SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1998
[ ] 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 333-24507
WILLCOX & GIBBS, INC.
(Exact name of registrant as specified in charter)
DELAWARE 22-3308457
(State of Incorporation) (I.R.S. Employer Identification No.)
900 Milik Street, Carteret, New Jersey 07008
(Address of principal executive offices)
732-541-6255
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
(Cover sheet continued on next page)
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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 [ ] No [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of May 6, 1999: 1,186,555 shares of Common Stock of the Company were
outstanding. The Company's Common Stock is not publicly traded.
Documents incorporated by reference: None.
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
Willcox & Gibbs, Inc. ("Willcox & Gibbs" or the "Company") is a
holding company engaged through its subsidiaries in the distribution of
replacement parts, supplies and ancillary equipment to the apparel and other
sewn products industries. The Company currently operates through six principal
business units: (i) its Sunbrand division ("Sunbrand"), which is a distributor
of replacement parts, supplies and ancillary equipment to manufacturers of
apparel and other sewn products; (ii) its Unity Sewing Supply Co. division
("Unity"), which is a wholesale distributor to dealers of replacement parts and
supplies for use by the apparel and other sewn products industry; (iii) its
Willcox & Gibbs, Ltd. ("W&G, Ltd.") subsidiary, which is a distributor to
manufacturers and dealers in the United Kingdom and Europe of replacement parts
and supplies for use by the apparel and other sewn products industry (which
business the Company has determined to discontinue); (iv) its Clinton Management
Corp., Clinton Machinery Corporation, Clinton Leasing Corp. and Clinton
Equipment Corp. subsidiaries (collectively, "Clinton"), which distribute screen
printing equipment and supplies primarily for the apparel industry; (v) its
Leadtec Systems, Inc. ("Leadtec") subsidiary, which develops and supplies
computer-based production planning and control systems for the apparel industry;
and (vi) Macpherson Meistergram, Inc. and its subsidiary, Geoffrey E. Macpherson
Canada, Inc. (together, "Macpherson") which distribute embroidery equipment and
supplies used in the apparel industry. The Company has also developed a new
product line called "AC & DS," described below.
The Company believes that it is the largest independent distributor
in North America of replacement parts, supplies and ancillary equipment to
manufacturers of apparel and other sewn products, offering a broad product line
of over 200,000 items. These products include industrial sewing equipment parts,
such as needles, hooks, motors, tools and other accessories, and ancillary
equipment, such as embroidery equipment and supplies, screen printing equipment
and supplies and production planning and control systems. The Company believes
that its broad product line gives it the advantage of being the apparel and sewn
products industries' leading one-stop shop.
Manufacturers of apparel and other sewn products generally utilize a
variety of modern equipment and supplies in their production processes. Although
there have been advances in the speed of equipment and automation of
manufacturing methods, the basic sewing process has changed very little since
the first sewing machines were introduced over 125 years ago. Accordingly, the
basic design of sewing equipment and replacement parts and supplies used with
respect to such equipment has remained stable for many years, and new
generations of sewing equipment have frequently utilized many parts designed for
prior generations. In addition, since numerous manufacturers of sewn products do
not regularly replace major equipment upon the introduction of new models,
substantial numbers of older machines typically continue to be used for many
years after the production of more advanced units.
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The improvements in speed of equipment and the trend toward
automation in apparel and sewn products manufacturing have increased the demand
for replacement parts and supplies by manufacturers, since high speed production
increases the wear and tear on equipment. In addition, automation results in the
utilization of other equipment, such as cutting and finishing devices, that must
be maintained. As a result of the large number of differing replacement parts
and supplies utilized by apparel and sewn products manufacturers and the
relatively small quantity of many items required at varying times, such
manufacturers generally prefer to obtain replacement parts and supplies from
dealers that stock a wide range of products and offer prompt delivery. In
addition, manufacturers of such replacement parts, supplies and ancillary
equipment often prefer to sell such products through distributors who can
provide wide market coverage, assume credit risk and stock inventory, thereby
limiting the manufacturers' costs of marketing and distribution.
The replacement parts distribution business involves both "genuine"
and "generic" parts. "Genuine" parts are replacement parts manufactured by the
original equipment manufacturer. "Generic" parts are non-branded replacement
parts manufactured by someone other than the original equipment manufacturer.
CHAPTER 11 BANKRUPTCY FILING
As a result of the decline in the Company's results of operations in
1998, the Company was unable to make the interest payment on its 12 1/4% Senior
Notes due 2003 (the "Senior Notes") scheduled for December 15, 1998.
Subsequently, the Company and an unofficial committee comprised of institutions
that beneficially owned the majority in aggregate principal amount of the
outstanding Senior Notes reached a non-binding agreement in principle on the
terms of a restructuring (the "Proposed Restructuring") to be accomplished
pursuant to a plan of reorganization under chapter 11 of title 11 of the United
States Code (the "Bankruptcy Code").
On April 20, 1999 (the "Petition Date"), the Company and twelve of
its direct and indirect subsidiaries (collectively, the "Debtors"), WG Apparel,
Inc. ("WG Apparel"), Leadtec, J&E Sewing Supplies, Inc., W&G Daon, Inc., Clinton
Management Corp., Clinton Machinery Corporation, Clinton Leasing Corp., Clinton
Equipment Corp., Macpherson Meistergram, Inc., Geoffrey E. Macpherson Canada,
Inc., Emtex Leasing Corporation and Paradise Color Incorporated, each filed
voluntary petitions for protection and reorganization under chapter 11 in the
United States District Court for the District of Delaware (the "Bankruptcy
Court"). The reorganization cases are being jointly administered under Case
Number 99-928 (PJW) pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy
Procedure. The Company is in possession of its properties and assets and
continues to manage its businesses with its existing directors and officers as
debtor in possession subject to the supervision of the Bankruptcy Court.
Pursuant to the provisions of the Bankruptcy Code, certain actions
to collect upon any of the Company's liabilities as of the Petition Date or to
enforce pre-petition contractual obligations were automatically stayed. Absent
approval from the Bankruptcy Court, the Company is prohibited from paying
pre-petition obligations. However, the Bankruptcy Court has approved payment of
certain pre-petition liabilities such as employee wages and benefits and certain
specified pre-petition obligations to vendors, customers and taxing authorities.
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Additionally, the Bankruptcy Court has authorized the retention of legal and
financial professionals and adequate protection payments (payments to adequately
protect holders of certain secured claims against the Company). As a debtor in
possession, the Company has the right, subject to Bankruptcy Court approval and
certain other conditions, to assume or reject certain pre-petition executory
contracts and unexpired leases. Parties affected by such rejections may file
pre-petition claims with the Bankruptcy Court in accordance with bankruptcy
procedures.
On the Petition Date, the Company also filed with the Bankruptcy
Court a plan of reorganization (the "Plan") and proposed disclosure statement
embodying the Proposed Restructuring. Under the terms of the Plan, the only
impaired claims and interests are claims relating to the Senior Notes and
interests represented by the existing Common Stock of the Company (the "Old
Common Stock"). If the Plan is implemented, existing Senior Notes would be
canceled and each holder thereof would receive a PRO RATA share of (a)
$5,206,250 in cash; (b) $30,000,000 principal amount of a new issue of Series C
Notes; and (c) shares of Class A Common Stock of the Company that represent 80%
of the shares of the reorganized Company Common Stock to be outstanding on the
effective date of the Plan. In addition, the Plan provides that Old Common Stock
of the Company would be canceled, and each Holder thereof would receive a PRO
RATA share of (a) shares of Class B Common Stock of the Company that represent
20% of the shares of the reorganized Company Common Stock to be outstanding on
the effective date of the Plan; and (b) warrants to purchase 176,747 shares of
Class A Common Stock of the Company exercisable at a purchase price of $.01 per
share. Warrants for approximately the first third (55,921) of the shares of
Class A Common Stock would be exercisable on or before the fifth anniversary of
the effective date of the Plan, and only if the average daily closing price per
share of the Class A Common Stock over a 20 business day period exceeds $65.
Warrants for approximately the second third (58,864) of the shares of Class A
Common Stock would be exercisable on or before the sixth anniversary of the
effective date of the Plan, and only if the average daily closing price per
share of the Class A Common Stock over a 20 business day period exceeds $75.
Warrants for approximately the last third (61,962) of the shares of the Class A
Common Stock would be exercisable on or before the seventh anniversary of the
effective date of the Plan, and only if the average daily closing price per
share of the Class A Common Stock over a 20 business day period exceeds $85. The
Plan contemplates that other claims against the Debtors arising prior to the
Petition Date will be reinstated and paid in full.
Implementation of the Plan is subject to a number of conditions,
including receipt of acceptances from (i) the holders of claims with respect to
the Senior Notes constituting at least two-thirds in dollar amount and more than
one-half in number, counting only holders that vote, and (ii) the holders of at
least two-thirds of the shares of Old Common Stock of the Company, counting only
holders that vote. The Company must also arrange a new credit facility to fund
the cash payments required under the Plan and to provide for the Company's
ongoing liquidity needs. In addition, the Plan must be confirmed by the
Bankruptcy Court.
There can be no assurance that the Plan will be confirmed by the
Bankruptcy Court, or that such Plan will be consummated. The Company has the
exclusive right to pursue confirmation of a plan for 180 days after the Petition
Date. There can be no assurance that the Bankruptcy Court would grant any
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extension of such exclusivity period if requested by the Company. If the
exclusivity period were to expire or be terminated, other interested parties,
such as creditors of the Company, would have the right to propose alternative
plans of reorganization.
Although the Chapter 11 bankruptcy filing raises substantial doubt
about the Company's ability to continue as a going concern, the accompanying
consolidated financial statements have been prepared on a going-concern basis.
This basis contemplates the continuity of operations, realization of assets, and
discharge of liabilities in the ordinary course of business. The statements also
present the assets of the Company at historical cost and the current intention
that they will be realized as a going-concern and in the normal course of
business. A plan of reorganization could materially change the amounts currently
disclosed in the consolidated financial statements.
The consolidated financial statements do not present the amount
which may ultimately be paid to settle liabilities and contingencies which may
be allowed in the Chapter 11 bankruptcy cases. Under Chapter 11 bankruptcy, the
rights of, and ultimate payment by the Company to, pre-petition creditors may be
substantially altered. This could result in claims being liquidated in the
Chapter 11 bankruptcy cases at less (and possibly substantially less) than 100
percent of their face value. At this time, because of material uncertainties,
pre-petition claims are carried at face value in the accompanying consolidated
financial statements. For further information about the financial impact of the
Chapter 11 bankruptcy filing, see Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
ACQUISITIONS
Willcox & Gibbs was organized as a Delaware corporation in 1994 by
members of the Company's current management and certain other investors to
acquire the sewn products replacement parts, supply and ancillary equipment
distribution businesses of the Company's predecessor, currently known as Rexel,
Inc. (the "Company's Predecessor"), which occurred in a management buyout on
July 13, 1994 (the "Management Buyout"). Pursuant to the Management Buyout, the
Company, through its wholly owned subsidiary, WG Apparel, acquired the assets of
Sunbrand and Unity, as well as the stock of Leadtec and W&G, Ltd., and certain
other assets in exchange for $41.0 million in cash, $3.0 million principal
amount of subordinated debt and a warrant to purchase 122,970 shares of Common
Stock of the Company. The cash portion of such purchase price was funded through
approximately $36.2 million of borrowings and $4.8 million from the sale of
Common Stock of the Company. On July 26, 1995, the Company repurchased from the
Company's Predecessor such subordinated debt and warrants, together with certain
other assets (including the name "Willcox & Gibbs, Inc."), for approximately
$4.1 million in cash.
Effective February 1, 1996, the Company acquired all of the
outstanding capital stock of Clinton (the "Clinton Acquisition"). The purchase
price for Clinton consisted of $4.0 million in cash, 100,000 shares of the
Company's Class A Common Stock, the assumption of $4.5 million of indebtedness
and payables, which was subsequently repaid, and contingent payments of up to
35% of the operating income of Clinton during each of the five years ending
December 31, 2000. In 1998, such contingent payments were reduced to 10% of
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Clinton's operating income with respect to 1998, 1999 and 2000. Such contingent
payments may not exceed $10.5 million in the aggregate over such five year
period.
Effective November 27, 1996, the Company acquired certain assets
of E.C. Mitchell Co., Inc. ("Mitchell") for $3.0 million in cash (the
"Mitchell Acquisition"). The acquired assets relate to the manufacture and
sale of abrasive cords and tapes used principally in the apparel industry.
Effective January 3, 1997, the Company acquired all of the
outstanding capital stock of Macpherson for a cash purchase price of $24.0
million (the "Macpherson Acquisition"). In connection with the Macpherson
Acquisition, the Company assumed and repaid immediately approximately $6.1
million of indebtedness of Macpherson and approximately $6.4 million of trade
payables of Macpherson. In connection with the Macpherson Acquisition, the
Company acquired Embroidery Leasing Corp., which changed its name to Emtex
Leasing Corporation (the "Leasing Company"), a leasing company affiliate of
Macpherson, for approximately $0.9 million including a note for approximately
$0.5 million, payable over three years, plus interest at 6.0% per annum. The
Leasing Company offers lease financing to the Company's customers to support the
Company's sales of equipment.
Also effective January 3, 1997, the Company issued $85 million
aggregate principal amount of the Senior Notes. The Senior Notes were issued to
provide the financing for the Macpherson acquisition, and other working capital
needs.
THE APPAREL SEGMENT
SUNBRAND
Sunbrand, which has been operating for over 40 years, believes it is
the largest distributor in North America of replacement parts, supplies and
ancillary equipment to manufacturers of apparel and other sewn products.
Sunbrand's products are purchased from many of the leading manufacturers of
equipment for the apparel and sewn products industry. Sunbrand's net sales
accounted for approximately 39.8% of the Company's 1998 consolidated net sales.
Sunbrand carries one of the most extensive lines of replacement
parts and supplies for the apparel and other sewn products industry in North
America. Its product line includes a full range of replacement parts for sewing
machines, spreading and cutting equipment, finishing equipment, and general
supplies. Sunbrand also offers a broad base of manufacturing equipment,
distribution systems, information systems and management services.
Sunbrand has its headquarters and principal warehouse facility in
Atlanta, Georgia. In addition, Sunbrand maintains six strategically located
branches that serve as regional sales offices and distribution points: Fall
River, Massachusetts; Miami, Florida; El Paso, Texas; Mexico City and Gomez
Palacio/Torreon, Mexico; Santo Domingo, Dominican Republic; and Bogota,
Colombia.
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While there is strong competition throughout the markets served by
Sunbrand, Sunbrand believes that it is the largest distributor in North America
of replacement parts and supplies to manufacturers of apparel and other sewn
products. Most of Sunbrand's competitors are small, regional distributors. In
addition, there are three national competitors to Sunbrand, some of which may
have greater financial resources than the Company. Competition is principally
based on product availability, price and speed of delivery.
UNITY
Unity, founded over 50 years ago in New York City, is a leading
wholesale distributor to dealers in North America of replacement parts and
supplies for use in the apparel and sewn products industry. Unity does not sell
directly to manufacturers or other end-users. Unity's net sales accounted for
approximately 5.7% of the Company's 1998 consolidated net sales.
Unity's product line includes genuine and generic replacement parts,
needles, motors, tables, stands, cleaning guns and sewing lights. Since Unity's
customers (other than Sunbrand) are dealers who typically resell to medium-sized
and smaller apparel manufacturers, Unity's sales have generally been
substantially comprised of more economical generic replacement parts rather than
genuine parts.
Unity purchases generic parts from hundreds of small manufacturers,
principally through trading houses or similar arrangements. Unity purchases the
majority of its products from the Far East and Germany. Unity operates
warehouses in Carteret, New Jersey; Los Angeles, California; Miami, Florida; and
Medellin, Colombia.
Unity's business is highly competitive. The Company believes that
there are four other significant wholesalers that supply dealers with apparel
parts and supplies, none of which has more than two warehouses, as compared to
Unity's four distribution points. In addition, there are numerous smaller,
regional competitors, and in some instances dealers bypass wholesalers and buy
directly from manufacturers or trading companies when purchasing a significant
quantity of parts or supplies or if it is otherwise cost effective. Competition
is principally based on product availability, price and speed of delivery.
W&G, LTD.
W&G, Ltd., a United Kingdom corporation organized in 1908,
distributes generic and genuine replacement parts, supplies and ancillary
equipment to apparel manufacturers and dealers in the United Kingdom and Europe.
W&G, Ltd.'s net sales accounted for approximately 3.5% of the Company's 1998
consolidated net sales.
In December 1998, management decided to discontinue the operations
of W&G, Ltd. and to liquidate the related assets, which consist primarily of
inventory, accounts receivable, investments in joint venture arrangements, and
property and equipment. On May 4, 1999, W&G, Ltd. sold its M.E.C. - Willcox
division for cash of approximately $2 million, subject to adjustment. A portion
of the proceeds were used to repay approximately $1.1 million of
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secured debt of W&G, Ltd. See Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
MACPHERSON
Macpherson, founded in 1976, is principally engaged in the
distribution throughout the United States and Canada of embroidery equipment
used in the apparel industry. Such embroidery equipment is used to create
designs on apparel and other products utilizing one or more needle heads and
thread. Embroidery can add value to a finished product with little incremental
expense, and technological developments in recent years have improved equipment
capabilities and lowered capital costs. Macpherson accounted for approximately
37.1% of the Company's 1998 consolidated net sales.
Macpherson provides a complete line of technologically advanced
embroidery equipment for the apparel industry, as well as customer service,
support and training, and a comprehensive line of embroidery supplies and
accessories. Macpherson's principal supplier of embroidery machines is Barudan
Company, Ltd. ("Barudan"), a Japanese manufacturer.
Embroidery machines may contain single or multiple sewing heads.
Each sewing head consists of a group of needles that are fed by spools of thread
attached to the equipment. The needles operate in conjunction with each other to
embroider the thread into the cloth or other surface in such configuration as to
produce the intended design. Thread flowing to each needle can be of the same or
varying color. Each head creates a design, and heads operating at the same time
create the same size and shape designs. Thus, a 30 head machine with all heads
operating simultaneously can create an identical-design on thirty surfaces. The
design and production capabilities are enhanced through the integration of
computers and specialized software applications.
Macpherson is headquartered in Greensboro, North Carolina, and has
seven additional sales offices located throughout the United States and in
Canada. Each location has showrooms for the demonstration of equipment and
embroidery techniques.
Macpherson competes with Hirsch International Corp., a distributor
of Tajima singlehead and multihead embroidery machines. The Company believes
that Tajima has the largest share of the U.S. market for embroidery machines and
that Barudan has the second largest share of such market. Macpherson also
competes with a number of smaller distributors of competitive embroidery
machines and with original equipment manufacturers, such as Melco Industries,
which distribute products directly into Macpherson's markets. Macpherson
believes it competes on the basis of the quality of the embroidery equipment it
distributes, as well as its knowledge, experience and customer service.
Macpherson's customers are subject to competition from importers of embroidered
products, which could effect Macpherson's operations.
Macpherson has also developed the "New Business Opportunity Group"
in order to focus marketing efforts to small business entrepreneurs interested
in supplementing current income with part time work through the manufacture of
embroidery products at home and sale to consumers.
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THE LEASING COMPANY
In connection with the Macpherson Acquisition, the Company acquired
the Leasing Company, a leasing company affiliate of Macpherson. Prior to its
acquisition by the Company, substantially all of the assets and liabilities of
the Leasing Company were removed by the sellers. Accordingly, the principal
benefit of the acquisition was the existing organization of the Leasing Company.
The Leasing Company commenced operations in March 1996. The Leasing Company
offers flexible lease financing to the Company's customers to support the
Company's sales of equipment.
LEADTEC
Leadtec, founded by its current chief executive officer in 1978 and
acquired by the Company's Predecessor in 1985, develops, distributes and
supports computer software and specialized hardware for sewn products
manufacturers. Leadtec's net sales accounted for approximately 2.7% of the
Company's 1998 consolidated net sales.
Leadtec's primary product is "Satelite Plus", which is a production
planning and control system designed to allow apparel factory operators to
monitor production progress and efficiency. Satelite Plus is available in both
"batch" and "real-time" formats. Under the batch product, production operators
clip bar-coded coupons to capture data for each bundle or lot they produce. This
data is then processed by the Satelite Plus system to calculate pay and generate
reports for management. The real-time Satelite Plus product is a computerized
system that captures production events as they occur through terminals at
workstations that communicate with the computer system.
Sales of Satelite Plus factory installations typically require long
lead-times to develop, given the significant capital expenditure and management
resource commitment required. Accordingly, Leadtec's sales may vary
significantly from year to year, as an installation of numerous plants for a
single large customer can have a major impact on sales volume in any single
year.
Leadtec is not aware of any system similar to Satelite Plus'
real-time system. However, its real-time system competes with traditional batch
systems. There are numerous competitors with respect to the batch system.
Competition is usually based on price, functionality and support.
NEW PRODUCT LINE
In addition to the above, the Company has the exclusive distribution
rights for the sewn products industry for "Anti-Counterfeiting & Diversion
Solutions" ("AC & DS"). AC & DS provides a low cost means for branded apparel
companies to detect and prevent the sale of counterfeit merchandise to
consumers.
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THE SCREEN PRINTING SEGMENT
The Company's screen printing segment is composed of Clinton,
founded in 1985 and acquired by the Company in February 1996. Clinton was a
distributor of screen printing equipment and supplies principally for the
apparel industry, but during 1998, Clinton decided that it would no longer
pursue the origination of sales of screen printing equipment. Screen printing is
the process by which designs are applied to fabric or other material using
patterned screens. The Company acquired Clinton pursuant to its business
strategy of expanding the product lines it is able to offer through its existing
distribution network. Clinton accounted for approximately 10.2% of the Company's
1998 consolidated net sales.
Clinton offers a comprehensive line of textile screen printing
supplies, including inks, chemicals, emulsions, screen frames, screen mesh and
other accessory items. The majority of Clinton's products are used to produce
designs on men's, women's and children's T-shirts and sweatshirts and other
apparel items. Other significant applications include home furnishings, towels,
hats, industrial fabrics and other non-apparel promotional articles made from
fabric materials.
Clinton has its headquarters in Miami Lakes, Florida with
distribution warehouses in Miami Lakes, Florida; Charlotte, North Carolina; Los
Angeles, California; Nashville, Tennessee; and Mexico City, Mexico.
Competition with respect to Clinton's products is strong, mainly
from a variety of distributors of general printing equipment and supplies.
SUPPLIERS
The Company purchases products from over 1,200 different vendors,
including many of the leading manufacturers of equipment for the apparel and
sewn products industry. The Company's largest supplier accounted for
approximately 26.9% of the Company's 1998 total purchases. The Company's five
largest suppliers accounted for approximately 45.2% of its total purchases in
1998.
Pfaff AG ("Pfaff"), a German company, is a major manufacturer of
industrial sewing equipment for the apparel industry, including "lock-stitch"
industrial sewing machines. The Company (including its predecessor) had been the
exclusive distributor in the United States of Pfaff genuine parts since 1958.
Effective December 31, 1998, the Company became a non-exclusive distributor of
Pfaff parts, and Pfaff now has the ability to sell through its own distribution
network.
Sunbrand is the exclusive distributor of genuine replacement parts
in the United States for Pegasus Sewing Machine Mfg. Co., Ltd. ("Pegasus").
Pegasus is a significant Japanese manufacturer of industrial sewing equipment,
including "chain-stitch" industrial sewing machines. The Company (including the
Company's Predecessor) has been the exclusive distributor in the United States
<PAGE>
of Pegasus genuine parts since 1966. Under the Company's distributor agreement
with Pegasus, the Company is the exclusive United States distributor of Pegasus
genuine parts through 2000, which exclusive arrangements automatically renew for
successive two year periods unless notice of termination is given at least one
year before December 31, 2000 or the end of any successive two year period of
exclusivity. In order to maintain the exclusivity of the Pegasus distribution
agreement, the Company must meet certain performance targets. Historically the
Company has generally satisfied these requirements, although in certain prior
years they were not satisfied and Pegasus waived such shortfalls. Although the
Company believes that its relationship with Pegasus has been good, there can be
no assurance that the Pegasus distribution agreement will be extended beyond its
current term or that the Company will continue to be the distributor for Pegasus
parts. No assurance can be given that the failure to extend the Pegasus
distribution agreement or the loss by the Company of its supplier relationship
with Pegasus would not have an adverse effect on the Company's business,
financial condition and results of operations.
Barudan is one of the world's major manufacturers of embroidery
machines. Under the distribution agreement among Macpherson, Barudan and certain
of their affiliates, Macpherson is the exclusive distributor of new Barudan
embroidery equipment in the United States and Canada until December 31, 2003
(the "Barudan Agreement"). The Barudan Agreement automatically renews for a
period of five years unless either party terminates such agreement on not less
than 30 days notice.
CUSTOMERS
The Company serviced over 15,000 customers in 1998, no one of which
accounted for more than 4.0% of the Company's 1998 net sales. The Company's top
ten customers, which included Levi Strauss, Pillowtex, and VF Corporation,
represented approximately 15.1% of the Company's net sales in 1998.
Historically, a majority of the Company's sales have been to
customers in the United States, although sales to customers in the Western
Hemisphere outside the United States are important. Those markets accounted for
approximately 20.8% of the Company's 1998 net sales. The balance of the
Company's sales were to customers primarily in the United States and Europe.
Mexico was the principal location of the Company's customers outside of the
United States in 1998, followed by the Caribbean Basin Initiative ("CBI")
countries and other South American countries. The Company's strategy is to
continue to follow important customers from the U.S. as they pursue
opportunities in Mexico, the CBI and other South American countries.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 595 full
time employees. The Company's employees are not represented by any labor union.
The Company considers its employee relations to be good.
For information regarding the Company's foreign operations, see Note
13 of the Notes to Consolidated Financial Statements of the Company included in
Item 8 of this Report.
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ITEM 2. PROPERTIES
The Company leases all of its office and warehouse properties at its
various locations, except for the facilities owned by WG Apparel in Middleton,
Massachusetts and a facility owned by W&G, Ltd. in Braintree, England, which is
currently held for sale. The Company's headquarters are located in approximately
33,000 square feet of space in Carteret, New Jersey under a lease expiring in
2005, which also serves as the headquarters and principal warehouse for Unity.
Sunbrand's Atlanta offices and warehouse occupy approximately 88,000 square feet
under a lease expiring in 2001. Clinton operates its headquarters, showroom and
warehouse and shipping facilities out of approximately 40,000 square feet
located in Miami Lakes, Florida under a lease expiring in 2003. Macpherson
occupies a warehouse in Greensboro, North Carolina of approximately 40,000
square feet under lease that expires in 2008. The Company's other operations are
located in smaller leased spaces. The Company believes that, if necessary, it
would be able to lease adequate replacement space without material additional
expense.
ITEM 3. LEGAL PROCEEDINGS
For information concerning the Company's Chapter 11 bankruptcy
filing, see "--Chapter 11 Bankruptcy Filing" under Item 1. There are no other
material pending legal proceedings as of the date of this Report to which the
Company or any of its subsidiaries is a party or to which any of their property
is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of the Company's 1998 fiscal year no matters
were submitted to a vote of the Company's security holders.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public trading market for the Company's
Common Stock.
As of May 5, 1999, there were 25 holders of record of the Company's
Common Stock.
The Company has not paid any dividends since its organization in
1994. Future payment of cash dividends by the Company will be dependent on the
Company's emergence from its Chapter 11 proceedings and on such factors as
business conditions, earnings and the financial condition of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial data as of and for
the years ended December 31, 1998, 1997, 1996 and 1995 and the period from July
13, 1994 to December 31, 1994, which have been derived from the audited
consolidated financial statements of the Company. The unaudited financial data
of the Company's Predecessor for the period from January 1, 1994 to July 12,
1994 have been prepared as if the apparel operations had been operated as a
separate entity during those periods. However, such financial statements do not
reflect a complete allocation of all expenses applicable to the operation of an
independent company. Certain expenses were allocated to the apparel operations
by the Company's Predecessor based on actual usage or other allocation methods
that approximate actual usage. The consolidated financial statements of the
Company as of December 31, 1998 and 1997, and for each of the years in the
three-year period ended December 31, 1998, and the report thereon, are included
elsewhere herein. The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto of the Company included elsewhere herein.
<PAGE>
<TABLE>
<CAPTION>
COMPANY'S
COMPANY PREDECESSOR
____________________________________________________________________ ____________
JULY 13, 1994 JANUARY 1,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED to 1994
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, to July 12,
1998 1997 1996 1995 1994 1994
------------ ------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales........... $173,453 $180,332 $113,851 $90,431 $41,644 $41,309
Income (loss) before
income taxes and
extraordinary
item.............. (27,665) (4,705) 2,450 1,952 (642) 789
Income tax expense
(benefit)......... 2,320 (1,434) 1,137 558 (288) 426
------- -------- ------- ------ ------ ------
Income (loss) before
extraordinary
item.............. (29,985) (3,271) 1,313 1,394 (354) 363
Extraordinary
loss, net......... -- (1,557) -- (152) -- --
Net income (loss). $(29,985) $ (4,828) $ 1,313 $ 1,242 $ (354) $ 363
======== ======= ======= ====== ===== ======
Diluted income loss
per share:
Income (loss) before
extraordinary item. $ (29.74) $ (3.37) $ 1.25 $ 1.84 $(.74) --
Extraordinary -- (1.61) -- (0.20) -- --
item, net........ ------- ------- ------ ------ ----- ------
Net income (loss). $(29.74) $ (4.98) $ 1.25 $ 1.64 $ (.74) --
======== ======= ======= ======= ====== ======
Total assets........ $120,910 $139,814 $ 79,778 $52,528 $51,717 --
Total debt.......... 101,490 95,954 41,436 31,109 32,224 --
Common stock subject
to put option...... -- 3,000 3,000 -- -- --
Total stockholders'
equity (deficit).. (21,805) 5,087 12,677 7,892 5,967 --
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was organized in 1994 by members of the Company's
current management and certain other investors to acquire the sewn products
replacement parts, supply and ancillary equipment distribution businesses of the
Company's Predecessor, which occurred on July 13, 1994.
Effective February 1, 1996, the Company acquired Clinton and on
January 3, 1997, the Company acquired Macpherson. Accordingly, the results of
the Company for the year ended December 31, 1997 are not directly comparable to
the results for the year ended December 31, 1996 due to the inclusion of the
operations of Clinton and Macpherson in the 1997 period.
CHAPTER 11 BANKRUPTCY FILING
On April 20, 1999, the Company and twelve of its subsidiaries each
filed voluntary petitions for protection and reorganization under chapter 11 of
the Bankruptcy Code. See "- Chapter 11 Bankruptcy Filing" under Item 1.
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS
Inventory management is an important factor that may affect the
Company's results of operations. The carrying value of the Company's inventory
increased significantly in 1997 as a result of the acquisition of Macpherson.
Macpherson distributes embroidery equipment that is substantially higher cost on
a per item basis than the Company's historic inventory, which was composed
principally of replacement parts and supplies for use in the apparel and other
sewn products industries. The Company maintains an inventory of a large number
of items, many of which need not be replaced frequently. In general, the
Company's experience over many years of supplying the apparel and sewn products
industries, combined with the Company's technologically advanced inventory
control system, provide guidance on prudent inventory levels. However, because
demand for the Company's products is dependent on the needs of the apparel and
sewn products industries, a decline in the operations of the Company's customers
will reduce demand for the Company's products. Any such reduction in demand over
an extended period could result in price reductions and inventory writedowns,
which in turn could adversely affect the Company's gross margins.
The Company is a holding company, the only assets of which are the
stock of its subsidiaries. All of the operations of the Company are conducted
through its direct and indirect wholly owned subsidiaries. Accordingly, the
Company's ability to service its indebtedness and meet its other obligations are
dependent upon earnings and cash flow of its subsidiaries and the payment of
funds by those subsidiaries to the Company in the form of loans, dividends or
otherwise. In addition, the ability of the Company's subsidiaries to pay
dividends, repay intercompany liabilities or make other advances to the Company
is subject to restrictions imposed by corporate law and certain United States,
state and foreign tax considerations. Several of the Company's subsidiaries are
incorporated outside the United States.
The Company derives significant revenues and operating income from
certain lines of replacement parts and equipment distributed under its
distribution agreements with certain suppliers. The Company's distribution
agreements, both exclusive and non-exclusive, and other supply arrangements with
manufacturers are important to enable the Company to obtain products sought by
the Company's customers and to maintain the Company's broad product selection.
Substantially all of such distribution agreements and other arrangements may be
terminated by the supplier for any reason, although most exclusive distribution
agreements require advance written notice. No assurance can be given that any of
the Company's distribution agreements will be extended beyond their current term
or that the Company will continue to be the distributor for any particular
product.
In the years ended December 31, 1998, 1997, and 1996, approximately
24.4%, 24.4%, and 29.4% respectively, of the Company's net sales were derived
from international operations and export sales, which are subject in varying
degrees to risks inherent in doing business abroad. Such risks include the
possibility of unfavorable circumstances arising from host country laws or
regulations. In addition, foreign operations include risks of partial or total
expropriation; currency exchange rate fluctuations and restrictions on currency
repatriation; the disruption of operations from labor and political
disturbances, insurrection or war; and the requirements of partial local
ownership of operations in certain countries.
<PAGE>
Most of the Company's net sales are in U.S. dollars. Any change in
the value of the currencies of the foreign countries in which the Company does
business against the U.S. dollar will result in corresponding changes in the
price and affordability of the Company's products, which could have a material
adverse impact on the Company's business, financial condition and results of
operations. The Company purchases a substantial amount of its inventories using
foreign currencies. Although the Company, from time to time, enters into forward
exchange contracts to hedge against foreign currency exchange risks, there can
be no assurance that the Company will not experience foreign currency losses. In
addition, the economies of certain of the Company's target Latin American
markets have experienced significant and in some periods extremely high rates of
inflation over the past few years. Inflation and rapid fluctuation in inflation
rates have had and may continue to have negative effects on these economies and
could have a material adverse impact on the Company's business, financial
condition and results of operations.
The North American Free Trade Agreement ("NAFTA"), implemented on
January 1, 1994, removes barriers to free trade among Canada, the United States
and Mexico. The removal of barriers will take place over a 10 year period
between Mexico and the United States and over five years between Canada and the
United States. The Company believes that NAFTA has resulted in an increase in
apparel imports from Mexico that compete against products manufactured by the
Company's customers in the United States. Historically, a majority of the
Company's net sales have been to customers in the United States. No assurance
can be given that the Company will be able to increase sales outside of the
United States to offset any decline in sales to customers in the United States.
The Company is subject to intense competition in the markets in
which it competes. In addition, certain of the Company's competitors have
greater financial resources than the Company and are less leveraged than the
Company.
Inflation in the United States has not affected the Company's
results over the last several years, given its relatively low level during such
period.
YEAR 2000 ISSUE
Many existing computer programs use only the last two digits to
define a year and do not take account of the change in century that will occur
in the year 2000 ("Year 2000"). If this problem is not corrected, computer
applications could fail or create mistakes. As a result, the Company established
a Year 2000 project team in 1998 to assess its Year 2000 risks and to recommend
necessary remedial action. The project scope includes both information
technology and computer based embedded technology. The project team has focused
its efforts on information systems software and hardware, and third-party
relationships. The Company does not expect remediation costs to have a material
impact on its results of operations or liquidity.
The Company believes that its internal systems and equipment will be
Year 2000 compliant in a timely manner, although there can be no assurance that
the Company's systems or equipment will not encounter problems. In addition, the
Company cannot predict whether systems of third parties will be Year 2000
compliant in a timely manner. The implementation of the Company's new business
<PAGE>
systems and completion of the Year 2000 project as scheduled will reduce the
possibility of significant interruptions of normal operations. The Company
believes its most reasonably likely worst case scenario is that disruption of
its distribution system would occur, through product delays from suppliers or
delayed orders from customers, which could result in the reduction of the
Company's operations. The Company has not developed a specific Year 2000
contingency plan. Contingency plans will be addressed as additional information
is available regarding the Company's remediation and testing steps and the
status of third-party Year 2000 readiness.
RESULTS OF OPERATIONS
The following table sets forth the percentages that certain income
and expense items bear to net sales for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0%
Gross profit................................... 29.0 30.7 31.8
Selling, general and administrative expenses... 30.1 26.6 25.4
Other operating expenses....................... 7.0 - -
Operating income (loss)........................ (8.1) 4.1 6.4
Interest expense............................... 7.5 6.7 4.2
Income tax expense (benefit)................... 1.3 (0.8) 1.0
Extraordinary loss, net........................ - 0.9 -
Net income (loss).............................. (17.3) (2.7) 1.2
====== ======= =======
- -------------------------------------------------
</TABLE>
1998 COMPARED TO 1997
Net sales were $173.5 million in 1998, a decrease of $6.9 million,
or 3.8%, as compared to 1997. Sales by the Company's apparel equipment and
supplies segment increased 1.2% for 1998 over 1997. The increase was primarily
attributable to the expansion efforts in Latin America. However, as a result of
the decline in the value of the dollar against the yen, the Company experienced
higher costs of goods. When the Company increased prices to reflect those
increased costs, sales declined. In addition, lower domestic sales were
experienced as a result of the continued decline in apparel manufacturing in the
United States. Sales of the Company's screen printing segment declined by 32.9%
for 1998. Net sales of this segment were negatively affected by a declining
screen printing market and the Company's decision to emphasize the supply
business and discontinue selling screen printing equipment.
During 1998, the Company effected a restructuring with respect to
its screen printing segment, principally involving the departure from the
Company of the former shareholders and management of Clinton and certain other
employees and the discontinuance of the sale of screen printing equipment. As a
result, the Company recorded a charge of $15.5 million in 1998. The charge
included $1.8
<PAGE>
million in severance benefits and other related costs, $8.5 million to write-off
goodwill recorded when the Company acquired Clinton, as well as $5.2 million for
the impairment of certain inventory and accounts receivable and other related
costs. Of this amount, $10.3 million was reflected as other operating expenses,
$2.8 million was charged to selling, general and administrative expenses and
$2.4 million was charged to cost of goods sold. As part of the restructuring,
the Company's obligations arising from its original purchase of Clinton have
been revised to reduce the contingent payments for each of the years 1998, 1999
and 2000 from 35% of Clinton's operating income, as defined, to 10% thereof and
to eliminate the former Clinton shareholders' option to put to the Company
100,000 shares of the Common Stock in the Company at $30 per share. The Company
is monitoring the effects of the Clinton restructuring and may take further
action intended to improve the Company's results attributable to Clinton.
In December 1998, management decided to discontinue the operations
of W&G, Ltd., a subsidiary located in the United Kingdom. The Company intends to
liquidate the related assets, which consist primarily of inventory, accounts
receivable, investments in joint venture arrangements, and property and
equipment. As a result, the Company recorded a charge of $2.0 million in 1998
for impairment of long-lived assets and revised its estimate of the
recoverability of inventory and accounts receivable. Of this amount, $1.1
million has been reflected in other operating expenses, $0.5 million has been
recorded in cost of goods sold and $0.4 million has been charged to selling,
general and administrative expenses. The estimated net realizable value of the
assets subject to disposition are recorded as assets held for sale in the
accompanying 1998 consolidated balance sheet. On May 4, 1999, the Company sold
certain assets held for sale by W&G, Ltd. for cash of approximately $2.0
million, subject to adjustment. A portion of the proceeds were used to repay the
variable rate note payable by W&G, Ltd. of approximately $1.1 million. The
Company intends to liquidate the remaining assets within one year.
Gross profit in 1998 was $50.2 million, a decrease of $5.2 million,
or 9.4%, as compared to the same period of 1997. As a percentage of net sales,
gross profit in 1998 was 29.0% as compared with 30.7% in 1997. The decrease in
gross profit percentage was primarily attributable to the poor results of the
Company's screen printing segment, which were affected by a $2.4 million charge
in connection with the restructuring of the screen printing business and a $0.5
million charge in connection with the discontinuance of W&G, Ltd.
Selling, general and administrative expenses in 1998 were $52.2
million, an increase of $4.1 million, or 8.5%, as compared to 1997. As a
percentage of the net sales, such expenses increased to 30.1% for 1998 from
26.6% in 1997. The increase in expenses as a percentage of sales was principally
a result of increased costs as the Company continues to expand in Latin America,
fixed overhead costs at the Company's Clinton operation that did not decline in
proportion to lower sales, $2.8 million in charges relating to the restructuring
of the Company's screen printing segment and $0.4 million in charges relating to
the discontinuance of W&G, Ltd.
As a result of the charges discussed above, in 1998, the Company had
an operating loss of $14.0 million, a decrease of $21.4 million, as compared to
$7.4 million of operating income in 1997.
<PAGE>
Interest expense was $13.0 million in 1998, an increase of $0.9
million, or 7.2% compared to 1997. The increase in interest expense was a result
of higher borrowings in 1998 over the same period in 1997.
The Company recorded income tax expense of $2.3 million in 1998. All
of the Company's net deferred tax assets, which include substantial amounts of
net operating loss carryforwards, have been fully reserved by a valuation
allowance. Since operating profits continue to be lower than expected and as a
result of operational difficulties and higher than expected expenses at the
Company's screen printing segment, management believes that a valuation
allowance is required, since sufficient uncertainty exists regarding the
realizability of net deferred tax assets.
The Company's results for 1997 reflect an extraordinary loss from
the extinguishment of debt (net of income tax benefit) of $1.6 million owing to
the refinancing of the Company's indebtedness in connection with the Macpherson
Acquisition and the issuance by the Company of $85.0 million aggregate principal
amount of its 12 1/4% Series A Senior Notes due 2003 (the "Series A Notes")
relating thereto. The privately-placed Series A Notes were exchanged for the
freely-tradeable Series B Notes having substantially the same terms in the
latter half of 1997.
Net loss for the year 1998 was $30.0 million compared to a net loss
of $4.8 million in 1997. The increased loss was attributable to the factors
discussed above.
1997 COMPARED TO 1996
Net sales were $180.3 million in 1997, an increase of $66.5 million,
or 58.4%, as compared to 1996. Net sales increased primarily as a result of the
inclusion in the 1997 period of the results of Macpherson, acquired in January
1997, Clinton, acquired in February 1996, and Mitchell, acquired in November
1996, which contributed an aggregate additional $64.2 million to net sales in
1997 compared with 1996.
Net sales of Macpherson and Clinton declined, while the aggregate
sales of the Company's other principal subsidiaries increased, in 1997 as
compared to the 1996 period. During 1997, it became apparent that a new line of
embroidery machines produced by Barudan, Macpherson's principal supplier,
included a defect, which resulted in a halt of all deliveries of such machines
in August 1997 until the defect was corrected in October 1997. In addition,
during the 1997 period Barudan was late in supplying certain new machines, and
it imposed a limit on the available quantities of other new machines that
continued for a period of time. In the case of Clinton, during the 1997 period,
the Company experienced a decline in demand for apparel screen printing
equipment supplied by M&R Printing Equipment, Inc. ("M&R") and an increase in
costs associated with marketing efforts in the Company's European and Asian
sales territories for M&R equipment. The Company discontinued its operations in
Europe and Asia with respect to Clinton's businesses and marketing of M&R
equipment and has entered into an exclusive distribution agreement with another
equipment manufacturer, to distribute its apparel screen printing equipment in
North and South America (excluding Brazil). The initial term of the contract is
<PAGE>
for five years with automatic renewals for successive two year periods unless
canceled by either party six months in advance. The agreement calls for annual
sales quotas.
Gross profit in 1997 was $55.4 million, an increase of $19.2
million, or 53.0%, as compared with 1996. Gross profit increased primarily due
to the inclusion of Macpherson, Clinton and Mitchell in the 1997 period. As a
percentage of net sales, gross profit in 1997 was 30.7%, as compared with 31.8%
in 1996. The decrease in gross profit percentage was attributable to Macpherson
and Clinton. Macpherson's and Clinton's gross profit margins have traditionally
been lower than the gross profit margin associated with the Company's parts and
supplies businesses because a larger percentage of their sales are for
equipment. In addition, the Company discontinued several product lines,
including the M&R equipment line, in the fourth quarter of 1997. The 1997 gross
profit was charged $0.5 million to adjust the remaining inventory to their
liquidation value.
Selling, general and administrative expenses in 1997 were $48.1
million, an increase of $19.1 million, or 65.9%, as compared to 1996. The
increase consisted primarily of the addition of $14.0 million of operating
expenses for Macpherson, Clinton and Mitchell in 1997. Included in selling,
general and administrative expenses was approximately $1.8 million in costs
associated with the defect on a new line of embroidery machines, discontinued
product lines and the transfer of Macpherson's supply distribution to the
Company's Sunbrand division distribution center. The Company believes that this
consolidation will result in lower overhead and improved service levels to
customers. In addition, Clinton incurred higher marketing expenses in its
discontinued European and Asian markets. As a percentage of sales, such expenses
increased to 26.6% for 1997, from 25.4% for 1996, primarily related to the
factors above.
Operating income in 1997 was $7.4 million, an increase of $0.1
million, or 1.7% as compared to 1996. The increase in operating income resulted
from an increase in sales and the factors discussed above. As a percentage of
net sales, operating income was 4.1% for 1997 as compared to 6.4% for 1996. The
decrease was principally attributable to the lower gross margins from
Macpherson's and Clinton's sales and the additional costs described above.
Interest expense was $12.1 million in 1997, an increase of $7.3
million, or 151.7%, as compared with 1996. The increase in interest expense was
a result of the issuance by the Company of $85.0 million aggregate principal
amount of its Series A Notes as of January 3, 1997, the proceeds of which were
used to finance the acquisition of Macpherson and to refinance existing
indebtedness.
Provision for income taxes for 1997 was a benefit of $1.4 million, a
decrease of $2.6 million, as compared to 1996. The Company's effective tax rate
was 30.5% in 1997, as compared to 46.4% in 1996.
The Company's results for 1997 reflect an extraordinary loss from
the extinguishment of debt (net of income tax benefit) of $1.6 million owing to
the refinancing of the Company's indebtedness in connection with the Macpherson
Acquisition and the issuance of the Series A Notes.
<PAGE>
Net loss in 1997 was $4.8 million compared to net income of $1.3
million in 1996. The decrease was attributable to the additional cost factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its working capital requirements, capital
expenditures and acquisitions from cash provided by operations, borrowings under
its credit facilities and proceeds from the issuance of debt and equity
securities.
Net cash used by the Company was $191,000 during 1998. Net cash used
in the Company's operating activities was $3.5 million during 1998, principally
due to working capital changes. Net cash used in the Company's investing
activities during 1998 was $0.9 million, related principally to capital
expenditures for computer, office and warehouse equipment and improvements. Net
cash used in the Company's financing activities was $4.2 million during 1998,
principally due to increased borrowings form its revolving credit facility and
increased book overdrafts.
Net cash used in the Company's operating activities was $7.4 million
during 1997, principally due to working capital changes. Net cash used in the
Company's investing activities was $39.2 million during 1997, related
principally to the Macpherson acquisition. Net cash provided by financing
activities during 1997 aggregated $47.1 million, reflecting $84.0 million from
the issuance of the Series B Notes used to extinguish debt of $41.1 million,
$4.5 million in financing costs and $3.0 million to repurchase and retire
warrants.
On April 20, 1999, the Company filed in the Bankruptcy Court for the
District of Delaware a petition for relief under Chapter 11 of the Bankruptcy
Code seeking to implement a financial restructuring that had been prenegotiated
with an informal committee of holders of its 12 1/4% Senior Notes.
The restructuring, if implemented, will result in the substantial
deleveraging of the Company by canceling its existing $85 million in principal
amount of 12 1/4% Senior Notes in exchange for $5,206,250 in cash, $30,000,000
principal amount of a new issue of 7% Senior Notes and 850,000 shares of Class A
Common Stock of the Company, which represent 80% of the shares of Company Common
Stock to be outstanding on the effective date of the plan. Existing Common Stock
in the Company would be canceled in exchange for 212,500 shares of Class B
Common Stock of the Company, which represent 20% of the shares of the Company
Common Stock of the Company to be outstanding on the effective date of the plan,
and warrants for the purchase of a total of 176,747 shares of Class A Common
Stock of the Company exercisable at a purchase price of $.01 per share. The
warrants will be exercisable only if the average daily closing price per share
of the Class A Common Stock determined over 20 trading days exceeds certain
specified targets. See "Chapter 11 Bankruptcy Filing" in Item 1.
The plan of reorganization provides for payment in full in cash of
all pre-petition trade claims. In addition, the Company will continue during the
Chapter 11 case to pay trade creditors all post-petition obligations as they
come due.
<PAGE>
In connection with the bankruptcy filing, the Company agreed to a
$23 million Debtor-in-Possession ("DIP") revolving credit facility with The CIT
Group/Business Credit, Inc. and a DIP term loan of $7.5 million provided on a
subordinated basis by certain other lenders.
Implementation of the restructuring is subject to consummation of
the Chapter 11 plan, which requires, among other things, arranging a new credit
facility to be available upon emergence from Chapter 11 and Bankruptcy Court
approval of the plan. No assurances can be given that the plan will be
consummated. This SEC filing is not an offer with respect to any securities or
solicitation of acceptances of a Chapter 11 plan. Such an offer or solicitation
will be made in compliance with all applicable securities laws and provisions of
the Bankruptcy Court.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
pronouncement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999 although earlier application is encouraged. The Company has
chosen to adopt this pronouncement effective with its fiscal year which begins
January 1, 2000 and does not believe that it will materially affect its reported
results of operations or financial condition upon adoption.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company in the normal course of business is exposed to the risk
of loss from non-performance by its customers for amounts due the Company
through the extension of credit. The Company controls credit risk exposure
through credit approvals, credit limits, and monitoring procedures.
The Company's sales are predominantly denominated in the local
currency of the subsidiary originating the sale. A significant decline in the
value of currencies of the foreign countries in which the Company does business
could have a material adverse impact on the Company's business, financial
condition and result of operations. The Company had no derivative financial
instruments related to foreign currency exchange rates at December 31, 1998.
The Company's primary source of funds other than cash from
operations is borrowings under its revolving credit facility, which incurs
interest at variable rates at terms not to exceed six months, at which time the
borrowings are reset to current market rates.
The results of operations and financial condition of the Company are
based upon historical cost. While it is difficult to accurately measure the
impact of inflation due to the imprecise nature of estimates required, the
Company believes the effects on the results of operations and financial
condition have been minor. The Company will continue to monitor the impact of
inflation in setting its pricing and other policies.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements, supplementary financial
information and schedules are filed as part of this Report:
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets,
December 31, 1998 and 1997
Consolidated Statements of Operations,
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity (Deficit), Years
Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows,
Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
Years Ended December 31, 1998, 1997
and 1996
All schedules not mentioned above are omitted for the reason that
they are not required or are not applicable, or the information is included in
the Consolidated Financial Statements or the Notes thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Willcox & Gibbs, Inc.:
We have audited the accompanying consolidated balance sheets of
Willcox & Gibbs, Inc. and subsidiaries (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Willcox & Gibbs, Inc. and subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in notes 6 and 18 to the consolidated financial statements, the
Company has defaulted on its Series B senior notes, has a net capital
deficiency, and has filed voluntary petitions for protection and reorganization
under Chapter 11 of the Bankruptcy Reform Act of 1978, as amended, that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in note 18. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
Atlanta, Georgia
February 27, 1999
except as to
note 18, which
is as of May 4, 1999
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
ASSETS 1998 1997
---- ----
<TABLE>
<CAPTION>
<S> <C> <C>
Current assets:
Cash $ 1,134,513 1,325,314
Trade accounts receivable, net of allowance for
doubtful accounts of $5,451,000 in 1998 and
$4,315,000 in 1997 (notes 5 and 16) 30,671,177 38,465,525
Inventories (notes 3, 5 and 16) 45,288,937 48,734,769
Prepaid expenses and other current assets 4,504,129 3,495,686
Assets held for sale (notes 16 and 18) 5,380,910 -
Deferred income taxes (note 7) - 1,402,437
------------ -----------
Total current assets 86,979,666 93,423,731
Property and equipment, net (notes 4 and 16) 3,755,221 5,594,700
Deferred financing costs, less accumulated
amortization of $1,300,961 in 1998 and $650,481 3,252,403 3,902,883
in 1997 (note 2)
Intangible assets, less accumulated amortization of 23,107,349 32,385,755
$1,895,847 in 1998 and $1,059,711 in 1997 (notes
2 and 16)
Deferred income taxes (note 7) - 1,313,171
Other assets 3,193,467 3,815,404
------------ -----------
$120,910,043 139,813,707
============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1998 1997
---- ----
<S> <C> <C>
Current liabilities:
Revolving line of credit (note 5) $ 16,531,615 10,617,344
Book overdrafts 2,157,522 3,232,667
Current portion of long-term debt (notes 6 and 16) 84,958,415 594,383
Trade accounts payable 24,372,549 23,253,455
Accrued liabilities and other current liabilities 12,619,906 6,855,668
----------- ------------
Total current liabilities 140,640,007 44,553,517
Accrued retirement benefits (note 8) 2,074,638 2,431,455
Long-term debt, excluding current portion
(note 6) - 84,741,918
----------- -----------
Total liabilities 142,714,645 131,726,890
----------- -----------
Common stock subject to put option (note 2) - 3,000,000
Stockholders' equity (deficit) (notes 2, 8, 9, 10,
11 and 18):
Common stock:
Class A, no par value. Authorized 1,500,000
shares; issued and outstanding (including
100,000 shares subject to put option in
1997) 1,186,555 shares in 1998 and
1,001,319 shares in 1997 10,337,352 9,013,190
Class B, no par value. Authorized 250,000
shares; none issued - -
Class C, no par value. Authorized 250,000
shares; none issued - -
Additional paid-in capital 2,000,000 -
Class A common stock subscriptions receivable - (378,967)
Accumulated deficit (33,608,423) (3,623,617)
Accumulated other comprehensive income (loss) (533,531) 76,211
---------- -----------
Total stockholders' equity (deficit) (21,804,602) 5,086,817
Commitments and contingencies (notes 15 and 18) __________ _________
$120,910,043 139,813,707
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales (note 13) $ 173,453,083 180,331,561 113,851,258
Cost of goods sold 123,235,371 124,899,393 77,623,034
----------- ----------- ----------
Gross profit 50,217,712 55,432,168 36,228,224
Selling, general, and administrative
expenses 52,154,225 48,050,495 28,968,827
Other operating expenses
(notes 16 and 18) 12,103,683 - -
----------- ----------- ----------
Operating income (loss) (14,040,196) 7,381,673 7,259,397
Other income (expense):
Interest expense (13,016,311) (12,141,756 (4,824,553)
Other, net (608,088) 55,311 14,968
----------- ----------- ----------
Income (loss) before income
taxes and extraordinary item (27,664,595) (4,704,772) 2,449,812
Income tax expense (benefit) - (note 7) 2,320,211 (1,434,258) 1,136,685
----------- ----------- ----------
Income (loss) before
extraordinary item (29,984,806) (3,270,514) 1,313,127
Extraordinary loss, net of income
tax benefit of $954,228 in 1997
(notes 6 and 10) - (1,556,898) -
----------- ----------- ----------
Net income (loss) $(29,984,806) (4,827,412) 1,313,127
=========== =========== ==========
Basic income (loss) per share (note 11):
Income (loss) before extraordinary
item $ (29.74) (3.37) 1.46
Extraordinary item, net - (1.61) -
---------- ----------- ----------
Net income (loss) $ (29.74) (4.98) 1.46
========== =========== ==========
Diluted income (loss) per share
(note 11):
Income (loss) before extraordinary
item $ (29.74) (3.37) 1.25
Extraordinary item, net - (1.61) -
---------- ----------- ----------
Net income (loss) $ (29.74) (4.98) 1.25
=========== =========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
CLASS A RETAINED CLASS A ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL EARNINGS COMMON STOCK OTHER STOCKHOLDERS'
-------------------- PAID-IN (ACCUMULATED SUBSCRIPTIONS COMPREHENSIVE EQUITY
SHARES AMOUNT CAPITAL DEFICIT) RECEIVABLE INCOME (LOSS) (DEFICIT)
------ ------ ---------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 658,248 $ 6,582,480 826,612 888,400 (113,881) (291,661) 7,891,950
Comprehensive income:
Net income - - - 1,313,127 - - 1,313,127
Translation adjustments - - - - - 529,389 529,389
----------
Total comprehensive income 1,842,516
Proceeds from subscriptions
receivable - - - - 113,881 - 113,881
Class A common stock issued to
the Company's ESOP 33,715 337,150 281,781 - (429,462) - 189,469
Fair value of common stock
warrants issued (note 9) - - 357,000 - - - 357,000
Class A common stock issued in
Clinton acquisition subject
to put option (note 2) 100,000 - - - - - -
Class A common stock sold in
private placement (note 2) 184,314 1,843,140 439,005 - - - 2,282,145
--------- ----------- --------- ---------- -------- --------- -----------
Balance at December 31, 1996 976,277 8,762,770 1,904,398 2,201,527 (429,462) 237,728 12,676,961
Comprehensive income:
Net loss - - - (4,827,412) - - (4,827,412)
Translation adjustments - - - - - (161,517) (161,517)
-----------
Total comprehensive loss (4,988,929)
Proceeds from subscriptions
receivable - - - - 425,239 - 425,239
Class A common stock issued to
the Company's ESOP 25,042 250,420 124,324 - (374,744) - -
Repurchase and retirement of
warrants (note 9) - - (2,028,722) (997,732) - - (3,026,454)
--------- ----------- --------- ---------- -------- -------- ----------
Balance at December 31, 1997 1,001,319 9,013,190 - (3,623,617) (378,967) 76,211 5,086,817
Comprehensive income:
Net loss - - - (29,984,806) - - (29,984,806)
Translation adjustments - - - - - (609,742) (609,742)
----------
Total comprehensive loss (30,594,278)
Proceeds from subscriptions
receivable - - - - 378,967 - 378,967
Class A common stock issued to
the Company's ESOP 185,236 324,162 - - - - 324,162
Retirement of put option from
Clinton acquisition (note 2) - 1,000,000 2,000,000 - - - 3,000,000
--------- ----------- --------- ---------- -------- --------- ----------
Balance at December 31, 1998 1,186,555 $10,337,352 2,000,000 (33,608,423) - (533,531) (21,804,602)
========= =========== ========= ========== ======== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(29,984,806) (4,827,412) 1,313,127
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization of
property and equipment 1,348,512 1,246,019 651,606
Provision for losses on accounts
receivable 1,812,131 1,593,906 267,034
Amortization of deferred financing
costs 650,480 650,483 376,316
Amortization of intangible assets 836,136 831,087 228,622
Amortization of debt discount 212,500 211,093 175,929
Common stock issued to the Company's
ESOP 703,129 425,239 303,350
Deferred income taxes 2,715,608 (2,201,715) 271,252
Extraordinary loss on debt
extinguishment, net - 1,556,898 -
Loss on disposition of property and
equipment 129,271 - -
Impairment of intangible assets 8,442,270 - -
Impairment of assets held for sale 2,000,000 - -
Changes in operating assets and
liabilities, net of effects of
business acquisitions:
Trade accounts receivable 3,672,956 (3,488,032) (4,462,574)
Inventories 114,050 1,328,001 (1,005,426)
Prepaid expenses and other current (1,008,443) 277,737 (413,358)
assets
Other assets (1,705,693) (2,473,763) (203,064)
Trade accounts payable and other
liabilities 6,528,097 (2,532,919) 2,547,147
---------- ---------- ---------
Net cash provided by (used in)
operating activities (3,533,802) (7,403,378) 49,961
----------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (942,915) (1,966,796) (1,247,380)
Proceeds from sale of property and
equipment 42,758 107,671 76,094
Payments for business acquisitions, net
of cash acquired - (37,368,785)(12,012,103)
----------- ---------- ----------
Net cash used in investing
activities (900,157) (39,227,910)(13,183,389)
----------- ---------- ----------
Cash flows from financing activities:
Net proceeds from revolving line of
credit, net of proceeds from debt used 5,914,271 10,551,761 1,738,579
to finance business acquisitions
Increase (decrease) in book overdraft (1,075,145) 1,733,370 902,187
Proceeds from debt used to finance
business acquisitions - 83,980,050 9,167,439
Proceeds from other debt - - 1,603,500
Principal payments on long-term debt (594,382) (545,178) (2,110,083)
Payment of financing costs - (4,461,635) (530,930)
Proceeds from common stock sold in
private placement - - 2,282,145
Extinguishment of debt - (41,137,297) -
Repurchase and retirement of warrants - (3,026,454) -
---------- --------- ----------
Net cash provided by financing 4,244,744 47,094,617 13,052,837
activities ---------- --------- ----------
Effect of exchange rate changes in cash (1,586) (19,515) 41,853
---------- --------- ----------
Net change in cash, carried
forward $ (190,801) 443,814 (38,738)
========== ========= =========
</TABLE>
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net change in cash, brought
forward $ (190,801) 443,814 (38,738)
Cash at beginning of year 1,325,314 881,500 920,238
---------- ---------- ---------
Cash at end of year $1,134,513 1,325,314 881,500
========== ========== =========
Supplemental disclosure of
cash flow information:
Cash paid during the year for:
Interest $6,824,876 11,107,155 4,157,170
========== ========== =========
Income taxes, net of refunds $ 36,957 262,571 320,277
========== ========== =========
Supplemental disclosure of noncash
investing and financing activities:
Issuance of common stock subscriptions
receivable $ - 378,967 429,462
========== ========== =========
Effects of business acquisitions:
Fair value of assets acquired $ - 33,403,582 8,875,546
=========== ========== =========
Liabilities assumed $ - 17,043,864 4,167,724
=========== ========== =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) OPERATIONS AND PRINCIPLES OF CONSOLIDATION
Willcox & Gibbs, Inc. and subsidiaries (the "Company") is engaged
principally in the distribution of replacement parts, supplies, and
ancillary equipment to manufacturers of apparel and other sewn
products and screen printing products in the domestic and export
markets. The accompanying consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(B) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined primarily by using the first-in, first-out method.
(C) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is
provided primarily using the straight-line method over the following
estimated useful lives of the respective assets:
Buildings 40 years
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Leasehold improvements are amortized on a straight-line basis over
the shorter of the lease term or estimated useful life of the asset.
(D) DEFERRED FINANCING COSTS
Deferred financing costs represent origination fees and other
related costs incurred in connection with establishment of the
Company's credit facilities and the issuance of its senior notes.
These costs have been deferred and are being amortized using the
straight-line method over the term of the related debt.
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(E) INTANGIBLE ASSETS
Intangible assets consist primarily of costs in excess of the fair
value of net assets acquired in business combinations. Intangible
assets are amortized on a straight-line basis over the expected
periods to be benefited, generally 40 years. The Company assesses
the recoverability of its intangible assets by determining whether
the amortization of such balances over their remaining life can be
recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured
based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of intangible assets may be
impacted if estimated future operating cash flows are not achieved.
(F) BOOK OVERDRAFTS
Under the Company's cash management system, checks issued but not
presented to banks frequently result in overdraft balances for
accounting purposes and are classified as book overdrafts in the
accompanying consolidated balance sheets.
(G) INCOME TAXES
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(H) FORWARD EXCHANGE CONTRACTS
The Company, from time to time, enters into forward exchange
contracts for foreign currency as a hedge against accounts payable
denominated in a foreign currency. These contracts are used by the
Company to minimize exposure and reduce risk from exchange rate
fluctuations in the normal course of its foreign business. Gains and
losses on forward exchange contracts are deferred and included in
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
the measurement of foreign currency transaction gains and losses
when realized. Cash provided and used for forward exchange contracts
is included in the cash flows resulting from changes in trade
accounts payable. Contracts amounting to $1,153,846, whose
contractual amounts approximate market value, were outstanding at
December 31, 1997. No such contracts were outstanding at December
31, 1998.
(I) FOREIGN CURRENCY TRANSLATION
The local currency has been used as the functional currency of the
Company's subsidiaries located outside of the United States. Assets
and liabilities denominated in foreign currency are translated from
their respective foreign currencies into U.S. dollars using exchange
rates in effect at the balance sheet date. Revenues and expenses are
translated at the average exchange rates in effect during the
period. Translation gains and losses are included as a separate
component of stockholders' equity (deficit).
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's 12.25% Series B senior notes and
other notes payable are not reasonably estimable due to the
uncertainty of the outcome of the bankruptcy proceedings described
in note 18. The fair value of letters of credit are based on fees
currently charged for similar arrangements. The carrying value of
all other financial instruments approximate fair value due to the
short-term nature of such instruments.
(K) INCOME (LOSS) PER SHARE
Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE.
This pronouncement required the restatement of all prior-period
earnings per share data presented to conform to its provisions.
Basic income (loss) per share is computed by dividing net income
(loss) by the weighted-average number of shares of common stock
outstanding during the year. Diluted income (loss) per share is
computed by dividing net income (loss) by the sum of (1) the
weighted-average number of shares of common stock outstanding during
the period, (2) the dilutive effect of the assumed exercise of stock
options using the treasury stock method, and (3) dilutive effect of
other potentially dilutive securities.
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(L) STOCK OPTIONS
The Company accounts for its stock option plan in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. As such, compensation expense is recorded on the
date of grant only if the current market price of the underlying
stock exceeds the exercise price. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, had been
applied.
(M) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. This statement establishes rules for
the reporting of comprehensive income and its components.
Comprehensive income for the Company consists of net income (loss)
and foreign currency translation adjustments, and is presented in
the accompanying consolidated statements of stockholders' equity
(deficit). Prior year financial statements have been reclassified to
conform to the requirements of SFAS No.
130.
(N) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
these estimates.
(O) RECLASSIFICATIONS
Certain reclassifications were made to the 1997 and 1996 accounts to
conform to classifications adopted in 1998.
(2) ACQUISITIONS
Effective February 1, 1996, the Company purchased Clinton Machinery
Corporation and Clinton Management Corporation (collectively, "Clinton").
Clinton was a distributor of screen-printing equipment and supplies for
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
the apparel industry, but in 1998 it discontinued the distribution of
equipment. The aggregate purchase price consisted of $4,000,000 in cash;
100,000 shares of the Company's Class A common stock; the assumption of
approximately $4,500,000 of indebtedness and payables, which were
subsequently repaid; and contingent payments of up to 35.0% of the
operating income (as defined in the purchase agreement) of Clinton during
each of the five years ending through December 31, 2000. Such contingent
payments shall not exceed $10,500,000 and are recorded as additional
purchase consideration as such amounts become determinable. In addition,
the former shareholders of Clinton received a put option, giving them the
right to sell the Class A common shares to the Company at $30 per share on
the earliest of (i) the day after the Company's 12.25% Series B senior
notes described in note 6 have become due by occurrence of the scheduled
maturity date or sooner acceleration; (ii) the fourth anniversary of the
closing date of the acquisition; (iii) the occurrence of an initial public
offering of equity securities by the Company; and (iv) a change in control
of the Company, provided that in all cases such purchase is then permitted
under the indenture for the senior notes and the Company's revolving
credit agreement (note 5). As a result of the transaction, the Company
recorded approximately $8,531,000 of intangible assets and $463,000 of
deferred financing costs. The Company has made contingent payments of
approximately $730,000 through December 31, 1998.
As part of the restructuring during 1998 (note 16), the Company's
obligations arising from its original purchase of Clinton have been
revised to reduce the contingent payments for each of the years 1998, 1999
and 2000 from 35% of Clinton's operating income, as defined, to 10%
thereof and to eliminate the 100,000 share put option. The Company has
recorded an impairment of the intangible assets during the year ended
December 31, 1998.
Effective November 27, 1996, the Company acquired certain assets of E.
C. Mitchell Co., Inc. for $3,000,000 in cash. The acquired assets
relate to the manufacture and sale of abrasive cords and tape used
principally in the apparel industry. As a result of the transaction,
the Company recorded approximately $1,900,000 of intangible assets and
$68,000 of deferred financing costs.
Effective January 3, 1997, the Company acquired all the outstanding
capital stock of Macpherson Meistergram, Inc. ("Macpherson"). Macpherson
is primarily engaged in the distribution of embroidery equipment and
supplies to the apparel industry. The aggregate purchase price consisted
of $24,000,000 in cash and the assumption of approximately $6,100,000 of
indebtedness and $6,400,000 of trade payables. As a result of the
transaction, the Company recorded approximately $21,117,000 of intangible
assets and $4,553,000 of deferred financing costs.
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Also effective January 3, 1997, the Company acquired all the outstanding
capital stock of Embroidery Leasing Corp., which changed its name to Emtex
Leasing Corp. ("ELC"), a leasing affiliate of Macpherson, for
approximately $925,000. As a result of the transaction, the Company
recorded approximately $675,000 of intangible assets.
Each of the acquisitions have been accounted for as a purchase transaction
and, accordingly, the assets acquired and liabilities assumed have been
recorded at their estimated fair market values at the date of acquisition.
The results of operations of the acquired companies have been included in
the accompanying consolidated financial statements as of the respective
acquisition dates.
(3) INVENTORIES
Inventories consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Parts and supplies $ 34,801,415 29,868,767
Machinery and equipment 15,420,170 13,933,354
------------ ----------
$ 45,288,937 48,734,769
============ ==========
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Buildings and leasehold improvements $1,242,102 2,317,303
Machinery and equipment 4,651,097 4,961,710
Furniture and fixtures 900,113 985,622
--------- ----------
6,793,312 8,264,635
Less accumulated depreciation and 3,038,091 2,669,935
amortization --------- ---------
Net property and equipment $3,755,221 5,594,700
========= =========
(Continued)
</TABLE>
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(5) REVOLVING LINE OF CREDIT
At December 31, 1998, the Company had a Credit Agreement with its
principal lenders which provided for a revolving credit facility through
July 2001 of up to the lesser of (i) $22,000,000 or (ii) 81% of eligible
accounts receivable less outstanding letters of credit. At December 31,
1998, approximately $353,000 was available under the facility. Under the
Credit Agreement, substantially all receivables of the Company are pledged
as security. Borrowings under the facility bear interest at LIBOR or the
bank's base rate plus the "Applicable Margin" depending on the Company's
"Consolidated Total Debt to Adjusted EBITDA" ratio as defined in the
Credit Agreement (10.25% and 9% at December 31, 1998 and 1997,
respectively). The Company pays an annual fee of 0.5% of the total unused
availability of the facility. The Company also pays an annual fee of 2% on
outstanding letters of credit. Letters of credit approximating $1,222,000
and $5,386,000 were outstanding at December 31, 1998 and 1997,
respectively. The Company had available approximately $8,778,000 and
$4,614,000 in unused letters of credit at December 31, 1998 and 1997,
respectively.
The Credit Agreement includes various covenants, including restrictions on
liens, capital expenditures, debt, dividends, and requirements that
certain financial ratios be maintained. At December 31, 1998, the Company
was not in compliance with various covenants.
Effective February 5, 1999, the Company amended the Credit Agreement. This
amended Credit Agreement: (i) increased the maximum amount which can be
borrowed from $22 million to $23 million; (ii) modified the borrowing base
to 81% of eligible accounts receivable plus 35% of eligible inventory less
outstanding letters of credit; and (iii) accelerated the maturity of the
facility to April 15, 1999. In addition, the lender did not waive the
default resulting from the Company's failure to make its December 15, 1998
interest payment on its Series B senior notes (note 6), but acknowledged
that it will not assert its rights with respect to such default unless the
senior note holders assert their rights under the senior notes indenture.
The amended Credit Agreement did not cure all covenant violations which
existed at December 31, 1998.
In connection with the Company's and certain of its subsidiaries'
voluntary petitions for reorganization under the Bankruptcy Code, the
Company and certain subsidiaries entered into Debtor In Possession loan
agreements intended for borrowings during the bankruptcy proceedings and
used the proceeds of loans thereunder to repay the Credit Agreement (note
18).
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(6) LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
12.25% Series B senior notes,
due December 15, 2003, net of
unamortized discount of $1,063,907
and $1,276,407 in 1998 and 1997,
respectively $ 83,723,593 83,936,093
6.00% promissory note, principal and
interest payable in quarterly
installments of $50,000, with final
installment due September 30, 1999 192,972 374,683
Variable rate UK note payable 829,350 1,238,025
---------- ----------
84,958,415 85,336,301
Less current portion 84,958,415 594,383
---------- ----------
Long-term debt, excluding current
portion $ - 84,741,918
=========== ==========
</TABLE>
Effective January 3, 1997, the Company issued $85,000,000 principal amount
(less a discount of $1,487,000) of 12.25% senior notes which were due in
December 2003. Interest on the notes is payable semi-annually. The Company
used the proceeds, in part, to retire its outstanding senior notes, to
redeem common stock warrants for a total of $3,026,000 (note 9), and to
finance the acquisition of Macpherson. As result, the Company recorded an
extraordinary loss from the extinguishment of debt (net of income tax
benefit of $954,228) in the accompanying 1997 financial statements.
In connection with the $85,000,000 12.25% senior notes issued on January
3, 1997, the Company entered into an indenture which provides that the
notes are unconditionally guaranteed by each of the U.S. subsidiaries of
the Company. The Company may redeem the notes on or after December 15,
2001, at redemption prices ranging from 106.125% in 2001 to 103.063% in
2002. Up to 30% of the originally issued aggregate principal amount may be
redeemed at a price of 112.25% with the net proceeds of a public offering
of common stock at any time on or before December 15, 1999. The indenture
restricts the ability of the Company and its subsidiaries to incur
additional indebtedness and issue preferred stock; pay dividends or other
restricted payments; enter into sale/leaseback transactions; incur liens;
enter into certain transactions with affiliates; apply net proceeds from
certain asset sales; and assign, lease, convey, or otherwise dispose of
substantially all of the assets of the Company. At December 31, 1998, the
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Company was in default of its senior notes indenture because the Company
did not make the required interest payment due on December 15, 1998. As a
result, the senior notes, less the unamortized discount, have been
classified as a current liability in the accompanying 1998 consolidated
financial statements. As discussed in note 18, the Company has
subsequently filed a petition for protection under Chapter 11 of the
Bankruptcy Code.
The variable rate UK note payable is denominated in pound sterling and is
an obligation of Willcox & Gibbs, Ltd., the Company's United Kingdom
subsidiary. The note was subject to certain financial covenants, accrued
interest at 2.25% plus the bank's prevailing base rate (8.25% and 9.25% at
December 31, 1998 and 1997, respectively), was payable in equal semiannual
installments through October 2000, and was secured by substantially all
the assets of the Company's United Kingdom subsidiary. As discussed in
note 16, in December 1998 management decided to discontinue the operations
of Willcox & Gibbs, Ltd. As a result, the note payable has been classified
as a current liability in the accompanying 1998 consolidated financial
statements. As discussed in note 18, the Company repaid this note in May
1999.
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(7) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1998,
1997, and 1996 was allocated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income (loss) from continuing $2,320,211 (1,434,258) 1,136,685
operations Extraordinary item - (954,228) -
---------- ---------- ---------
$2,320,211 (2,388,486) 1,136,685
========== ========== =========
</TABLE>
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Income tax expense (benefit) attributable to continuing operations for the
years ended December 31, 1998, 1997, and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ (390,677) (197,035) 641,255
State - (23,181) 75,442
Foreign (4,720) 33,445 148,736
---------- --------- ---------
(395,397) (186,771) 865,433
---------- --------- ---------
Deferred:
Federal 2,429,755 (1,116,173) 242,689
State 285,853 (131,314) 28,563
---------- --------- ---------
2,715,608 (1,247,487) 271,252
---------- --------- ---------
$2,320,211 (1,434,258) 1,136,685
========== ========= =========
</TABLE>
Actual income tax expense (benefit) attributable to continuing operations
differs from expected income tax expense (benefit) (computed by applying
the U.S. federal statutory income tax rate of 34% to income (loss) before
income taxes and extraordinary item) for the years ended December 31,
1998, 1997, and 1996 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax
expense (benefit) $(9,405,962) (1,599,622) 832,936
Increase (decrease) in income
taxes resulting from:
Differing foreign tax rates 37,316 (159,965) (100,866)
Nondeductible expenses 109,225 205,642 70,437
State taxes, net of federal
income tax benefit 161,522 (101,967) 68,643
Change in valuation allowance 11,397,133 - -
Other, net 20,977 221,654 265,535
---------- --------- ---------
$ 2,320,211 (1,434,258) 1,136,685
========== ========= =========
</TABLE>
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance
for doubtful accounts $ 865,690 635,769
Inventory, due to reserves for
obsolescence and costs capitalized for 862,740 766,668
tax purposes
Net operating loss carryforwards 10,216,823 1,895,277
---------- ---------
Total deferred tax assets 11,945,253 3,297,714
---------- ---------
Deferred tax liabilities:
Accelerated depreciation (507,924) (532,747)
Costs not yet expensed for book purposes (40,196) (49,359)
---------- ---------
Total deferred tax liabilities (548,120) (582,106)
---------- ---------
11,397,133 2,715,608
Valuation allowance for deferred tax assets 11,397,133 -
---------- ---------
Net deferred tax asset $ - 2,715,608
=========== ==========
</TABLE>
Income (loss) before income taxes and extraordinary item for the years
ended December 31, 1998, 1997, and 1996 is composed of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. $(25,540,959) (5,933,662) 1,715,726
Foreign (2,123,636) 1,228,890 734,086
----------- --------- ---------
$(27,664,595) (4,704,772) 2,449,812
=========== ========= =========
</TABLE>
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
During 1998, a valuation allowance of $11,397,133 was recorded for
deferred tax assets. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. At December 31, 1998, the Company
has net operating loss carryforwards of approximately $26,900,000 for
federal and state income tax purposes which will expire in 2013 if not
utilized to offset future taxable earnings of the Company. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Based upon the nature of the temporary differences and
projections for future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not
the Company will not realize the benefits of these deductible differences.
No provision is made for income taxes which may be payable if
undistributed earnings of foreign subsidiaries were to be paid as
dividends to the Company, since the Company intends that such earnings
will continue to be invested in those countries. Foreign tax credits may
be available as a reduction of United States income taxes in the event of
such distributions.
(8) PENSION BENEFITS AND OTHER RETIREMENT PLANS
The Company has a qualified noncontributory defined benefit pension plan
covering substantially all of its domestic employees. The benefits are
based on years of service and defined levels of compensation. The Company
made annual contributions to the plan based on amounts determined by its
actuaries until July 31, 1998, when the plan was curtailed whereby no
employee shall become a participant in the plan after such date and no
participant's accrued benefits under the plan shall increase after such
date.
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The change in benefit obligation, change in plan assets and reconciliation
of funded status for 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 8,742,681 8,005,621
Service cost 214,771 360,178
Interest cost 629,787 586,981
Benefit payments (343,933) (381,859)
Actuarial loss 569,814 51,023
Plan curtailment (961,988) -
--------- ---------
Benefit obligation at end of year $ 8,851,132 8,621,944
========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning $ 7,433,877 6,730,352
of year
Actual return on plan assets 247,912 631,449
Employer contributions 420,755 453,935
Benefits paid (343,933) (381,859)
--------- ---------
Fair value of plan assets at end of year $ 7,758,611 7,433,877
========= =========
RECONCILIATION OF FUNDED STATUS
Funded status at end of year $ (1,092,521) (1,188,067)
Unrecognized actuarial (gain) loss 134,700 (109,991)
--------- ----------
Accrued pension cost $ (957,821) (1,298,058)
========== ==========
</TABLE>
The Company also maintains a defined benefit plan for substantially all
employees of its United Kingdom subsidiary. The plan is funded annually
for the maximum amount permitted by local statute. The benefits are based
on years of service and defined levels of compensation. The following
table sets forth the funded status of this plan and amounts recognized in
the accompanying consolidated balance sheets at December 31, 1998 and
1997.
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 2,152,993 1,876,415
========= =========
Accumulated benefit obligation $ 2,323,449 2,056,478
========= =========
Projected benefit obligation $ 2,881,968 2,645,455
Plan assets at fair value 2,788,752 2,459,837
--------- ---------
Accrued pension cost
$ 93,216 185,618
========= =========
</TABLE>
The change in benefit obligation, change in plan assets and reconciliation
of funded status of the plan is not presented because such information is
not material and is not readily determinable.
Net pension cost for the years ended December 31, 1998, 1997, and 1996
include the following components:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ------------------ -------------------
UNITED UNITED UNITED
DOMESTIC KINGDOM DOMESTIC KINGDOM DOMESTIC KINGDOM
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Service cost -
benefits earned
during the year $214,771 170,060 360,178 170,336 338,182 128,732
Interest cost on
projected
benefit
obligation 629,787 259,378 586,981 237,491 548,625 216,485
Expected return on
plan assets (569,761) (244,773) (532,650) (208,475) (461,446) (190,516)
Curtailment gain (194,279) - - - - -
-------- ------- ------- ------- ------- -------
Net pension
cost $ 80,518 184,665 414,509 199,352 425,361 154,701
======== ======= ======= ======= ======= =======
</TABLE>
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Assumptions used in accounting for the pension plans as of December 31,
1998, 1997, and 1996 were as follows:
<TABLE>
<CAPTION>
DOMESTIC UNITED KINGDOM
------------------- --------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rates 7.0% 7.5 7.5 9.0 9.0 9.0
Rates of increase in
compensation levels 4.5 4.5 4.5 8.0 8.0 8.0
Expected long-term rate of
return on assets 8.0 8.0 8.0 9.0 9.0 9.0
</TABLE>
The Company also maintains an unfunded, nonqualified supplemental
retirement plan covering key employees. Included in accrued retirement
benefits in the accompanying consolidated balance sheets at December 31,
1998 and 1997 is $1,023,601 and $947,779, respectively, relating to this
plan. Such amounts were determined using an assumed discount rate of 8%.
No salary increase was assumed as the Company has frozen salaries at
specified amounts. Net periodic supplemental retirement expense of
approximately $76,000, $148,000 and $60,000 is included in the
accompanying consolidated statements of operations for the years ended
December 31, 1998, 1997 and 1996, respectively.
In addition, the Company maintains the Willcox & Gibbs, Inc. Savings and
Employee Stock Ownership Plan to provide eligible employees with an
opportunity to purchase the Company's Class A common stock through payroll
deductions, which are matched by the Company, subject to certain
limitations. Participants may also direct their contributions into any
one, or combination of, available mutual fund investments. The purchase
price of the Company's common stock is based on an independent appraisal
of the value of the Company's shares at the subscription date. The
Company's matching contributions vest at a rate of 20% for each year of
service by the employee, with 100% vesting after five years of service. As
of July 1, 1998, the Company has indefinitely suspended purchases of
Company common stock by plan participants and began matching participant
contributions into selected mutual funds, subject to an annual maximum of
$3,000 per participant. The Company's contribution to the plan, net of
forfeitures, was approximately $499,000, $304,000, and $305,000 for the
years ended December 31, 1998, 1997, and 1996, respectively.
The Company also had a 401(k) profit sharing plan covering substantially
all full-time employees of Macpherson. The Company matched 25% of eligible
employees' contributions up to 4% of the eligible employees' compensation
for the year. The contribution to the plan was approximately $38,000 for
the year ended December 31, 1997. On January 1, 1998, the Company merged
this plan with the Willcox & Gibbs, Inc. Savings and Employee Stock
Ownership Plan.
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(9) STOCKHOLDERS' EQUITY (DEFICIT)
On July 13, 1994, the Company authorized 1,500,000 shares of Class A
common stock, no par value; 250,000 shares of Class B common stock, no par
value; and 250,000 shares of Class C common stock, no par value. All
classes of common stock have identical rights and privileges. Also on July
13, 1994, pursuant to the purchase agreement, the Company entered into a
Stockholders' Agreement to sell 481,250 shares of Class A common stock at
$10 per share to certain investors and assigned a stated value of $10 to
the shares issued. Additionally, the Company issued detachable warrants
for 122,970 shares of Class B common stock and 114,773 shares of Class C
common stock attached to certain indebtedness issued in conjunction with
the issuance of shares. All of the warrants for the Class B shares were
repurchased and retired by the Company in 1995. The warrants for the Class
C shares are convertible at any time for nominal consideration, subject to
certain redemption provisions.
In February 1996, the Company issued additional detachable warrants for
32,985 shares of Class C common stock in connection with a debt issuance.
In connection with the issuance of the $85,000,000 senior notes on January
3, 1997 discussed in note 6, warrants for 110,818 Class C shares were
repurchased and retired by the Company.
The stated value of the Company's Class A shares was $10 per share for all
transactions until January 1, 1998, when the stated value used became
$1.75 per share.
(10) STOCK OPTIONS
On August 15, 1994, the Company adopted the Willcox & Gibbs, Inc. Stock
Incentive Plan. Under the plan, options to purchase 41,250 shares were
authorized in 1994 to be granted to key employees of the Company and in
1997 an additional 12,000 shares were authorized to be issued. All options
granted through December 31, 1998 expire after ten years. The options are
exercisable and vest at a rate of 20% per year of service from date of
grant. The options are fully exercisable after five years of service from
date of grant.
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Pro forma information has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS No.
123. The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions:
Risk-free interest rate 6.00%
Dividend yield -
Volatility factor of expected market price 15.00%
Weighted-average expected life of option 8 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. As a
result of the Company's bankruptcy filing (note 18), estimated pro forma
amounts for the year ended December 31, 1998 are not significant. The
Company's pro forma information for the year ended December 31, 1997
follows:
<TABLE>
<CAPTION>
<S> <C>
Net loss before pro forma effect of compensation
expense recognition provisions of SFAS No. 123 $ 4,827,412
Pro forma effect of compensation expense recognition
provisions of SFAS No. 123 47,369
---------
Pro forma net loss $ 4,874,781
=========
Pro forma net loss per share:
Basic $ 5.03
====
Diluted $ 5.03
====
</TABLE>
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
A summary of the Company's stock option activity and related information
for the years ended December 31, 1998, 1997, and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
_________________________ ______________ _______________
WEIGHTED-
AVERAGE
WEIGHTED REMAINING WEIGHTED- WEIGHTED-
AVERAGE CONTRACT AVERAGE AVERAGE
EXERCISE LIFE EXERCISE EXERCISE
OPTIONS PRICE (YEARS) OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding -
beginning of year 47,800 $ 10.61 7.4 36,500 $ 10.00 36,500 $ 10.00
Granted - - - 12,000 15.00 - -
Exercised - - - - - - -
Forfeited - - - (700) 10.00 - -
------ ------ --- ------ ----- ------ ------
Outstanding - end
of year 47,800 $ 10.61 6.4 47,800 $ 10.61 36,500 $ 10.00
====== ====== === ====== ===== ====== ======
Exercisable at end
of year 31,800 $ 10.61 21,800 $ 10.00 14,600 $ 10.00
</TABLE>
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(11) INCOME (LOSS) PER SHARE
The following table sets forth the computations of basic and diluted
income (loss), before extraordinary item, per share for the years ended
December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerator for basic and
diluted income (loss) per
share $ (29,984,806) (3,270,514) 1,313,127
========== ========= =========
Denominator:
Denominator for basic
income (loss) per share
weighted-average shares
outstanding 1,008,159 969,169 900,255
Effect of dilutive
securities:
Employee stock options - - 6,916
Warrants - - 145,009
---------- --------- ----------
Denominator for diluted
income (loss) per share 1,008,159 969,169 1,052,180
========= ======= =========
Income (loss) before
extraordinary item per $ (29.74) (3.37) 1.46
share - basic ===== ==== ====
Income (loss) before
extraordinary item per $ (29.74) (3.37) 1.25
share - diluted ===== ==== ====
</TABLE>
Employee stock options and warrants which were outstanding during 1998 and
1997 were excluded from the computation of diluted income (loss) per share
because the effect would be antidilutive.
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(12) OPERATING SEGMENTS AND RELATED INFORMATION
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, in 1998 which changes the methodology
by which the Company reports information about its operating segments.
The Company has two reportable operating segments consisting of (a)
Apparel and (b) Screen Printing distribution. Each segment represents a
business unit that offers different products to dissimilar customer
groups. These segments are managed separately due to the different
economic characteristics, products, services and distribution methods
relative to each segment. The Company evaluates the performance of its
operating segments based upon revenues, gross profit and operating income.
Intersegment revenues are not significant. The accounting policies of the
two reportable operating segments are the same as those described in note
1.
The Apparel segment consists of the distribution of replacement parts,
supplies and equipment, including embroidery and ancillary equipment, to
apparel and other sewing products manufacturers and distributors. The
segment is differentiated primarily by use of stitching equipment.
The Screen printing segment involves the sale of machinery and supplies
utilizing a process by which designs are applied to fabric or other
material using patterned screens. This segment distributes a comprehensive
line of textile screen printing supplies, including inks, chemicals,
emulsions, screen frames, screen mesh and other accessory items.
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Segment information as of and for the years ended December 31, 1998, 1997
and 1996 follows:
<TABLE>
<CAPTION>
APPAREL SCREEN PRINTING TOTAL
------- --------------- -----
<S> <C> <C> <C>
1998
Revenues, net $155,679,402 17,773,681 173,453,083
Gross profit 48,694,203 1,523,509 50,217,712
Selling, general &
administrative expenses 43,307,501 8,846,724 52,154,225
Other operating expenses 1,814,933 10,288,750 12,103,683
Operating income (loss) 3,571,770 (17,611,966) (14,040,196)
Total assets 113,076,208 7,833,835 120,910,043
Capital expenditures 885,932 56,983 942,915
1997
Revenues, net $153,837,798 26,493,763 180,331,561
Gross profit 50,134,635 5,297,533 55,432,168
Selling, general &
administrative expenses 40,466,826 7,583,669 48,050,495
Operating income (loss) 9,667,809 (2,286,136) 7,381,673
Total assets 119,702,946 20,110,761 139,813,707
Capital expenditures 1,753,256 213,540 1,966,796
1996
Revenues, net $ 85,189,533 28,661,725 113,851,258
Gross profit 29,832,961 6,395,263 36,228,224
Selling, general &
administrative expenses 23,270,667 5,698,160 28,968,827
Operating income 6,562,294 697,103 7,259,397
Total assets 56,755,855 23,022,633 79,778,488
Capital expenditures 752,655 494,725 1,247,380
</TABLE>
(13) FOREIGN OPERATIONS
Following is a summary of geographic area information, as measured by the
locale of revenue-producing operations, for the years ended December 31,
1998, 1997 and 1996:
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales:
United States $ 151,445,400 159,849,118 101,022,121
Canada 3,367,461 3,338,919 -
United Kingdom 6,131,206 7,591,263 7,371,861
Latin America 12,509,016 9,552,261 5,457,276
------------ ------------ -----------
$ 173,453,083 180,331,561 113,851,258
============ =========== ===========
Net income (loss):
United States $ (27,867,004) (5,739,539) 680,988
Canada 81,794 53,637 -
United Kingdom (2,449,194) 138,424 301,818
Latin America 249,598 720,066 330,321
-------------- ------------ -----------
$ (29,984,806) (4,827,412) 1,313,127
============= ============ ===========
Identifiable assets:
United States $ 106,794,541 124,646,101 69,484,993
Canada 1,005,912 1,216,039 -
United Kingdom 5,561,415 7,535,673 7,110,908
Latin America 7,548,175 6,415,894 3,182,587
------------- ------------ -----------
$ 120,910,043 139,813,707 79,778,488
============ ============ ===========
</TABLE>
Total sales to unaffiliated foreign customers were approximately
$42,200,000, $44,000,000, and $33,400,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
(14) SIGNIFICANT SUPPLIERS
The Company is the exclusive distributor of genuine replacement parts in
the United States for Pegasus Sewing Machine Mfg. Co., Ltd. ("Pegasus"), a
Japanese sewing equipment manufacturer. The Company's distribution
agreement with Pegasus extends through 2000 and automatically renews for
successive two-year periods unless notice of termination is given at least
one year prior to December 31, 2000 or the end of any successive two-year
period of exclusivity. In order to maintain the exclusivity of the Pegasus
distribution agreements, the Company must meet certain performance
targets. Historically, the Company has generally satisfied these
requirements, although in certain prior years they were not satisfied and
Pegasus waived such shortfalls. During the years ended December 31, 1998,
1997 and 1996, approximately 6%, 5% and 7%, respectively, of the Company's
total purchases were from Pegasus.
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Through December 31, 1998 the Company was the exclusive distributor of
genuine replacement parts in the United States for Pfaff AG ("Pfaff"), a
German sewing equipment manufacturer. Effective January 1, 1999, the
Company became a non-exclusive distributor and Pfaff now has the ability
to sell through its own distribution network. During the years ended
December 31, 1998, 1997 and 1996, approximately 5%, 4% and 6%,
respectively, of the Company's total purchases were from Pfaff.
In 1997, through its acquisition of Macpherson, the Company obtained
exclusive distribution rights in the United States and Canada for Barudan
embroidery machines under a distribution agreement among the Company,
Barudan Company, Ltd. ("Barudan"), and certain of its affiliates. The
distribution agreement is until December 31, 2003 and automatically renews
for a period of five years unless either party terminates such agreement
on not less than 30 days notice. During the years ended December 31, 1998
and 1997, approximately 27% and 26% respectively, of the Company's total
purchases were from Barudan and affiliated companies.
In 1996, through its acquisition of Clinton, the Company obtained
exclusive distribution rights in certain territories for M&R Printing
Equipment, Inc. ("M&R"), a manufacturer of screen-printing equipment for
the apparel industry. The Company's distribution agreements with M&R were
terminated during 1997. During the years ended December 31, 1997 and 1996,
approximately 6% and 16%, respectively, of the Company's total purchases
were from M&R.
(15) COMMITMENTS
The Company has several noncancelable operating leases, primarily for
buildings and equipment. These leases generally contain renewal options
for periods ranging from three to seven years and require the Company to
pay most executory costs such as maintenance and insurance.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31,
1998 are approximately:
YEAR ENDING DECEMBER 31,
1999 $ 1,350,000
2000 1,094,000
2001 980,000
2002 687,000
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
2003 523,000
Thereafter 1,214,000
---------
$ 5,848,000
=========
Total rental expense for the years ended December 31, 1998, 1997, and 1996
was approximately $2,127,000, $2,043,000, and $1,559,000, respectively.
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(16) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
During 1998, the Company effected a restructuring with respect to its
screen printing segment, principally involving the departure from the
Company of the former shareholders of Clinton and certain other employees
and the discontinuance of the sale of screen printing equipment. As a
result, the Company recorded a charge of $15.5 million in 1998. The charge
included $1.8 million in severance benefits and other related costs, $8.5
million to write-off goodwill recorded when the Company acquired Clinton,
as well as $5.2 million for the impairment of certain inventory and
accounts receivable and other related costs. Of this amount, $10.3 million
was reflected as other operating expenses, $2.8 million was charged to
selling, general and administrative expenses and $2.4 million was charged
to cost of goods sold.
In December 1998, management decided to discontinue the operations of
Willcox & Gibbs, Ltd., a subsidiary located in the United Kingdom. The
Company intends to liquidate the related assets, which consist primarily
of inventory, accounts receivable, investments in joint venture
arrangements, and property and equipment. As a result, the Company
recorded an impairment of property and equipment and joint venture
investments, revised its estimate of the recoverability of inventory and
accounts receivable and recorded $2,000,000 of expense in 1998. Of this
amount, $1,100,000 has been reflected as other operating expenses,
$500,000 has been recorded as cost of goods sold and $400,000 has been
charged to selling, general and administrative expenses. The estimated net
realizable value of the assets subject to disposition are recorded as
assets held for sale in the accompanying 1998 consolidated balance sheet.
The Company intends to liquidate such assets within one year.
As a result of the Company's default on its senior note agreement in
December 1998 (note 6), the Company began to incur costs in an effort to
implement a financial restructuring. As of December 31, 1998, such costs
totaled $711,413 and are reflected as other operating expenses. As
discussed in note 18, the Company has subsequently filed a petition for
protection under Chapter 11 of the Bankruptcy Code.
(17) GUARANTOR SUBSIDIARIES
Set forth below are condensed consolidating financial statements of the
subsidiaries of the Company that have fully and unconditionally, jointly
and severally guaranteed the Company's 12.25% Series B senior notes (the
"Guarantor Subsidiaries") and the nonguarantor subsidiaries of the Company
(the "Nonguarantor Subsidiaries"). Information with respect to the Company
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(parent only) is not presented since it is a holding company with no
operations and no assets other than its investments in its subsidiaries.
As of the date of issuance of the 12.25% Series B senior notes, the
Guarantor Subsidiaries were WG Apparel, Inc.; Leadtec Systems, Inc.; J&E
Sewing Supplies, Inc.; W&G Daon, Inc.; Clinton Management Corp.; Clinton
Machinery Corporation; Clinton Leasing Corp.; Clinton Equipment Corp.;
Macpherson Meistergram, Inc.; and Paradise Color Incorporated, and the
Nonguarantor Subsidiaries were Willcox & Gibbs, Ltd.; Sunbrand S.A. de
C.V.; Sunbrand Caribe S.A.; M.E.C. (Sewing Machine Limited); Eildon
Electronics Limited; Unity de Colombia, Ltda; Sunbrand de Colombia, Ltda;
Emtex Leasing Corporation; and Geoffrey E. Macpherson Canada, Inc. The
Guarantor Subsidiaries are wholly owned by the Company, and there are no
restrictions on the ability of the Guarantor Subsidiaries to make
distributions to the Company, except those generally applicable under
relevant corporation laws. Separate financial statements of each Guarantor
Subsidiary and the eliminating entries have not been included because
management has determined that they are not material to investors.
As discussed in note 18, each of the Guarantor Subsidiaries, and certain
Nonguarantor Subsidiaries, filed a petition for protection under Chapter
11 of the Bankruptcy Code.
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
_________________________________________
GUARANTOR NONGUARANTOR
ASSETS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
____________ ____________ ____________
<S> <C> <C> <C>
Cash $ 975 160 1,135
Accounts receivable, net 26,130 4,541 30,671
Inventories 31,824 13,465 45,289
Assets held for sale - 5,381 5,381
Other current assets 4,371 133 4,504
------- ------ -------
Total current assets 63,300 23,680 86,980
Property and equipment, net 3,508 247 3,755
Intangible assets, net 26,360 - 26,360
Other assets 2,121 1,694 3,815
------- ------ -------
$ 95,289 25,621 120,910
====== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Revolver and current portion of
long-term debt $100,661 829 101,490
Book overdrafts 1,887 271 2,158
Trade accounts payable 16,391 7,981 24,372
Accrued liabilities and other
current liabilities 11,900 720 12,620
------- ------ -------
Total current liabilities 130,839 9,801 140,640
Accrued retirement benefits 2,075 - 2,075
------- ------ -------
Total liabilities 132,914 9,801 142,715
------- ------ -------
Intercompany, net (9,220) 9,220 -
Common stock 10,337 - 10,337
Other equity(deficit) (38,742) 6,600 (32,142)
------- ------ -------
Total stockholders' equity
(deficit) (28,405) 6,600 (21,805)
------- ------ -------
$ 95,289 25,621 120,910
====== ====== =======
</TABLE>
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
__________________________________________
GUARANTOR NONGUARANTOR
ASSETS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
____________ ____________ ____________
<S> <C> <C> <C>
Cash $ 1,254 71 1,325
Accounts receivable, net 32,067 6,399 38,466
Inventories 42,370 6,365 48,735
Other current assets 4,730 168 4,898
------- ------ -------
Total current assets 80,421 13,003 93,424
Property and equipment, net 4,037 1,558 5,595
Intangible assets, net 36,289 - 36,289
Other assets 2,361 2,145 4,506
------- ------ -------
$123,108 16,706 139,814
======= ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolver and current portion of
long-term debt $ 10,798 413 11,211
Book overdrafts 3,233 - 3,233
Trade accounts payable 22,563 691 23,254
Accrued liabilities and other
current liabilities 5,319 1,537 6,856
------- ------ -------
Total current liabilities 41,913 2,641 44,554
Long-term debt, excluding current
portion 83,917 825 84,742
Accrued retirement benefits 2,245 186 2,431
------- ------ -------
Total liabilities 128,075 3,652 131,727
------- ------ -------
Common stock subject to put option 3,000 - 3,000
Intercompany, net (5,627) 5,627 -
Common stock 9,013 - 9,013
Other equity(deficit) (11,353) 7,427 (3,926)
------- ------ -------
Total stockholders' equity (2,340) 7,427 5,087
------- ------ -------
$123,108 16,706 139,814
======= ====== =======
</TABLE>
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
__________________________________________
GUARANTOR NONGUARANTOR
SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
_____________ ____________ ____________
<S> <C> <C> <C>
Net sales $ 150,845 22,608 173,453
Cost of goods sold 108,062 15,173 123,235
------- ------ -------
Gross profit 42,783 7,435 50,218
Selling, general, and administrative
expenses 45,292 6,862 52,154
Other operating expenses 11,004 1,100 12,104
------- ------ -------
Operating loss (13,513) (527) (14,040)
Interest expense (12,880) (136) (13,016)
Other, net (117) (491) (608)
-------- ------ -------
Loss before income taxes (26,510) (1,154) (27,664)
Income tax expense (benefit) 2,327 (6) 2,321
-------- ------ -------
Net loss $ (28,837) (1,148) (29,985)
======== ====== =======
</TABLE>
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
____________________________________________
GUARANTOR NONGUARANTOR
SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
____________ ____________ ____________
<S> <C> <C> <C>
Net sales $ 161,346 18,986 180,332
Cost of goods sold 112,820 12,080 124,900
-------- -------- --------
Gross profit 48,526 6,906 55,432
Selling, general, and administrative 42,639 5,411 48,050
-------- -------- --------
expenses
Operating income 5,887 1,495 7,382
Interest expense (11,960) (181) (12,141)
Other, net (26) 81 55
-------- -------- --------
Income (loss) before income taxes (6,099) 1,395 (4,704)
Income tax expense (benefit) (1,467) 33 (1,434)
-------- -------- --------
Income (loss) before extraordinary (4,632) 1,362 (3,270)
item
Extraordinary loss, net of income tax (1,557) -- (1,557)
benefit -------- -------- --------
Net income (loss) $ (6,189) 1,362 (4,827)
======== ======== ========
</TABLE>
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
______________________________________________
GUARANTOR NONGUARANTOR
SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
____________ ____________ ____________
<S> <C> <C> <C>
Net sales $ 100,995 12,586 113,851
Cost of goods sold 68,712 8,911 77,623
--------- ------- --------
Gross profit 32,283 3,945 36,228
Selling, general, and administrative 25,661 3,308 28,969
expenses --------- ------- --------
Operating income 6,622 637 7,259
Interest expense (4,602) (222) (4,824)
Other income, net (118) 133 15
--------- -------- ------------
Income before income taxes 1,902 548 2,450
Income tax expense 940 197 1,137
---------- -------- ----------
Net income $ 962 351 1,313
========= ======== ==========
</TABLE>
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
____________________________________________
GUARANTOR NONGUARANTOR
SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
____________ ____________ ____________
<S> <C> <C> <C>
Cash flows from operating activities $ (4,274) 740 (3,534)
-------- ------- --------
Cash flows from investing activities (664) (236) (900)
-------- ------- --------
Cash flows from financing activities:
Proceeds from debt issuance 5,914 -- 5,914
Principal payments on debt (181) (413) (594)
Other changes (1,074) -- (1,074)
-------- ------- --------
4,659 (413) 4,246
-------- ------- --------
Effect of exchange rates -- (2) (2)
-------- ------- --------
Net change in cash (279) 89 (190)
Cash at beginning of period 1,254 71 1,325
-------- ------- --------
Cash at end of period $ 975 160 1,135
======== ======== ========
</TABLE>
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
_____________________________________________
GUARANTOR NONGUARANTOR
SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
____________ ____________ ____________
<S> <C> <C> <C>
Cash flows from operating activities $ (7,706) 303 (7,403)
------- ------- --------
Cash flows from investing activities:
Payment for business acquisitions (37,369) -- (37,369)
Other changes (1,520) (339) (1,859)
------- ------- --------
(38,889) (339) (39,228)
------- ------- --------
Cash flows from financing activities:
Proceeds from debt issuance 94,532 -- 94,532
Principal payments on debt (41,270) (412) (41,682)
Payments for financing costs (4,462) -- (4,462)
Repurchase and retirement of
warrant (3,026) -- (3,026)
Other changes 1,733 -- 1,733
------- ------- --------
47,507 (412) 47,095
------- ------- -------
Effect of exchange rates -- (20) (20)
------- ------- -------
Net change in cash 912 (468) 444
Cash at beginning of period 342 539 881
------- ------- -------
Cash at end of period $ 1,254 71 1,325
====== ======== =======
</TABLE>
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
_____________________________________________
GUARANTOR NONGUARANTOR
SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
____________ ____________ ____________
<S> <C> <C> <C>
Cash flows from operating activities $ 1,512 (1,462) (50)
------- ------- -------
Cash flows from investing activities:
Payment for business acquisitions,
net of cash acquired (12,012) -- (12,012)
Other changes (921) (250) (1,171)
------- ------- -------
(12,933) (250) (13,183)
------- ------- -------
Cash flows from financing activities:
Proceeds from debt issuance 10,906 1,604 12,510
Proceeds from sale of common stock 2,585 -- 2,585
Other changes (2,042) -- (2,042)
------- ------- -------
11,449 1,604 13,053
------- ------- -------
Effect of exchange rates -- 42 42
------- ------- -------
Net change in cash 28 (66) (38)
Cash at beginning of period 315 605 920
------- ------- -------
Cash at end of period $ 343 539 882
======= ======= =======
</TABLE>
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(18) BANKRUPTCY FILING AND OTHER SUBSEQUENT EVENTS
(a) BANKRUPTCY FILING:
On April 20, 1999 (the "Petition Date"), Willcox & Gibbs, Inc. and twelve
of its direct and indirect subsidiaries, WG Apparel, Inc., Leadtec, J&E
Sewing Supplies, Inc., Daon, Inc., Clinton Management Corp., Clinton
Machinery Corporation, Clinton Leasing Corp., Clinton Equipment Corp.,
Macpherson Meistergram, Inc., Geoffrey E. Macpherson Canada, Inc., Emtex
Leasing Corporation and Paradise Color Incorporated, each filed voluntary
petitions for protection and reorganization under Chapter 11 of the
Bankruptcy Code in the United States District Court for the District of
Delaware (the "Bankruptcy Court"). The Company is in possession of its
properties and assets and continues to manage its businesses with its
existing directors and officers as debtors in possession subject to the
supervision of the Bankruptcy Court.
On the Petition Date, the Company also filed with the Bankruptcy Court a
plan of reorganization (the "Plan") and proposed disclosure statement
embodying the proposed restructuring. Under the terms of the Plan, the
only impaired claims and interests are claims relating to the Senior Notes
and interests represented by the existing Common Stock of the Company (the
"Old Common Stock"). If the Plan is implemented, existing Senior Notes
would be canceled and each holder thereof would receive a PRO RATA share
of (a) $5,206,250 in cash; (b) $30,000,000 principal amount of a new issue
of Series C Notes; and (c) shares of Class A Common Stock of the Company
that represent 80% of the shares of the reorganized Company Common Stock
to be outstanding on the effective date of the Plan. In addition, the Plan
provides that Old Common Stock of the Company would be canceled, and each
Holder thereof would receive a PRO RATA share of (a) shares of Class B
Common Stock of the Company that represent 20% of the shares of the
reorganized Company Common Stock to be outstanding on the effective date
of the Plan; and (b) warrants to purchase 176,747 shares of Class A Common
Stock of the Company exercisable at a purchase price of $.01 per share.
Warrants for approximately the first third (55,921) of the shares of Class
A Common Stock would be exercisable on or before the fifth anniversary of
the effective date of the Plan, and only if the average daily closing
price per share of the Class A Common Stock over a 20 business day period
exceeds $65. Warrants for approximately the second third (58,864) of the
shares of Class A Common Stock would be exercisable on or before the sixth
anniversary of the effective date of the Plan, and only if the average
daily closing price per share of the Class A Common Stock over a 20
business day period exceeds $75. Warrants for approximately the last third
(61,962) of the shares of the Class A Common Stock would be exercisable on
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
or before the seventh anniversary of the effective date of the Plan, and
only if the average daily closing price per share of the Class A Common
Stock over a 20 business day period exceeds $85. The Plan contemplates
that other claims against the Debtors arising prior to the Petition Date
will be reinstated and paid in full.
Implementation of the Plan is subject to a number of conditions, including
receipt of acceptances from (i) the holders of claims with respect to the
Senior Notes constituting at least two-thirds in dollar amount and more
than one-half in number, counting only holders that vote, and (ii) the
holders of at least two-thirds of the shares of Old Common Stock of the
Company, counting only holders that vote. The Company must also arrange a
new credit facility to fund the cash payments required under the Plan and
to provide for the Company's ongoing liquidity needs. In addition, the
Plan must be confirmed by the Bankruptcy Court.
There can be no assurance that the Plan will be confirmed by the
Bankruptcy Court, or that such Plan will be consummated. The Company has
the exclusive right to pursue confirmation of a plan for 180 days after
the Petition Date. There can be no assurance that the Bankruptcy Court
would grant any extension of such exclusivity period if requested by the
Company. If the exclusivity period were to expire or be terminated, other
interested parties, such as creditors of the Company, would have the right
to propose alternative plans of reorganization.
Although the Chapter 11 bankruptcy filing raises substantial doubt about
the Company's ability to continue as a going concern, the accompanying
consolidated financial statements have been prepared on a going-concern
basis. This basis contemplates the continuity of operations, realization
of assets, and discharge of liabilities in the ordinary course of
business. The statements also present the assets of the Company at
historical cost and the current intention that they will be realized as a
going-concern and in the normal course of business. A plan of
reorganization could materially change the amounts currently disclosed in
the consolidated financial statements.
(b) SALE OF ASSETS BY WILLCOX & GIBBS, LTD.:
On May 4, 1999, the Company sold certain assets held for sale by Willcox &
Gibbs, Ltd. for cash of approximately $2 million, subject to adjustment
(see note 16). A portion of the proceeds were used to repay the variable
rate note payable by Willcox & Gibbs, Ltd. of approximately $1.1 million.
(note 6).
(Continued)
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
<TABLE>
ADDITIONS
___________________________
BALANCE AT CHARGED TO ALLOWANCE DEDUCTIONS BALANCE
BEGINNING COSTS AND OF ACQUIRED FROM AT END
OF PERIOD EXPENSES SUBSIDIARIES RESERVES OF PERIOD
_________ __________ ____________ _________ _________
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
- allowance for doubtful $4,315,000 1,812,000 - 676,000 5,451,000
========= ========= ======= ======= =========
accounts
Year ended December 31, 1997
- allowance for doubtful $2,419,000 1,594,000 780,000 478,000 4,315,000
accounts ========= ========= ======= ======= =========
Year ended December 31, 1996
- allowance for doubtful $1,596,000 267,000 746,000 190,000 2,419,000
accounts ========== ========= ======= ======= =========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Age (as of Office & Principal Occupations
Name 12/31/98) During Last Five Years
_______________________ ___________ ___________________________________________
John K. Ziegler<F1><F3> 61 Chairman of the Board,
Chief Executive Officer and a Director of
the Company (1994 to present); Chairman of
the Board and Chief Executive Officer of
the Company's Predecessor (1987 to 1994).
Maxwell L. Tripp<F1><F4> 59 President, Chief Operating Officer and a
Director of the Company (1997 to
present); Vice President of the Company
(1994-1997); President of Sunbrand
(1985-1997).
John K. Ziegler, Jr.<F5> 30 Vice President and
Chief Financial Officer of the Company
(1995 to present); Treasurer and Secretary
of the Company (1994-1995); CPA at Coopers
& Lybrand (1990-1994).
Jack Klasky<F6> 55 Vice President and a Director of the
Company (1994 to present); President of
Leadtec (1978 to present).
Alan B. Lee<F7> 51 Vice President and a Director of the
Company (1994 to present); President of
Unity (1985 to present).
Mary-Anne Kieran 39 Secretary of the Company (1995 to
present); Secretary of the Company's
Predecessor (1992-1994).
Richard J. Mackey<F2> 67 Director of the Company and Consultant
to the Company (1997 to present);
President and a Director of the Company
(1994-1996); Chairman of the Board and
Chief Financial Officer (August 1992 to
February 1999) and Chief Executive
Officer (August 1992 to May 1994) of
Worldtex, Inc. (manufacturer of covered
elastic yarns and narrow elastic
fabrics).
<PAGE>
<TABLE>
<CAPTION>
Age (as of Office & Principal Occupations
Name 12/31/98) During Last Five Years
_______________________ ___________ ___________________________________________
<S> <C> <C> <C> <C> <C> <C>
Christopher W. Roser<F1> 40 Director of the Company (1994 to
present); General Partner of the Roser
Partnerships I, II and III (venture
capital partnerships) (1987 to present)
Frank E. Walsh, 32 Director of the Company (1994 to
III<F1><F2> present); Vice President of Jupiter
Capital Management (a New Jersey registered
investment advisory firm) (1991 to
present); Director of Dynamotion/ATI, a
publicly traded capital goods manufacturer
for the printed circuit board industry
- ------------------------
<FN>
<F1> Member of the Compensation and Stock Incentive Committee of the Board.
<F2> Member of the Audit Committee of the Board.
<F3> Mr. Ziegler and WG Apparel are parties to an employment contract pursuant
to which WG Apparel employed Mr. Ziegler in an executive officer capacity.
See Item 11. Executive Compensation--Employment Contracts.
<F4> Mr. Tripp and WG Apparel are parties to an employment contract pursuant to
which WG Apparel employed Mr. Tripp in an executive officer capacity. See
Item 11. Executive Compensation--Employment Contracts.
<F5> Mr. Ziegler, Jr. and WG Apparel are parties to an employment contract
pursuant to which WG Apparel employed Mr. Ziegler, Jr. in an executive
officer capacity. See Item 11. Executive Compensation--Employment
Contracts.
<F6> Mr. Klasky, WG Apparel and Leadtec are parties to an employment contract
pursuant to which WG Apparel and Leadtec employed Mr. Klasky in an
executive officer capacity. See Item 11. Executive
Compensation--Employment Contracts.
<F7> Mr. Lee and WG Apparel are parties to an employment contract pursuant to
which WG Apparel employed Mr. Lee in an executive officer capacity. See
Item 11. Executive Compensation--Employment Contracts.
John K. Ziegler is the father of John K. Ziegler, Jr.
The officers of the Company are elected annually by the Board.
</FN>
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth certain
information concerning the compensation earned during the years ended December
<PAGE>
31, 1998, 1997 and 1996 for the Chief Executive Officer of the Company and its
four other most highly compensated executive officers (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual All Other
Compensation Compensation
Name and Principal Position Year Salary Bonus<F3> <F1><F2>
______________________________________ ______ ________ ________ ____________
<S> <C> <C> <C> <C>
John K. Ziegler....................... 1998 $247,953 $ $3,000
0
Chairman of the Board, Chief 1997 246,631 0 3,000
Executive Officer and Director 1996 200,000 100,000 3,000
Maxwell L. Tripp...................... 1998 187,956 20,000 3,000
President, Chief Operating Officer 1997 155,728 40,000 3,000
and Director 1996 124,908 60,908 3,000
Jack Klasky........................... 1998 157,501 28,550 3,000
Vice President, President of Leadtec 1997 159,856 21,000 3,000
and Director 1996 154,908 100,151 3,000
Alan B. Lee........................... 1998 115,927 10,000 3,000
Vice President, President of Unity 1997 117,911 10,009 3,000
and Director 1996 110,000 36,000 3,000
John K. Ziegler, Jr................... 1998 121,317 10,000 3,000
Vice President and Chief Financial 1997 95,419 10,000 3,000
Officer 1996 88,422 25,000 3,000
- ------------------------
<FN>
<F1> The aggregate amount of perquisites and other personal benefits, if any,
did not exceed the lesser of $50,000 or 10% of the total annual salary and
bonus reported for each Named Executive Officer and has therefore been
omitted.
<F2> Amounts shown reflect matching contributions made by the Company to the
Company's Savings and Employee Stock Ownership Plan, a defined
contribution plan, of $3,000 on behalf of the indicated Named Executive
Officers.
<F3> Bonus awards for 1998 are estimated.
</FN>
</TABLE>
<PAGE>
AGGREGATED OPTIONS. The table below sets forth certain information
with respect to options held as of December 31, 1998 by each Named Executive
Officer.
AGGREGATED FISCAL YEAR-END OPTIONS VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Year-End($) at Fiscal Year-End($)
---------------------- ---------------------
<TABLE>
<CAPTION>
Exercisable(E)/ Exercisable (E)/
Name Unexercisable (U) Unexercisable (U)
_________________________________ ______________________ _____________________
<S> <C> <C>
John K. Ziegler................... 2,400(E) $36,000
1,600(U) 24,000
Maxwell L. Tripp.................. 3,000(E) 45,000
2,000(U) 30,000
Jack Klasky....................... 3,000(E) 45,000
2,000(U) 30,000
Alan B. Lee....................... 3,000(E) 45,000
2,000(U) 30,000
John K. Ziegler, Jr............... 1,200(E) 18,000
800(U) 12,000
</TABLE>
RETIREMENT PLAN. Under the Company's non-contributory retirement
plan, eligible employees will be entitled at the normal retirement age of 65 to
an annual retirement benefit. The benefits payable under this plan were frozen
as of July 31, 1998. Prior to the freeze, the participants annual accrued was
equal to 1 1/4% of their earnings up to the maximum earnings subject to Social
Security withholding and 1 1/2% of all earnings in excess of such amount but
less than $160,400 (as adjusted annually for cost of living increases) for each
full year of service under the plan. Benefits under this plan are 100% vested
after five years of service. As of December 31, 1998, the estimated annual
retirement benefits payable under the plan formula described above at current
Social Security withholding rates, assuming that normal retirement occurs at age
65, to the Named Executive Officers are as follows: to Mr. Ziegler, $99,903; to
Mr. Tripp, $33,313; to Mr. Klasky, $19,398; to Mr. Lee $28,188; to Mr. Ziegler,
Jr., $3,257.
Under the Company's supplemental retirement plan, key employees
selected by the Compensation and Stock Incentive Committee (the "Compensation
Committee") are entitled to an amount, payable monthly over a ten-year period
following any specified event of retirement, death, disability or termination of
employment, equal to a percentage (up to 40%) determined by the Compensation
Committee of the portion (determined by the Compensation Committee) of the
employee's base salary, (determined by the Compensation Committee), multiplied
by the employee's years of participation in the plan (not exceeding 10). Thus,
<PAGE>
upon normal retirement at age 65 (or, if later, then years as a participant), an
employee receiving the maximum award possible under the plan will receive a
total retirement of 400% of base salary. If death or disability occurs before
age 65, the employee will receive a total death or disability benefit of up to
400% of base salary. After three full years as a plan participant, 30% of the
retirement benefit becomes vested and thereafter an additional 10% of the
retirement benefit vests for each additional full year of service. Upon
involuntary termination (other than for cause, a defined) of any participant's
employment or upon voluntary early retirement of any "designated participant"
selected by the Compensation Committee, a portion of the vested retirement
benefit will be paid which is in the same ratio to the full vested benefit as
the ratio of the total years worked for the Company to the total years which
would have been worked to age 65. Amounts representing annual accruals under the
plan have not been and cannot be readily calculated for individual participants.
The Compensation Committee has determined Messrs. Ziegler, Tripp, Klasky, Lee
and Ziegler, Jr. participate in the plan and are entitled to benefits of 40% of
their base salary per year for 10 years.
EMPLOYMENT CONTRACTS
Mr. Ziegler and WG Apparel are parties to an employment contract
pursuant to which WG Apparel employs Mr. Ziegler in an executive officer
capacity for an indefinite period, subject to termination by WG Apparel upon not
less than one year written notice. The employment contract provides that Mr.
Ziegler shall serve as Chairman of the Board and Chief Executive Officer of WG
Apparel for so long as requested by WG Apparel's Board of Directors. Under the
employment contract, Mr. Ziegler is entitled to receive a base salary (currently
$250,000 per annum) and bonus or bonuses as may be provided by the Compensation
Committee of the Board of Directors of WG Apparel (the "WGA Compensation
Committee") pursuant to WG Apparel's Incentive Compensation Plan for Key
Employees (the "WGA Incentive Plan"), or any successor, replacement or
additional incentive plan. Mr. Ziegler is to receive no less than eight percent
(8%) of the annual amount available for distribution under the WGA Incentive
Plan.
Mr. Tripp and WG Apparel are parties to an employment contract
pursuant to which WG Apparel employs Mr. Tripp in an executive officer capacity
for an indefinite period, subject to termination by WG Apparel upon not less
than one year written notice. The employment contract provides that Mr. Tripp
shall serve as a Vice President of WG Apparel and as President of Sunbrand for
so long as requested by WG Apparel's Board of Directors. Under the employment
contract, Mr. Tripp is entitled to receive a base salary (currently $200,000 per
annum) and bonus or bonuses as may be provided by the Compensation Committee
pursuant to the WGA Incentive Plan, and Sunbrand's Incentive Compensation Plan,
or any successor, replacement or additional incentive plan. Mr. Tripp is to
receive no less than eight percent (8%) of the annual amount available for
distribution under the WGA Incentive Plan, and no less than thirty percent (30%)
of the annual amount available for distribution under Sunbrand's Incentive
Compensation Plan or such lesser amount as provided under that plan.
<PAGE>
Mr. Ziegler, Jr. and WG Apparel are parties to an employment
contract pursuant to which WG Apparel employs Mr. Ziegler, Jr. in an executive
officer capacity for an indefinite period, subject to termination by WG Apparel
upon not less than one year written notice. The employment contract provides
that Mr. Ziegler, Jr. shall serve as Controller and Secretary of WG Apparel for
so long as requested by WG Apparel's Board of Directors. Under the employment
contract, Mr. Ziegler, Jr. is entitled to receive a base salary (currently
$150,000 per annum) and bonus or bonuses as may be provided by the WGA
Compensation Committee pursuant to the WGA Incentive Plan. WGA Incentive Plan,
Mr. Ziegler, Jr. is to receive no less than three percent (3%) of the annual
amount available for distribution under the WGA Incentive Plan.
Mr. Klasky, WG Apparel and Leadtec are parties to an employment
contract pursuant to which WG Apparel and Leadtec employ Mr. Klasky in an
executive officer capacity for an indefinite period, subject to termination by
WG Apparel and Leadtec upon not less than one year written notice. The
employment contract provides that Mr. Klasky shall serve as a Vice President of
WG Apparel and as President of Leadtec for so long as requested by WG Apparel's
and Leadtec's Board of Directors. Under the employment contract, Mr. Klasky is
entitled to receive a base salary (currently $180,000 per annum) and bonus or
bonuses as may be provided by the WGA Compensation Committee pursuant to the WGA
Incentive Plan, and Leadtec's Incentive Compensation Plan. Mr. Klasky will
receive no less than eight percent (8%) of the annual amount available for
distribution under the WGA Incentive Plan and no less than twenty percent (20%)
from Leadtec's Incentive Compensation Plan.
Mr. Lee and WG Apparel are parties to an employment contract
pursuant to which WG Apparel employs Mr. Lee in an executive officer capacity
for an indefinite period, subject to termination by WG Apparel upon not less
than one year written notice. The employment contract provides that Mr. Lee
shall serve as a Vice President of WG Apparel and as President of Unity for so
long as requested by WG Apparel's Board of Directors. Under the employment
contract, Mr. Lee is entitled to receive a base salary (currently $120,000 per
annum) and bonus or bonuses as may be provided by the WGA Compensation Committee
pursuant to the WGA Incentive Plan and Unity's Incentive Compensation Plan. Mr.
Lee will receive no less than eight percent (8%) of the annual amount available
for distribution under the WGA Incentive Plan and no less than one and three
quarters percent (1.75%) from Unity's Incentive Compensation Plan.
The Debtors intend to assume certain employment contracts after
amendment in order to clarify certain terms (including the entitlement to
severance in the event of termination) but such amendments will not alter the
salary and benefits payable to the employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Ziegler, Tripp and Walsh comprised the Compensation
Committee during 1998. During such time, Mr. Ziegler and Mr. Tripp were officers
of the Company.
COMPENSATION OF DIRECTORS
The Company does not pay fees to its directors for their services in
such capacity.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December
31, 1998 regarding the beneficial ownership of: (i) each class of the Company's
voting securities by each person who is known by the Company to be the
beneficial owner of more than 5% of any class of the Company's voting
securities, and (ii) each class of equity securities of the Company by (a) each
director of the Company, (b) each of the Named Executive Officers (as defined
under the heading "Executive Compensation"), and (c) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES<F1> CLASS<F2>
_____________________________________________ ___________________ ____________
<S> <C> <C>
John K. Ziegler............................... 92,063<F3> 7.3%
c/o Willcox & Gibbs, Inc.
900 Milik Street
Carteret, New Jersey 07008
Richard J. Mackey............................. 71,232<F4> 5.7
c/o Willcox & Gibbs, Inc.
900 Milik Street
Carteret, New Jersey 07008
The Roser Partnership II, Ltd................. 68,615<F5> 5.5
1105 Spruce Street
Boulder, Colorado 80302
Frank E. Walsh, III........................... 138,863<F6> 11.1
330 South Street
Morristown, New Jersey 07962
Jack Klasky................................... 33,161<F7> 3.2
c/o Leadtec Systems, Inc.
6800 Owensmouth Avenue
Suite 320
Canoga Park, California 91303
Alan B. Lee................................... 4,000<F8> 0.3
c/o Unity Sewing Supply Co.
900 Milik Street
Carteret, New Jersey 07008
Maxwell L. Tripp.............................. 43,290<F9> 3.4
c/o Sunbrand
3900 Green Industrial Way
Atlanta, Georgia 30341
John K. Ziegler, Jr........................... 31,800<F10> 2.5
c/o Willcox & Gibbs, Inc.
900 Milik Street
Carteret, New Jersey 07008
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES<F1> CLASS<F2>
_____________________________________________ ___________________ ____________
<S> <C> <C>
Company's Savings and Employee Stock Ownership 467,395 37.2
Plan.......................................
Frontier Trust Company
c/o Bank of North Dakota
700 East Main Avenue
Bismarck, North Dakota 58501
All Company directors and executive officers as a 954,419 <F11> 77.7
group (9 persons)..........................
- -----------------------
<FN>
<F1> The persons included in the table had sole voting and investment power
with respect to shares reported as beneficially owned, except as otherwise
indicated in the following notes.
<F2> Percentages are calculated by dividing (x) shares in the "Number of
Shares" column by (y) the sum of shares outstanding on December 31, 1998
and the shares which a particular owner (or group of owners) has a right
to acquire within 60 days of such dates.
<F3> Included 16,730 shares of Common Stock in the Company held by Mr. Ziegler
as trustee for the benefit of his wife, as to which Mr. Ziegler shares
voting and investment power, and 3,200 shares for which options are
presently exercisable.
<F4> Included 1,800 shares for Common Stock in the Company for which options
are presently exercisable.
<F5> Christopher W. Roser, a director of the Company, is a principal of the
general partner of the Roser Partnership II, Ltd.
<F6> Includes 138,863 shares of Common Stock in the Company held by the WG
Trust under which an uncle of Mr. Walsh acts as trustee and holds voting and
investment power. Mr. Walsh is a beneficiary of such trust.
<F7> Includes 4,000 shares of Common Stock in the Company for which options are
presently exercisable.
<F8> Includes 4,000 shares of Common Stock in the Company for which options are
presently exercisable.
<F9> Includes 4,000 shares of Common Stock in the Company for which options are
presently exercisable.
<F10> Includes 1,800 shares of Common Stock in the Company for which options are
presently exercisable.
<F11> Includes 18,800 shares of Common Stock in the Company for which options
are presently exercisable.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The financial statements and financial statement schedules included
in this Report are listed in the introductory portion of Item 8.
EXHIBITS
The following exhibits are filed as part of this Report (for
convenience of reference, exhibits are listed according to numbers assigned in
the exhibit tables of Item 601 of Regulation S-K under the Securities Exchange
Act of 1934 and management contracts or compensatory plans are indicated by an
asterisk):
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
NUMBER ___________
_______
2.1 Stock Purchase Agreement, dated November 27, 1996, among WG
Apparel, Inc., Willcox & Gibbs, Inc. and Macpherson
Meistergram, Inc., Geoffrey E. Macpherson Canada, Inc., Neil
A. Macpherson, Bridget Macpherson, Bridget Macpherson as
Trustee under the Mark Edward Macpherson Trust Agreement,
dated February 1, 1982, Ouida B. Brown as Trustee under the
Mark Edward Macpherson Trust No. 2, Bridget M. Macpherson as
Trustee under the Katherine Emma Macpherson Trust Agreement,
dated February 1, 1982, Ouida B. Brown as Trustee under the
Katherine Emma Macpherson Trust No. 2, and Neil A. Macpherson
as Trustee under the Nicholas Ian Macpherson Trust Agreement
-- Filed as Exhibit 2.1 to the Company's Registration
Statement on Form S-4 (No. 333-24507) and incorporated herein
by reference.
3.1 Second Amended and Restated Certificate of Incorporation of
Willcox & Gibbs, Inc. -- Filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-4 (No. 333-24507) and
incorporated herein by reference.
3.2 Bylaws of Willcox & Gibbs, Inc. -- Filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-4 (No. 333-24507)
and incorporated herein by reference.
<PAGE>
EXHIBIT DESCRIPTION
NUMBER ___________
_______
4.1 Indenture, dated as of January 3, 1997, by and among Willcox &
Gibbs, Inc., WG Apparel, Inc., Clinton Management Corp.,
Clinton Machinery Corporation, Leadtec Systems, Inc., W&G
Daon, Inc., J&E Sewing Supplies, Inc., W&G Tennessee Imports,
Inc., Clinton Leasing Corp., Clinton Equipment Corp., Paradise
Color Corp. (collectively, the "Subsidiary Guarantors"), and
IBJ Schroder Bank & Trust Company, as Trustee, with respect to
the 12 1/4% Senior Notes due 2003 -- Filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-4 (No. 333-24507)
and incorporated herein by reference.
4.2 Supplemental Indenture, dated as of January 3, 1997, by and among
Willcox & Gibbs, Inc., the Subsidiary Guarantors and IBJ Schroder Bank
& Trust Company, as Trustee -- Filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-4 (No. 333-24507) and incorporated
herein by reference.
4.3 Pledge and Security Agreement, dated January 3, 1997, between WG
Apparel, Inc. and IBJ Schroder Bank & Trust Company, as Trustee --
Filed as Exhibit 4.5 to the Company's Registration Statement on Form
S-4 (No. 333-24507) and incorporated herein by reference.
4.4 Form of New Note -- Included in Exhibit 4.1.
10.1 Agreement to Purchase Stock, dated November 27, 1996, of Embroidery
Leasing Company, between Michael Bennett and WG Apparel, Inc. -- Filed
as Exhibit 10.1 to the Company's Registration Statement on Form S-4
(No. 333-24507) and incorporated herein by reference.
10.2 Amendment No. 1, dated December 17, 1996, to Merger Agreement among
Willcox & Gibbs, Inc., Clinton Machinery Corporation, WG Apparel, Inc.,
Frank Scannavino, Charles Nall and Marc Glazer -- Filed as Exhibit 10.2
to the Company's Registration Statement on Form S-4 (No. 333-24507) and
incorporated herein by reference.
10.3 Financing and Security Agreement, dated December 17, 1996, among WG
Apparel, Inc., Willcox & Gibbs, Inc., Leadtec Systems, Inc., Clinton
Management Corp., Clinton Machinery Corporation and Macpherson
Meistergram, Inc., as Borrowers, and NationsBank, N.A., as Lender --
Filed as Exhibit 10.3 to the Company's Registration Statement on Form
S-4 (No. 333-24507) and incorporated herein by reference.
10.4 First Amendment to Financing and Security Agreement, dated April 23,
1997, among WG Apparel, Inc., Willcox & Gibbs, Inc., Leadtec Systems
Inc., Clinton Management Corp., Clinton Machinery Corporation,
Macpherson Meistergram, Inc., as Borrowers, and NationsBank, N.A., as
Lender -- Filed as Exhibit 10.35 to the Company's Registration
Statement on Form S-4 (No. 333-24507) and incorporated herein by
reference
<PAGE>
EXHIBIT DESCRIPTION
NUMBER ___________
_______
10.5 Termination of Security Agreement, dated January 3, 1997, among Willcox
& Gibbs, Inc., Clinton Machinery Corporation, WG Apparel, Inc., Frank
Scannavino, Charles Nall and Marc Glazer -- Filed as Exhibit 10.4 to
the Company's Registration Statement on Form S-4 (No. 333-24507) and
incorporated herein by reference.
10.6 Employment Agreement, dated February 1, 1996, among Clinton Machinery
Corp. and Clinton Management Corp. and Frank Scannavino -- Filed as
Exhibit 10.5 to the Company's Registration Statement on Form S-4 (No.
333-24507) and incorporated herein by reference.
10.7 Employment Agreement, dated February 1, 1996, among Clinton Machinery
Corp. and Clinton Management and Marc Glazer -- Filed as Exhibit 10.6
to the Company's Registration Statement on Form S-4 (No. 333-24507) and
incorporated herein by reference.
10.8 Employment Agreement, dated February 1, 1996, among Clinton Machinery
Corp. and Clinton Management Corp. and Charles Nall -- Filed as Exhibit
10.7 to the Company's Registration Statement on Form S-4 (No.
333-24507) and incorporated herein by reference.
10.9 Employment Agreement, dated June 27, 1994, between WG Apparel, Inc. and
Alan B. Lee -- Filed as Exhibit 10.8 to the Company's Registration
Statement on Form S-4 (No. 333-24507) and incorporated herein by
reference.
10.10 Employment Agreement, dated June 27, 1994, between WG Apparel, Inc. and
John K. Ziegler, Sr. -- Filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-4 (No. 333-24507) and incorporated
herein by reference.
10.11 Employment Agreement, dated June 27, 1994, among WG Apparel, Inc., WG
Leadtec of Delaware, Inc. and Jack Klasky -- Filed as Exhibit 10.10 to
the Company's Registration Statement on Form S-4 (No. 333-24507) and
incorporated herein by reference.
10.12 Employment Agreement, dated June 27, 1994, between WG Apparel, Inc. and
Maxwell Tripp -- Filed as Exhibit 10.11 to the Company's Registration
Statement on Form S-4 (No. 333-24507) and incorporated herein by
reference.
10.13 Pegasus Sewing Machine Mfg. Co., Ltd. Distribution Agreement, dated
January 1, 1995, between Pegasus Sewing Machine Mfg. Co., Ltd. and WG,
Inc., as amended as of June 8, 1995 -- Filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-4 (No. 333-24507) and
incorporated herein by reference.
<PAGE>
EXHIBIT DESCRIPTION
NUMBER ___________
_______
10.14 Distribution Agreement, dated October 15, 1997, between MHM
Siebdruckmashinen Gesmbh. KG. and Clinton Machinery Corp. -- Filed as
Exhibit 10.15 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated herein by
reference.
10.15 Distribution Agreement, dated June 27, 1996, among Rhein-Nadel
Maschinennadel Gmbh, Muva Maschinennadel Gmbh, WG, Inc., Unity Sewing
Supply Co. and Sunbrand, as amended as of October 4, 1996. -- Filed as
Exhibit 10.16 to the Company's Registration Statement on Form S-4 (No.
333-24507) and incorporated herein by reference.
10.16 Second Revision of Fundamental Barudan Agreements and Contracts, dated
November 27, 1996, among Barudan Company, Ltd., Barudan America, Inc.
and Macpherson Meistergram, Inc. as amended by letter agreement dated
December 4, 1996 -- Filed as Exhibit 10.17 to the Company's
Registration Statement on Form S-4 (No. 333-24507) and incorporated
herein by reference.
10.17 Revision of Fundamental Agreements and Contracts, dated June 1, 1994,
among Barudan Company, Ltd., Barudan America, Inc. and Macpherson
Meistergram, Inc. -- Filed as Exhibit 10.18 to the Company's
Registration Statement on Form S-4 (No. 333-24507) and incorporated
herein by reference.
10.18 Distribution Agreement, dated November 7, 1985, among Barudan Company,
Ltd., Barudan America, Inc. and Macpherson Meistergram, Inc. -- Filed
as Exhibit 10.19 to the Company's Registration Statement on Form S-4
(No. 333-24507) and incorporated herein by reference.
10.19 Asset Purchase Agreement, dated October 1996, between E.C. Mitchell Co.
Inc., Everett Mitchell, as Seller, and WG Apparel, Inc., as Buyer --
Filed as Exhibit 10.20 to the Company's Registration Statement on Form
S-4 (No. 333-24507) and incorporated herein by reference.
10.20 Loan Agreement, dated October 1996, between W&G, Ltd., as Borrower, and
Coutts & Co., as Lender -- Filed as Exhibit 10.21 to the Company's
Registration Statement on Form S-4 (No. 333-24507) and incorporated
herein by reference.
10.21 Consulting Agreement, dated January 3, 1997, between Macpherson
Meistergram, Inc. and Neil A. Macpherson -- Filed as Exhibit 10.22 to
the Company's Registration Statement on Form S-4 (No. 333-24507) and
incorporated herein by reference.
10.22 Employment Agreement, dated January 3, 1997, between Macpherson
Meistergram, Inc. and Jerry Lee -- Filed as Exhibit 10.23 to the
Company's Registration Statement on Form S-4 (No. 333-24507) and
incorporated herein by reference.
<PAGE>
EXHIBIT DESCRIPTION
NUMBER ___________
_______
10.23 Employment Agreement, dated January 3, 1997, between Macpherson
Meistergram, Inc. and Ronald P. Emerman -- Filed as Exhibit 10.24 to
the Company's Registration Statement on Form S-4 (No. 333-24507) and
incorporated herein by reference.
10.24 Employment Agreement, dated January 3, 1997, between Macpherson
Meistergram, Inc. and Jeffrey L. Hickman -- Filed as Exhibit 10.25 to
the Company's Registration Statement on Form S-4 (No. 333-24507) and
incorporated herein by reference.
10.25 Employment Agreement, dated January 3, 1997, between Macpherson
Meistergram, Inc. and Jacob G. Bumm -- Filed as Exhibit 10.26 to the
Company's Registration Statement on Form S-4 (No. 333-24507) and
incorporated herein by reference.
10.26 Employment Agreement, dated January 3, 1997, between Macpherson
Meistergram, Inc. and Steven C. Edwards -- Filed as Exhibit 10.27 to
the Company's Registration Statement on Form S-4 (No. 333-24507) and
incorporated herein by reference.
10.27 Warrant Redemption Agreement, dated December 17, 1996, among Willcox &
Gibbs, Inc., NationsCredit Commercial Corporation and Bank of America
Illinois -- Filed as Exhibit 10.28 to the Company's Registration
Statement on Form S-4 (No. 333-24507) and incorporated herein by
reference.
10.28 Fundamental Agreement, dated October 1, 1986, among Barudan Co., Ltd.,
Geoffrey E. Macpherson Ltd. and Macpherson Inc.-- Filed as Exhibit
10.29 to the Company's Registration Statement on Form S-4 (No.
333-24507) and incorporated herein by reference.
10.29 Employment Agreement, dated June 27, 1994, between WG Apparel, Inc. and
John K. Ziegler, Jr. -- Filed as Exhibit 10.30 to the Company's
Registration Statement on Form S-4 (No. 333-24507) and incorporated
herein by reference.
10.30 Amendment No. 2 to Warrantholders Rights Agreement, dated January 3,
1997, among Willcox & Gibbs, Inc., the Stockholders and Warrantholders
-- Filed as Exhibit 10.31 to the Company's Registration Statement on
Form S-4 (No. 333-24507) and incorporated herein by reference.
10.31 Amendment No. 1 to Warrantholders Rights Agreements, dated February 1,
1996, among Willcox & Gibbs, Inc., the Stockholders and Warrantholders
-- Filed as Exhibit 10.32 to the Company's Registration Statement on
Form S-4 (No. 333-24507) and incorporated herein by reference.
<PAGE>
EXHIBIT DESCRIPTION
NUMBER ___________
_______
10.32 Warrantholders Rights Agreement, dated July 13, 1994, among Investors,
Stockholders and Warrantholders -- Filed as Exhibit 10.33 to the
Company's Registration Statement on Form S-4 (No. 333-24507) and
incorporated herein by reference.
10.33 Form of Warrant -- Filed as Exhibit 10.34 to the Company's Registration
Statement on Form S-4 (No. 333-24507) and incorporated herein by
reference.
10.34 Distributorship Agreement, dated as of October 1, 1998, between G.M.
Pfaff AG and Willcox & Gibbs, Inc. -- Filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated December 15, 1998 and
incorporated herein by reference.
21.1 Subsidiaries of Willcox & Gibbs, Inc. -- Filed as Exhibit 21.1 to the
Company's Registration Statement on Form S-4 (No. 333-24507) and
incorporated herein by reference.
24.1 Powers of Attorney of certain directors and officers of the Company --
Filed as Exhibit 24.1 to The Company's Annual Report on Form 10-K for
1997 and incorporated herein by reference.
27.1 Financial Data Schedule -- Filed with EDGAR copy only.
8-K REPORTS
A Current Report on Form 8-K, dated December 15, 1998, was filed with the
SEC on December 16, 1998, reporting under Items 5 and 7.
<PAGE>
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.
Dated: June 3, 1999
WILLCOX & GIBBS, INC.
By: /s/ John K. Ziegler
--------------------------------
John K. Ziegler
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on June 3, 1999 by the following persons on
behalf of the registrant and in the capacities indicated.
SIGNATURE TITLE
_________ _____
/S/ John K. Ziegler Chairman, Chief Executive
- ------------------------------------------ Officer, Director and
John K. Ziegler attorney-in-fact for persons
indicated by an asterisk
(Principal Executive Officer)
Maxwell L. Tripp* President, Chief Operating
- ------------------------------------------ Officer and Director
Maxwell L. Tripp
John K. Ziegler, Jr.* Chief Financial Officer
- ------------------------------------------ (Principal Financial and
John K. Ziegler, Jr. Accounting Officer)
Jack Klasky* Vice President and Director
- ------------------------------------------
Jack Klasky
Alan B. Lee* Vice President and Director
- ------------------------------------------
Alan B. Lee
<PAGE>
Richard J. Mackey* Director
- ------------------------------------------
Richard J. Mackey
Christopher W. Roser* Director
- ------------------------------------------
Christopher W. Roser
Frank E. Walsh, III* Director
- ------------------------------------------
Frank E. Walsh, III
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy material has been sent to security holders.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
WILLCOX & GIBBS, INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,135
<SECURITIES> 0
<RECEIVABLES> 30,671
<ALLOWANCES> 5,451
<INVENTORY> 45,289
<CURRENT-ASSETS> 86,980
<PP&E> 3,755
<DEPRECIATION> 1,349
<TOTAL-ASSETS> 120,910
<CURRENT-LIABILITIES> 140,640
<BONDS> 84,351
0
0
<COMMON> 10,337
<OTHER-SE> (32,142)
<TOTAL-LIABILITY-AND-EQUITY> 120,910
<SALES> 173,453
<TOTAL-REVENUES> 173,453
<TOTAL-COSTS> 123,235
<CGS> 123,235
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,812
<INTEREST-EXPENSE> 13,016
<INCOME-PRETAX> (27,665)
<INCOME-TAX> 2,320
<INCOME-CONTINUING> (29,985)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,985)
<EPS-BASIC> (29.74)
<EPS-DILUTED> (29.74)
</TABLE>
