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 JULY 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 July 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
<TABLE>
<CAPTION>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
CONSOLIDATED BALANCE SHEETS
January 3, July 4,
1998 1998
------------ ----------------
ASSETS (Unaudited)
<S> <C>
Current assets:
Cash and cash equivalents $ 1,072,280 $ 404,728
Receivables:
Trade accounts receivable, net of allowace of $543,000 and
$698,000 as of January 3, 1998 and July 4, 1998, respectively 21,216,104 44,098,860
Other receivables 174,561 231,934
Inventories 6,932,272 11,060,013
Prepaid expenses and other current assets 1,155,761 1,635,145
------------ ----------------
Total current assets 30,550,978 57,430,680
Property, plant and equipment, net 35,141,104 43,694,884
Other assets:
Notes receivable from related party 187,500 276,800
Intangible assets, net of accumulated amortization of $1,251,002
and $1,388,215 as of January 3, 1998 and July 4, 1998,
respectively 4,420,319 4,283,106
Deferred loan costs and other, net of accumulated amortization of
$523,743 and $842,466 as of January 3, 1998 and July 4, 1998, 4,929,666 4,734,088
respectively
Other assets - 68,060
------------ ----------------
Total assets $ 75,229,567 $ 110,487,618
============ ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
2
<PAGE>
<TABLE>
<CAPTION>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
CONSOLIDATED BALANCE SHEETS
January 3, July 4,
1998 1998
---------- ----------
LIABILITIES AND STOCKHOLDER'S DEFICIT (Unaudited)
<S> <C>
Current liabilities:
Accounts payable $ 5,961,475 $ 9,451,334
Accrued expenses 6,065,182 7,965,459
Current maturities of capital lease obligations 697,934 420,202
Due to Holdings 2,678,587 4,981,432
---------- ----------
Total current liabilities 15,403,178 22,818,427
Long-term debt 102,000,000 124,000,000
Capital lease obligations - less current maturities 61,685 -
Deferred income taxes 1,930,694 2,256,580
Other long-term liabilities - 68,060
---------- ----------
Total liabilities 119,395,557 149,143,067
---------- ----------
Commitments and contingencies
Stockholder's deficit:
Common stock, $.01 par value, 1,000 shares authorized, issued
and outstanding as of January 3, 1998 and July 4, 1998 10 10
Additional paid-in capital 1,361,713 1,461,713
Accumulated deficit ( 45,295,099) ( 39,595,807)
Accumulated other comprehensive income ( 232,614) ( 521,365)
---------- ----------
Total stockholder's deficit ( 44,165,990) ( 38,655,449)
---------- ----------
Total liabilities and stockholder's deficit $75,229,567 $ 110,487,618
========== ==========
</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>
<S> <C>
Three Months Ended Six Months Ended
----------------------- -------------------------
July 5, July 4, July 5, July 4,
1997 1998 1997 1998
---------- ---------- ---------- ----------
Net sales $ 40,179,627 $ 49,160,174 $ 72,559,216 $87,940,092
Cost of sales 26,011,125 31,916,312 48,390,267 59,153,275
---------- ---------- ---------- ----------
Gross profit 14,168,502 17,243,862 24,168,949 28,786,817
---------- ---------- ---------- ----------
Operating expenses:
Selling 3,106,582 3,843,598 6,077,573 7,263,648
Administrative 1,799,847 2,555,336 3,951,829 4,940,401
Research and development 462,433 494,104 958,552 922,081
---------- ---------- ---------- ----------
Total operating expenses 5,368,862 6,893,038 10,987,954 13,126,130
---------- ---------- ---------- ----------
Income from operations 8,799,640 10,350,824 13,180,995 15,660,687
---------- ---------- ---------- ----------
Other income (expense):
Interest expense ( 2,969,731 )( 3,312,564 ) ( 5,080,792 ) (6,315,913 )
Amortization of deferred financing costs ( 120,800 )( 159,977 ) ( 294,278 ) ( 318,723 )
Other ( 51,260 )( 20,369 ) ( 103,184 ) ( 3,706 )
---------- ---------- ---------- ----------
Total other expense ( 3,141,791 )( 3,492,910 ) ( 5,478,254 ) (6,638,342 )
---------- ---------- ---------- ----------
Income before income taxes and
extraordinary loss 5,657,849 6,857,914 7,702,741 9,022,345
Income tax expense 2,457,000 2,544,427 3,359,073 3,323,053
---------- ---------- ---------- ----------
Income before extraordinary loss 3,200,849 4,313,487 4,343,668 5,699,292
Extraordinary loss on early extinguishment
of debt, net of tax benefit of $1,527,000 - - 2,856,884 -
---------- ---------- ---------- ----------
Net income $ 3,200,849 $ 4,313,487 $ 1,486,784 $ 5,699,292
========== ========== ========== ==========
Basic and diluted income per share:
Income before extraordinary loss $ 3,201 $ 4,313 $ 4,344 $ 5,699
Extraordinary loss on early
extinguishment of debt ( 2,857 )
---------- ---------- ---------- ----------
Net income $ 3,201 4,313 $ 1,487 $ 5,699
========== ========== ========== ==========
Weighted average shares outstanding 1,000 1,000 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 SIX MONTHS ENDED JULY 4, 1998
<TABLE>
<CAPTION>
<S> <C>
Retained Accumulated
Shares of Additional Earnings Other
Common Common Paid-in (Accumulated) Comprehensive
Stock Stock Capital Deficit) Income Total
------- ------ -------- ---------- ----------- -----------
Balance as of
January 3, 1998 1,000 $ 10 $ 1,361,713 $( 45,295,099 ) $( 232,614 ) $ (44,165,990 )
Net Income 5,699,292 5,699,292
Stock compensation 100,000 100,000
Accumulated Other
Comprehensive
Income ( 288,751 ) ( 288,751 )
------- ------ -------- ---------- ----------- -----------
Balance as of
July 4, 1998 1,000 $ 10 $ 1,461,713 $( 39,595,807) $( 521,365 ) $ (38,655,449 )
======= ====== ======== ========== =========== ===========
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE SIX MONTHS ENDED JULY 4, 1998
Net Income $ 5,699,292
Other comprehensive income, net of tax:
Currency translation adjustment ( 288,751 )
----------
Comprehensive income $ 5,410,541
==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
5
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
Six Months Ended
--------------------------
July 5, July 4,
1997 1998
---------- -----------
Cash flows from operating activities:
Net income $ 1,486,784 $ 5,699,292
Adjustments to reconcile net income to net cash
used in operating activities:
Loss on early extinguishment of debt 4,383,884
Depreciation and amortization 1,663,730 2,752,047
Stock compensation 100,000
Loss on sale of property and equipment 115,460 16,305
Effect of foreign currency exchange rate ( 288,751 )
Changes in operating assets and liabilities:
Trade and other receivables ( 20,079,937 ) ( 22,940,129 )
Inventories ( 2,135,003 ) ( 4,127,741 )
Prepaid expenses and other ( 1,891,876 ) ( 658,135 )
Due to Holdings ( 550,404 ) 2,302,845
Accounts payable 3,812,915 3,489,859
Accrued expenses and other liabilities 4,775,412 2,294,223
---------- -----------
Net cash used in operating activities ( 8,419,035 ) ( 11,360,185 )
---------- -----------
Cash flows from investing activities:
Purchases of and additions to property, plant and equipment ( 3,928,571 ) ( 10,920,042 )
Proceeds from sale of property and equipment and refunds of
deposits 48,303 41,392
---------- -----------
Net cash used in investing activities ( 3,880,268 ) ( 10,878,650 )
---------- -----------
Cash flows from financing activities:
Payments on capital lease obligations ( 263,478 ) ( 339,417 )
Proceeds from line of credit and issuance of debt, net 28,000,000 22,000,000
Dividends paid ( 1,600,000 )
Advances on notes receivable - related parties ( 931,263 ) ( 89,300 )
Payment of note payable to related party ( 5,743,581 )
Payments for financing costs ( 6,838,950 )
---------- -----------
Net cash provided by financing activities 12,622,728 21,571,283
---------- -----------
Net increase (decrease) in cash and cash equivalents 323,425 ( 667,552 )
Cash and cash equivalents at beginning of period 48,817 1,072,280
---------- -----------
Cash and cash equivalents at end of period $ 372,242 $ 404,728
========== ===========
</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 six-month period ended July 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 July 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 July 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.
On June 14, 1997, the Company declared a dividend in the amount of $1.6
million to enable Holdings to exercise an option to repurchase shares of
Holdings' common stock and to repay a note due to a shareholder of
Holdings. This transaction was related to the recapitalization discussed
in Note 2 of the Company's January 3, 1998 audited financial statements.
Additionally, as part of the same transaction, the Company made a loan of
$931,263 to an officer at an interest rate of prime plus .5%. The
principal and interest were repaid in full on August 12, 1997.
In March 1998, the Company loaned an officer $100,000 and created an
unsecured note receivable.
During June 1998, Holdings sold three officers of the Company a total of
857.46 shares of Holdings' Class A common stock for approximately
$158,000. Holdings loaned the officers an amount equal to the sales price
and created full recourse notes receivable secured by the issued shares.
In connection with the stock issuance, the Company recorded non-cash
compensation expense of $100,000.
8
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. INVENTORIES
Inventories are summarized as follows:
January 3, July 4,
1998 1998
------------ ------------
(Unaudited)
Raw Materials $2,082,516 $2,957,693
Work-in-process 1,516,899 2,673,839
Finished goods 3,332,857 5,428,481
------------ ------------
Total inventories $6,932,272 $11,060,013
============ ============
4. LONG-TERM DEBT
As of January 3, 1998 and July 4, 1998, long-term debt consisted of the
following:
January 3, July 4,
1998 1998
---------- -----------
(unaudited)
Senior credit facility......... $ 2,000,000 $24,000,000
11% Senior subordinated notes.. 100,000,000 100,000,000
------------ -----------
Total long-term debt........ $102,000,000 $124,000,000
============- ============
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.
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)
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 July 4, 1998, the Company had $24 million outstanding under
the Working Capital Commitment, and approximately $18 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 1% for an Acquisition Commitment Advance and .5% for a Working
Capital Commitment Advance or the Eurodollar Rate plus 2.5% for an
Acquisition Commitment Advance or 2% 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.
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)
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 guarantors for
these periods has been excluded because management believes that this
information is not material to investors. Prior to the acquisition
discussed in Note 7, Glenoit Canada had no operations.
The following tables present summarized balance sheet information of
Glenoit Corporation, Glenoit Asset Corporation, and Glenoit Canada as of
July 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 July 4, 1998 is as follows
(unaudited):
<TABLE>
<CAPTION>
<S> <C>
Glenoit Consolidated
Glenoit Asset Domestic Glenoit
Corporation Corporation Eliminations Operations Canada Eliminations Consolidated
----------- ----------- ------------ ---------- ------ ------------ ------------
Cash and cash equivalents ............. $ (284) $ 83 $ (201) $ 606 $ 405
Accounts and other receivables, net ... 41,611 41,611 2,720 44,331
Inventories ........................... 10,117 10,117 943 11,060
Other current assets .................. 1,578 1,578 57 1,635
-------- -------- -------- -------- --------
Total current assets ............. 53,022 83 53,105 4,326 57,431
Property, plant and equipment, net .. 35,398 35,398 8,297 43,695
Other assets .......................... 53,311 32,222 $ (64,527) 21,006 404 $ (12,048) 9,362
--------- --------- --------- --------- --------- --------- ---------
Total assets ..................... $ 141,731 $ 32,305 $ (64,527) $ 109,509 $ 13,027 $ (12,048) $ 110,488
========= ========= ========= ========= ========= ========= =========
Accounts payable ...................... $ 8,711 $ 8,711 $ 740 $ 9,451
Other current liabilities ............. 12,633 $ 2,812 $ (2,812) 12,633 734 13,367
--------- --------- --------- --------- --------- --------- ---------
Total current liabilities ........ 21,344 2,812 (2,812) 21,344 1,474 22,818
Long-term debt ........................ 124,000 124,000 124,000
Other long-term liabilities ........... 34,521 (32,222) 2,299 26 2,325
Stockholders equity (deficit) ......... (38,134) 29,493 (29,493) (38,134) 11,527 $ (12,048) (38,655)
--------- --------- --------- --------- --------- --------- ---------
Total liabilities and equity ..... $ 141,731 $ 32,305 $ (64,527) $ 109,509 $ 13,027 $ (12,048) $ 110,488
========= ========= ========= ========= ========= ========= =========
</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 operating statements information, in thousands, for the six
months ended July 4, 1998 is as follows (unaudited):
<TABLE>
<CAPTION>
<S> <C>
Glenoit Consolidated
Glenoit Asset Domestic Glenoit
Corporation Corporation Eliminations Operations Canada Eliminations Consolidated
----------- ----------- ------------ ---------- ------ ------------ ------------
Net sales ..................... $ 81,145 $ 81,145 $6,795 $87,940
Cost of sales ................. 54,025 54,025 5,128 59,153
-------- -------- -------- --------
Gross profit .................. 27,120 27,120 1,667 28,787
Operating expenses ............ 12,389 $ 5 12,394 732 13,126
Royalty income (expense) ...... (5,083) 5,083 -- -- --
-------- -------- -------- -------- --------
Income from operations ........ 9,648 5,078 14,726 935 15,661
Interest expense (income) ..... 7,422 (1,099) 6,323 (7) 6,316
Other expense (income) ........ (4,272) $ 4,015 (257) (10) $ 590 323
Income taxes .................. 799 2,162 -- 2,961 362 -- 3,323
- ------------------------------- -------- -------- -------- -------- -------- --------- --------
Net income ............... $ 5,699 $4,015 $(4,015) $ 5,699 $590 $ (590) $5,699
======== ====== ======= ======== ==== ======== ======
</TABLE>
Summarized cashflow statement information, in thousands, for the period
ended July 4, 1998 is as follows (unaudited):
<TABLE>
<CAPTION>
<S> <C>
Glenoit Consolidated
Glenoit Asset Domestic Glenoit
Corporation Corporation Eliminations Operations Canada Eliminations Consolidated
----------- ----------- ------------ ---------- ------ ------------ ------------
Cashflows from operating activities.... $(17,790) $ 6,175 $(11,615) $255 $(11,360)
Cashflows used in investing activities. (8,019) (8,019) (2,860) (10,879)
Cashflows from financing activities.... 24,874 (6,168) 18,706 2,866 21,572
------ ------ ------ ----- ------
Net increase (decrease) in cash........ (935) 7 (928) 261 (667)
Cash at beginning of period........... 651 76 727 345 1,072
------ ------ ------ ----- ------
Cash at end of period.................. $ (284) $ 83 $ (201) $ 606 $ 405
====== ====== ====== ===== ======
</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.
12
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 $27.9
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.
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.
13
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. INCOME TAXES (CONTINUED)
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.
7. ACQUISITION
Effective August 30, 1997, Glenoit Corporation through Glenoit Canada,
acquired certain assets and certain liabilities of Collins & Aikman
Canada, Inc. for cash consideration of approximately $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 six months of 1997,
the acquired business had sales of approximately $6.7 million. Net income
and basic and diluted income per share for the six months ended July 5,
1997 as presented in the accompanying unaudited consolidated statements of
income would not differ significantly on a proforma basis adjusted for
this acquisition.
8. SUBSEQUENT EVENT
In July 1998, Holdings settled a dispute regarding additional purchase
price owed to a shareholder associated with the recapitalization in
December 1995 discussed in Note 2 to the Consolidated Financial Statements
as of January 3, 1998. Accordingly, Holdings paid approximately $1.9
million to the shareholder during July 1998. These funds were paid to
Holdings by the Company.
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 July 4, 1998, increased to $49.2 million or
22.4% compared to $40.2 million during the comparable quarter in the prior year.
Sales in the Fabric Division grew due to increased unit volume in active/outdoor
wear. Sales in the Fabric Division were also positively impacted by the
acquisition of Glenoit Canada in September 1997 which generated sales of $3.5
million during the second quarter of 1998. Net sales in the Consumer Products
Division increased approximately 46.2% during the second quarter of 1998
compared to 1997 as a result of increased unit volume.
Net sales year to date through July 4, 1998 were $87.9 million compared to $72.6
million for the first six months of the prior year. This increase of $15.4 or
21.2% related to the items discussed above. Glenoit Canada reported sales of
$6.8 million for the first six months of 1998.
Gross profit for the quarter ended July 4, 1998, was $17.2 million or 35.1% of
net sales compared to $14.2 million or 35.3% of net sales for the same period
last year. Gross profit year-to-date July 4, 1998 was $28.8 million or 32.7% of
net sales compared to $24.2 million or 33.3% of net sales for the first six
months of the prior year. The increases of $3.1 million and $4.6 million,
respectively, are 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 July 4, 1998, were $6.9 million or
14.0% of net sales compared to $5.4 million or 13.4% of net sales in the second
quarter of the prior year. Operating expenses for the six months ended July 4,
1998 increased to $13.1 million from $11.0 million for the same period in the
prior year. Dollar increases over the prior year were primarily in sales related
categories such as commissions and compensation related costs as well as
expenses incurred by Glenoit Canada.
Operating income was $10.4 million for the quarter ended July 4, 1998 compared
to $8.8 million in the prior year. This represents an increase of $1.6 million
or 17.6% for the quarter and resulted from the factors described above.
15
<PAGE>
Operating income increased 18.8% to $15.7 million for the first six months of
1998 over the same six months of 1997. This increase relates to the unit volume
increases described above offset by the anticipated lower margins of the
Canadian operation.
Interest expense for the quarter ended July 4, 1998, was $3.3 million compared
to $3.0 million for the same period last year. Interest expense year to date
July 4, 1998 was $6.3 compared to $5.1 million for the first six months of 1997.
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 July 4, 1998, was $4.3 million compared to net
income of $3.2 million the prior year. Net income for the first six months of
1998 was $5.7 compared to $4.3 million for the same period in the prior year
(excluding the effect of an extraordinary loss on early extinguishment of debt
of $2.9 million related to the refinancing 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 July 4, 1998, there were borrowings of $24.0 million under the
Working Capital Commitment and approximately $18.0 million available to borrow
under the Working Capital Commitment and up to $25.0 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
16
<PAGE>
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 July 4, 1998, Holdings has
obligations with a face amount of $27.9 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.
During the six months ended July 4, 1998, net cash used in operating activities
was $11.4 million, which resulted from the Company increasing its working
capital to meet its seasonal requirements. Receivables increased by $22.9
million, inventories and other assets increased by $4.8 million. Accrued
liabilities increased by $2.3 million, due primarily to sales and compensation
related costs. Accounts payable increased by $3.5 million related to increased
raw material purchases and tax related accruals increased $2.3 million.
CAPITAL IMPROVEMENTS
Capital expenditures for the six months ended July 4, 1998 were $10.9 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.
17
<PAGE>
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").
18
<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.
19
<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.
(b) Reports on Form 8-K
None
20
<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: August 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: August 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)
21
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