SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED APRIL 4, 1998
OR
___TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file numbers 333-42411 and 333-42411-01
GLENOIT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3862561
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
GLENOIT ASSET CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0343206
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
111 West 40th Street
New York, New York 10018
Telephone: (212) 391-3915
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes__X_ No___
None of the voting securities of Glenoit Corporation or Glenoit Asset
Corporation is held by non-affiliates.
As of April 4, 1998, there were 1,000 shares of Glenoit Corporation common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
1
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 3, April 4,
1998 1998
-------------- --------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,072,280 $ 115,077
Receivables:
Trade Accounts receivable, net of allowace of $543,000 and
$602,000 as of January 3, 1998 and April 4, 1998, respectively 21,216,104 34,996,012
Other receivables 174,561 199,080
Inventories 6,932,272 9,793,975
Prepaid expenses and other current assets 1,155,761 1,703,025
-------------- --------------
Total current assets 30,550,978 46,807,169
Property, plant and equipment, net 35,141,104 40,296,842
Other assets:
Notes receivable from related party 187,500 281,825
Intangible assets, net of accumulated amortization of $1,251,002
and $1,312,053 as of January 3, 1998 and April 4, 1998,
respectively 4,420,319 4,359,268
Deferred loan costs and other, net of accumulated amortization of
$523,743 and $682,489 as of January 3, 1998 and April 4, 1998,
respectively 4,929,666 4,820,998
-------------- --------------
Total assets $ 75,229,567 $ 96,566,102
============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
2
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 3, April 4,
1998 1998
---------------- ---------------
LIABILITIES AND STOCKHOLDER'S DEFICIT (Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 5,961,475 $ 9,282,776
Accrued expenses 6,065,182 9,287,494
Current maturities of capital lease obligations 697,934 592,233
Due to Holdings 2,678,587 3,068,587
---------------- ---------------
Total current liabilities 15,403,178 22,231,090
Long-term debt 102,000,000 115,000,000
Capital lease obligations - less current maturities 61,685 0
Deferred income taxes 1,930,694 2,080,694
---------------- ---------------
Total liabilities 119,395,557 139,311,784
---------------- ---------------
Commitments and contingencies
Stockholder's deficit:
Common stock, $.01 par value, 1,000 shares authorized, issued
and outstanding as of January 3, 1998 and April 4, 1998 10 10
Additional paid-in capital 1,361,713 1,361,713
Accumulated deficit ( 45,295,099 ) ( 43,909,294 )
Accumulated other comprehensive income ( 232,614 ) ( 198,111 )
---------------- ---------------
Total stockholder's deficit ( 44,165,990 ) ( 42,745,682 )
---------------- ---------------
Total liabilities and stockholder's deficit $ 75,229,567 $ 96,566,102
================ ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
April 5, April 4,
1997 1998
----------------- -----------------
<S> <C> <C>
Net sales $ 32,379,589 $ 38,779,918
Cost of sales 22,379,142 27,236,963
----------------- -----------------
Gross profit 10,000,447 11,542,955
----------------- -----------------
Operating expenses:
Selling 2,970,991 3,420,050
Administrative 2,151,982 2,385,065
Research and development 496,119 427,977
----------------- -----------------
Total operating expenses 5,619,092 6,233,092
----------------- -----------------
Income from operations 4,381,355 5,309,863
----------------- -----------------
Other income (expense):
Interest expense ( 2,111,061 ) ( 3,003,349 )
Amortization of deferred financing costs ( 173,478 ) ( 158,746 )
Other ( 51,924 ) 16,663
----------------- -----------------
Total other expense ( 2,336,463 ) ( 3,145,432 )
----------------- -----------------
Income before income taxes and
extraordinary loss 2,044,892 2,164,431
Income tax expense 902,073 778,626
----------------- -----------------
Income before extraordinary loss 1,142,819 1,385,805
Extraordinary loss on early extinguishment
of debt, net of tax benefit of $1,527,000 2,856,884
----------------- -----------------
Net income (loss) $ ( 1,714,065 ) $ 1,385,805
================= =================
Basic and diluted income per share:
Income before extraordinary loss $ 1,143 $ 1,386
Extraordinary loss on early extinguishment
of debt ( 2,857 )
----------------- -----------------
Net income (loss) $ ( 1,714 ) 1,386
================= =================
Weighted average shares outstanding 1,000 1,000
================= =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
4
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 4, 1998
<TABLE>
<CAPTION>
Retained Accumulated
Shares of Additional Earnings Other
Common Common Paid-in (Accumulated Comprehensive
Stock Stock Capital Deficit) Income Total
------------- ------------ -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of
January 3, 1998 1,000 $ 10 $ 1,361,713 $ ( 45,295,099 ) $ ( 232,614 ) $ ( 44,165,990 )
Net Income 1,385,805 1,385,805
Accumulated Other
Comprehensive
Income 34,503 34,503
------------- ------------ -------------- ------------- -------------- --------------
Balance as of
April 4, 1998 1,000 $ 10 $ 1,361,713 $ ( 43,909,294 ) $ ( 198,111 ) $ ( 42,745,682 )
============= ============ ============== ============= ============== ==============
</TABLE>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 4, 1998
<TABLE>
<CAPTION>
<S> <C>
Net Income $ 1,385,805
Other comprehensive income, net of tax:
Currency translation adjustment 34,503
-------------
Comprehensive income $ 1,420,308
=============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
April 5, April 4,
1997 1998
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ ( 1,714,065 ) $ 1,385,805
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Loss on early extinguishment of debt 4,383,884
Depreciation and amortization 954,502 1,289,538
(Gain) loss on sale of property and equipment 38,080 ( 4,778 )
Effect of foreign currency exchange rate 34,503
Changes in operating assets and liabilities:
Trade and other receivables ( 8,365,895 ) ( 13,804,427 )
Inventories ( 2,169,252 ) ( 2,861,703 )
Prepaid expenses and other ( 791,513 ) ( 593,091 )
Due to Holdings ( 550,404 ) 390,000
Accounts payable 3,902,087 3,321,301
Accrued expenses and other liabilities ( 629,509 ) 3,372,312
---------------- ---------------
Net cash used in operating activities ( 4,942,085 ) ( 7,470,540 )
---------------- ---------------
Cash flows from investing activities:
Purchases of and additions to property, plant and equipment ( 533,000 ) ( 6,230,777 )
Proceeds from sale of property and equipment and refunds of
deposits 3,600 11,500
---------------- ---------------
Net cash used in investing activities ( 529,400 ) ( 6,219,277 )
---------------- ---------------
Cash flows from financing activities:
Payments on capital lease obligations ( 99,834 ) ( 167,386 )
Proceeds from line of credit and issuance of debt, net 12,256,419 13,000,000
Advances on notes receivable - related parties ( 100,000 )
Payments for financing costs ( 6,642,846 )
---------------- ---------------
Net cash provided by financing activities 5,513,739 12,732,614
---------------- ---------------
Net increase (decrease) in cash and cash equivalents 42,254 ( 957,203 )
Cash and cash equivalents at beginning of period 48,817 1,072,280
---------------- ---------------
Cash and cash equivalents at end of period $ 91,071 $ 115,077
================ ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
6
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
Notes to Consolidated Financial Statements (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Glenoit Corporation and subsidiaries (collectively the "Company")
have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three-month period ended
April 4, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending January 2, 1999. The unaudited
financial statements should be read in conjunction with the audited
financial statements and footnotes thereto for the fiscal year ended
January 3, 1998.
CONSOLIDATION
Prior to September 1997, the accompanying financial statements included
the accounts of Glenoit Corporation and its wholly-owned subsidiaries
Glenoit Mills, Inc. ("Mills"), Tarboro Properties, Inc. ("Tarboro"),
and Glenoit Asset Corporation, Inc. ("Glenoit Asset Corporation"). In
September 1997, Glenoit Corporation merged with Mills and Tarboro. In
addition, Glenoit Corporation's newly formed wholly-owned subsidiary,
Glenoit Corporation of Canada ("Glenoit Canada") acquired the assets of
Collins & Aikman Canada Inc. (see Note 7). Accordingly, at April 4,
1998 the accompanying financial statements include the accounts of
Glenoit Corporation and it's wholly-owned subsidiaries Glenoit Canada
and Glenoit Asset Corporation. The Company is a wholly-owned subsidiary
of Glenoit Universal, Ltd. ("Holdings").
NET INCOME PER SHARE
As of January 3, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share", which requires the
Company to present both basic and diluted earnings per share. There is
no difference between the Company's basic and diluted earnings per
share as the Company does not have any common stock equivalents.
7
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS No. 130") for the fiscal year
ending January 2, 1999. SFAS No. 130 requires the Company to display an
amount representing the total comprehensive income for the period in a
financial statement which is displayed with the same prominence as
other financial statements. The Company did not have any items of other
comprehensive income for the period ended April 5, 1997 and therefore
is not required to report comprehensive income.
2. RELATED PARTY TRANSACTIONS
On March 5, 1997, the Company declared a dividend and issued a note in
the amount of approximately $5.8 million (the "Note") to a shareholder
of Holdings in satisfaction of a contingent earnout obligation of
Holdings related to the recapitalization discussed in the January 3,
1998 financial statements. This note contained a mandatory prepayment
provision which required the Company to retire the Note and accrued
interest as of the date of a bond offering of the Company. On April 1,
1997, the date of the bond offering described in Note 4, the Company
retired the Note from the proceeds of the bond offering.
In March 1998, the Company loaned an officer $100,000 and created an
unsecured note receivable.
3. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
January 3, April 4,
1998 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
Raw Materials $2,082,516 $3,477,582
Work-in-process 1,516,899 2,131,130
Finished goods 3,332,857 4,185,263
----------------- -----------------
Total inventories $6,932,272 $9,793,975
================= =================
</TABLE>
8
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. LONG-TERM DEBT
As of January 3, 1998 and April 4, 1998 long-term debt consisted of the
following:
<TABLE>
<CAPTION>
January 3, April 4,
1998 1998
(unaudited)
<S> <C> <C>
Senior credit facility........................... $ 2,000,000 $ 15,000,000
Senior subordinated notes at 11%................. 100,000,000 100,000,000
------------ -----------
Total long-term debt........................ $102,000,000 $115,000,000
============- ============
</TABLE>
On April 1, 1997, the Company issued $100,000,000 of senior
subordinated notes (the "Senior Subordinated Notes") in a private
placement bond offering. The Senior Subordinated Notes bear interest at
a fixed rate of 11% and mature on April 15, 2007. The Company at its
option, can prepay these notes at a price of 105.5% of the original
principal amount, beginning on April 15, 2002. The premium declines by
1.833% thereafter each year beginning on April 15 until reduced to the
original principal amount. Additionally, prior to April 15, 2000, the
Company may redeem in the aggregate up to 25% of the original aggregate
principal amount with the proceeds of one or more Public Equity
Offerings, as defined in the Indenture governing the Senior
Subordinated Notes, at a redemption price of 110% of the original
principal amount. Upon a Change of Control of the Company, as defined
in the Indenture governing the Senior Subordinated Notes, the holder of
a Senior Subordinated Note may require the Company to redeem the note
at a price of 101% of the principal amount. Interest is payable
semi-annually, and began on October 15, 1997.
On April 1, 1997, the Company also entered into a $70 million senior
credit facility (the "Facility") with a financial institution. Of the
total commitment of $70 million under the Facility, $25 million is
designated as an Acquisition Commitment and $45 million as a Working
Capital Commitment, which is a revolving credit facility limited to the
Borrowing Base as defined in the Facility. The Company may borrow under
the Acquisition Facility through December 31, 1999. The bank also
extended up to a total of $5 million in letters of credit to the
Company; however, the amount is limited to the amount of the unused
Working Capital Commitment. At April 4, 1998, the Company had $15
million outstanding under the Working Capital Commitment, and
approximately $16.4 million available under the Working Capital
Commitment and up to $25 million available under the Acquisition
Commitment.
At the option of the Company, the Company may designate advances under
the Facility to bear interest at the Base Rate, as defined in the
Facility, plus .5% for an Acquisition
9
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. LONG TERM DEBT (CONTINUED)
Commitment Advance and 1% for a Working Capital Commitment Advance or
the Eurodollar Rate plus 2% for an Acquisition Commitment Advance or
2.5% for a Working Capital Commitment Advance. The Company must pay a
commitment fee equal to five eighths of one percent per year of the
unused Acquisition Commitment and one half of one percent per year of
the unused Working Capital Commitment. Additionally, the Company must
pay a letter of credit fee of two percent per year of the average
available amount under the letters of credit for each quarter such
letters of credit are outstanding.All interest, commitment fees and
letter of credit fees under the Facility are payable quarterly and
began on June 30, 1997. The principal balance of the Acquisition
Commitment is repayable quarterly commencing on March 31, 2000 in
amounts equal to one-twentieth of the aggregate principal balance then
outstanding, with the balance due on December 31, 2001. The Working
Capital commitment is due on December 31, 2001.
Prior to December 31, 1999, the Company may be required to prepay the
Acquisition Commitment and Working Capital Commitment in amounts equal
to the Net Cash Proceeds of the sale of assets, stock, debt securities
or any other Net Cash Proceeds, as defined by the Facility. The
Acquisition and Working Capital Commitments would then be permanently
reduced by such payment.
The Facility and Senior Subordinated Notes have various covenants that
require the Company to: maintain key financial ratios, restrict
corporate borrowings, limit the Company's ability to pay dividends,
limit the type and amount of certain investments which may be
undertaken by the Company, limit the Company's disposition of assets,
limit the Company's ability to enter into operating and capital leases,
and restrict the Company's ability to issue shares of its stock.
Substantially all of the Company's assets and operations are pledged as
collateral for the Facility. Holdings and Glenoit Asset Corporation
have guaranteed the Company's obligations under the Facility. Holdings
and Glenoit Asset Corporation have no substantive assets or operations
and rely on the Company to fund their obligations.
The Senior Subordinated Notes are fully and unconditionally guaranteed,
on a joint and several basis, by Glenoit Asset Corporation. Glenoit
Asset Corporation's operations consist solely of leasing certain
trademarks and other intangibles to Glenoit Corporation. Accordingly,
Glenoit Asset Corporation's assets and operations consist primarily of
intercompany assets and operations with Glenoit Corporation. Glenoit
Canada has not guaranteed the Senior Subordinated Notes. Prior to the
formation of Glenoit Canada in June 1997, all of Glenoit Corporation's
wholly-owned subsidiaries fully and unconditionally guaranteed the
Senior Subordinated Notes. For periods prior to the formation of
Glenoit Canada, the Company had no independent operations or assets
other than its investment in its subsidiaries. The financial
information of the subsidiary
10
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. LONG TERM DEBT (CONTINUED)
guarantors for these periods has been excluded because management
believes that this information is not material to investors.
The following tables present summarized balance sheet information of
Glenoit Corporation, Glenoit Asset Corporation, and Glenoit Canada as
of April 4, 1998 and the related summarized operating statement and
cash flow statement information for the period then ended. The Company
believes that separate financial statements and other disclosures
regarding Glenoit Asset Corporation, the sole subsidiary guarantor of
the Senior Subordinated Notes, are not material to investors.
Summarized balance sheet information, in thousands, as of April 4, 1998
is as follows (unaudited):
<TABLE>
<CAPTION>
Glenoit Consolidated
Glenoit Asset Domestic
Corporation Corporation Eliminations Operations Canada Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.............(286) 74 ( 212) 327 115
Accounts and other receivables, net..32,722 32,722 2,473 35,195
Inventories...........................8,971 8,971 823 9,794
Other current assets..................1,646 1,646 57 1,703
------- ------- -- -----
Total current assets........... 43,053 74 43,127 3,680 46,807
Property, plant and equipment, net..33,871 33,871 6,426 40,297
Other assets.........................46,744 28,511 (57,096) 18,159 423 (9,120) 9,462
-------- ------ -------- ------ --- ------- -----
Total assets...................123,668 28,585 (57,096) 95,157 10,529 (9,120) 96,566
======= ====== ======== ====== ====== ======= ======
Accounts payable..................... 8,192 8,192 1,091 9,283
Other current liabilities.......... 12,432 1,510 (1,510) 12,432 516 12,948
-------- ----- ------- -------- --- ------
Total current liabilities.......20,624 1,510 (1,510) 20,624 1,607 22,231
Long-term debt......................115,000 115,000 115,000
Other long-term liabilities........ 30,592 (28,511) 2,081 2,081
Stockholders equity (deficit)..... (42,548) 27,075 (27,075) (42,548) 8,922 (9,120) (42,746)
-------- ------ -------- -------- ----- ------- --------
Total liabilities and equity
(deficit)................... 123,668 28,585 (57,096) 95,157 10,529 (9,120) 96,566
======= ====== ======== ======= ====== ======= ======
</TABLE>
Summarized operating statements information, in thousands, for the
three months ended April 4, 1998 is as follows (unaudited):
<TABLE>
<CAPTION>
Consolidated
Glenoit Glenoit Asset Domestic Glenoit
Corporation Corporation Eliminations Operations Canada Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.............................35,531 35,531 3,249 38,780
Cost of sales.........................24,792 24,792 2,445 27,237
------ ------ ----- ------
Gross profit..........................10,739 10,739 804 11,543
Operating expenses.....................5,959 3 5,962 271 6,233
Royalty income (expense)..............(1,935) 1,935 - - -
------- ----- ------ -------- ------
Income from operations................ 2,845 1,932 4,777 533 5,310
Interest expense (income)............. 3,534 (525) 3,009 ( 6) 3,003
Other expense (income)...............(1,797) 1,597 ( 200) ( 7) 349 142
Income taxes.......................... (278) 860 - 582 197 - 779
----- --- ------- --- --- ----- ---
Net income....................... 1,386 1,597 (1,597) 1,386 349 (349) 1,386
===== ===== ======= ===== === ===== =====
</TABLE>
11
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. LONG-TERM DEBT (CONTINUED)
Summarized cashflow statement information, in thousands, for the period
ended April 4, 1998 is as follows (unaudited):
<TABLE>
<CAPTION>
Consolidated
Glenoit Glenoit Asset Domestic Glenoit
Corporation Corporation Eliminations Operations Canada Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Cashflows from operating activities... (10,617) 2,455 (8,162) 691 (7,471)
Cashflows used in investing
activities....................... ( 5,344) (5,344) (875) (6,219)
Cashflows from financing activities... 15,024 (2,457) 12,567 166 12,733
-------- ------- ------- ----- -------
Net decrease in cash.................. ( 937) ( 2) ( 939) ( 18) ( 957)
Cash at beginning of period........... 651 76 727 345 1,072
-------- ------- -------- ----- -------
Cash at end of period................. ( 286) 74 ( 212) 327 115
======== == ======== === ===
</TABLE>
On April 1, 1997, the Company utilized the proceeds from the 11% Senior
Subordinated Notes to retire the Company's existing debt with financial
institutions, which included the balance of an $80 million senior
credit facility (the Term A and B Notes and the working capital line of
credit) (the "Old Facility") and a $15 million 12.5% Senior
Subordinated Note payable (the $15 Million Senior Subordinated Note").
Additionally, on April 1, 1997, the Company retired a note to a
shareholder of Holdings in the amount of approximately $5.8 million. As
a result of the Company's payoff of these obligations, the Company
charged to earnings $2,884,000 of net deferred loan costs and a
$1,500,000 prepayment penalty related to the $15 million Senior
Subordinated Note. During the first quarter of 1997, the Company
recognized an extraordinary loss from the early extinguishment of debt
of $2,857,000, which is net of a tax benefit of $1,527,000 related to
these charges.
5. COMMITMENTS AND CONTINGENCIES
Holdings is a holding company and as a result does not have any
substantive assets or operations that generate revenues or cash flows.
Accordingly, Holdings relies on the Company's distribution of dividends
in order to fund its operations and meet its obligations, including its
interest and principal payments.
Holdings has obligations with a face amount of approximately $26.9
million, bearing interest at stated rates between 5% to 12.5%, to
shareholders ("Shareholder Notes") with principal due in 2004 and 2005.
These obligations are not reflected in the Company's accompanying
balance sheets or income statements. Subject to existing debt
restrictions, Shareholder Notes with a face amount of approximately
$9.7 million contain certain acceleration clauses. At the option of
Holdings, subject to the Company's existing debt restrictions, the
interest may be paid by the issuance of additional notes or in cash.
12
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
However, Holdings must pay interest in cash on certain of the
Shareholder Notes if defined levels of consolidated cash flows of
Holdings are attained. Annual interest payments during the next five
years are approximately $2 million in 1998, and approximately $2.6
million per year thereafter, excluding interest on notes that may be
issued to pay interest. Assuming Holdings makes all interest payments
related to the Shareholder Notes with additional notes, the Company's
ultimate distribution of dividends in order for Holdings to meet its
existing debt obligations is expected to be approximately $63 million
beginning December 2004 through December 2005. However, the Company may
be required to declare dividends in order for Holdings to fund certain
of its obligations in cash as discussed above. Such amounts could
approximate $3 million in the aggregate and are due through December
2004, if the defined levels of consolidated cash flow of Holdings are
met.
6. INCOME TAXES
The Company's and Holdings' federal income tax returns for the years
ended January 1, 1994 and December 31, 1994, have been examined by the
Internal Revenue Service ("IRS"). The IRS has assessed taxes, penalties
and interest relating to the deductibility of certain expenses claimed
as deductions by the Company. The Company is currently in the process
of responding to the IRS. In the opinion of management, adequate
provision has been made in the accompanying financial statements for
its income tax obligations; however, should the Company be responsible
for all taxes, penalties and interest assessed by the IRS, the Company
would be required to pay an additional amount of approximately $1.6
million over amounts currently accrued. The Company believes that the
proposed adjustments by the IRS are inappropriate and intends to
vigorously contest these assessments.
Holdings has an indemnification agreement with a shareholder with
respect to certain tax obligations. While tax obligations are the
expense and liability of the Company and Holdings, the indemnification
agreement provides for an additional contribution of capital to
Holdings from this shareholder via reductions of long-term obligations
due the shareholder from Holdings.
The Company and Holdings, have entered into a Tax Sharing Agreement
whereby the Company will pay Holdings its respective pro rata share of
the total consolidated tax liability or receive its respective pro rata
share of the total consolidated tax refund, as set forth in the tax
sharing agreement. Under the Tax Sharing Agreement, the Company and
Holdings are treated as separate tax groups.
13
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. ACQUISITIONS
Effective August 30, 1997, Glenoit Corporation through Glenoit Canada,
acquired certain assets and certain liabilities of Collins & Aikman
Canada, Inc. for cash consideration of approxiomately $8.2 million. The
acquisition has been accounted for as a purchase and, accordingly, the
operating results of the acquired business have been included in the
results of operations since the acquisition date. The purchase price
allocation attributed approximately $3.4 million to net working capital
items, approximately $4.4 million to property, plant and equipment and
approximately $ .4 million to goodwill. For the first quarter of 1997,
the acquired business had sales of approximately $2.8 million. Net
income and basic and diluted income per share for the three months
ended April 5, 1997 as presented in the accompanying unaudited
consolidated statements of income would not differ significantly on a
proforma basis adjusted for this acquisition.
14
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
On December 13,1995, Glenoit Universal, Ltd. ("Holdings") formed a wholly owned
subsidiary, Glenoit Corporation (the Company), formerly Glenoit Intermediate,
Inc. and exchanged all of the issued and outstanding stock of Glenoit Mills,
Inc. and subsidiary ("Mills") for all of the issued and outstanding shares of
common stock of Glenoit Corporation. The Company is engaged primarily in the
manufacture of fabric ("Fabric Division") and household rugs ("Consumer Products
Division") with plants in North Carolina, Canada and Tennessee. The Company
offers a wide range of textile products to customers in retail, apparel, and
automotive industries throughout North America.
RESULTS OF OPERATIONS
Net sales for the quarter ended April 4, 1998, increased to $38.8 million or
19.8% compared to $32.4 million during the comparable quarter in the prior year.
Sales in the Fabric Division grew due to increased unit volume in active/outdoor
wear and home furnishings. Sales in the Fabric Division were also positively
impacted by the acquisition of Glenoit Canada in September 1997 which generated
sales of $3.2 million during the first quarter of 1998. Net sales in the
Consumer Products Division increased as a result of increased unit volume.
Gross profit for the quarter ended April 4, 1998, was $11.5 million or 29.8% of
net sales compared to $10.0 million or 30.9% of net sales for the same period
last year. This increase of $1.5 million or 15.4% is attributable to increased
unit volume in both operating divisions. These gains were slightly offset by
increased levels of depreciation as a result of the Company's aggressive capital
expenditure program as well as anticipated lower margins in the Canadian
operation.
Operating expenses for the quarter ended April 4, 1998, were $6.2 million or
16.1% of net sales compared to $5.6 million or 17.4% of net sales in the first
quarter of the prior year. Dollar increases over the prior year were primarily
in sales related categories such as commissions as well as expenses incurred by
Glenoit Canada.
Operating income was $5.3 million for the quarter ended April 4, 1998 compared
to $4.4 million in the prior year. This increase, resulting from the factors
described above, represents an increase of $.9 million or 21.1% for the quarter.
Interest expense for the quarter ended April 4, 1998, was $3.0 million compared
to $2.1 million for the same period last year. Interest expense has increased
due to higher levels of debt and a higher effective borrowing rate relating to
senior subordinated debt issued at the end of the first quarter of 1997.
Net income for the quarter ended April 4, 1998, was $1.4 million compared to net
income of $1.1 million the prior year (excluding the effect of an extraordinary
loss on early extinguishment of debt of $2.9 million related to the refinancing
15
<PAGE>
of the Company's debt which took place on April 1, 1997).
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on internally generated cash flow from operations,
supplemented by borrowings under its senior credit facility and vendor financing
to meet its debt service requirements, capital expenditures and working capital
needs. The Company is highly leveraged.
On April 1, 1997, the Company issued $100 million of senior subordinated notes
(the "Notes"). Concurrently with the issuance of the Notes, the Company entered
into a $70 million senior credit facility ("the New Credit Facility") with a
syndicate of lenders led by BNP, pursuant to which the Company obtained
available credit (i) up to $45.0 million for working capital and general
corporate purposes (the "Working Capital Commitment"), subject to a Borrowing
Base, and (ii) up to $25.0 million for acquisitions (the "Acquisition
Commitment"). The Company also prepaid all outstanding indebtedness under the
Old Facility. At April 4, 1998, there were borrowings of $15.0 million under the
Working Capital Commitment and approximately $16.4 million available to borrow
under the Working Capital Commitment and up to $25 million under the Acquisition
Commitment. A more detailed description of the senior subordinated notes and the
senior credit agreement may be found in the notes to consolidated financial
statements.
Principal and interest payments in respect of the Notes and the New Credit
Facility will represent significant liquidity requirements for the Company. In
addition, the Company will be permitted (but will not be obligated) to make
certain payments to Holdings, including payments (i) in respect of principal and
interest of the Seller Notes, (ii) to cover certain administrative and operating
expenses of Holdings and (iii) to cover certain tax liabilities allocable to the
Company, subject in each case to certain conditions as described in the Notes
and the New Credit Facility.
The Company believes that cash generated from operations, together with vendor
financing and amounts available under the New Credit Facility, will be adequate
to meet its debt service requirements, capital expenditures and working capital
needs for the foreseeable future, although no assurance can be given in this
regard. The Company's future operating performance and ability to service or
refinance the Notes and to extend or refinance its other indebtedness will be
subject to future economic conditions and to financial, business and other
factors beyond the Company's control.
Holdings is a holding company and as a result does not have any substantive
assets or operations that generate revenues or cashflows. Accordingly, Holdings
relies on the Company's distribution of dividends to meet its obligations,
including interest and principal payments. As of April 4, 1998, Holdings has
obligations with a face amount of $26.9 million, bearing interest at stated
rates between 5% to 12.5%, to shareholders with principal due in 2004 and 2005.
For further discussion see Note 5 of the Unaudited Consolidated Financial
Statements.
On March 5, 1997, the Company declared a dividend and issued a note in the
amount of approximately $5.8 million to a shareholder of Holdings in
satisfaction of a contingent earnout obligation of Holdings as discussed in Note
2 to the Unaudited Consolidated Financial Statements.
16
<PAGE>
During the quarter ended April 4, 1998, net cash used in operating activities
was $7.5 million which resulted from the Company increasing its working capital
to meet its seasonal requirements. Receivables increased by $13.8 million,
inventories and other current assets increased by $3.5 million. Accrued
liabilities increased by $3.4 million, due primarily to accrued interest on
senior subordinated notes. Accounts payable increased by $3.3 million related to
increased raw material purchases and tax related accruals increased $.4 million.
CAPITAL IMPROVEMENTS
Capital expenditures for the quarter ended April 4, 1998 were $6.2 million.
These additions were primarily in the Fabric Division for additions of knitting
and blending equipment as well as updating the manufacturing technology in the
newly acquired Canadian operation. Expenditures were also made for upgrades to
management information systems.
SEASONALITY
The Company's business is seasonal in nature. Generally, there is increased
retail demand for garments and rugs during the fall (back-to-school) and
December holiday selling seasons. Consequently, demand for the Company's
products is generally higher during the Company's second and third fiscal
quarters when such products are produced for these selling seasons.
INFLATION
The Company believes that inflation has not had a material impact on the results
of operations presented.
IMPACT OF YEAR 2000 COMPLIANCE
The Company has performed a review of its computer programs and is in the
process of reviewing the Company's Year 2000 exposure to third parties such
as customers and suppliers. Due to conversions already in progress to improve
operating performance, in which Year 2000 compliance was ancillary, the Company
estimates costs to be incurred will not have a material adverse effect
on the Company. The Company estimates, with modifications to existing
software and conversions to new systems that are currently in progress,
its exposure to the Year 2000 issue to be minimal.
There can be no guarantees that these estimates will be achieved and actual
results could differ from those anticipated. Specific factors that might
cause differences include, but are not limited to, the ability of the Company
to complete its conversions in a timely manner, the ability of third parties
such as customers and suppliers to modify or convert their systems to be
Year 2000 compliant and similar uncertainties.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition, including in
particular, the likelihood of the Company's success in developing and expanding
its business. These statements are based upon a number of assumptions and
estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur which will
affect the Company's results. The forward looking statements in this Form 10-Q
are intended to be subject to the safe harbor protection provided by Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 (the
"Safe Harbor Acts").
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 2: LEGAL PROCEEDINGS
There have been no material developments in legal proceedings involving the
Company or its subsidiaries since the Company's Annual Report on Form 10-K
for the year ended January 3, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Glenoit Corporation is hereby
incorporated by reference to Exhibit 3.1 to Glenoit Corporation's
Registration Statement on Form S-4 (Registration No. 333-42411)
filed on December 16, 1997.
3.2 By-Laws of Glenoit Corporation are hereby incorporated by
reference to Exhibit 3.2 to Glenoit Corporation's Registration
Statement on Form S-4 (Registration No. 333-42411) filed on
December 16, 1997.
3.3 Certificate of Incorporation of Glenoit Asset Corporation is
hereby incorporated by reference to Exhibit 3.3 of Amendment No. 1
to Glenoit Asset Corporation's Registration Statement of Form S-4
(Registration No. 333-42411-01) filed February 4, 1998.
3.4 By-Laws of Glenoit Asset Corporation are hereby incorporated by
reference to Exhibit 3.4 of Amendment No. 1 to Glenoit Asset
Corporation's Registration Statement of Form S-4 (Registration No.
333-42411-01) filed February 4, 1998.
4.1 Indenture dated as of April 1, 1997 between Glenoit Corporation,
the Subsidiary Guarantors (as defined therein) and United States
Trust Company of New York is hereby incorporated by reference to
Exhibit 4.1 to Glenoit Corporation's Registration Statement on
Form S-4 (Registration No.
333-42411) filed on December 16, 1997.
4.2 Purchase Agreement dated as of March 26, 1997 among Glenoit
Corporation, the Subsidiary Guarantors (as defined therein),
Salomon Brothers Inc. and CIBC Wood Gundy Securities Corp. is
hereby incorporated by reference to Exhibit 4.2 to Glenoit
Corporation's Registration Statement on Form S-4 (Registration No.
333-42411) filed on December 16, 1997.
4.3 Registration Agreement dated as of March 26, 1997 among Glenoit
Corporation, the Subsidiary Guarantors (as defined therein),
Salomon Brothers Inc. and CIBC Wood Gundy Securities Corp. is
hereby incorporated by reference to Exhibit 4.3 to Glenoit
Corporation's Registration Statement on Form S-4 (Registration No.
333-42411) filed on December 16, 1997.
18
<PAGE>
10.1 Second Amended and Restated Credit Agreement dated as of April 1,
1997 among Glenoit Corporation, the banks, financial institutions
and other institutional lenders listed on the signature pages
thereto as the Restatement Lenders, the Banque Nationale de Paris,
as Administrative Agent for the Lender Parties (as defined
therein) is hereby incorporated by reference to Exhibit 10.1 to
Glenoit Corporation's Registration Statement on Form S-4
(Registration No. 333-42411) filed on December 16, 1997.
10.2 Supply Agreement dated February 1, 1997 by and between the Company
and Sterling Fibers, Inc. is hereby incorporated by reference to
Exhibit 10.2 of Amendment No. 1 to Glenoit Corporation's
Registration Statement on Form S-4 (Registration No. 333-42411)
filed on February 4, 1998.
10.3 Employment Agreement dated October 28, 1997 by and among the
Company, Glenoit Universal, Inc. and Thomas J. O'Gorman is hereby
incorporated to reference to Exhibit 10.3 of Amendment No. 1 to
Glenoit Corporation's Registration Statement on Form S-4
(Registration No. 333-42411) filed on February 4, 1998.
10.4 Employment Agreement dated August 5, 1996 by and between the
Company and Lester D. Sears is hereby incorporated by reference to
Exhibit 10.4 of Amendment No. 1 to Glenoit Corporation's
Registration Statement on Form S-4 (Registration No. 333-42411)
filed on February 4, 1998.
10.5 Stockholders Agreement dated as of December 14, 1995 by and among
Glenoit Universal, Inc., Citicorp Venture Capital, John Mowbray
O'Mara, Banque Nationale de Paris, The Equitable Life Assurance
Society of the United States, the Seller, Soannes Investment
Corporation, Thomas J. O'Gorman and certain other parties thereto
to is hereby incorporated by reference to Exhibit 10.5 of
Amendment No. 1 to Glenoit Corporation's Registration Statement on
Form S-4 (Registration No. 333-42411) filed on February 4, 1998.
21.1 Subsidiaries of Glenoit Corporation is hereby incorporated by
reference to Exhibit 21.1 to Glenoit Corporation's Registration
Statement on Form S-4 (Registration No. 333-42411) filed on
December 16, 1997.
27.1 Financial Data Schedules of Glenoit Asset Corporation.
27.2 Financial Data Schedule of Glenoit Corporation.
(b) Reports on Form 8-K
None
19
<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: May 14, 1998
GLENOIT CORPORATION
By /S/ LESTER D. SEARS
Lester D. Sears
Executive Vice President and
Chief Financial Officer
(On behalf of the Registrant and as Principal
Financial and Accounting Officer)
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: May 14, 1998
GLENOIT ASSET CORPORATION
By /S/ LESTER D. SEARS
Lester D. Sears
Executive Vice President and
Chief Financial Officer
(On behalf of the Registrant and as Principal
Financial and Accounting Officer)
20
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