeited (57,113) 13.077
Forfeited (26,500) 2.000
-------
Outstanding, June 30, 1999 404,443 10.434
=======
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
Options exercisable at period end 353,808 364,999
========== ============
Weighted-average fair value
of options granted during the
period $ 0.00 $ 0.90
========== ============
9
<PAGE>
The following table summarizes information about fixed stock options
outstanding at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- ---------------------------------------
EXERCISE NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
PRICES OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
AT REMAINING EXERCISE AT EXERCISE
6/30/1999 CONTRACTUAL LIFE PRICE 6/30/1999 PRICE
<S> <C> <C> <C> <C> <C> <C>
$13.077 307,943 6.5 $13.077 257,308 $13.077
2.000 96,500 9.5 2.000 96,500 2.000
--------- ---------
$2.000 to
13.077 404,443 7.2 10.434 353,808 10.056
=========== =========
</TABLE>
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 1998 and 1996,
respectively; dividend yield of 0.0% and 0.08%, expected volatility of
123.0% and 40.9%, risk-free interest rates of 4.7% and 5.9%, and
expected lives of 5 years.
On April 27, 1999, the Board of Directors authorized the award of
qualified incentive options in the amount of 25,000 shares. However, at
June 30, 1999, these options had not been granted.
6. EARNINGS (LOSS) 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 (loss) per common share. SFAS No. 128
requires the presentation of basic earnings (loss) per common share and
diluted earnings (loss) 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 potential common shares
such as stock options and warrants and the numerator is adjusted to add
back (a) any convertible preferred dividends and (b) the after tax
amount of interest recognized in the period associated with any
convertible debt.
Options to purchase shares of common stock were outstanding during 1999
and 1998 (see Note 5) 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. Warrants
to purchase shares of common stock were outstanding during 1999 but
were not included in the computation of diluted EPS because the assumed
exercise of these warrants would have been anti-dilutive. Accordingly,
there were no differences in the numerators and denominators used in
the basic EPS and diluted EPS computations.
7. COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with three of its senior
executive officers. The term of one of the agreements expires in
December 2000. Under this agreement, upon termination of the employment
agreement after a change of control in the Company, as defined, the
Company would be liable for (i) a maximum of the employee's annual
salary, as defined, plus (ii) any bonuses, as defined. In addition,
under the employment agreement, the senior executive officer is
entitled to a minimum annual bonus payment to be paid at such time as
bonuses to other executive officers. In another agreement, the term of
the agreement expires in December 2002. Under this agreement, upon
termination 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 current base salary plus the average of the annual bonuses
paid to the employee. The term of another agreement expires in December
2000. Upon leaving the Company involuntarily, the Company would be
liable for the amount of the employee's base salary for one year.
10
<PAGE>
WATER TAKE-OR-PAY - At June 30, 1999, the Company had an outstanding
take-or-pay agreement for the purchase of treated water and wastewater
treatment for its Eden, North Carolina facilities. The committed amount
is for 450 million gallons per year through June 30, 2011. Under this
contract, the Company is committed at June 30, 1999 to purchase treated
water and wastewater treatment, assuming current price levels, as
follows:
Fixed and Determinable Portion of Take-or-Pay Obligations:
YEAR COMMITTED AMOUNT
1999 $509,062
2000 1,002,375
2001 988,875
2002 975,375
2003 959,625
Thereafter 6,887,250
-------------
Total $11,322,562
=============
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.
8. RELATED PARTY TRANSACTIONS
On March 31, 1999, the Company amended an operating lease agreement for
a building being leased from certain shareholders. Per the amendment,
the Company agreed to vacate the entire premises with the exception of
1,116 sq. ft. The amended lease is in affect through December 31, 1999.
Rents will total $5,022. Upon vacating the premises, the Company
abandoned leasehold improvements with a total net loss of $688,276.
9. 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
<S> <C> <C> <C> <C>
Customer A 28.8% 27.4% 28.6% 29.9%
Customer B 7.5% 12.1% 6.8% 7.2%
Gross sales by type of
product were as follows
(in millions):
Fleece $11.4 $13.1 $20.2 $30.5
Jersey 19.9 31.4 41.6 49.9
Closeouts/Irregulars 3.0 .7 6.9 1.2
Other 4.2 8.2 8.6 11.5
</TABLE>
11
<PAGE>
The geographic location of property, plant and equipment, net, was as
follows (in millions):
JUNE 30, 1999 DECEMBER 31, 1998
`
U.S. $38.2 $42.8
Mexico .2 1.0
10. FINANCIAL INSTRUMENTS
The Company entered into an interest rate swap agreement to reduce the
impact of changes in interest rates on some of its variable rate debt.
The agreement was terminated on May 14, 1999 as a result of the
Company's filing for bankruptcy protection. The swap agreement was a
contract to exchange variable rate for fixed rate interest payments
over the life of the agreement without the exchange of the underlying
notional amounts. The notional amount of the interest rate swap
agreement was used to measure interest to be paid or received and does
not represent the amount of exposure to credit loss. The differential
paid or received on the interest rate swap agreement was recognized as
an adjustment to interest expense. This interest rate swap agreement
was held for purposes other than trading. The Company entered into an
interest rate swap transaction pursuant to which it exchanged its
variable rate interest obligation on $45,000,000 notional principal
amount for a fixed rate payment obligation of 5.89% per annum for the
four year period beginning April 30, 1999. The fixing of the interest
rate for these periods was to minimize in part the Company's exposure
to the uncertainty of variable interest rates during this four-year
period. The carrying value of the interest rate swap at May 14, 1999
and December 31, 1998 was $0 and the fair value was ($345,000) and
($841,465), respectively. The fair value of the interest rate swap was
based on an average quoted market price. The interest rate swap
contract was with one of the members of the financial members of the
Credit Agreement.
11. EMPLOYEE BENEFIT PLANS
The Company has initiated three incentive plans during the second
quarter of 1999: the Combat Pay Plan, the Accrued Incentive Plan, and
the Performance Bonus Plan. Most all of the plans are offered to
individuals which are considered key to the successful implementation
of the Company's turnaround plan. The Combat Pay Plan is based on
continued employment with the Company. To be eligible for the
incentive, the employee must be employed by the Company on the last day
of the month. The term of this incentive plan is May 1999 through
December 1999. Expenses for this plan were $22,000 through June 30,
1999. The Accrued Incentive Plan is also based on continued employment
with the Company. To be eligible for this incentive, the employee must
be employed with the Company on September 30, 1999 and December 31,
1999. The Performance Bonus Plan is based on attainment of specified
financial goals. This incentive will be paid on December 31, 1999, if
those certain financial goals are achieved and the employee is employed
with the Company on that date. There were no expenses accrued for or
paid for the Accrued Incentive Plan and the Performance Bonus Plan as
of June 30, 1999.
The Company maintains a Sales Incentive Plan payable to the sales staff
if specified sales volume is reached. There were no expenses accrued
for or paid for this plan as of June 30, 1999.
12. GOING CONCERN MATTERS
Although the Company filed for protection under Chapter 11 of the U. S.
Bankruptcy Code on May 14, 1999, the accompanying financial statements
have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. As shown in the financial statements, the Company
incurred a net loss of $44,454,033 for the six months ended June 30,
1999 and has classified all of its debt as current. The Company also
has negative working capital of $55,764,860 and $44,664,223 at June 30,
1999 and December 31, 1998, respectively. These factors among others
indicate that the Company will be unable to continue as a going concern
for a reasonable period of time. The financial statements do not
include any adjustments relating to the recoverability and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
In response to the Company's poor performance and its liquidity
problems experienced during 1998, the Company undertook to develop a
business plan (the "Business Plan") designed to return the Company to
profitability and to provide the Company with the ability to service
its debt.
12
<PAGE>
In order to reduce overhead and other costs, the Company has eliminated
certain management positions, reduced management salaries, and has
suspended management bonuses for an indefinite period. Additional
personnel and overhead cost reduction measures have been and are
planned to be taken related to the closing of certain facilities. In
December 1998, management announced its intention to close the Rocky
Mount production facility which was sold on August 5, 1999 at a price
of approximately $1.2 million for the facility and the equipment
located therein. In addition, the Company has downsized its corporate
and administrative positions and has discontinued its Eden sewing
operations. As of March 31, 1999, all outlet stores had been closed.
The Company has also decided to sell its sales office in Martinsville,
Virginia. On April 26, 1999, management announced its intention to
close the Chatham and Altavista production facilities. The Chatham
facility closed on July 30, 1999 and the Altavista facility is expected
to close at the end of August, 1999. Due to these planned dispositions,
property, plant and equipment have been reduced by approximately
$2,846,000 to reflect their estimated net realizable value.
Because of the closing of the sewing facilities noted above and due to
the down-sizing at other sewing facilities, the Company has shifted a
significant portion of its sewing operations to outside contractors,
primarily in Mexico. The Company has experienced lower overhead costs
associated with the use of outside sewing contractors. In March 1999,
the Company also announced the closing of the Frank L. Robinson, Inc.
distributorship (FLR). As a result of this closing, the Company moved
certain FLR inventories to Stardust to be sold as part of the Stardust
operations. Approximately $2,000,000 of other FLR inventories were
liquidated to generate cash. The inventory liquidation was complete at
June 30, 1999. The inventories to be liquidated were reported at their
estimated net realizable value in the balance sheet December 31, 1998.
The Company had a relationship with a certain contractor in Mexico
whereby the Company provided sewing equipment to be used by this
contractor to assemble the Company's products. The Company is no longer
using this contractor. The equipment is still located in Mexico. Due to
the uncertainty as to the disposition of this equipment, the Company
has reduced the carrying value of the equipment by approximately
$665,000.
The Company is in the process of eliminating certain less profitable
product styles. The Company believes that this will reduce its product
mix to a more manageable level. Due to this reduction, closeout
inventories of approximately $12,500,000 have been identified for
liquidation. These inventories are also reported in the balance sheet
at their estimated net realizable value at June 30, 1999.
On August 3, 1999 the Company obtained permission from the bankruptcy
court to sell the Stardust distributorship. The Company expects to
close on the sale in August 1999 and receive a payment of approximately
$10.5 million after adjustments. Upon review of the sale and purchase
price to be obtained, the Company has determined that there is no
longer any goodwill associated with the Stardust division. The
unamortized goodwill in the amount of $25,615,185 was written off at
June 30, 1999.
As a result of lower than projected sales and Court Orders described
hereafter, the Company faces a severe cash crisis. On May 17, 1999 an
Order was entered by the Bankruptcy Court, with the consent of the
Company's lenders, authorizing the Company to use cash collateral in
accordance with an agreed upon budget. The Cash Collateral Order had
certain default provisions which, when triggered, would allow the
Company's lenders to withdraw their consent to the Company's continued
use of cash collateral and make it incumbent upon the Company to seek
additional relief from the Court. A final Cash Collateral Order was
entered by the Court on June 8, 1999.
Among other covenants and restrictions contained in the Cash Collateral
Order is a requirement which limits the Company's use of cash
collateral to the extent that aggregate of the Company's eligible
accounts and eligible inventory falls below $41.85 million (the Cash
Collateral Coverage Amount). Because of faster than anticipated
collections, inventory write downs and accounts receivable aging the
Cash Collateral Coverage Amount soon fell below the required $41.85
million and the Company's ability to use funds in the Cash Collateral
Account was severely restricted. Other events of default under the Cash
Collateral Order have occurred but formal notice of default has not
been given the Company by its lenders.
On June 21, 1999 the Company and its lenders entered into a Debtor In
Possession Financing and Security Agreement ("DIP Financing Agreement")
pursuant to which the Lenders extended the company a $3.0 million
post-petition line of credit. The DIP Financing Agreement had a number
of conditions and the ability of the Company to borrow funds under the
DIP Financing Agreement was subject to termination at any time at the
discretion of the lenders. On June 23, 1999 the DIP Financing Agreement
was approved by the Court on an interim basis and the Company was
authorized to borrow up to $2.0 million. The Company in fact borrowed
$1.5 million from its lenders pursuant to the DIP Financing Agreement
and Order. The DIP Financing Agreement terminates on August 27, 1999
and full repayment of amounts outstanding are required at that time.
Without additional borrowings thereafter the Company will be unable to
sustain its operations at their current level by mid-September.
The Company's ability to reorganize under Chapter 11 and emerge as a
going concern is dependent upon a number of factors. The Company needs
to obtain a source of financing sufficient to satisfy the lenders'
secured claim and provide the Company with a source of working capital.
Without the infusion of significant new equity in the Company it is
doubtful that the Company will be able to secure such financing.
Moreover, the Company must be able to demonstrate the feasibility of
its reorganization by the maintenance of a solid customer base which
will provide sufficient revenues to sustain its operations. Because of
the uncertainty of the Company's future, it has been difficult for the
Company to obtain firm commitments for future sales from existing
customers. Without firm financing commitments or new equity investment
it is likely that the Company will be forced to discontinue its
operations as a going concern and liquidate its assets.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction
with the financial statements and related notes of the Quarterly Report
on Form 10-Q and should be read in conjunction with the Company's 1998
Annual Report.
Although the Company filed for protection under Chapter 11 of the U. S.
Bankruptcy Code on May 14, 1999, the accompanying financial statements
have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. As shown in the financial statements, the Company
incurred a net loss of $44,454,033 for the six months ended June 30,
1999 and has classified all of its debt as current as of June 30, 1999.
The Company also has negative working capital of $55,764,860 and
$44,664,223 at June 30, 1999 and December 31, 1998, respectively. These
factors among others indicate that the Company will be unable to
continue as a going concern for a reasonable period of time. The
financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
In response to the Company's poor performance and its liquidity
problems experienced during 1998, the Company undertook to
develop a business plan (the "Business Plan") designed to return the
Company to profitability and to provide the Company with the ability
to service its debt.
In order to reduce overhead and other costs, the Company has eliminated
certain management positions, reduced management salaries, and has
suspended management bonuses for an indefinite period. Additional
personnel and overhead cost reduction measures have been and are
planned to be taken related to the closing of certain facilities. In
December 1998, management announced its intention to close the Rocky
Mount production facility which was sold on August 5, 1999 at a price
of approximately $1.2 million for the plant and equipment located
therein. In addition, the Company has downsized its corporate and
administrative positions and has discontinued its Eden sewing
operations. As of March 31, 1999, all outlet stores had been closed.
The Company has also decided to sell its sales office in Martinsville,
Virginia. On April 26, 1999, management announced its intention to
close the Chatham and Altavista production facilities. The Chatham
facility closed on July 30, 1999 and the Altavista facility is expected
to close at the end of August 1999. Due to these planned dispositions,
property, plant and equipment have been reduced by approximately
$2,846,000 to reflect their estimated net realizable value.
Because of the closing of the sewing facilities noted above and due to
the down-sizing at other sewing facilities, the Company has shifted a
significant portion of its sewing operations to outside contractors,
primarily in Mexico. The Company has experienced lower overhead costs
associated with the use of outside sewing contractors. In March 1999,
the Company also announced the closing of the Frank L. Robinson, Inc.
distributorship (FLR). As a result of this closing, the Company moved
certain FLR inventories to Stardust to be sold as part of the Stardust
operations. Approximately $2,000,000 of other FLR inventories were
liquidated to generate cash. The inventory liquidation was complete at
June 30, 1999. The inventories to be liquidated were reported at their
estimated net realizable value in the balance sheet at December 31,
1998.
The Company had a relationship with a certain contractor in Mexico
whereby the Company provided sewing equipment to be used by this
contractor to assemble the Company's products. The Company is no longer
using this contractor. The equipment is still located in Mexico. Due to
the uncertainty as to the disposition of this equipment, the Company
has reduced the carrying value of the equipment by approximately
$665,000.
The Company is in the process of eliminating certain less profitable
product styles. The Company believes that this will reduce its product
mix to a more manageable level. Due to this reduction, closeout
inventories of approximately $12,500,000 have been identified for
liquidation. These inventories are also reported in the balance sheet
at their estimated net realizable value at June 30, 1999.
On August 3, 1999 the Company obtained permission from the bankruptcy
court to sell the Stardust distributorship. The Company expects to
close on the sale in August 1999 at a purchase price, after adjustment,
approximating $10.5 million. Upon review of the sale and purchase price
to be obtained the Company has determined that there is no longer any
goodwill associated with the Stardust division. The unamortized
goodwill in the amount of $25,615,185 was written off at June 30, 1999.
As a result of lower than projected sales and Court Orders described
hereafter, the Company faces a severe cash crisis. On May 17, 1999 an
Order was entered by the Bankruptcy Court, with the consent of the
Company's lenders, authorizing the Company to use cash collateral in
accordance with an agreed upon budget. The Cash Collateral Order had
certain default provisions which, when triggered, would allow the
Company's lenders to withdraw their consent to the Company's continued
use of cash collateral and make it incumbent upon the Company to seek
additional relief from the Court. A final Cash Collateral Order was
entered by the Court on June 8, 1999.
Among other covenants and restrictions contained in the Cash Collateral
Order is a requirement which limits the Company's use of cash
collateral to the extent that the aggregate of the Company's eligible
accounts and eligible inventory falls below $41.85 million (the Cash
Collateral Coverage Amount). Because of faster than anticipated
collections, inventory write downs and account receivable aging the
Cash Collateral Coverage Amount soon fell below the required $41.85
million and the Company's ability to use funds in the Cash Collateral
Account was severely restricted. Other events of default under the Cash
Collateral Order have occurred but formal notice of default has not
been given the Company by its lenders.
On June 21, 1999 the Company and its lenders entered into a Debtor In
Possession Financing and Security Agreement ("DIP Financing
Agreement") pursuant to which the Lenders extended the company a $3.0
million post-petition line of credit. The DIP Financing Agreement had
a number of conditions and the ability of the Company to borrow funds
under the DIP Financing Agreement was subject to termination at any
time at the discretion of the lenders. On June 23, 1999 the DIP
Financing Agreement was approved by the Court on an interim basis and
the Company was authorized to borrow up to $2.0 million. The Company
in fact borrowed $1.5 million from its lenders pursuant to the DIP
Financing Agreement and Order. The DIP Financing Agreement terminates
on August 27, 1999 and full repayment of amounts outstanding are
required at that time. Without additional borrowings thereafter the
Company will be unable to sustain its operations at their current
level by mid-September.
The Company's ability to reorganize under Chapter 11 and emerge as a
going concern is dependent upon a number of factors. The Company needs
to obtain a source of financing sufficient to satisfy the lenders'
secured claim and provide the Company with a source of working
capital. Without the infusion of significant new equity in the Company
it is doubtful that the Company will be able to secure such financing.
Moreover, the Company must be able to demonstrate the feasibility of
its reorganization by the maintenance of a solid customer base which
will provide sufficient revenues to sustain its operations. Because of
the uncertainty of the Company's future, it has been difficult for the
Company to obtain firm commitments for future sales from existing
customers. Without firm financing commitments or new equity investment
it is likely that the Company will be forced to discontinue its
operations as a going concern and liquidate its assets.
14
<PAGE>
RESULTS OF OPERATIONS
The following table presents the major components of the Company's
statements of operations as a percentage of net sales:
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------- --------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 105.2 90.9 102.5 90.4
----- ------ ----- ------
Gross profit (loss) (5.2) 9.1 (2.5) 9.6
Operating expenses 84.4 11.0 51.5 10.9
------ ------ ----- ------
Loss from operations (89.6) (1.9) (54.0) (1.3)
Other expenses, net 3.8 3.4 5.7 3.2
------- ------- ------ -------
Loss before income taxes (93.4) (5.3) (59.7) (4.5)
Income tax benefit (1.9) (1.6)
------- ------- ------- --------
Net loss (93.4)% (3.4)% (59.7)% (2.9)%
======== ======= ======== =======
</TABLE>
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 ("1999"), COMPARED TO
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 ("1998")
NET SALES - Net sales for the six months ended June 30, 1999 were $74.5
million, a decrease of $15.7 million, or 17.4% over net sales of $90.2
million for the first six months of 1998. Net sales for the second
quarter of 1999 were $36.9 million, a decrease of $14.2 million, or
27.8% from net sales of $51.1 million for the second quarter of 1998.
The dollar value of sales is down due to high volume of closeout sales
at reduced selling prices, lower average selling prices resulting from
competitive markets, lost or delayed sales as a result of disruptions
in production due to the startup associated with contractor production,
and the closing of the Frank L. Robinson (FLR) distributorship.
During the first half of 1999, because of the downward trend in product
prices due to an overall market decline, inflation had a minimal effect
on the Company's net sales. The Company is exposed to inflationary
pressures from the purchases of raw materials and labor. However,
during the first half of 1999, these markets were relatively stable and
inflation did not have a material effect on income from continuing
operations.
GROSS MARGINS - Gross margins declined to (5.2)% and (2.5)% of net
sales for the second quarter and first six months of 1999,
respectively, from 9.1% and 9.6% in the comparable periods of 1998. The
decline was primarily the result of lower operating efficiencies and
high percentage of sales of closeout inventory previously written down
to net realizable value. Also, second quarter margins were impacted by
additional write-downs to net realizable value of excess inventories to
be liquidated at reduced prices.
The Company anticipates a substantial reduction in inventories by
year-end. As a result of this reduction, a liquidation of previous
years' LIFO increments is expected to occur. The Company also
anticipates a liquidation of base year costs. In the event that these
liquidations occur, the resulting impact will be to lower cost of sales
and increase gross margin by reducing the LIFO valuation reserve.
OPERATING EXPENSES - Operating expenses increased 290% to $38.4 million
in the first six months of 1999 from $9.8 million in the first six
months of 1998 and to $31.0 million or 453% from $5.6 million in the
second quarter of 1999 compared to the second quarter of 1998. The
increase is due primarily to the write off of goodwill associated with
the Stardust division in the amount of $25.6 million in the second
quarter of 1999.
15
<PAGE>
OTHER EXPENSES, NET - Other expenses, net, increased 45.8% to $4.2
million in the first six months of 1999 from $2.9 million in 1998. This
increase was primarily due to an increase in interest expense.
INCOME TAXES - The effective tax rate was 0% in 1999 compared to 36.4%
in 1998. The 0% effective rate in 1999 is due to the uncertain ability
of the Company to generate future taxable income and the resulting
uncertain realization of tax loss carryforwards and other deferred tax
assets.
LIQUIDITY AND CAPITAL RESOURCES
PRINCIPAL SOURCES OF LIQUIDITY - As a result of the inability of the
Company to increase the amount of funds available for borrowing under
its credit facility and as a result of its operating losses during 1998
and 1999, the Company experienced severe liquidity shortages. The
inadequate liquidity subsequently resulted in the Company failing to
pay its suppliers in a timely manner, causing delays in the delivery of
raw materials. This caused some disruptions and delays in production
and, at times, resulted in lost sales.
At June 30, 1999, the Company had a working capital deficiency of $55.8
million, a decrease of $11.1 million as compared to December 31, 1998.
This decrease is primarily attributable to a net decrease in
receivables, refundable taxes and inventory of $26.3 million. These
reductions in working capital were partially offset by reductions in
accounts payable and debt of $7.7 million and an increase in cash of
$6.6 million.
CASH FLOWS FROM OPERATING ACTIVITIES - For the six months ended June
30, 1999, net cash provided by operations totaled $8.5 million as
compared to net cash used for the six months ended June 30, 1998 of
$8.1 million. Accounts receivable, net, decreased $7.0 million due to
collections and low sales volume. Inventory decreased $16.6 million
from efforts to liquidate excess and closeout product. Taxes receivable
decreased $2.7 million from refunds. These increases in cash were
offset by the net loss of $44.5 million less non-cash charges of $31.9
million for depreciation, amortization, write-off of goodwill and
losses on disposal of property, as well as a decrease in accounts
payable of $4.5 million.
CASH FLOWS FROM INVESTING ACTIVITIES - Capital expenditures were $ .1
million for the six months ended June 30, 1999. Other assets, net,
increased $ .5 million.
CASH FLOWS FROM FINANCING ACTIVITIES - For the six months ended June
30, 1999 the Company had net repayments of debt of $3.2 million and
proceeds from additional financing of $1.5 million provided through the
bankruptcy proceedings.
CREDIT AGREEMENT
In April 1998, the Company entered into a syndicated credit agreement
(the "Credit Agreement") with a group of financial institutions (the
"Banks") for the purpose of refinancing its then existing credit
facility. Prior to the Company's bankruptcy filing, the Credit
Agreement had been amended ten times. As a result of the Company's
Chapter 11 filing, the Company's obligations to its lenders on an
ongoing basis are determined by the Bankruptcy Court.
16
<PAGE>
CASH COLLATERAL AND SECURITY AGREEMENT AND DEBTOR-IN-POSSESSION
FINANCING
On May 14, 1999, the Company filed for protection under Chapter 11 of
the U. S. Bankruptcy Code. The Company requested and was granted from
the Bankruptcy Court The Final Stipulation and Order for the Debtor's
Use of Cash Collateral and for Adequate Protection (the "Debtor's Use
of Cash Collateral") authorizing the Company to use funds located in
the cash collateral account for operations. The cash collateral account
was created through an agreement
17
<PAGE>
with the lending agent on November 16, 1998 whereby funds remitted to
this account by the Company's customers were for use by the Company
only in accordance with an operating budget approved by the Company's
lenders and filed with the Court. In order for the Company to be in
compliance with this stipulation and order, the Company must comply
with certain covenants, including, but not limited to, the following:
(1) 85% of eligible receivables (as defined) plus 60% of eligible
inventory (as defined) plus cash retained in the cash collateral
account shall not fall below $41.85 million, (2) expenditures will not
be made, without prior written consent from the agent or court, which
vary any budget line item amount more than 15% from the approved
budget or, in the aggregate, exceed such aggregated amounts set forth
in the applicable budget by more than $50,000, (3) aggregate cash
receipts less aggregate cash disbursements (the "change in cash")
should not be less than ($1.8) million in any calendar week and the
change in cash shall not be negative for each of any four consecutive
calendar weeks, (4) reports of accounts receivable aging will be
provided to the agent each Thursday, and, (5) file a motion with the
applicable parties by June 14, 1999 to dispose of the Stardust
distributorship and/or its assets. As of June 30, 1999 the Company was
not in compliance with the stipulation and order authorizing the use
of cash collateral.
After the May 14, 1999 filing for bankruptcy protection, the Company
entered into a Debtor-in-Possession Financing and Security Agreement
(the "DIP") in order to continue operations without causing irreparable
damage to the organization. The interim DIP financing, approved by the
Bankruptcy Court on June 23, 1999, authorizes, but does not require the
financial institutions which are party to the syndicated credit
agreement to give additional financing to the Company of up to $2.0
million. The Company must comply with various covenants in order to
maintain the DIP financing. These covenants include, but are not
limited to, (1) refraining from obtaining any future debt, (2)
refraining from incurring any additional liens on any of its property,
(3) only investing in permissible investments, (4) refraining from
paying dividends on or purchasing its capital stock, (5) restrictions
on transactions with affiliates, and (6) limiting capital expenditures
to not more than $30,000 in any calendar month and $78,000 through
August 27, 1999. The final DIP financing agreement was approved by the
Bankruptcy Court on July 9, 1999 and increased the amounts of funds
which could be borrowed to up to $3.0 million. As of June 30, 1999, the
Company was not in compliance with the DIP financing agreement and had
not obtained waivers related to its non compliance. The Company
actually borrowed $1.5 million under its DIP financing facility. All
amounts borrowed are due and payable in full on August 27, 1999, at
which time the DIP financing facility will expire.
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. The Company is in
the process of completing its implementation of its new 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. Although
the Company expects to be Year 2000 compliant when necessary, failure
of the Company or significant key suppliers or customers to be fully
compliant could potentially have a material adverse impact on the
results of the Company's operations. However, due to the many factors
involved, including factors impacting third parties, which the Company
cannot readily ascertain, the Company is currently unable to estimate
the potential impact. However, there can be no guarantee that a failure
to convert by another company would not have a material adverse effect
on the Company.
The Company considers the likelihood of the Company not being ready for
the Year 2000 to be remote, but is currently unable to determine the
likelihood of its key suppliers and customers not being ready for the
Year 2000. Contingency plans are not being developed in the event that
critical operations become interrupted as the result of key suppliers
or customers failing to resolve their respective Year 2000 issues in a
timely manner.
18
<PAGE>
FORWARD LOOKING STATEMENTS
Information in this Form 10-Q may contain certain 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 the ability to maintain adequate
borrowing capability to operate as discussed above and in the Company's
previous filings with the Securities and Exchange Commission.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM L. LEGAL PROCEEDINGS
At 8:00 a.m. on May 14, 1999, Pluma, Inc. filed a voluntary petition under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Middle District of North Carolina. The case has been assigned the following
number: 99-11104. Pursuant to the provisions of Sections 1107 and 1108 of the
Bankruptcy Code, Pluma, Inc. will operate as a debtor-in-possession during the
pending reorganization proceeding.
ITEM 2. CHANGES IN SECURITIES
The Company's credit agreement with its several lenders prohibits the Company
from declaring and paying a dividend on its common stock. Any such dividend
payment constitutes a default under the credit agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
FILED
EXHIBIT NUMBER HEREWITH(*)
10.1 Form of Employment Agreement between Pluma and John Wigodsky
10.2 Form of Incentive Package between Pluma and William H. Watts
11.1 Computation of Earnings per Share
27.0 Financial Data Schedule
b. Reports on Form 8-K
None
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 thereunto duly authorized.
PLUMA, INC.
/s/ John Wigodsky
-----------------------------------------
John Wigodsky
President & Chief Executive Officer
/s/ William Watts
-----------------------------------------
William Watts
Vice President and Chief Financial Officer
20
EMPLOYMENT AGREEMENT
This Agreement is made and entered into in Eden, North Carolina, as of
this 7th day of May, 1999, by and between PLUMA, INC., a North Carolina
corporation ("Employer") which has its principal office at 801 Fieldcrest Road,
Eden, North Carolina, and JOHN WIGODSKY ("Employee"), an individual with an
address at 3414 Habersham Road, Atlanta, Georgia 30305.
WHEREAS, the Employer desires to obtain the services of the Employee for
its own benefit and for the benefit of any existing and/or future affiliated
company (defined as any corporation or other business entity that directly or
indirectly controls, is controlled by or is under common control with the
Employer), and the Employee desires to secure employment from the Employer upon
the following terms and conditions.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants hereinafter set forth, and of other good and valuable consideration,
the receipt and sufficiency of which are mutually acknowledged, the parties
hereto agree as follows:
1. Employment.
The Employer hereby agrees to employ the Employee, and the Employee
hereby accepts employment with the Employer, for the term set forth in Section 3
below, in the position and with the duties and responsibilities set forth in
Section 2 below, and upon the other terms and conditions hereinafter stated.
2. Duties of Employee.
(a) The Board of Directors shall elect or appoint Employee to the
offices of Chief Executive Officer and President of Employer who shall report in
both such capacities directly to the Board of Directors of Employer. Employee
shall further be elected as a member of the Board of Directors and shall serve
on its Executive Committee. Employee agrees to serve in such capacities and to
carry out the duties incident thereto, which duties shall include, but not be
limited to, the following:
(i) The assumption and maintenance of overall executive
authority and responsibility for Employer during the term of this agreement;
(ii) Development and execution of any and all business plans
and related initiatives undertaken by or on behalf of the Employer designed to
return Employer to profitability and financial stability;
(iii) Communication with Employer's employees, the Board of
Directors, and all appropriate external constituencies, including the Employer's
lenders;
<PAGE>
(iv) The development and implementation of financial and
recapitalization strategies for the Employer;
(v) The development and implementation of strategies with
regard to dealing with the Employer's trade suppliers;
(vi) The oversight of appropriate action steps concerning sale
of assets not contemplated as part of the ongoing business of the Employer; and
(vii) Performance of all other duties assigned by the Board of
Directors.
Employee shall perform the designated duties competently, diligently and in a
businesslike and professional manner. The Employer shall retain full direction
and control of the means and methods by which Employee performs the above
services and of the place(s) at which such services are to be provided. Employee
shall relocate from his current residence in Atlanta, Georgia to the vicinity of
either Winston-Salem, North Carolina or Martinsville, Virginia. Employee will
travel as reasonably required to perform his duties under this Agreement;
provided, however, that the Employer's principal place of business shall be
located in either Martinsville, Virginia or Eden, North Carolina, and any change
of location in this principal place of business would be subject to Employee's
prior approval.
(b) Employee shall be a full-time employee of Employer and while so
employed, shall engage in no other business, profession or employment activity
(whether or not pursued for pecuniary advantage) including but not limited to
any employment that is or may be competitive with, or that might place him in a
competing position to that of the Employer or any affiliate of Employer.
Notwithstanding the above, nothing in this Agreement shall preclude or prohibit
Employee from participating in personal investment activities or serving on the
board of directors of non-profit corporations or, after January 1, 2001, other
for-profit public or private companies (so long as Employee has first notified
Employer of his desire to so serve as a director of another for-profit company
and has received Employer's Board of Director's approval of such directorship,
which approval will not be unreasonably withheld or delayed) provided that such
activities do not otherwise inhibit the performance of Employee's duties and
responsibilities under this Agreement or conflict with the businesses of the
Company or its affiliates.
3. Term.
The initial term of this Agreement and of Employee's employment
hereunder shall commence on May 10, 1999 and unless sooner terminated pursuant
hereto, shall end on December 31, 2002. Subsequent to December 31, 2002, the
term of this Agreement may be renewed if Employer and Employee agree to extend
the term hereof, with such renewal terms to be for one-year periods thereafter,
subject to termination by either party at any time, and further subject to the
terms and conditions hereof.
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<PAGE>
4. Salary and Benefits.
(a) Employer will pay to Employee an initial base salary computed on
the basis of $275,000.00 per year, payable in installments in accordance with
Employer's normal payroll practices. Employee shall be eligible to be considered
for annual salary increases in accordance with Employer's salary administration
practices for senior officer personnel; provided however, that in any event,
Employee's base salary shall be increased annually by no less than the
percentage increase in the Consumer Price Index during the previous year of
employment. The Consumer Price Index shall mean the United States city average
for urban wage earners and clerical workers all items, groups, subgroups and
special groups of items as promulgated by the Bureau of Labor Statics of the
United States Department of Labor using the years 1982-1984 as a base of 100.
(b) In consideration of Employee ceasing to seek employment
elsewhere and agreeing to serve the Employer, a financially troubled company
whose continued long-term existence is not certain, the Employer agrees to pay
to Employee the sum of $50,000.00 upon the execution hereof. The Employee will
receive no other bonus for his services rendered to the Employer during the
calendar year ending 1999. For the last three (3) years of the term of this
Agreement, the Employee is not guaranteed a bonus, but rather, will be eligible
to receive a bonus based upon the performance of the Employer during each
subsequent year. In the first quarter of the years 2000, 2001 and 2002, the
Employer's Compensation Committee and Board of Directors will establish target
goals (based on, among other things, the Employer's net income, EBIDTA, return
on capital and other measures typically used by companies in establishing bonus
compensation) which, if achieved by the Employer, shall entitle Employee to a
bonus. It is the current expectation of the parties that such a bonus would have
as its target 75% of the Employee's annual base salary for the year in question,
with a maximum of 150% of Employee's annual base salary for the year in question
should Employer achieve or exceed base targets set by Employer's Compensation
Committee and Board of Directors.
(c) In addition, Employer will grant to Employee warrants to
purchase 300,000 shares of the Employer's common stock at a price equal to the
closing price of the Employer's common stock on the New York Stock Exchange on
May 10, 1999 (the "Warrants"). At the Employer's annual shareholder's meeting to
be held in the year 2000, the Employer will endeavor to seek shareholder
approval of a new Pluma, Inc. Year 2000 Stock Option Plan (the "Stock Option
Plan") which will provide for the issuance to Employer's employees of incentive
stock options (within the meaning of Section 422 of the Internal Revenue Code of
1986) and some non-qualified stock options. In the event that the Stock Option
Plan is approved by Employer's shareholders and if the Employee so elects, the
Employer and the Employee will cancel the Warrants and in lieu thereof, the
Employer will issue to Employee incentive stock options for the purchase of
300,000 shares of Employers common stock. The purchase price for the shares
underlying the incentive stock options issued under the Stock Option Plan will
be determined by the provisions of the Stock Option Plan.
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(d) Employer shall reimburse Employee for all reasonable travel,
lodging, entertainment and other expenses incurred in the performance of his
duties of employment hereunder to the extent such expenses are properly
deductible by Employer for United States federal income tax purposes and
consistent with Employer's expense reimbursement policies as they may be in
effect from time to time. Employee agrees to keep and maintain such records of
the aforesaid expenses as Employer may reasonably require.
(e) Employer will make available to Employee during the term of this
Agreement employee benefits which, in Employer's sole discretion, shall be
substantially identical or equivalent to the benefits provided to Employer's
other employees from time to time. Notwithstanding the foregoing, it is
understood and agreed that Employee's participation in any employee benefit plan
is subject to the Employee's eligibility and qualification under the terms of
the particular plan or plans, subject to the same conditions and limitations as
are applicable to other senior officers of Employer. Nothing herein shall
obligate Employer to implement, maintain or continue any such plan or plans.
(f) Employer will purchase for the benefit of Employee a term life
insurance policy providing for a death benefit in an amount no less than
$550,000.00, naming as beneficiary thereof the person or other entity the
Employee may designate as beneficiary. Employer shall maintain such policy in
effect throughout the term of this Agreement and any extensions thereof.
(g) Employer will pay Employee's reasonable costs associated with
temporary lodging, food and transportation (including air fare home to Atlanta,
Georgia) until Employee moves into a permanent residence in the Winston-Salem,
North Carolina or Martinsville, Virginia area, provided that Employer's
obligation for payment of these costs shall terminate no later than November 1,
1999. At or prior to the end of 1999, the Employer will also pay to Employee an
amount equal to the income tax liability, if any, incurred by Employee as a
result of the Employer's reimbursement to Employee of these expenses.
(h) Employer will pay for up to three (3) house-hunting trips for
Employee's spouse. Employer will pay for Employee's family's moving expenses to
either Winston-Salem, North Carolina or Martinsville, Virginia, said moving
expenses to include the cost of the physical move of furniture or other
household items to a new residence, together with payment of all closing costs
associated with any loan procured by the Employee when purchasing the new
residence. Moreover, Employer will pay Employee an amount equal to his base
salary for one month to defray other general costs associated with the move,
together with an amount equal to the income tax liability incurred by Employee
as a result of such payment. At or prior to the end of 1999, the Employer will
also pay to Employee an amount equal to the income tax liability, if any,
incurred by Employee as a result of the Employer's reimbursement to Employee of
these expenses.
(i) Employee shall be entitled to a minimum of three (3) weeks
vacation per year.
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5. Termination.
(a) If the termination of this Agreement has not sooner occurred by
the action of either party, Employee's employment hereunder shall terminate upon
the occurrence of any of the following:
(i) Upon the death of Employee. In the event of the death of
the Employee during his employment under this Agreement, the following payments
shall be made to the Employee's designated beneficiary, or, in the absence of
such designation, to the estate or other legal representative of the Employee:
(1) his base salary for the month in which his death occurs, and (2) if the
death occurs after 1999, if Employee would have been entitled to a bonus under
Section 4(b) above had he lived for any entire calendar year, Employee shall
receive a prorated portion of such bonus determined by multiplying the entire
bonus for such year by a fraction, the numerator of which is the number of days
from January 1 of such year until the date of death of such Employee and the
denominator of which is 365, and other bonuses (if any) as have been earned by
Employee and not paid to him at the time of his death, provided all bonuses due
Employee after 1999 shall not be paid until Employer pays bonuses to those other
of its employees who participate in the Employer's bonus plan for senior
executives for the period in which Employee is entitled to be paid. Any rights
and benefits the Employee or his estate or any other person may have under
employee benefit plans and programs of the Employer generally in the event of
the Employee's death shall be determined in accordance with the terms of such
plans and programs. Except as provided in this Section 5(a)(i), neither the
Employee's estate nor any other person shall have any rights or claims against
the Employer in the event of the death of the Employee during his employment
hereunder.
(ii) Termination by the Employer For Cause. Nothing herein
shall prevent the Employer from terminating the Employee's employment at any
time "For Cause," as hereinafter defined. Upon termination For Cause, the
Employee shall receive base salary through the date of termination at the rate
in effect on the date of termination; but the Employee shall not be entitled to
any bonus or other incentive compensation regardless of whether such bonus or
other incentive compensation has been earned but is unpaid at the date of the
termination of employment For Cause. Any payments and benefits due the Employee
under employee benefit plans and programs of the Employer following a
termination of the Employee's employment For Cause shall be determined in
accordance with the terms of such benefit plans and programs.
For purposes of this Agreement, "Cause" shall mean Employee's
gross misconduct (as defined herein) or willful and material breach of Section 2
of this Agreement. For purposes of this definition, "gross misconduct" shall
mean (A) a felony conviction in a court of law under applicable federal or state
laws which results in material damage to the Employer or any of its subsidiaries
or materially impairs the value of Employee's services to the Employer, or (B)
willfully engaging in one or more acts, or willfully omitting to act in
accordance with duties hereunder, which is demonstrably and materially damaging
to the Employer or any of its subsidiaries, including acts and omissions that
constitute gross negligence in the performance of Employee's duties under this
Agreement. For purposes of this Agreement, an act or failure to act
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<PAGE>
on Employee's part shall be considered "willful" if it was done or omitted to be
done by him not in good faith, and shall not include any act or failure to act
resulting from any incapacity of Employee. Notwithstanding the foregoing,
Employee may not be terminated for Cause unless and until there shall have been
delivered to him a copy of a resolution duly adopted by a majority affirmative
vote of the membership of the Board of Directors of the Employer (the "Board")
(excluding Employee, if he is then a member) at a meeting of the Board called
and held for such purpose finding that, in the good faith opinion of the Board,
Employee was guilty of conduct which constitutes Cause as set forth in this
Section 5(a)(ii). Notwithstanding the above, the first two times the Board of
Directors determines that this Agreement should be terminated for Cause, the
Employee shall be given notice of such determination specifying the nature of
the grounds for such termination and not less than 30 days to correct the acts
or omissions complained of, if correctable. During this 30-day period, Employee
shall be afforded the opportunity, together with his counsel, to be heard before
the Board of Directors regarding the grounds for termination. The third time and
thereafter that the Board of Directors determines that this Agreement should be
terminated for Cause, Employee shall have no opportunity to correct the acts or
omissions complained of nor the opportunity to be heard before the Board of
Directors, unless the Board of Directors desires to hear from Employee.
(iii) Change of Control. At the election of Employee or
Employer this Agreement may be terminated upon a "Change of Control" of
Employer, provided that notice of such termination is given by either party to
the other after such Change of Control. A Change of Control shall mean the
occurrence of any one of the following events:
(1) any "person," as such term is used in Section 13 (d)
and 14 (d) of the Securities and Exchange Act of 1934 (the "Act") (other than
the Employer, any trustee, fiduciary or other person or entity holding
securities under any employee benefit plan of the Employer), together with all
"affiliates" and "associates" (as such terms are defined in Rule 12b-2 under the
Act) of such person, shall become the "beneficial owner" (as such term is
defined in Rule 13d-3 under the Act), directly or indirectly, of securities of
the Employer representing 50% or more of either (a) the combined voting power of
the Employer's then outstanding securities having the right to vote in an
election of the Employer's Board of Directors ("Voting Securities") or (bb) the
then outstanding shares of the Employer (in either such case other than as a
result of acquisition of securities directly from the Employer); or
(2) the majority of those persons who, as of May 1,
1999, constituted the Employer's Board of Directors (the "Incumbent Directors")
cease for any reason, including, without limitation, as a result of a tender
offer, proxy contest, merger or similar transaction, to constitute at least a
majority of the Board, provided that any person becoming a director of the
Employer subsequent to May 1, 1999, whose election or nomination for election
was approved by a vote of at least a majority of the Incumbent Directors shall,
for purposes of this Agreement, be considered an Incumbent Director; or
(3) the shareholders of the Employer shall approve (aa)
any consolidation or merger of the Employer where the shareholders of the
Employer immediately prior
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to the consolidation or merger would not immediately after the consolidation or
merger beneficially own (as such term is defined in Rule 13d-3 under the Act),
directly or indirectly, shares representing in the aggregate 50% of the voting
shares of the corporation issuing cash or securities in the consolidation or
merger (or of its ultimate parent corporation, if any), (bb) any sale, lease,
exchange or other contemplated disposition (arranged by a party as a single
plan) of all or substantially all of the assets of the Employer or (cc) any plan
or proposal for the liquidation or dissolution of the Employer.
Notwithstanding the foregoing, a "Change of Control" shall not
be deemed to have occurred for purposes of this Section 5(a)(iii) solely as the
result of an acquisition of securities by the Employer which, by reducing the
number of outstanding shares or other Voting Securities of Employer, increases
(x) the proportionate number of Employer's shares beneficially owned by any
person to 50% or more of such shares then outstanding or (y) the proportionate
voting power represented by the Voting Securities beneficially owned by any
person to 50% or more of the combined voting power of all then outstanding
Voting Securities; provided, however, that if any person referred to in clause
(x) or (y) of this sentence shall thereafter become the beneficial owner of any
additional shares of Employer or other Voting Securities (other than pursuant to
a stock split, stock dividend, or similar transaction), then a "Change of
Control" shall be deemed to have occurred for purposes of the foregoing clause
5(a)(iii).
Upon termination of this Agreement under this Section 5a(iii),
if the Employee is eligible [as defined below], Employer shall:
(A) Within 30 days after termination of Employee's
employment upon a Change in Control, pay to Employee an amount, in cash, equal
to three times the current base salary plus the average of the annual bonuses
paid to Employee during the time he has been employed hereunder (not to exceed
three years), less 1/36 of the amount calculated immediately above for each
month that the Employee remains employed with Employer following the effective
date of the Change in Control; and
(B) If allowed to do so by the Employer's insurance
carrier, or under the terms of the Employer's insurance plan in effect at the
time of Employee's termination (in the event Employer is a self-insurance or
partial self-insurer) continue the medical, disability and life insurance
benefits which Employee was receiving at the time of termination for a period of
eighteen (18) months after termination of employment or, if earlier, until
Employee has commenced employment elsewhere and becomes eligible for
participation in the medical, disability and life insurance programs, if any, of
his successor employer. Coverage under Employer's medical, disability and life
insurance programs shall cease with respect to each such program as Employee
becomes eligible for the medical, disability and life insurance programs, if
any, of his successor employer.
The Employee is eligible for the benefits provided in this
Section 5(a)(iii), unless the Employer or the Employer's successor, after a
Change in Control, offers the Employee
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<PAGE>
a bona fide employment contract for a term which would expire no earlier than
the end of the term of this Agreement set forth in Section 3 above under the
terms of which the Employee would perform the same duties for the same or
greater levels of compensation as were afforded under the terms of this
Agreement and this offer of continued employment is rejected by the Employee. If
this offer of employment is made to and rejected by Employee, Employee shall not
be eligible for the benefits provided under the provisions of this Section
5(a)(iii).
(iv) Employee's Disability. In the event of the Employee's
disability (as hereinafter defined) during his employment under this Agreement,
the Employee's employment may be terminated by the Employer. For the first three
months following termination of employment due to Employee's disability, the
Employee shall be paid his base salary at the rate in effect at the time of the
commencement of disability. Thereafter, the Employee shall be entitled to
benefits in accordance with and subject to the terms and provisions of the
Employer's disability plan for senior management employees as in effect at the
time of the commencement of the Employee's disability. For purposes of this
Agreement, "disability" shall have the same meaning as given that term under the
Employer's disability plan for senior management employees, as in effect from
time to time. Anything herein to the contrary notwithstanding, if, during the
three month period following a termination of employment under this Section
5(a)(iv) in which salary continuation payments are payable by the Employer, the
Employee becomes re-employed or otherwise engaged (whether as an employee,
partner, consultant, or otherwise), any salary or other remuneration or benefits
earned by him from such employment or engagement shall offset any payments due
him under this Section 5(a)(iv). In the event of the Employee's disability, any
rights and benefits the Employee may have under employee benefit plans and
programs of the Employer generally shall be determined in accordance with the
terms of such plans and programs. Upon termination of the Employee's employment
by reason of disability under this Section 5(a)(iv) after the year 1999, the
Employee shall also be entitled, in addition to the other payments provided for
in this Section 5(a)(iv), to payment of a bonus if Employee would have been
entitled to a bonus under Section 4(b) above had his employment not been
terminated as a result of his disability before the end of the entire calendar
year during which the termination of his employment occurred. In such event,
Employee shall receive a prorated portion of the bonus he would have received
for the entire year had his employment not been terminated by reason of
disability determined by multiplying the entire bonus for such year by a
fraction, the numerator of which is the number of days from January 1 of such
year until the date of Employee's termination and the denominator of which is
365. Also, Employee shall be entitled to other bonuses (if any) as had been
earned by Employee and not pay to him at the time of his disability, provided
all bonuses due Employee after 1999 shall not be paid until Employer pays
bonuses to those other of its employees who participate in the Employer's bonus
plan for senior executives for the period in which Employee is entitled to be
paid. Except as provided in this Section 5(a)(iv), neither the Employee nor his
estate, nor any other person, shall have any rights or claims against the
Employer in the event of the termination of the Employee's employment by reason
of disability.
(v) Termination by the Employer For Other Reasons.
Notwithstanding any other provision of this Agreement, the Employer may
terminate the Employee's employment at
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any time and for whatever reason it deems appropriate, or for no reason. In the
event such termination by the Employer is not due to a reason set forth in
Section 5(a)(i)-(iv) above, the Employee shall be entitled to payment of an
amount equal to two times the current base salary plus the average of the annual
bonuses paid to Employee during the time he has been employed hereunder (not to
exceed three years).
(vi) Termination by the Employee for "Good Reason." For
purposes of this Agreement, "Good Reason" shall mean the occurrence of any of
the following, without Employee's prior written consent: (A) a material change,
adverse to Employee, in Employee's positions, titles, or offices, status, rank,
nature of responsibilities, or authority within the Employer, except in
connection with the termination of Employee's employment for Cause, Disability,
Normal Retirement or Approved Early Retirement, as a result of Employee's death,
or as a result of action by Employee, (B) an assignment of any duties to
Employee which are inconsistent with his duties, status, rank, responsibilities,
and authorities in effect prior to a Change in Control, (C) a decrease in annual
base salary or other material benefits provided under this Agreement, unless
such benefits are replaced by substantially similar benefits of another
provider, (D) any other failure by the Employer to perform any material
obligation under, or breach by the Employer of any material provision of this
Agreement, provided however, the first two times the Employer defaults
hereunder, the Employer shall be given notice of such default and not less than
30 days to correct the default, if correctable and the third time and thereafter
that the Employer defaults hereunder, Employer shall have no opportunity to
correct the default, (E) any failure to secure the Agreement of any successor
corporation or other entity to the Employer to fully assume the Employer's
obligations under this Agreement in a form reasonably acceptable to Employee,
and (F) any attempt by the Employer to terminate Employee for Cause which does
not result in a valid termination for Cause, except in the case that valid
grounds for termination for Cause exists but are corrected as permitted under
Section 5(a)(ii). In the event of such termination for Employee for "Good
Reason", the Employee shall be entitled to a payment in an amount equal to two
times the current base salary plus the average of the annual bonuses paid to
Employee during the time he has been employed hereunder (not to exceed three
years).
6. Confidentiality; Non-Solicitation.
(a) Confidential Information. The Employee promises and agrees that
he will not, either while in the Employer's employ or for a period of two (2)
years subsequent to the date of termination of Employee's employment with
Employer, disclose to any person not employed by the Employer, or not engaged to
render services to the Employer, or use, for himself or any other person, firm,
corporation or entity, any confidential information of the Employer obtained by
him while in the employ of the Employer which might be useful in attempting to
establish or facilitating the establishment of a competing business relationship
with those customers of Employer of which Employee had actual knowledge as of
the date of termination of Employee's employment with the Employer or with which
Employee had contact during the period of his employment with the Employer. Such
confidential information may include, without limitation, any of the Employer's
methods, processes, techniques, practices, research data, marketing and sales
information, personnel
9
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data, customer lists, financial data, plans, know-how, trade secrets and
proprietary information of the Employer; provided, however, that this provision
shall not preclude the Employee from use or disclosure of information known
generally to the public [other than information known generally to the public as
a result of a violation of this Section 6(a) by the Employee], from use or
disclosure of information acquired by the Employee outside of his affiliation
with the Employer, from disclosure required by law or court order, or from
disclosure or use appropriate and in the ordinary course of carrying out his
duties as an employee of the Employer.
(b) Rights to Materials. The Employee further promises and agrees
that, upon termination of his employment for whatever reason and at whatever
time, he will not take with him, without the prior written consent of an officer
authorized to act in the matter by the Board of Directors of the Employer, any
records, files, memoranda, reports, customer lists, drawings, plans, sketches,
documents, specifications, and the like (or any copies thereof) (whether in the
form of hard copy, diskette or otherwise) relating to the business of the
Employer or any of its current or future affiliated companies.
(c) Non-Solicitation. In the event the Employee's employment with
Employer is terminated for any reason, Employee promises and agrees that for a
period of two (2) years following the date of the termination of his employment
he will not (1) call upon those employees, agents, suppliers, customers, or
other persons having business relationships with the Employer of which the
Employee had actual knowledge as of the date of termination of the Employee's
employment with the Employer or with which the Employee had contact during the
period of his employment with Employer for the purpose of soliciting or inducing
any of such persons to discontinue their relationship with the Employer's
business; or (2) solicit, divert or take away or attempt to solicit, divert or
take away in any fashion any of the customers, clients, business or patrons of
the Employer's business existing as of the date of termination of Employee's
employment with Employer and of which the Employee had actual knowledge or with
which Employee had contact during the period of his employment with Employer.
Each of the covenants on the part of Employee contained in
this Section 6 shall be construed as an agreement independent of any other
covenant set forth herein and independent of any other provision in this
Agreement and the existence of any claim or cause of action of Employee and
Employer, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement of this covenant.
7. Injunctive Relief.
Employee acknowledges and agrees that Employer would suffer
irreparable injury in the event of a breach by him of any of the provisions of
Section 6 of this Agreement and that Employer shall be entitled to an injunction
restraining Employee from any breach or threatened breach thereof. Employee
further agrees that, in the event of his breach of any provision of Section 6
hereof, Employer shall be entitled to terminate its obligation to make any
payments otherwise due and payable to Employee hereunder. Nothing herein shall
be construed, however, as prohibiting
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Employer from pursuing any other remedies at law or in equity which it may have
for any such breach or threatened breach of any provision of Section 6 hereof,
including the recovery of damages from Employee.
8. Notices.
All notices required or permitted hereunder shall be in writing and
shall be delivered personally or by facsimile or sent by United States
registered or certified mail, postage prepaid, addressed to Employer at Post
Office Box 487, Eden, North Carolina 27288 and to Employee at 3414 Habersham
Road, Atlanta, Georgia 30305, or at such changed addresses as the aforementioned
may designate in writing. Any such notice shall be deemed given and effective
when received at the aforesaid address.
9. Entire Agreement. This Agreement contains the entire agreement of the
parties with respect to the employment of the Employee by the Employer and
supersedes and replaces all other understandings and agreements, whether oral or
written, if any there be, previously entered into between the parties with
respect to such employment.
10. Amendment; Waiver. No provisions of this Agreement may be amended,
modified or waived unless such amendment, modification or waiver is agreed to in
writing and signed by the Employee and by a duly authorized officer of the
Employer. No waiver by either party of any breach by the other party of any
provision of this Agreement shall be deemed a waiver of any other breach.
11. Severability. If any one or more of the provisions contained in this
Agreement shall be invalid, illegal, or unenforceable in any respect under any
applicable law, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
12. Withholding. Anything herein to the contrary notwithstanding, all
payments made by the Employer hereunder shall be subject to the withholding of
such amounts relating to taxes as the Employer may reasonably determine it
should withhold pursuant to any applicable law or regulation.
13. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws and judicial decisions of the State of North Carolina.
The parties acknowledge and agree that this Agreement was executed by the
Employer and the Employee in Eden, North Carolina.
14. Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the Employee and his personal representatives, estate
and heirs and the Employer and its successors and assigns, including without
limitation any corporation or other entity to which the Employer may transfer
all or substantially all its assets and business (by operation of law or
otherwise) and to which the Employer may assign this Agreement. The Employee may
not assign this Agreement or any part hereof without the prior written consent
of the Employer, which consent may be withheld by the Employer for any reason it
deems appropriate.
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15. Paragraph Headings. Paragraph headings are for convenience of
reference only and shall not be construed as part of this Agreement.
16. Survivability of Obligations. Any covenants herein, the performance of
which may extend beyond the term of this Agreement, shall be deemed to survive
the termination of this Agreement.
17. Equal Interpretation. This Agreement was prepared through the joint
efforts, negotiation and preparation of both parties hereto and this Agreement
shall not be construed in favor or nor against any party hereto.
18. Arbitration. Except as hereinafter provided, any controversy or claim
arising out of or relating to this Agreement of any alleged breach thereof shall
be settled by arbitration in the City of Winston-Salem, North Carolina in
accordance with the rules then obtaining of the American Arbitration Association
and any judgment upon any award, which may include an award of damages, may be
entered in the highest State or Federal court having jurisdiction. Nothing
contained herein shall in any way deprive the Company of its claim to obtain an
injunction or other equitable relief arising out of the Employee's breach of the
provisions of Section 6 of this Agreement. All reasonable costs and expenses
(including fees and disbursements of counsel) incurred by Employee in seeking to
enforce rights pursuant to this Agreement shall be paid on behalf of or
reimbursed to Employee promptly by the Employer, whether or not Employee is
successful in asserting such rights; provided, however, that no reimbursement
shall be made of such expenses relating to any unsuccessful assertion of rights
if and to the extent that Employee's assertion of such rights was in bad faith
or frivolous, as determined by independent counsel mutually acceptable to
Employee and the Employer.
IN WITNESS WHEREOF, the parties have executed this Agreement in
counterparts on the date first above written.
PLUMA, INC.
By: /s/ Ronald A. Norelli
--------------------------------------
Its: Vice Chairman and CEO (Interim)
--------------------------------------
/s/ John Wigodsky
--------------------------------------------
JOHN WIGODSKY
12
Pluma, Inc. PLUMA
1300 Kings Mountain Road
P.O. Box 4431 (540) 666-0550
Martinsville, VA 24115 (540) 666-2069 (Fax)
May 7, 1999
Mr. William H. Watts
Senior Vice President &
Chief Financial Officer
Pluma, Inc.
26 Broad Street
P.O. Box 5151
Martinsville, Virginia 24115
Dear Bill:
On behalf of the Compensation Committee and the Board of Directors, I am happy
to report that a Special Incentive Package was approved for you at the Board
meeting of April 27. The first component of this Package is an incentive for you
to stay with Pluma during the upcoming months which are critical to Pluma's
recovery (the "Stay Incentive"). The second is a performance-based bonus
("Performance Award") dependent upon the ("Net Income") of the Company for the
six month period of April 1 through September 30, 1999 (with Net Income defined
as EBITDA less interest expense and the total of all Performance Awards).
The Stay Incentive consists of two payments of thirteen thousand dollars
($13,000) each. These payments would be made on September 30, 1999 and December
31, 1999 respectively. The only requirement to receive these awards is that you
be continuing as a full-time employee of Pluma on each of those dates.
The Performance Award will be based on Pluma's cumulative Net Income for the
period April 1 through September 30, 1999, in accordance with the twenty-nine
week business plan (the "Plan") presented to Pluma's Bank Group.
The Plan called for Net Income of three million four hundred and seventy four
thousand dollars ($3,474,000). You will be eligible to receive a sixty thousand
dollar ($60,000) bonus for Company performance at 110% of Plan, or three million
eight hundred and twenty one thousand four hundred dollars ($3,821,400). For
Company performance less than 70% of Plan there will be no bonus. And for
performance at 150% of Plan your eligible bonus would be one hundred and
fourteen thousand dollars ($114,000). The sliding scale to determine the
eligible bonus is shown below. This incentive would be paid on or before
December 31, 1999.
<PAGE>
Mr. William H. Watts
May 7, 1999
Page 2
PLUMA, INC.
-----------
Proposed Performance Bonus Plan For
Period April-September, 1999
% of Plan "Net Income" ($M) % Available Bonus Eligible Bonus
<70% <$2,431.8 0% --
70% $2,431.8 35% $21,000
80% $2,779.2 60% $36,000
90% $3,126.6 75% $45,000
100% $3,474.0 90% $54,000
110% $3,821.4 100% $60,000
120% $4,168.8 115% $69,000
130% $4,516.2 135% $81,000
140% $4,863.6 160% $96,000
150% $5,211.0 190% $114,000
160% $5,558.4 225% $135,000
In addition to these awards the Board has awarded you qualified incentive
options representing twenty-five thousand shares of Pluma stock at an option
price of two dollars ($2.00) per share. The Company's counsel will be preparing
the option documents and forwarding them to you. In addition, the Board has
authorized a special severance agreement in which you would be paid your base
salary for one year should you leave Pluma involuntarily any time before
December 31, 2000, for any reason other than cause. Again, Terry Crumpler will
be preparing the appropriate letter.
Finally, the Company has agreed to pay normal and customary moving and permanent
relocation costs to cover: (1) the physical move of your furniture and other
personal and household goods to the Martinsville area; (2) customary closing
costs (e.g., loan origination fees, survey and title insurance, etc.) on a loan
for a new home purchase in the Martinsville area; (3) the "gross-up" of (1) and
(2) to cover the income tax liabilities, if any, and (4) an allowance equivalent
to one month's salary to cover other incidental expenses normally associated
with a move (for example, curtains for the new house).
The Company appreciates your efforts and contributions in accomplishing a
successful turnaround of Pluma. The Board hopes that you will eventually earn a
substantial Performance Award under this special incentive plan.
Sincerely,
/s/ Ronald A. Norelli
Ronald A. Norelli
Vice Chairman and Chief Executive Officer (Interim)
EXHIBIT 11.1
PLUMA, INC.
COMPUTATION OF EARNINGS PER SHARE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
LOSS AVAILABLE TO COMMON SHAREHOLDERS -
Net loss available to common shareholders $(34,429,209) $(1,718,296) $(44,454,033) $ (2,599,979)
------------- ------------ ------------- -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Common shares outstanding 8,109,152 8,109,152 8,109,152 8,109,152
Assumed exercise of stock options
------------ ------------- ------------- ------------
Total 8,109,152 8,109,152 8,109,152 8,109,152
=========== ============= ============ ===========
LOSS PER COMMON SHARE
Basic and diluted $ (4.25) $ (.21) $ (5.48) $ (.32)
============ ============ ============= = ===========
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet and statements of operations for the six months ended June 30, 1999 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,248,821
<SECURITIES> 0
<RECEIVABLES> 22,287,231
<ALLOWANCES> 4,401,181
<INVENTORY> 40,048,459
<CURRENT-ASSETS> 68,081,055
<PP&E> 67,429,812
<DEPRECIATION> 29,004,438
<TOTAL-ASSETS> 107,001,050
<CURRENT-LIABILITIES> 123,845,915
<BONDS> 0
0
0
<COMMON> 36,849,127
<OTHER-SE> (53,693,992)
<TOTAL-LIABILITY-AND-EQUITY> 107,001,050
<SALES> 74,512,206
<TOTAL-REVENUES> 74,512,206
<CGS> 76,401,278
<TOTAL-COSTS> 76,401,278
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (2,444,533)
<INTEREST-EXPENSE> 3,768,152
<INCOME-PRETAX> (44,454,033)
<INCOME-TAX> 0
<INCOME-CONTINUING> (44,454,033)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,454,033)
<EPS-BASIC> (5.48)
<EPS-DILUTED> (5.48)
</TABLE>
