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APRIL 2003 BUSINESS PLAN

Table of contentsExecutive Summary..............................................................................3Description of the Business.................................................................5Industry and Market Analysis...........................................................14Marketing Pan......................................................................................18Management Plan...............................................................................23Operations Plan...................................................................................28Financial Plan.......................................................................................33Risk Assessment and Contingency Plan..........................................38Supporting Documents.......................................................................40

CONTACT

Diane BrowningPresidentAppalachian By Design, Inc.208 South Court StreetLewisburg, WV 24901T 304.647.3455 x13 / F [email protected]

http://www.abdinc.org/

mailto:[email protected]

© 2003 Appalachian By Design, Inc. Description of the Business

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EXECUTIVE SUMMARY

Business Description

During the last ten years, Appalachian By Design (ABD) has developed a home-based machine knitting industry in mid-Appalachia. The sparsely populated, mountainous terrain does not encourage economic development. However, for the families who are rooted here, there is a strong tie to home and land that is more important than relocating for economic gain. ABD has targeted handloom knitting because it can be done at home, while allowing Appalachian residents to receive the training and access to larger markets so they can increase their income and assets. The enterprise has built a national wholesale marketing program and a retail business at The Greenbrier, a premier resort, so it can become a true player in the knitwear industry. Its technical training program works one-on-one with women (and some men), 60% of whom are low income. Its efforts to raise the skills and wages in the trade through accessing high-end market channels is creating systemic change both in individual lives and in the wider perception of cottage industry. ABD has now cultivated a critical mass of technical skills, human capital and systems for distributed manufacturing. It is poised to leverage this capacity into a higher wage niche market through a women’s custom-made knit suit line called the ABD Collection.

Business Highlights

Listed below are the reasons ABD believes the ABD Collection is a strong investment opportunity: Proof of concept. Developed and test-marketed a core

collection of knit women’s separates and suits through its retail shop at The Greenbrier and three trunk shows. Garnered over $25,000 in revenue during nine-month test period.

Seasoned management. ABD has an experienced and committed management team, complemented by a strong Board of Directors to provide institutional oversight and successfully guide the venture. Management includes Diane Browning, President with 20 years experience in community and economic development in mid-Appalachia, with 10 years as President of ABD; and Jonathan Harrison, CFO with seven years experience working with social enterprises, with a focus on improving cash flow and increasing long-term earnings.

Industry viability. ABD research estimates the market size for high-end luxury knitwear to be between $700 million and $800 million and market trends show an upswing in made-to-measure apparel.1 Women’s knitted suits are a profitable niche in the apparel industry, with double-digit net margins reported by the

1 Wall Street Journal, November 8, 2002


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top competitors. Established, high-quality product line. Refined selection of

dresses, slacks, skirts, and tops created to suit a wide range of body types. Knit in an 80% lightweight wool and 20% rayon yarn that maintains its shape, resists wrinkles and travels well. The Collection offers 21 styles of jackets, dresses, tops, skirts, and slacks in a selection of six classic colors. ABD has positioned the line as a good investment in a product that has been made expressly to fit the customer

Social Impact

ABD uses the production of high-end knitwear to provide training, technology, and an entrepreneurial outlet to its direct beneficiaries, the knitters. Social benefits include: Provides home-based work to low-income women in isolated rural

Appalachia, increasing their self-sufficiency and independence; Offers a “place-based” work option, eliminating commuting costs

and facilitating child care; Reduces isolation by creating a network of mutual support; Creates opportunities for career advancement; and, Provides an incubator for women to cultivate and spin off new

ventures through training and access to equipment.

ServicesABD provides the following services to its knitters: Technical knitting apprenticeship program; Machine lease program; Computer training; and, Knitter retirement program.

Target Customers

The key demographics of our target customers include: Professional women who desire classic styles; Women between the ages of 40 and 70 years old who travel to

resorts; Women who know the styles and silhouettes that suit them, and

purchase clothing based on what they know works for their body type; and,

Women who want to support a social purpose enterprise.

Products & Value Proposition

The ABD Collection’s suit and separates line is knit from a luxury yarn and made-to-order. The key benefits of the ABD Collection to our consumers include: Made to fit widely different bodies and lifestyles; Focused on classic styles that are the foundation of a wardrobe;


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Sold in a setting that makes customers feel pampered and special; Merchandized with fine scarves, jewelry, and body care items;

and, Supports women’s social venture through expenditure of

wardrobe dollars.

Capitalization and Performance

Investment capital of $177,000 over the next 18 month (July 2003 to December 2004) is required for launch capitalization. ABD is anticipating a $100,000 investment in 2003 which would allow for hiring dedicated staff, purchases of additional equipment, implementation of the marketing plan, and the creation of an additional sample set for the line. An additional $78,000 will be needed in 2004 to provide working capital and additional marketing support. The venture is estimating year 3 performance of 30.8% ROE on revenues of $708,000 and is planning a steady sales growth of 8-10% in year 4 and 5. The ABD Collection’s contribution to the company’s annual revenues rises from 9% in 2003 to 54% in 2006.

DESCRIPTION OF THE BUSINESS

Company Mission & Overview

Created by and for rural women, ABD’s mission is to create economic opportunities for residents of rural Appalachia through sustainable self-employment. Focusing on machine knitting, ABD links skilled rural artisans and their quality products to major markets through an innovative training program, niche marketing, and a distributed production network.

When ABD was founded in 1992, a handloom industry did not exist in the Appalachian region. In the last ten years, through a combination of marketing, technology, and distributed manufacturing processes, ABD has reinvented the cottage industry.

ABD’s innovative training program has created the expertise and capacity in the region to produce high-quality hand-loomed products, including baby clothes, home accessories, and now high-end women’s apparel. In order to insure an ongoing market for the knitters’ products, it has developed a national marketing program to penetrate more affluent markets. As a result, ABD has secured niche opportunities to sell boutique apparel through


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trunk shows and at a luxury resort.

Over the past decade, ABD has built the critical mass of technical skills, human capital, and systems for distributed manufacturing in a sparsely populated, mountainous region of mid-Appalachia. The network of knitters now includes over 60 micro-enterprises, operated from homes in the mountains of West Virginia and southwestern Virginia. Approximately 95% of the knitters are women and 60% are low-income.

Business Highlights

Listed below are the reasons ABD believes ABD Collection is a strong investment opportunity: Proof of concept. In 2002, with limited resources, ABD

developed and test marketed a core collection of knit women’s separates and suits through its retail shop at The Greenbrier, one of the country’s premier resorts, and through three trunk shows. During this nine-month test period, the ABD Collection garnered over $25,000 worth of sales. As a result of this success, ABD is now working with The Greenbrier’s Social Director to offer by-appointment trunk shows as part of the hotel’s targeted event schedule. For example, in March, during a weekend billed as “Wonderful Women’s Weekend”, 65 female guests viewed the ABD Collection as part of a custom activity. ABD transacted $1,600 in sales in four hours and plans to build on this experience and expand its marketing to other spas and resorts that hold similar programs. ABD also intends to build sales through trunk shows, hosted by existing customers and facilitated by a trained ABD Collection wardrobe consultant.

Seasoned management. ABD has an experienced and committed management team, complemented by a strong Board of Directors to provide institutional oversight and to successfully guide the venture. Management includes:

- Diane Browning, President, has 20 years experience in community and economic development in mid-Appalachia. During these years, she earned the West Virginia Partnership for Progress Award, a Benedum Foundation Fellowship, and the SBA’s Mid-Atlantic Women’s Business Advocate Award.

- Jonathan Harrison, CFO, has seven years experience working with social enterprises, with a focus on improving cash flow and increasing long-term earnings.


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Established, high-quality product line. The line, created by ABD’s expert designer/trainer’s 18 years of experience, consists of a refined selection of dresses, slacks, skirts and tops created to suit a wide range of body types. All of the pieces are knit in an 80% lightweight wool and 20% rayon yarn. This yarn is widely used in luxury knit lines because of its year-round weight, elasticity, and easy care. This material maintains its shape, resists wrinkles and travels well.

Industry viability. Market size for high-end luxury knitwear is estimated between $700 million and $800 million a year. Women’s knit suits have earned a reputation as smart dressing for professional women. This reputation can be attributed to St. John Knits, the industry leader with forty years of astute design and market penetration. ABD plans to capitalize on this established demand with a different approach. It will market the line as made-to-measure, allowing the customer personal fit and the ability to personalize their purchases through color and button selection. Market trends show an upswing in this made-to-measure trend.2 Internally the just-in-time manufacturing of the line reduces both inventory and the working capital requirements below the requirements of traditional apparel companies.

2 Wall Street Journal, November 8, 2002


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Beneficiaries ABD uses the production of high-end knitwear to provide training, technology and an entrepreneurial outlet to its direct beneficiaries, the knitter. Survey profiles, formed through recent interviews of 43 members of the network reveal the following characteristics:3

Low-income (60% report household income at or below the Department of Health and Human Services poverty guidelines of $18,100 for a family of four);

95% are women;

All live in rural communities (towns under 15,000);

Most are married with one or more dependents, including children, parents, and/or a disabled spouse; and

75% are engaged in self-employment on a part-time basis, an average of 20 hours per week, which represents a critical part of family income. However, for the 25% of the knitters who work full-time at their business, their earnings are the primary source of income.

Social Benefits

Provides home-based work to low-income women in isolated rural Appalachia, increasing self-sufficiency and independence. It is widely recognized that the economy in Appalachia is re-structuring, with fewer high-wage, unionized mining and manufacturing jobs and more low-paid, part-time service-sector employment. Wal-Mart is now the region’s largest employer.

ABD has boosted the standard of living of people in rural areas where decent jobs are scarce. ABD works with people who want to start home-based businesses because they can no longer access sustainable jobs in their communities and/or because they want to be home to take care of family members. West Virginia has the lowest rate of participation of women in the workforce.4 Unlike some cottage

3 Surveys conducted in February & March 2003 for data collection for “Performance Monitoring Tool for Social Businesses”; copy of instrument in supporting documents.4 Geographic Profile of Employment and Unemployment, 2000 Bureau of Labor Statistics

ABD is an example of what can happen when the goal of cottage industry is not isolation and exploitation but access and independence.

Utne Reader May-June 1995


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industries, ABD sets its rate well above the minimum wage – currently, at $7.00 per hour. Most of ABD’s experienced knitters reported earning $7.50 to $12.00 per hour. Furthermore, the knitters participate directly in setting the rate and other policies that affect their income. The successful launch of the ABD Collection will further increase these wages.

Offers a “place-based” work option. Most employment opportunities available in Appalachia involve long commutes and are not sufficient to cover child care costs. ABD enables women to work from their homes. In research conducted from 1994 to 2001 by Dr. Ann Oberhauser, Associate Professor at West Virginia University, knitters identified three reasons for wanting to start home-based machine knitting businesses – family responsibilities, barriers to wage employment, and the loss of sustainable jobs in their communities.5 One knitter gave voice to this when talking about self-employment versus a job: “… it was such a long way to travel for a small amount of pay, bad weather…now, I’m home with the kids and if the kids are at school and they get sick, I can still go the school and handle it. When the kids need something, I can stop the knitting and take care of that and then go back to the knitting… it’s like it’s all meshed together.”

Reduces isolation by creating a network of mutual support. ABD has changed the way home-based knitting works for rural women. For example, ABD has encouraged the use of telecommunications to streamline the work distribution process, while facilitating communication and connection. ABD distributes low-cost or free computers to those who do not have them, and provides one-on-one training. More than 80% of ABD knitters now communicate via e-mail, an impressive accomplishment in a state that is ranked 48th in the country in online access.6

Further, by organizing area teams, using a peer-to-peer training program, and hosting an Annual Meeting, ABD helps to decrease the isolation of home-based workers. A central focus has been to build a culture of participation in which knitters have input at every decision level. A vital part of this culture is the Steering Committee of knitter leaders who meet quarterly to troubleshoot and create knitter policies.

5 See enclosed “Summary of Research Collaboration”6 Wall Street Journal, May 9, 2000


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Creates opportunities for career advancement. ABD classifies its knitters in three categories: apprentice, experienced and lead. The introduction of the ABD Collection has created a definitive upward career track that awards experienced and skilled knitters with higher earnings. As the ABD Collection was developed, five of the most skilled knitters and two employees were trained on the technical requirements of the apparel. Their base hourly rate increased to $12.00 per hour, a 70% increase in their earnings. Three more knitters are in the process of advancing to this master level.

Provides an incubator for women to cultivate entrepreneurial spirit and start new ventures through training and access to equipment. Currently, 32 knitters who have participated in ABD trainings now market their services and products independently, to galleries, craft fairs, design firms and knitting seminars. ABD’s economic network established the support systems for people to explore other opportunities. Some women have advanced to become knitting trainers and business trainers, which pay a higher wage. Some have become knitting equipment dealers and yarn dealers. Knitters have formed their own clusters and market their services to design companies, contributing further to the region’s reputation as a resource for machine knitting.

Promotes the Appalachian region and refines its image through a high-quality product. Through its focus on high-quality products and attendant marketing, ABD is shifting the typically poor image of Appalachia to what is at the region’s core – great beauty, self-sufficiency, and a strong sense of place.

Company History

ABD was founded in the spring of 1992 by Diane Browning, President, and was incorporated in the State of West Virginia in 1994.

At the time, Ms. Browning was working for Women and Employment (now The Center for Economic Options), a non-profit, community-based organization that supports business development for rural women. Ms. Browning organized eight women to respond to an opportunity in the handloom knitwear market. The initial effort proved to be successful and, within two years, 20 women were involved in a budding home-based industry.


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Key Accomplishments

ABD currently has nine full-time and three part-time employees. To date, ABD has accomplished the following milestones:

1992 Secured contract with Espirit to knit 800 sweaters.

Built sales solely through contract orders for the next five years.

1993 Created training program and curriculum.

1994 Incorporated in the State of West Virginia.

1995 Established Finishing and Distribution Center7 and hired finishing staff.

1996

Renovated former Sears retail store into Finishing and Distribution Center and moved operation.8

Enhanced training program by giving trainees knitting machines to take home during the training period.Created machine lease program, allowing knitters to lease knitting machines at a nominal cost until they are able to purchase equipment; generally a $1,200 investment.

1997 Introduced wholesale line to offset the seasonality and unpredictability of contract work.

Incorporated a manufacturing software system into operations. This system runs a material requisition planning (MRP) program, creates bills of materials and work orders, and tracks inventory levels.

7 During its start-up years, ABD served primarily as a broker for knitting contracts. Knitting and shipments to customers were organized around two lead knitters, one who had a knitting store in Garrett County, MD, and another who worked from her home in Spencer, WV. Knitters knitted the sweaters, hand sewn the seams, buttons, and labels and returned the sweaters to these “production centers.” In response to price pressure from customers and to exert more control over the processes, ABD set up its own finishing and distribution center. 8This approach of centralizing some of the functions of the manufacturing process for efficiency of scale is unique to the knitting cottage industry in the U.S. and the United Kingdom. It reduces the cost of the hand-loomed sweater, in effect making the home-based knitter more efficient. It also allows ABD to aggregate knitter production and enter larger markets than individual knitters would be able to on their own.


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1999 Shifted training program to one-on-one training with peer trainers, decentralizing the training function to the wider network and establishing natural mentor relations.

2000 Opened retail store at The Greenbrier’s Art Colony.

2002 Re-branded the wholesale line to Appalachian Baby Design as a result of the baby line’s growth to 80% of wholesale sales. This change enabled ABD to concentrate design efforts in one category and better direct marketing dollars.

Designed and tested the ABD Collection, generating over $25,000 in sales during a nine-month test period, with limited resources.

Present

Appalachian Baby Design line sells through 150 retail accounts.

ABD Collection is offered at The Greenbrier with plans to expand marketing to trunk shows and other resorts.

The knitter network includes over 60 micro-enterprises, operated from homes in the mountains of West Virginia and southwestern Virginia.

Products The ABD Collection is a knit suit and separates line that is knit from a luxury yarn. Twenty-one styles of jackets, dresses, tops, skirts, and slacks in a selection of six classic colors are manufactured on a made-to-order basis. Additions and edits of the design, yarn colors, buttons and trims will be made each Spring and Fall.

Sizing is based on European sizing 0 to 5, casting away the U.S. sizing stereotype that many women abhor, especially as their sizes increase. Exceptional selections of buttons are sourced,


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including semi-precious stones, handmade European glass, vintage glass, and European blazed buttons. These choices enable women to add a personal detail.

Because the garments are made-to-measure, created using a steam-blocking process, and personalized with accessories, they serve women who want to look good, appreciate fine workmanship, and are pleased that their wardrobe dollars are going to a women’s social enterprise.

Services ABD provides the following services to its knitters:

Technical knitting apprenticeship program. ABD created its own technical knitting apprenticeship program. Knitters are trained on an as-needed basis as the demand for additional product increases. Course work is followed by roughly one year of on-the-job learning, supported by ABD staff and experienced peer trainers within the network, who have been trained in adult learning techniques. Follow-up training is a key component of the training program and includes:

- Order Specific and Advanced training;

- Professional grant program;

- Mentor program; and,

- Telephone and drop-in assistance (available during the ABD business hours).

Further, ABD has developed its own training curriculum and books. ABD owns the publishing rights to the training books used in its technical knitting apprenticeship program. The curriculum includes:

- Introduction to Machine Knitting. A 16-hour technical course taught over a two- week period, during which time the trainees have knitting machines in their homes to practice on and with which to experience home-based work. The courses are taught by knitter-trainers one-on-one, or in small groups.

- Production Knitting. A 16-hour course teaching “best practices” used in knitting businesses and by ABD. The


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course includes “order-specific” training on an item that trainees can choose to produce for an ABD customer.

- The Business of Knitting. A four-hour business basics course that provides information about legal issues, taxes, record-keeping and time management. This course is taught by either an ABD staff member or peer knitter.

Machine lease program. For a nominal rate, a knitter can lease a machine to see if the occupation fits her lifestyle.

Computer training. During the last six years, ABD has provided low-priced or free computers to its knitters. As a result of these efforts, a majority of ABD’s knitters have on-line access. ABD is also currently working with a technology consultant to develop an on-line resource and chat room to strengthen the group knowledge base.

Knitter retirement program. In May 2003, ABD will launch a knitter retirement program styled after Individual Development Accounts, an innovative national initiative to promote economic independence. After five hours of financial training by a certified financial planner, women who are eligible (worked with the company for a year) will receive assistance setting up a retirement account. If they meet their savings goal each quarter, ABD will match the savings 2:1 for three years. This provides an incentive to develop a long-term savings habit, as well as to bolster their savings.

Target Customer

The key demographics of ABD Collection’s target customers include:

Professional women who desire classic styles;

Women between the ages of 40 and 70 years who travel to resorts;

Women who know the styles and silhouettes that suit them, and purchase clothing based on what they know works for their body type; and,

Women who want to support a social purpose enterprise.


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Value Proposition

The key benefits of the ABD Collection to female consumers include:

Made to fit widely different bodies and lifestyles;

Focused on classic styles that are the foundation of a wardrobe;

Sold in a setting that makes customers feel pampered and special;

Merchandized with fine scarves, jewelry, and body care items; and,

Supports women’s social venture through expenditure of wardrobe dollars.

Business Objectives

As outlined in the financial plan, ABD’s business objectives are the following:

Projected revenues of the ABD Collection near $300,000 in 2004, rising consistently each year to approximately $1 million in sales in 2006;

This venture’s growth will raise lead knitter salaries from $7.00 to $12.00 per hour, create the equivalent of 26 full-time jobs, and increase ABD’s in-house employment base from ten to 20;

The Collection will deliver an average net margin of 13.4% of sales over the next five years;

The creation of the ABD Collection, a social purpose venture, will require over 119,000 labor hours during the next five years. Because of the labor intensity of machine knitting, over 75% of the cost of sales is in labor. This translates into livable wage jobs for women who live in high unemployment, where there are few job opportunities, and most importantly, few positions that pay near livable wages;

The ABD Collection will support nearly five “full-time equivalent” workers in its first year, with over 26 FTE’s supported in Year Five of the program; and

Many of the women in the production network choose to knit part-time in order to manage other responsibilities in their lives, yet their income is a crucial part of the family income.9


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Year Five projections show the production pool will include over 50 trained production workers at an average of 20 hours per week, adding an additional $11,000 in gross income to each household per year. The median household income for a family of four in the Greenbrier-Monroe and Pocahontas County Area is $27,500 per year; the additional income will represent a 30% increase.

9 See Relocating gender and rural economic strategies, Oberhauser, Environment and Planning A, 2002.

© 2003 Appalachian By Design, Inc. Industry & Market Analysis

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INDUSTRY AND MARKET ANALYSIS

Industry Overview & Market Size

Women’s knit suits are a sub-segment of the $184 billion apparel industry with women’s apparel sales constituting more than half of all industry sales.10 The industry is projected to grow by 10.6% rate by 2004.11

The ABD Collection is operating within two sub-segments of this market: knitwear and direct sales.

Knitwear. ABD approximates that the market size for high-end luxury knitwear is between $700 million and $800 million per year. Estimations drawn from industry data show the following market shares for the high-end market:

Direct sales. A sub-segment of the women’s apparel market uses direct sales through a network of wardrobe consultants who share their expertise on color, fabric, style, fit, and the use of accessories. The direct sales segment is estimated at $18 billion annually in the United States.12

Market Competition

ABD considers the following companies to be its primary competitors within the knitwear market sub-segment:

St. John Knits. St. John Knits, based in Irvine, California, is the major company in women’s knitwear, with over $300 million in sales. Since 1962, St. John Knits has produced Chanel-like knit suits and has built a loyal following,

10 Retail Industry, February 22, 2000.11 Euromonitor: September 2000 and January 2000.12 Associated Press, “In-home trunk shows peddle find fashions direct”, January 30, 1998.

Market Share

45%

40%

15% St John Knits

Major Private Labels(Liz Claiborne, Jones NYCottage Designers(French Rags, MariaFiccalora)


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especially with women ages 50 years and older. St. John Knits sells under the labels St. John, St. John Sport, and Marie Gray through 29 of their own stores, 10 outlet stores, three St. John Home stores, and a company website. They also have in-store boutiques in Nordstrom, Saks Fifth Avenue, and Neiman Marcus, which account for 46% of their collective sales. The women’s shop at The Greenbrier carries St. John knitwear, and ABD estimates sales of the line there to be approximately $1 million per annum. Vestar/Gray Investors LLC, a partnership between the Gray family, the founders, and Vestar Capital Partners, owns 93% of the company. The following are their vital statistics:

St. John Knits International, Inc. EMPLOYEES: 5,225 ANNUAL EMPLOYEE GROWTH: 4.19%SALES: 2001 SALES ($mil.)- 365.92 1YR SALESGROWTH- 8.76% INCOME-STATEMENT: 2001 NET INC. ($mil.)- 25.88 1YR NET INC. GROWTH- 8.68%

French Rags. Based in Los Angeles and privately-owned by knitwear designer Brenda French, French Rags is another apparel company specializing in knits. Their sales are estimated at approximately $10 million annually.

ABD has included French Rags as a major competitor due to the similarity of their product line and marketing strategy. Instead of selling through traditional retail channels, French Rags employs a multi-level marketing strategy: trained wardrobe consultants based all around the U.S. host trunk shows in their homes or at hotel suites twice a year. They send invitations to clients, with whom they set up individual appointments for viewing the collection and fittings. Regarding their production, French Rags switched from hand-loomed to factory machines that produce knit fabric, which is considered less tailored than full fashioning on a knitting bed, but allows for greater volume. A profile of French Rags’ switch to this technology was published by Inc. Magazine and is included in the supporting materials.


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Maria Ficalora Knitwear Ltd. New York City-based knitwear designer Maria Ficalora produces an eponymous line of tailored knit separates, which she also markets directly through trunk shows held in cities, primarily on the East Coast. She currently uses a network of Chinese-American knitters based in Queens, New York. In the winter of 2001, Ms. Ficalora and her husband opened a retail shop on the Upper East Side of Manhattan, with annual revenues estimated at $3 million.

Other knitwear designers. Other knitwear design competitors in the mid-sized company category include Helen Hsu Designs, a New York knitwear designer with annual sales of $6 million, Dunollie Looms, New York City, and Nancy Pederson, West Palm Beach, Florida.

Direct sales. Within the direct sales sub-segment, the following three companies dominate the in-home trunk show market for women: 13

Doncaster. Based in Rutherfordton, N.C. and started in 1931, Donacaster markets a designer bridge line. They report sales at approximately $50 million, through over 3,000 sales agents. The average price of a Donacaster outfit is between $300 and $450.

Carlisle. Based in New York City and started in 1991, Carlisle reports sales at $65 million with 800 sales agents. A typical suit sells for $700.

Worth. Based in New York City and started in 1991, Worth has estimated annual sales of $30 million, through a network of 400 wardrobe consultants.

French Rags. Profiled in the knitwear competition section, also operates within the direct sales segment.

Market Trends Growing trend in custom-made clothing. The Wall St.

Journal has reported that the sales of made-to-measure suits are growing.14 Hartmarx Corp. says their sales in this category now account for 25% of its business, compared with 20% in

13 Business Week, June 13, 1997.14 Wall Street Journal, November 8, 2002


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recent years; Saks has reported a record level of made-to-measure sales; and Brooks Brothers is now offering this service. As Business Week reported in its recent article on the subject, “Customization not only expands markets but also allows businesses to charge more.”15

Growth in planned apparel purchases. According to the latest Cotton Inc. Lifestyle Monitor™, fewer women are making impulse buys; in 2001, planned apparel purchases grew 5% to 56.9%, while impulse buys dropped 5.5% to 40.5% of shoppers. Attending a trunk show, the marketing vehicle for the ABD Collection, versus browsing a store requires planning.

Women have less time for shopping. Due to an increase in working women, women have less spare time. Women are now 48% of the labor force, with employment in professional occupations increasing the fastest.16 As a veteran Carlisle consultant reported, “a lot of my clients are businesswomen. They need to look good and professional all the time, but they don’t have much time to spend at the stores.”17 By planning ABD Collection shows and presentations in relaxed settings, such as in a home or at a resort, where there is little of the pressure of daily life, the environment will be more conducive to sales.

Increase in guest occupancy at resorts and spas. Unlike other direct sellers, the ABD Collection is targeting the resort and spa guest, an industry that is expected to have “sustained growth for leisure travelers”18 in the coming years.

Pricing Strategy

The pricing strategy for the ABD Collection was developed based on an analysis of cost of production and competitors pricing. Consideration was given to both signaling quality and gaining market share. Pricing was placed below market leaders in order to more readily gain market share. Because the product is custom-made and hand-knit rather than a ready-to-wear commercial machine knit, it can command a higher

15 Business Week, December 2, 2002, p.68, 4p., 3c16 Profile of Employment and Unemployment, 2000 Bureau of Labor Statistics17 San Diego Metropolitan Magazine, “A Custom Clothing Option” Melissa Jacobs,

September 1998

18 Yesawich, Pepperdine & Brown Special Report 2002, Orlanda, Florida, November 2002


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price point. ABD used keystone benchmarking within the product line to ensure a minimum gross margin of 60% on the product. Below are some examples of price comparisons within the knitwear marketplace:

ABD Collecti

on

Carlisle

French Rags

St. John

Dress Slacks

$275 $365 $295 $595

Jacket $450 $500 $475 $1,250

Dress $475 $174 $325 $990

© 2003 Appalachian By Design, Inc. Marketing Plan no. 22April 2003

MARKETING PLAN

Sales Strategy Overview

ABD’s sales strategy is to sell the product at retail prices through trunk shows at resorts and special events instead of through traditional wholesale channels. ABD’s emphasis is on a one-on-one intimate shopping experience and service designed to cultivate a loyal customer base.

ABD is pursuing a sales strategy with targeted U.S. resorts and spas. A strong relationship with the primary event decision maker is essential to establishing and maintaining entrée to these venues. At The Greenbrier, ABD has established relationships with its Social Director and Retail Manager.

Distribution Channels

ABD will sell the ABD Collection directly to end customers at retail prices to realize the full price, instead of wholesale distribution through retail outlets.

Resorts. ABD’s primary marketing strategy for The Collection is retailing the line at resorts. ABD’s retail store at The Greenbrier will be the flagship for the new line, and will serve as the laboratory for displaying new designs, obtaining customer feedback and training sales staff. Because of the made-to-order business model, ABD expects to develop a clientele whose measurements are kept on file, making it convenient to order additional garments in different styles or colors. The strategy is to nurture a loyal customer base and cultivate a strong re-order business.

A trunk show is set up in a resort room and features samples of each design in every size offered – currently 90 pieces – on racks and mannequins. Accessories, such as jewelry, scarves, and pocketbooks that have been specially selected to coordinate with the line and which are currently available in the retail shop will be shown and merchandised in the room. A trained wardrobe consultant staffs the event and appointments are made for individuals to view the line and try on different styles. Special attention is given to creating a relaxed environment with good music, drinks, fruit and pastries so that the experience is memorable19. Each customer receives individual attention regarding her coloration, the clothing requirements of her lifestyle, and the image she wants to project.

Recent initiatives. ABD held a trunk show at a The Greenbrier event entitled, “Wonderful Women’s Weekend,” which was

19 Drawing from The Experience Economy, Gilmore and Pine, Harvard Business School, 1999


marketed as a relaxing and informative package of programs of interest to women. The program included financial planning, elder care issues, makeovers, cooking demonstrations, and spa events. The ABD Collection occupied a room in the Conference Center and scheduled four hours of appointments. Sales netted $1,600 during those four hours, and measurements were taken for women who asked the wardrobe consultant to contact them directly when they returned home.

Resort concept expansion. Building on its experience and contacts at The Greenbrier, ABD plans to work with event planners and in-house hotel meeting planners. Resorts are ideal locations for shopping because they offer a “captive audience”; guests are secluded on resort property, are generally in a relaxed mood and, with less of their typical daily demands, have more leisure time.

ABD’s focus will be female-oriented events, either based on professional affiliations, such as bar associations, or gatherings based on services provided, such as a women’s spa get-away weekend. The hotel industry delineates these hotel guests as either conference or social guests. ABD sales staff is in the process of scheduling resort events in 2003 and has made preliminary contact with staff at the following resorts:

Homestead Resort, Hot Spring Virginia;

Glade Springs Resort, Daniels, West Virginia;

The Atlantic Club, New Jersey (an existing wholesale customer); and,

The Golden Door, California.

As part of women wellness packages at resorts, this concept is also being discussed with a spa consultant who has relationships with Grove Park Inn, Ashville, NC; Kingsmill, Williamsburg, VA; The Equinox, Vermont; Canyon Ranch, the Berkshires, Massachusetts; and Kohler Water Spas, Kohler, Wisconsin. It is anticipated that this consultant will be hired to assist the Sales Manager during Phase Two of ABD Collection’s growth plan.

Off-resort trunk shows. The second distribution channel is to stage trunk shows presenting ABD’s wholesale line, Appalachian Baby Design, in cities where sales staff currently travels for trade shows. These cities include New York, Atlanta, Dallas, and Seattle.


A hotel suite will be the venue so the line can be displayed and sales staff can make appointments for viewing. This will spread the expense of a stay in a city between the two marketing programs. Women working in the gift market trade, such as sales representatives and show room managers, who spend money and effort on dressing appropriately for their jobs working with the public, are part of the target market.

The following are the initial steps taken in the off-resort trunk channel:

New York Gift Show. During the February 2003 New York Gift Show, the ABD Collection sample set was exhibited in a hotel suite. Six women out of the 30 invited made appointments, resulting in $5,400 in sales. ABD sales staff found that the women who came were rushed, and many who were invited couldn’t arrange their work/home schedule so they could attend. The plan is to continue to test this avenue in the cities where the wholesale tradeshows are held, but reevaluate after the test period.

Home presentation. In November 2002, the ABD Collection was presented in a home outside of Washington, D.C. Six women attended and net sales were $5,200.

Sample sales. Twice a year, ABD plans to sell its samples and design prototypes in a sample sale to the women in the community. New, fresh samples are then produced for the sales program, enabling us to recover the cost of the sample and produce a fresh group for sales events. It also allows local women to access special clothing at marked-down prices while building community awareness of ABD’s venture and mission.

Projected Growth

The following is ABD’s projection of the growth of each sales channel:

Sales Channel*

2004 2005 2006

Resort 60% 60% 56%Off-Resort 30% 27% 27%Re-order 10% 13% 17%Total 100% 100% 100%

*Average % of sales for each sales channel.

As the chart above illustrates, ABD is projecting that as its brand matures, there will be an increase in special orders and re-orders and


a decrease in the trunk show and resort channels. Based on the test trunk shows (November 8 & 9, 2002 in Washington, D.C. and February 9, 10 & 11, 2003) and retail sales, the following are conversion and reorder projections: Average sale (one jacket and separate – skirt, slacks, or top): $850.00 Average number of potential customers per trunk show: 25 Conversion rate based on test marketing: 50% Re-order rate (based on test phase): 33%

Sales Incentives

Resort staff. Resort employees directly involved with booking and promoting the ABD Collection trunk shows are given a custom-made suit of their choice. During the test phase, this gift has built strong buy-in.

Off-resort events. For off-resort events, ABD offers women who bring two friends or more a 15% discount of the purchase of an ABD Collection piece.

Wardrobe consultants. Currently, wardrobe consultants are paid a day rate, plus a 5% commission, for sales at the trunk shows. The salesperson handles all follow-up order management so the customer has one primary contact throughout the transaction. As sales increase, only commissions will be paid, which ABD anticipates to be a high and strong incentive to build long-term relationships with the ABD Collection customer.

Systems & Tools

Listed below is an explanation of ABD’s sales systems and tools:

Sales systems. Customer account management software is to be integrated into ABD’s sales system to create an effective and easy-to-manage database of ABD Collection customers that will include each customer’s essential measurement information, as well as birthday, anniversary, and notable comments. To insure privacy of personal information, sections of the customer field will only be accessible to authorized sales staff.

Sales tools. A leading regional graphic artist was hired to develop a visual identity system for the line, including hangtag, label, show invitations, swatch cards, and line/price sheet. These items are included in the Supporting Documents.

Sales training. Growth in sales is directly related to growth in wardrobe consultants. A key duty of the Sales Manager is to expand


the sales training and support systems for wardrobe consultants. Along with regular on-site training, before each trunk show event, the consultant will be updated with internal sales reports on best sellers, industry trend reports, press kits, postcards, and trunk show invitations.

Marketing Strategy

The ABD Collection is positioned as classic silhouettes that are made expressly to fit the customer. To date, ABD has initiated the following marketing activities designed to target affluent and professional women:

Direct mail. ABD has designed a custom invitation that can be sent to customers, or placed in a resort’s program packet, as it has done at The Greenbrier. Regular reminders of line extensions, color changes and special events will be part of a direct mailing schedule. Once ABD’s customer database is fully activated, targeted mailings will be timed around the individual’s special occasions, such as birthdays and anniversaries.

Public and media relations. ABD has succeeded in attracting positive media attention in both trade and consumer publications for its wholesale line by maintaining a wide network of trade contacts. In the second phase of its growth strategy, ABD plans to hire a public relations firm to develop public and media relations and generate targeted coverage of its product line and venture.

Company website. ABD’s company website is located at www.abdinc.org. The website will be upgraded to include a page on the ABD Collection which will feature new designs, new colors, trunk show schedules, and resort events. To build a sense of exclusivity and highlight the Collection’s made-to-order specificity, customers will be given an access code to enter the site.

Word of mouth recognition. ABD is committed to meeting and exceeding customer expectations to attract new customers through word of mouth advertising, which has increasingly been the most effective marketing strategy to break through an overly crowded marketplace. ABD plans to focus on developing influential customers that can build positive word of mouth brand cache by: putting the product in early-adopters’ hands, reducing the price barrier, and listening.20 Since the crucial element of this strategy is the quality inherent in the product, special emphasis is placed on getting every order right, developing a strong quality control

20 The Anatomy of Buzz, How to Create Word of Mouth Marketing, Emanuel Rosen, Doubleday, 2000.

http://www.abdinc.org/


system (see “Operations”), and enhancing the purchase with special touches, such as providing a complimentary garment bag with each order.

ABD plans to focus on developing influential customers that can build positive word of mouth referrals. This strategy has been followed during the test market phase by: - Encouraging interested customers to try on the product with a

money-back guarantee;- Offering an introductory rate, reducing possible price barriers;

and,- Asking customers to fill out a questionnaire on the product,

service, and their buying habits (see “Support Documents”).

MANAGEMENT PLAN

Management Overview

ABD currently has nine full-time and three part-time employees. Diane Browning, the founder, has served as President since inception in 1992, bringing over 20 years of experience in market and economic development in Appalachia.

To compensate for a sparse rural labor pool, management has reached out across the country to recruit a diverse mix of design, finance, sales, and legal talent. The mix of rooted staff and talented consultants is the dynamic that has readied the enterprise for growth.

To support Ms. Browning, ABD intends to recruit additional dedicated staff as it moves the venture into its second phase of growth. These positions include: - Director of Sales;- Production Manager;- Two Finishing Technicians; and,- Two additional Wardrobe Consultants.

Organizational Overview

The chart below illustrates ABD’s organizational overview:

Management ABD’s senior management is composed of the following individuals:

Name Diane BrowningTitle Founder, President & Director

President

CFOFinance, Fundraising,

ReportingExecutive Assistant

Training & Network Development

Network Relations, Recruitment,Training, Telecom.

Production ManagerPurchasing, Inventory Mgt.,

Shipping

Sales & Marketing

Governing Board

Bookkeeper Knitters Finishing Center Staff

Retail Shop(Venue for both lines)

ABD Collection

(direct sales via trunk shows)

Appalachian Baby Design

(wholesale marketing)

Expertise Over 20 years experience in community and economic development in Appalachia.

Accomplishments & Experience

Oversees ABD’s development as a social enterprise.

Earned the West Virginia Partnership for Progress Award, a Benedum Foundation Fellowship, and the Small Business Association’s Mid-Atlantic Women’s Business Advocate Award.

Served as Community Development Specialist at Women and Employment (now The Center for Economic Options), a non-profit, community-based organization that supports business development for rural women.

Education B.A. Political Science, Trinity College, Burlington, VT

Name Jonathan HarrisonTitle CFO, per contract with Alt. Consulting Expertise Seven years of business management experience

in the social enterprise field, with a focus on improving cash flow and increasing long-term earnings.


Created ABD Collection’s initial financial model, established financial reporting systems, and monitors progress.

Founded a non-profit economic development organization founded in 1998 that has grown to a staff of 12 employees, with an operating budget of over $800,000 annually.

Education B.A. Marketing and Communications, State University of New York at Albany.MBA, Yale School of Management

Name Yevette ShaferTitle Production & Training Manager for the ABD

CollectionExpertise Over 10 years experience in the knitting industry.

Started at ABD as a knitter in 1993. Extensive industry training throughout the U.S., including two week-long seminars on knitwear CAD training and a certified course at North Carolina State’s Textile Department.


Learned the pattern construction of the ABD garments, as well as how to best teach these techniques.

Worked at Kellwood Company as Quality Control Manager for the last four of an 18 year career with the company.

Education Currently enrolled in a bachelors program at the Community College.

Established Design Relationships

ABD has established relationships with design consultants from diverse backgrounds, allowing the Company to draw on different strengths and skills. The design team plans quarterly reviews of designs, customer feedback and trends.

The following individuals comprise ABD’s design team:

Name David MilesExpertise 18 years of custom knit service and knitting

seminar experience. Assisted with developing each style in the ABD Collection launch and trained ABD staff and knitters in the production of the line.

Name Michelle WoodfredExpertise Knitwear designer trained at the Pratt Institute and

worked many years as a knitwear designer for Calvin Klein. Lead designer on Appalachian Baby Design and adds a fresh, feminine, West Coast perspective to the designs of the ABD Collection.

Name Lynda GroseExpertise Currently a design consultant with companies such

as Patagonia and Aid to Artisans and former knitwear designer with Espirit Considered ABD’s founding designer, who convinced Esprit to work with a group of West Virginia knitters in 1992.

Name Margaret WoodExpertise 20 years of design and product development

experience in the USA, Europe and the Far East. From 1982-1993, owned a design consultancy in New York City, developing knitted textile designs for a variety of clients including retailers, catalogs, yarn manufacturers, trend services and designers such as Donna Karan, Calvin Klein and Ralph Lauren.

Knitters ABD currently contracts with 24 knitters and nine hand-finishers. Depending on their level of expertise and their income goals, knitters produce between 10 to 14 units per week. In peak periods, high producers create 15 to 20 units per week. ABD is fortunate to have excess capacity of trained knitters who can take up production slack to keep percentages high during peak periods.

When projecting capacity, ABD classifies its knitters as:- Apprentice (less than one year experience and produce ten to

fourteen units per week);- Experienced (produce five to ten units per week); and, - Lead (produce ten or more units per week).

Currently, of ABD’s 24 core knitters, three are lead, sixteen are experienced, and five are apprentices.

Through the Appalachian Baby Design line, ABD contract work, and now through the ABD Collection, a knitter can start with a beginner level project and gradually increase her skills through products that require more technical skill and sophisticated equipment. Certain customer designs are well suited to apprentices, while experienced knitters, who are the most technically proficient, produce more complex patterns. Work is distributed first to lead knitters since they produce the most product. This important group serves as a model for apprentices and those considering entering the trade.

Sales Team To date, David Miles, one of ABD’s design and training consultants, has given two wardrobe consultants over 40 hours of sales and measurement training for the ABD Collection. A training video was produced as a refresher for them and an introduction for future staff. A minimum of 40 hours training is planned for each additional wardrobe consultant.

One of ABD’s sales employees has 18 years experience selling Mary Kay Cosmetics. The Mary Kay sales philosophy and training program is considered the world’s gold standard of personal selling. With her help, ABD’s sales program has, and will continue to, draw on Mary Kay’s successful direct sales techniques.

Board of Directors

ABD’s Board members bring a high degree of commitment and combined talent to the organization. The feasibility and development of the ABD Collection has been an agenda item for every meeting during the last two years and its growth closely monitored.

Currently, ABD’s Board of Directors is comprised of the following five individuals, in addition to Ms. Browning, who serves ex-officio, as President.

Name Monica ApplebyCurrent Position

Director, New Enterprises Fund.

Expertise Directs an organization that supports the development of micro-enterprises through lending and other programs. Played a formative role in developing “Virginia Home Knitters” which encompasses ABD network members from southwestern Virginia.

Name Monnie BareCurrent Position

Visual Merchandiser & Retail Manager, The Greenbrier.

Expertise Guided ABD’s development of its retail shop, as well as designed its booth and a button line for Appalachian Baby Design. Experience in both the arts and management.

Name Beth FerrierCurrent Position

Attorney at Law, Sowash, Carson & Ferrier, L.P.A.

Expertise 17 years experience practicing non-profit and business law.

Name Karen Jacobson, Board Secretary & Treasurer

Current Position

Deputy Director, Randolph County Housing in Elkins, WV.

Expertise Worked for six years as ABD’s Vice President of Development and Finance, responsible for developing the training program and raising over $2 million in grants and loans to finance the organization’s growth. Also wrote the first feasibility study on ABD.

Name John WaltersCurrent Position

Director, The Lightstone Community Development Corporation Loan Fund, a West Virginia Small Business Development Center and U.S. Small Business Administration certified micro-lender.

Expertise Previously ran his own entrepreneurial ventures, including 12 years running a family-owned manufacturing company.

© 2003 Appalachian By Design, Inc. no. 34April 2003 Operations Plan

OPERATIONS PLAN

Facilities Location. The ABD Collection will be marketed and finished from its headquarters located in Lewisburg, West Virginia. Lewisburg is located in the southeastern part of the state, off of I-64 (running E/W) and 40 miles from I-81 (the nearest N/S corridor). In July 1996, ABD moved to its present facility, located in an old Sears retail building, which was renovated to meet ABD's specifications.

ABD’s knitters work from their homes in the mountains and valleys of West Virginia, Virginia and Kentucky. The majority of the knitters are organized into area teams; however, a few live too far to travel easily to area meetings and trainings. They work with ABD by phone, email, mail, and UPS, and receive occasional home visits from ABD trainers. The below map illustrates the various location of ABD’s knitters:

Production Capacity

The facility includes a 900 square foot administrative suite, with a 400 square foot conference room used for training and meetings, and a 2,200 square foot area for in-house production, finishing and shipping of product and inventory storage. The finishing center houses raw materials inventory, finished goods inventory, steam tables, washer, dryer, and a design studio with computerized knitting machines and a CAD program. ABD currently has five linking machines from Hong Kong.

ABD’s training programs will be essential to increasing production capacity over the next four years. ABD plans to increase production capacity through the following three initiatives:


Recruiting more knitters through its "Introduction to Production Knitting" course;

Helping apprentices to become experienced knitters through orders and order-specific training; and,

Increasing the skills and efficiency rates of experienced knitters through its Apprentice Program.

The table below illustrates ABD’s projected production capacity:Projected Company-wide Production Capacity Knitters/UnitsKNITTERS

2004 2005

2006

Lead Knitters (10 per wk) 6 8 10Experienced (8 per wk) 18 22 25Apprentice (4 per wk) 10 20 25Total Knitters 34 50 60Total Annual Production Capacity – Units

12,200 16,800

20,000

Knitter Training

ABD has a rigorous, mandatory training program that consists of:

One-on-one peer training program. In 1999, ABD shifted its knitting training program to one-on-one sessions with peer trainers, most of whom learned to knit through ABD and have been trained in adult learning techniques. In the past, there was a delay until a class of six formed. Decentralizing this training function from ABD to the wider network of knitters has helped facilitate the training and has enabled ABD’s knitters to receive training more quickly. ABD will use this peer train-the-trainer system to expand the ABD Collection.

Skill upgrade class and training video. Regularly scheduled ABD-led skill upgrade classes will also be part of ongoing training. In the spring of 2002, ABD also produced an ABD Collection training video for reference for trained knitters and as an introduction to the line for new knitters.


Purchasing & Suppliers

ABD currently uses three major suppliers for the high-end yarns used in the collections: Dytex Yarns, Haverhill, MA; Bonnie Triola Yarns, Eire, NY (letter of support included), and Silk City Yarns, Patterson, NJ. ABD has long-standing relationships with all of these vendors and each is committed to the business partnership.

ABD’s major button suppliers are Blue Moon Button in San Mateo, CA and Renaissance Button in San Francisco, CA. ABD purchases its other finishing items, such as labels, in the United States and abroad, if unavailable domestically.

Quality Control

Producing quality products is one of ABD’s core values. For many years, ABD staff and the Knitters’ Steering Committee worked with a quality specialist, Grant Stewart, from the Center for Entrepreneurial Studies and Development at West Virginia University. Grant assisted in developing quality standards, worked to create the first "Train the Trainers" session, and held team training with the Steering Committee.

The ABD Collection uses a three-phase inspection program to insure the highest quality of production. After knitters have completed and inspected their part of the production, the pieces are inspected again prior to any finishing activities, such as blocking, linking and tagging. The product is inspected once more before being packaged and shipped to the customer. A key hire in the second phase of ABD’s growth strategy will be a production manager who will be recruited specifically for his or her expertise in managing a first-rate quality control program.

Technology In March 2002, ABD’s new manufacturing software, Oak Street by Industrious Software Solutions, went on-line. Once the system is fully integrated into the operation, ABD plans to incorporate bar coding into the manufacturing and distribution processes.


Process Flow

The following chart outlines ABD’s process flow:

Customer

ABD & Sales

ABD Distribution

Knitter Production

ABD Finishing

Shipping Accounting

Pack, Ship & Invoice

Customer Order

Customer Receipt

Stock & Supply System

Acquire Raw

Material

Generate Purchase Order &

Receive Material & Commence

Knitting

Yes Finish Inspect

Ship Knitted

Goods to ABD

Generate Sales Order

No

Finish?

Work is completed to order according to specifications provided by ABD’s trained wardrobe consultants. Custom orders are filled within four to six weeks of an order placement. The following steps take place upon receiving a sales order:

ABD staff notifies the knitters by calling or emailing knitters directly;

ABD issues a work order and raw materials (yarn) to the knitter with delivery due dates. The yarn is sent via UPS to the knitters who live outside of the Lewisburg area; local knitters come to ABD’s office and pick it up.

Depending on the design, knitters may complete an entire garment, or knit only pieces of the garment, which are then finished in ABD’s finishing center.

Knitters are responsible for self-inspection, repair, adding tags


identifying their work, and shipping or hand delivering the product to ABD according to the work orders and in time to allow for shipping to the customer on time. They are also responsible for the cost of shipping the product back to ABD.

To monitor process flow, a manufacturing valuation report is prepared and reviewed weekly, including the units and dollar value of: raw material on hand; work orders; work in process; finished product; weekly shipments; and sales orders pending.

Growth Strategy

ABD will undertake a formal and systematic approach to expanding its business. ABD’s expansion strategy will be executed in three operational phases, the first of which has been completed.

Phase 1 / Proof of Concept / January 2002 to December 2002.

- Designed core product line. In 2002, ABD designed its core made-to-measure knitwear line.

- Established operations. Developed production capacity for test market and trained knitters.

- Tested market. Tested new knitwear line through The Greenbrier retail store for nine months. During this time, ABD also hosted two trunk shows. ABD succeeded in launching the product line without increasing expenses or staff.

Phase 2 / Rollout / January 2003 to December 2004.

ABD is in the process of raising capital to complete the following:

- Expand management, board of directors, and staff. ABD intends to hire a Director of Sales, Production Manager, and two additional finishing center staff. ABD also intends to expand its knitter recruitment through regional job fairs, as well as recruit two additional wardrobe consultants and additional members to its Board of Directors.

- Enhance sales and marketing. In order to increase brand awareness, ABD intends to hire a public relations agency, develop a sales system and training program for its wardrobe consultants, and enhance its customer relations program.

- Improve operations. ABD intends to redesign the Finishing Center in an effort to increase productivity.


Phase 3 / Increase Production Capacity / January 2005 and Beyond.

- Increase staff. ABD intends to hire a Creative Design Director, increase finishing staff to six employees, and further increase knitting staff.

- Enhance operations. ABD plans to re-evaluate its organizational structure, expand its production facilities, and qualify for ISO certification.

Additional Opportunities

Following the execution of its core strategy, ABD may seek to pursue the following additional growth opportunities:

Consulting. Develop a consulting business that provides assistance to rural economic groups, using its flexible manufacturing systems model.

Brand extension. Guide the development of other products that can be merchandised with the ABD Collection, such as jewelry and accessories.

© 2003 Appalachian By Design, Inc. no. 40April 2003 Financial Plan

FINANCIAL PLAN

Financial Plan Overview

ABD has chosen to show the ABD Collection (the “venture”) as a stand-alone entity in anticipation of spinning it off in Year Five into a separate for-profit subsidiary organization of ABD. Projections illustrate how the ABD Collection operates as a business in general and in comparison to industry averages and trends.

The minimal start-up capital to date has been raised in conjunction with ABD and estimates year-end cash position of $33,750 on test market sales of $40,000. In 2003, the venture is positioning itself for investment opportunities; ABD thus has presented three-year financial statements for the years 2004 to 2006. Realistic return on assets, sales, and equity are forecast for the first year, with more aggressive performance hurdles cleared in years 2005 and 2006.

Sources & Uses of Capital

The venture requires approximately $177,000 over the next 18 months (July 2003 to December 31, 2004) for post-start up capitalization. ABD is anticipating a $100,000 investment (paid-in-capital) in 2003 which would allow for purchases of additional equipment, implementation of the marketing plan, and the creation of an additional sample set for the line. An additional $78,074 will be needed in 2004 to provide working capital and additional marketing support.

The below chart illustrates the breakdown of sources and uses of funds. Sources and Uses of Capital Sources of Capital $ Yale Business Plan Competition

$ 100,000

Other Social Investors 77,074

Total $ 177,074

Uses of Capital Sales Director Annual Salary $

32,000 Production Manager (Annual Salary $

45,000 Equipment Purchases $

12,274 Working Capital $

40,000 Sample Sets $

18,000 Marketing Expenses year

2004 $ 30,800

Total $ 177,074


Projected Financial Performance

The financial performance of the venture is conservatively estimated on a real-case scenario given tight economic times. ABD is planning for a real-case scenario cash flow including higher inventory, longer than average for retail turnover on accounts receivable, and a comfortable SG&A percentage of revenues. ABD is estimating the following performance for the venture over the first three years:

ABD Collection 2004 2005 2006Revenue (grant and income)

299,466 460,717 708,796

Gross Margin 58.0% 59.0% 59.0%SG & A 55.0% 49.0% 43.4%Depreciation 1.7% 3.5% 2.3%Operating Income 1.3% 6.5% 13.3%

Return on: Assets 2.02% 13.32% 29.25%Equity 2.20% 14.23% 30.81%

Balance Sheet Projections

Equipment. ABD’s forecasts the venture will require a relatively small amount of start-up capital designated for equipment to begin operations. As outlined below, an estimate of $12,274 in year 2003 purchases will retrofit and redesign the finishing center with upgraded equipment to more efficiently process the line. The bulk of the capital requirements will be for selling expenses related to the marketing program of the venture. The stand-alone venture does not anticipate taking on outstanding debt to purchase equipment. The following outlines the estimated capital expenditures from 2003 to 2006: Total value of equipment in-house plus new equipment purchases

in 2003 will be $28,076; Capital expenditures for equipment will total $12,274 in 2003; Equipment expenditures for Year 2004 are estimated at $25,000; Equipment purchases for Years 2005 and 2006 are estimated at

$10,000 each year.

Other balance sheet assumptions: Trade payables and receivables are calculated at 21 and 27 days,

respectively. Receivables should be stronger due to prepayment and use of credit cards on most payments;


Cash is forecasted at 35% of total assets in Year One due to heavy paid-in-capital not used up in Year One. In future years beyond start-up, cash percentage of assets decreases to 16% of assets.

Investments of $33,086 will be made to ABD, the parent organization of the venture, as indicating contribution to the program and training expenses of the organization;

Inventory is held constant at 30% of Cost of Goods Sold (COGS) in keeping with industry averages for knitwear;

Other current assets include remainders on sample sets; Other assets include the value of trademarks, goodwill, contracts,

and licensing; and Paid-in-capital recognizes venture philanthropy as equity (see

sources of capital on page 34.


ABD Collection YE 2003 YE 2004 YE 2005 YE 2006Balance Sheet

Cash / Excess Securities 33,975 68,936 44,659 50,247Investments-ABD 33,086Trade Receivables 13,000 22,379 29,000 32,000Grant ReceivablesInventory 18,000 40,000 45,000 72,000Other Current Assets 5,000 5,219 6,400 7,400Total Current Assets 69,975 136,534 125,059 194,733

Beginning Gross P P & E 13181 28,076 52,120 83,766Capital Expenditures 12,274 25,000 10,000 10,000Adj. to retire depr. assets 2,621 -878 22,883 22,883Less accum. depreciation -78 -1,238 -4,670Net P P & E 28,076 52,120 83,766 111,979

Other Assets 18,949 8,000 17,000 15,000Total Net Fixed assets 47,025 60,120 100,766 126,979

Total Assets 117,000 196,654 225,824 321,711Liabilities & Equity

Accounts payable 7,000 7,400 8,200 9,500Other current liabilities 10,000 8,000 6,303 6,778Current Operating Liabilities 17,000 15,400 14,503 16,278Total Current Liabilities 17,000 15,400 14,503 16,278

Deferred Income Taxes 1,123Other 4,936 4,382Total LT Liabilities 4,936 131,476 155,672

Total Liabilites 17,000 15,400 14,503 16,278

Paid in Capital 100,000 177,274 177,274 177,274Retained Earnings 3,976 34,048Net income 3,976 30,072 94,111Total Equity 100,000 181,250 211,322 305,433

Total Liabilities and Equity 117,000 196,650 225,825 321,711

Income Statement

The company is estimating sales of $299,466 in 2004. This represents sales of 1,000 units, with a gross margin of 58.2%. Approximately 75% of the COGS are in labor, with 25% in material purchases. There is a detailed explanation of the revenue assumptions in the Supporting Documents. The sales forecasts include the following projections:

Revenue growth is very healthy with a 35% increase in sales over the first five fiscal years ending December 31, 2007; and

Gross profit will stay constant in Year One at 58% and will increase by


1% in Year Two and remain constant.

The following table is a snapshot of the venture’s projected income statement for years 2004 to 2006:ABD Collection YE 2004 YE 2005 YE 2006Statement of ActivitesSales Revenue Total Sales Revenue 299,466 460,717 708,796Cost of Sales 125,776 188,894 290,606Gross Profit 173,690 271,823 418,190S G & A expense

Admin Salary and Benefits 93968 115843 160325Commissions Paid 29947 69108 106319Marketing Expenses 30800 25800 25800Operating Expenses 10000 15000 15000 Total SG&A 164,715 225,751 307,444

Depreciation 5,000 16,000 16,634Operating Income 3,976 30,072 94,111 Expenses. Expenses are divided into marketing, administrative

salaries, and other operating costs. ABD forecasts annual marketing expenses of $30,800. A marketing budget outlining planned expenditures for Years 2004 to 2006 is included in the Supporting Documents. SG &A will start at 55% of revenues throughout the start-up period and will decrease within the first three years as a percentage of sales to 50%, due to scale economies and lower recruiting costs for the management team.

Administrative costs for the venture will be allocated across the program using shared resources from ABD in some cases. A production manager and sales director will be added to the staff at the end of 2003. The product Manager’s salary is allocated at 80%. The sales Director’s salary is at 100%, but does not include commissions. Commissions are structured as commission plus expenses in year one of 10% plus expenses. In year 2005, the structure moves to 15% straight commission with expenses carried by the wardrobe consultants as the brand develops cache and recognition. A chart outlining the venture’s management and personnel expenses is included in the Supporting Documents.

Working Capital & Cash Flow

The following tables include projections that indicate that both working capital and cash flow for the venture will be strong in Year One, with some decrease in liquidity in Year Three as a result of purchases of capital equipment. ABD plans to increase capital expenditures and the short-term line-of-credit during this first three-year period. ABD has developed its own network of knitters, unlike other designers who rely on


developing outside contract sources.

2004 2005 2006Working Capital Cash / Excess Securities 68,936 44,664 50,252 Projected Cash for Operations 23,858 36,705 56,469 Excess Market Securities 45,078 7,960 Current Assets 136,534 125,064 194,738 Current Liabilities 15,400 14,503 16,278 Working Capital 121,134 110,561 178,460

Cash Flow 2004 2005 2006CASH FROM OPERATING ACTIVITIES: Net Earnings (Loss) 3,981 30,072 94,111Plus Depreciation 5,000 16,000 16,634 Minus Change in: Trade Receivables 9,379 6,621 3,000Inventory 22,000 5,000 27,000Other Current Assets 219 1,181 1,000 Plus Change in:Accounts payable 400 800 1,300Other current liabilities -2,000 -1,697 475Current L-T projected debtNet Cash From Operating -33,198 -4,718 16,847CASH FROM INVESTING ACTIVITIES: Minus Change in:Capital Expenditures 25,000 10,000 10,000Other Assets -10,949 9,000 -2,000Net Cash From Investing 14,051 19,000 8,000CASH FROM FINANCING ACTIVITIES: Plus Change in:Paid in Capital 77,274Deferred Income Taxes 1,123Other 4,936 -554 -4,382Net Cash From Financing 82,210 -554 -3,259Net Increase/Decrease of Cash 34,961 -24,272 5,588Cash Beginning of Period 33,975 68,936 44,664Cash-End of Period 68,936 44,664 50,252

See “Supporting Documents” for additional financial projections and assumptions.


RISK ASSESSMENT AND CONTINGENCY PLAN

Sensitivity Analysis

A sensitivity analysis was conducted on the current financial projections with a 20% sensitivity to test the soundness of the financial project. Results of the analysis show: A 20% shortfall in revenues in years one through three will result

in the organization being undercapitalized at the end of Year Three by $17,888, and ABD will have to carry this negative cash position in the line-of-credit it will establish for $75,000. This line-of-credit will carry the organization into 2007. The venture will have had net revenue loss of only $15,000 compared to the real case scenario and will change hiring plans to lower dependency on design director as full time employee.

This analysis kept operating expenses and margins constant during the period and lowered isolated sales as a factor. In reality, margins would not erode as quickly as have been forecasted in the sensitivity analysis.

A 20% underestimation of sales will result in an increase in net revenues of $293,796. This will force the organization to evaluate its sales and marketing plan and make adjustments to its staffing base to fulfill the highest order of customer service.

Please see the cash flow spreadsheet in for contingency planning on a worst-case scenario of 20% shortfall of sales projections in the Supporting Documents section. Other major risks, with accompanying mitigation plan, include: New entrant in an established market. As with any new

apparel brand, a determined effort must be made to gain market and mind share. The niche marketing focus of personal selling at resorts, where there is a relaxed and captive target customer, sets the venture apart from other entrants into the sector.

There has been a long held perception of Appalachia as a disadvantaged region that is at variance with exclusive product line. Because the region is isolated geographically, sparsely populated and home to a traditional culture, it is not widely viewed as a source for luxury goods. Yet ABD has built its reputation on exceptional design, using the finest quality yarns, employing state of the art technology and instilling a culture of first-rate quality through its training program. The affluent target market for Appalachian Baby Design, and now the ABD Collection, demands nothing less and ABD works hard to satisfy that customer. In the process, the company is recasting perceptions of the region and its artisans.


Ability to maintain quality while scaling enterprise. There is a recognized risk of losing quality and missing delivery schedules as sales grow. Internally, ABD will draw from the processes and controls that it developed as the wholesale line grew. A key hire in the launch phase is a production manager, who will be recruited specifically for quality control and inventory control experience. Regarding expansion of production capacity, ABD has developed a time-tested training program to recruit and train more knitters, and since that is its core mission, it is eager to expand.

Potential for low margins and high operating costs. ABD plans to mitigate this risk by rigorous benchmarking of costs with the goal of maintaining 60% margin in the first three years.

Potential difficulty recruiting capable staff. Because of the rural labor pool, it can be difficult to attract the needed talent to grow the business. ABD’s plan budgets competitive salaries to attract strong skill sets. The venture is specifically targeting talented salespersons working at The Greenbrier who want to exit the difficult work hours of the hospitality industry, as well as experienced production managers working at local manufacturing facilities that are currently downsizing.

© 2003 Appalachian By Design, Inc. Supporting Documents

no. 48April 2003

SUPPORTING DOCUMENTS

Supporting Literature

Oberhauser, Relocating Gender and Rural Economic Strategies , Environment and Planning, 2002 (Academic Case Study of Appalachian By Design’s Economic Network Development)

Plotkin, Riches from Rags, Inc. Magazine, March 1995. (Article on knitwear manufacturer French Rags).

Shirk & Wadia God, Family and an Electric Knitting Machine, Chapter 8, Kitchen Table Entrepreneurs, Ms. Foundation Publication, 2002.

Wadia & Holley Accessing Lucrative Markets, Collaborative Fund for Women’s Economic Development, Ms. Foundation, 2001 (case study of ABD’s Marketing Program).

ABD Collection Materials

ABD envelope with invitation, brochure, hang tag. ABD Collection buyer questionnaire.

Evaluation Instrument

Performance Monitoring Tool for Social Businesses, FIELD, The Aspen Institute.

ABD Press Packet

Appalachian Baby Design line sheet. Media Coverage. Catalog and Magazine Placement.

Letters of Support

Andrea Levere, Vice President, Corporation for Enterprise Development

Raymond Daffner, Program Manager, Appalachian Regional Commission

Anna Wadia, Ms. Foundation Bonnie Triola, Yarn Supplier Donald Parker, Vice President, BB&T Bank

Management & Director Resumes

Diane Lynch Browning Karen C. Jacobson Jonathan A. Harrison Yevette M. Shafer Beth B. Ferrier

Consultant Resumes

David H. Miles Michele Woodford

Financial Documentation

Financial Projections and Assumptions