SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
_X _ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDING JANUARY 3, 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)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |_| No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regular S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
None of the voting securities of Glenoit Corporation or Glenoit Asset
Corporation is held by non-affiliates.
As of January 3, 1998, there were 1,000 shares of Glenoit Corporation common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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GLENOIT CORPORATION AND GLENOIT ASSET CORPORATION
FORM 10-K Annual Report Index
Item 1. Business, page 1.
Item 2. Properties, page 8.
Item 3. Legal Proceedings, page 8.
Item 4. Submission of Matters to a Vote of Security Holders, page 8.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters,
page 9.
Item 6. Selected Financial Data, page 10.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, page 12.
Item 8. Financial Statements and Supplementary Data, page 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure, page 14.
Item 10. Directors and Executive Officers of the Registrant, page 15.
Item 11. Executive Compensation, page 16.
Item 12. Security Ownership of Certain Beneficial Owners and Management,
page 19.
Item 13. Certain Relationships and Related Transactions, page 20.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K,
page 22.
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PART I
ITEM 1: BUSINESS
General
Glenoit, founded in 1954, is a domestic manufacturer and marketer of
specialty fabrics known as "sliver-knit" pile fabrics and a domestic
manufacturer of printed rugs for the home. Through its Fabric Division, the
Company produces an extensive line of sliver (pronounced "sly-ver") knit pile
fabrics, principally made from acrylic, which are used in the manufacture of
performance-oriented outerwear, sportswear, coats, accessories, home textiles,
automotive interiors, military uniforms, toys and a variety of other end-use
products. The Company principally manufactures fabrics on a made-to-order basis
and currently has over 1,100 customers. Sliver-knit pile fabrics are produced
through a specialized process in which fabric is manufactured directly from
loose fibers, in contrast to the more traditional knitting process in which
fibers are first spun into yarn and then knit into fabric. Through its Consumer
Products Division, the Company manufactures a wide variety of printed kitchen
rugs, welcome mats, bath rugs and children's area rugs sold primarily through
national discount retailers. The Company also manufactures rugs designed
specifically for use in the kitchen. The Fabric Division and Consumer Products
Division accounted for approximately 73% and 27%, respectively, of the Company's
net sales of $146.9 million in fiscal 1997.
The Company has experienced rapid growth in sales, operating income and
earnings before interest, taxes, depreciation and amortization ("EBITDA") over
the past five years. In connection with this growth, the Company has incurred
significant debt. As of January 3, 1998, the Company had outstanding
indebtedness of $102.8 million (excluding trade payables, accrued liabilities,
and unused commitments under its credit facilities). From fiscal 1993 to fiscal
1997, the Company's net sales have grown from $62.5 million to $146.9 million,
representing a compound annual growth rate ("CAGR") of 23.8%, operating income
has grown from $5.8 million to $25.9 million representing a CAGR of 45.4% and
EBITDA has grown from $7.1 million to $29.1 million, representing a CAGR of
42.3%. This growth has principally occurred in the Fabric Division and is
attributable to the Company's development and introduction of branded,
performance-oriented sliver-knit fabrics. These fabrics were developed to target
the increasing consumer preference towards more casual and comfortable dress and
a growing emphasis on outdoor activities and styling related to outdoor
activities. Beginning with Glenaura(TM) in 1993, the Company has introduced a
series of branded, performance-oriented fabrics which have transformed the
Company's Fabric Division from a traditional deep-pile fabric manufacturer
dependent upon the coat market into a diversified fabric producer serving a
broader range of faster growing end-use markets. Today, the Company's
performance-oriented fabrics are principally manufactured from acrylic
micro-fiber and are marketed under the brand names Berber by Glenoit(TM),
Glenaura(TM), Zendura(TM) and GlenPile(TM).
The Company believes that its performance-oriented sliver-knit fabrics
offer apparel manufacturers greater design flexibility and superior performance
characteristics in comparison with competing fleece fabrics. These qualities
include the enhanced design and color capability of "Jacquard" knitting (which
allows the fabrics to have intricate and colorful designs knitted into the
fabric rather than printed onto the surface), added versatility in texture and
feel and greater warmth-to-weight ratios and the ability to promote the
evaporation of perspiration, thereby providing greater warmth to the wearer.
These performance-oriented fabrics have been introduced by the Company's
customers into sportswear lines marketed under brand names such as Liz
Claiborne, Jones New York, Ralph Lauren and Anne Klein; outerwear lines marketed
under brand names such as L.L. Bean, Lands' End, Columbia, Woolrich and Bogner;
and private label programs for retailers such as Saks Fifth Avenue, Nordstrom,
Lord & Taylor, Banana Republic, Victoria's Secret and The Gap.
In addition to performance-oriented sliver-knit fabrics, the Company is a
manufacturer and marketer of faux furs in the United States. Faux fur
synthetically replicates animal fur such as mink, beaver and leopard and is
typically used in women's and children's coats. The Company also manufactures
fabrics used to cover audio speakers in certain models of General Motors cars,
fireproof fabric marketed under the Glentec(TM) name used by the United States
Navy, and a wide variety of other fabrics used in the manufacture of toys, golf
club head covers, powder puffs, case linings and other end-use products.
The Company believes that it is currently the principal domestic
manufacturer of sliver-knit fabrics made from micro-fiber (which is defined as
fiber having a diameter of less than one denier). The Company's ability to
produce these fabrics is a result of its (i) manufacturing expertise in the
sliver-knitting process which is more complex and difficult to utilize than
traditional knitting, (ii) state-of-the-art sliver-knitting equipment with
proprietary manufacturing enhancements, (iii) experienced sliver-knitting
workforce and (iv) exclusive supply agreement for Microsupreme(R) acrylic
micro-fiber with Sterling Fibers, Inc. Over the last six years, the Company has
replaced or substantially upgraded all of its knitting equipment. In addition,
in September 1995 the Company acquired a 140,000 square-foot sliver-knitting
manufacturing facility through its acquisition of the Borg Textile Corporation
(the "Borg Acquisition") which the Company successfully upgraded and converted
to produce higher-margin micro-fiber fabrics. In addition, effective August 30,
1997, the Company, through its wholly-owned subsidiary, Glenoit Corporation of
Canada, acquired certain assets and liabilities of Collins & Aikman's Canada,
Inc.
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The Consumer Products Division manufactures a wide variety of printed
kitchen rugs, welcome mats, bath rugs and children's area rugs which are sold to
national discount retailers including Wal-Mart, Kmart and Target, which
typically sell such rugs at retail prices ranging from $3.99 to $9.99. The
Company's kitchen rugs are manufactured under an exclusive licensing agreement
with Barth and Dreyfuss of California, Inc. ("B&D"), a major manufacturer of
kitchen textiles such as towels and potholders. Under the licensing agreement,
the Company has the exclusive right to use B&D's designs on the Company's
kitchen rugs, which are marketed jointly with B&D's kitchen textile products.
The Company believes that its vertically integrated, state-of-the-art
manufacturing and design operations provide the Consumer Products Division with
efficient design capabilities, a low-cost, high-quality product line, and the
ability to manufacture and ship large orders in a short time period. The
Company's technology allows it to take a customer's design and produce numerous
rug samples in as little as two hours, without incurring the expense and the one
month time delay associated with full scale production. The Company's heat
transfer and screen printing capabilities allow it to produce printed rugs that
have an appearance similar to that of woven rugs but cost significantly less to
produce. The Company has the ability to produce over 500,000 rugs per week and
generally ships rugs within five business days after receiving an order.
Business Strategy
Principal elements of the Company's strategy are:
Capitalize on Trend Towards Performance Outerwear and Sportswear. In each
of the last four years, the Company has successfully introduced new
performance-oriented fabrics designed to target the consumer trend toward more
casual and comfortable dress and the greater emphasis on physical fitness and
the outdoors. With its current line of performance-oriented fabrics, the Company
believes that it is well positioned to continue to capitalize on this trend and
will seek to continue to penetrate additional outerwear and sportswear lines.
Furthermore, the Company plans to capitalize on the demand for
performance-oriented fabrics in international markets such as Japan and Europe
through its distribution agreements with third party sales organizations in
these regions.
Build Brand Awareness. The Company has been building brand awareness for
its performance-oriented fabrics by promoting Glenoit's brand names through
garment hang-tags, a print advertising campaign undertaken jointly with its
supplier of acrylic micro-fiber and designers' advertisements and retailers'
catalogs which mention the Company's fabric by name.
Increase Penetration of Home Textile Market with Innovative New Products.
The Company plans to continue to develop innovative fabric products for the home
textile market, a relatively small but fast growing segment of the Fabric
Division. The Company believes that its micro-fiber fabrics are well suited for
use in products for the home textile market, and the Company recently began
selling its micro-fiber fabrics for use in throws, covered pillows and
comforters.
Leverage Existing Distribution Channels. The Company seeks to utilize its
strong distribution relationships with large national discount retailers such as
Wal-Mart, Kmart and Target to expand distribution of consumer products. Today,
the Company primarily sells kitchen rugs through this distribution channel;
however, the Company is planning to expand its distribution of welcome mats
through this channel. In addition, the Company seeks to expand distribution of
its rugs through other channels such as hardware and specialty retail stores.
Make Selective Acquisitions. The Company intends to pursue selective
strategic acquisitions in order to increase fabric manufacturing capacity and
broaden fabric and consumer product offerings. The Company believes that the
Borg Acquisition demonstrates its ability to re-train personnel and upgrade an
existing manufacturing operation to produce higher margin micro-fiber products.
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Products
Fabric Division
The Fabric Division manufactures a diverse line of sliver-knit pile fabrics
used in the manufacture of performance-oriented outerwear, sportswear, coats,
accessories, home textiles, automotive interiors, military clothing and other
products. The Fabric Division's largest and fastest growing segment is a line of
performance-oriented micro-fiber fabrics which are principally made from
Microsupreme(R) micro-fiber produced by Sterling Fibers, Inc. In 1993, the
Company introduced the first of its performance-oriented fabrics, Glenaura(TM),
and has since introduced Berber by Glenoit(TM) (1994), Zendura(TM) (1995) and
GlenPile(TM) (1996). These fabrics are primarily used in the manufacture of
outerwear, sportswear, and accessories, including coats, pullovers, heavy
shirts, hats, gloves, scarves, robes and slippers, and are sold to manufacturers
of sportswear marketed under brand names such as Liz Claiborne, Jones New York,
Ralph Lauren and Anne Klein; manufacturers of outerwear marketed under brand
names such as L.L. Bean, Lands' End, Columbia, Woolrich and Bogner; and private
label programs for retailers such as Saks Fifth Avenue, Nordstrom, Lord &
Taylor, Banana Republic, Victoria's Secret and The Gap. In addition, the Company
sells micro-fiber fabrics in the home textile market for use in throws, covered
pillows and comforters manufactured and marketed by Revman Industries Inc. under
the brand name Indoor Outfitters(TM).
The Fabric Division's second largest product category is faux fur which is
composed of fabrics with a heavier, deeper pile than performance-oriented
fabrics and is used in women's and children's coats and linings, which was the
Fabric Division's principal business prior to 1993. Faux fur is typically used
to replicate traditional animal fur such as mink, beaver, seal and leopard. The
Company believes that it is the leading domestic supplier of faux fur and sells
its fabrics to manufacturers of garments that are sold through retailers such as
Saks Fifth Avenue, Bloomingdale's, Nordstrom, Neiman Marcus, Kmart and JC
Penney.
In the automotive market, the Company's fabrics, which allow for greater
sound penetration than other knit or woven fabrics, are used to cover audio
speakers in the interiors of automobiles produced by the Cadillac, Buick and
Oldsmobile divisions of General Motors Corporation. The Company also sells
fabric to the U.S. Government, including a fireproof fabric marketed under the
brand name Glentec(TM), which is used by the United States Navy. In addition,
the Company's fabrics are used in the manufacture of toys, golf club head
covers, powder puffs, linings for golf bags and musical instrument cases and
other end-use products.
Consumer Products Division
The Consumer Products Division produces a wide variety of printed kitchen
rugs, welcome mats, bath rugs and children's area rugs which are typically
two-feet by three-feet in size. The Consumer Product Division's largest product
category is kitchen rugs, which accounted for a substantial majority of its
fiscal 1997 net sales. The Company's kitchen rugs are manufactured under an
exclusive license agreement with B&D. Under this agreement, the Company has the
exclusive right to use B&D copyrighted designs to produce kitchen rugs that are
coordinated with B&D's towels, pot holders and other kitchen textiles. These
products are marketed jointly to retailers as a coordinated package. In the
children's area rug category, the Company produces rugs decorated with licensed
cartoon characters for Couristan, Inc., a major manufacturer and distributor of
area rugs. The Company's rugs have various surface textures and are made
primarily from polyester. The Company also produces cotton and polypropylene
rugs. The Consumer Products Division sells its rugs directly to national
discount retailers such as Wal-Mart, Kmart and Target, which typically sell such
rugs at retail prices ranging from $3.99 to $9.99.
Sales and Marketing
Fabric Division
The Fabric Division's marketing efforts are handled by an in-house sales
force supported by a customer service department. The Fabric Division
supplements its sales coverage with several experienced commissioned, outside
sales organizations specializing in certain markets. The Fabric Division
maintains a showroom at the Company's headquarters in New York. The Fabric
Division has its own design and research and development departments that
develop exclusive designs for the Company and certain of the Company's
customers. No single customer accounted for more than 10% of the Fabric
Division's net sales in fiscal 1997, reflecting the diversity of its customer
base.
The Fabric Division principally manufactures fabrics on a made-to-order
basis, thereby minimizing its inventory. The Company's performance-oriented
fabrics are marketed principally under the brand names Berber by Glenoit(TM),
Glenaura(TM), Zendura(TM) and GlenPile(TM), and are being increasingly promoted
through garment hang-tags and through a print advertising
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campaign undertaken jointly with the Company's supplier of Microsupreme
micro-fiber. As a result of growing consumer recognition of the Company's
branded fabrics, designers and retailers are increasingly using the Company's
brand names in their advertising and catalogs.
Consumer Products Division
The B&D sales force, supervised by the Consumer Products Division's
marketing management, acts as representative agents for substantially all of the
Consumer Products Division's products. In return, the Company pays B&D a
variable royalty on the sale of all rugs printed with B&D designs and also
contributes to the compensation of the B&D sales force. The Consumer Products
Division's marketing management maintains active relationships with key
customers, and marketing calls to these customers are made jointly by the
Company and B&D employees. The Consumer Products Division markets its products
primarily to national discount retailers such as Wal-Mart, Kmart and Target,
which collectively accounted for approximately 57% of the Consumer Products
Division's net sales in fiscal 1997. The Consumer Products Division has recently
entered into strategic marketing relationships in order to increase distribution
of the Company's rugs through hardware stores and specialty retail gift shops.
In order to support its sales force and respond promptly to the delivery
requirements of its customers, the Consumer Products Division utilizes
Electronic Data Interchange ("EDI") with most of its principal customers. EDI
minimizes the lead time for customer orders, permits a more efficient, targeted
manufacturing schedule, and improves communication, planning and processing
times at each stage of the production cycle. EDI, combined with the Company's
manufacturing capabilities, allows the customer to place an order on Monday and
in most cases have the products shipped by Friday. This rapid order turn-around
has resulted in an expanded relationship with Wal-Mart, Kmart, Target and other
major customers.
Manufacturing Facilities and Operations
The Company operates two manufacturing facilities located in Tarboro, North
Carolina, one manufacturing facility located in Jacksboro, Tennessee, and one
manufacturing facility located in Elmira, Ontario, Canada. The North Carolina
and Canadian facilities are owned by the Company. The Tennessee facility is
leased with an expiration date in September 2005, and an annual rental cost of
approximately $340,000. The Company also maintains a 10,000-square-foot
administrative office and sales showroom at 111 West 40th Street in New York
City's garment district, providing easy access to the Company's major customers.
The lease on the New York office expires on July 31, 2005, and has an annual
rental cost of approximately $296,000. The Company is currently in the process
of increasing its capacity in the Fabric Division through a plant expansion and
installation of new manufacturing equipment at its three fabric facilities. In
the opinion of management, with the completion of this expansion, the Company's
manufacturing capacity is sufficient to meet the Company's requirement for the
foreseeable future. The following table sets forth certain information relating
to the Company's facilities:
Approximate
Location Square Feet Use
-------- ----------- ---
Tarboro, North Carolina
Plant #1 ..................... 427,000 Fabric Division
Plant #2 ..................... 281,000 Consumer Products Division
Jacksboro, Tennessee .............. 140,000 Fabric Division
Elmira, Ontario ................... 135,000 Fabric Division
New York, New York ................ 10,000 Headquarters and Showroom
Fabric Division
The Company is a vertically integrated manufacturer involved in all aspects
of the sliver-knitting process including dyeing, carding, knitting and
finishing. Sliver-knit fabrics are produced using a process in which the fabric
is knit directly from loose fibers, in contrast with the more traditional
knitting process in which fibers are first spun into yarn before being knit into
fabric. In the sliver-knitting process, pile is constructed by attaching loose
fibers to a lightweight knit backing. Tufts of fibers are caught in the tight
loops of the knit, allowing their loose ends to stand free from the backing to
form the pile. Because the fibers are added individually, various colors and
types of fiber can be mixed. This allows for versatility in fabric texture,
appearance and technical features. In addition, the Company's computer
controlled sliver-knitting machines have the capability of creating intricate
"Jacquard" patterns by mixing various fibers and colors. The Company's equipment
also performs a number of finishing processes that create different surface
textures from sheared and velvet-like to curled "sherpa" to "hi-low" patterns
with a subtle embossed look. With the Company's state-of-the-art equipment and
experienced research and production personnel, the Company manufactures a wide
variety of fabrics that can be used in a range of end-use products.
The sliver-knitting process begins with loose fibers that have been
selected for the aesthetic and technical qualities they will lend to the
finished fabric. Most of the fibers used by the Company are pre-dyed by the
supplier and then mixed to create the
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required shade. The loose fibers are blown together in air chambers mixing their
color and fiber type. The mixed fibers are subsequently sent through a series of
carding machines that aligns them in the same direction, producing a soft rope
called "roving" or "sliver." The sliver is fed into the sliver-knitting machine
where portions of the fibers are blown by small air jets into the high speed
needles. As the needles knit the lightweight but strong knit backing, the fibers
are caught securely into each of the loops. The high-speed, computerized needles
can be programmed to knit a large variety of patterns using multiple slivers
simultaneously. After knitting, the pile fabric is sent to the finishing area
and sheared to the desired height. The fabric is subsequently placed through a
series of technical finishing processes developed by the Company to control the
weight, thickness and surface texture of the final fabric.
Since 1991, under a new management team, the Company has replaced or
upgraded substantially all of its knitting machines, including those from the
Jacksboro facility acquired in the Borg Acquisition. In addition, the Company
has replaced or upgraded its blending and carding machines and made
modifications to its dyeing and finishing equipment.
Consumer Products Division
The Consumer Products Division's rug manufacturing operations are
vertically integrated. The rug manufacturing process begins with fabric
formation (although the Company purchases certain pre-formed fabrics on the open
market). The fabric is then coated with a durable textured backing. Next, the
fabric is printed with a design and cut into individual rugs. After cutting, the
rugs are "serged" and inspected for quality. The customer's unique price tag and
bar code are attached, and the rugs are packaged for shipment.
The Company's technology allows it to take a customer's design and produce
numerous rug samples in as little as two hours without incurring the expense and
one month delay associated with full scale production. Accordingly, the Company
commences full production only after it has received confirmed orders from its
customers. The Company has the ability to produce over 500,000 rugs per week and
generally ships rugs within five business days after receiving an order. The
Company believes that its production capabilities are an important competitive
advantage.
The Company uses a high-speed, continuous heat transfer printing process
that results in deep and permanent colors which will withstand machine washing
and drying. In addition, heat transfer printed rugs have an appearance similar
to that of rugs woven from dyed yarn, yet can be produced at a substantially
lower cost than woven rugs. In 1995, the Company added screen printing to its
manufacturing capabilities to enable the printing of designs on cotton and
polypropylene rugs as well as to facilitate shorter production runs.
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Licenses and Trademarks
The Company's principal trademarks are Glenoit(TM), Berber by Glenoit(TM),
Glenaura(TM), Zendura(TM), GlenPile(TM) and Glentec(TM).
Under an agreement with B&D, the Company has the exclusive right to use B&D
copyrighted designs on its printed kitchen rugs in all countries worldwide
except Canada. Under the licensing agreement, the Company is required to pay B&D
a variable royalty (subject to a $250,000 annual minimum) on all products
utilizing B&D designs. This agreement terminates in November 1998 and may be
extended indefinitely at the Company's option in successive one-year periods by
giving written notice to B&D at least 90 days before the expiration of each
term. Under this agreement, the Company is required to maintain a high level of
quality and style and to comply with certain reporting obligations. B&D can
terminate the agreement in the event of a material default by the Company
(including a failure to pay the $250,000 minimum annual royalty).
Raw Materials and Suppliers
The Company's principal raw materials are acrylic and polyester, which the
Company purchases from several large chemical companies. The Company's largest
supplier is Sterling Fibers, Inc., which is the exclusive supplier of acrylic
micro-fiber used in the Company's fabrics. The Company seeks to purchase
sufficient amounts of acrylic and polyester to cover existing order commitments.
The Company does not speculate on the price of raw materials. Although the
Company has always been able to obtain sufficient supplies of raw materials, any
shortage or interruption in the supply, variations in the quality or
fluctuations in the cost of raw materials could have a material adverse effect
on the Company's business, financial condition or results of operations.
The Company has entered into a supply agreement dated February 1, 1997 by
and between the Company and Sterling Fibers, Inc. (the "Sterling Agreement"),
pursuant to which the Company has the exclusive right to purchase from Sterling
(and the Company has agreed not to purchase from any other supplier) colored
micro-fiber for the purpose of manufacturing pile knits (other than pile knits
based on stretchable yarns such as spandex) in the United States, Mexico and
Canada, subject to the terms and conditions of the Sterling Agreement. Under the
Sterling Agreement, the Company has agreed to purchase from Sterling certain
minimum quantities of Sterling's Microsupreme(R) micro-fiber, and Sterling and
the Company have agreed to promote and advertise micro-fiber and micro-fiber
products. The Sterling Agreement has an initial term expiring on February 1,
2000, but will be automatically extended for successive one-year periods unless
either party gives written notice to other party at least one year before the
expiration of the current term. Either party may terminate the Sterling
Agreement in the event of a default by the other party which is not cured within
30 days after notice.
Competition
The textile industry is highly competitive, with no one company dominating
the industry. The Company's competitors range from large vertically integrated
textile companies producing a variety of goods to numerous smaller companies
which direct their efforts at particular niches in the textile markets. Each of
these competitors seeks to set or anticipate fashion trends and respond quickly
to changes in styles with new products. The primary competitive factors in the
textile industry are price, product styling and differentiation, quality,
manufacturing flexibility, delivery time and customer service. In addition,
imports of foreign-made textile and apparel products are a significant source of
competition for many domestic textile manufacturers. The Company believes that
its manufacturing presence in the United States and its emphasis on shortening
production and lead times allows the Company to respond more quickly than
foreign producers to changing fashion trends and to its domestic customers'
requirement that suppliers meet tight production schedules and provide rapid
delivery. The Company's continued success, however, will be affected by the
ability of certain of the Company's customers to remain competitive, which may
be affected by the level of imports. The Company's continued success will also
depend upon the Company's ability to maintain its manufacturing flexibility and
capacity and, most importantly, its ability to continue to produce innovative,
quality products to satisfy specific customer needs.
The Fabric Division competes directly with several smaller manufacturers of
sliver-knit pile fabrics, including Monterey Mills, Inc., Tex-Tenn Corporation,
Draper Knitting Company, Inc. and Roller Fabrics Inc. The Company also competes
with manufacturers of competing non-sliver-knit natural and synthetic fabrics
such as high-end fleece. Such manufacturers include Malden Mills Distributors
Corp., Dyersberg Corporation and Menra Mills Corporation.
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The Consumer Products Division competes with various manufacturers of rugs
for the home, including foreign rug producers. The Consumer Products Division's
principal competitors are Bacova Guild Ltd., a subsidiary of Burlington
Industries, Inc., and American Rug Craftsmen, Inc., a subsidiary of Mohawk
Industries, Inc.
Employees
The Company benefits from an experienced work force with which it maintains
good working relationships. As of January 3, 1998, the Company employed 1,288
employees, of whom 1,103 were hourly and 185 were salaried.
Of the Company's hourly employees, approximately 385 are represented by the
Union of Needletrades, Industrial Textile Employees and are located in
Jacksboro, Tennessee and Elmira, Ontario. The Tennessee agreement with this
union expires on February 21, 1999. The Canadian agreement expires December 25,
1999. The Company's other facilities are non-unionized.
Backlog
The Fabric Division's order backlog was approximately $ 10.6 million at
January 3, 1998 as compared to approximately $10.8 million at January 4, 1997.
Substantially all of the orders outstanding at January 3, 1998 are expected to
be filled within three months of that date. Orders on hand are not necessarily
indicative of total future sales.
No significant order backlog exists for the Consumer Products Division as
most customers order on a weekly basis.
Environmental, Safety and Health Regulation
The Company is subject to increasingly stringent federal, state and local
laws and regulations governing, among other things, the management of hazardous
substances, discharges to air and water, and occupational health and safety.
Such laws include the Federal Water Pollution Control Act, the Clean Air Act and
the Resource Conservation and Recovery Act. The Company's operations,
particularly its dyeing and finishing processes, result in the discharge of
substantial quantities of wastewater and hazardous air emissions. Operating
permits establishing discharge and emission limits for these processes are
subject to revocation, modification or renewal, and violations of such permits
may result in substantial fines and/or civil or criminal sanctions.
The Company may be subject to the requirements of the 1990 Amendments to
the Federal Clean Air Act, including those relating to emissions of hazardous
air pollutants. The Company believes that it will be able to achieve compliance
with such requirements at a cost which will not be material. However, the
Company cannot currently estimate with certainty the impact of future emissions
limitations or enforcement practices upon its operations.
The Company's operations also are governed by certain requirements under
the Occupational Safety and Health Act relating to workplace safety and worker
health which, among other things, establish permissible exposure limits for
cotton dust, formaldehyde, asbestos and noise. In addition, the Company may be
liable under environmental laws, particularly the Federal Comprehensive
Environmental Response, Compensation and Liability Act, for the cleanup of
contamination that occurs on or from the Company's properties, including
contamination that occurred prior to the Company's ownership or operation of the
properties, or for cleanup of contamination on any off-site location to which
the Company shipped hazardous substances for disposal.
The Company believes that it is in compliance in all material respects with
all applicable environmental, health and safety requirements. However, there can
be no assurance that the costs or liabilities related to such requirements that
may be imposed in the future will not result in a material adverse effect on the
Company's business, financial condition and results of operations.
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Legal Proceedings
The Company is a party to various litigation matters incidental to the
conduct of its business. The Company does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company's and its parent's, Glenoit Universal, Ltd. ("Holdings")
federal income tax returns for January 1, 1994 and December 31, 1994, have been
examined by the Internal Revenue Service ("IRS"). The IRS has assessed taxes,
penalties and interest of approximately $3.0 million 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.
The Company's state income tax returns for the years ended January 1, 1994
and December 31, 1994, have been examined by the New York Department of Finance,
which in April 1997, assessed taxes and interest in the amount of approximately
$130,000. The Company is currently in the process of responding to the New York
Department of Finance, as it believes that the proposed adjustments made by the
New York Department of Finance are inappropriate and intends to vigorously
contest these assessments.
Pursuant to the completion of a series of transactions in order to
consummate a leverage recapitalization ("the Recapitalization"), the Seller has
agreed to indemnify Holdings against any tax liability of Holdings, the Company
or its subsidiaries incurred prior to the Recapitalization. The term of such
indemnity extends to the applicable statute of limitations for assessing any
such tax. Any claims under the tax indemnity are required to be reduced by any
tax benefit received by Holdings, the Company or its subsidiaries that arise in
connection with the event giving rise to the indemnity claim and may be
satisfied only by offset against the amounts owed by Holdings to the Seller
under the terms of the Seller Notes.
ITEM 2: PROPERTIES
For information concerning the principal physical properties of the Company
and subsidiaries, see "Item 1: BUSINESS - - Manufacturing Facilities and
Operations".
ITEM 3: LEGAL PROCEEDINGS
For information concerning any material pending legal proceedings the
Company or its subsidiaries are party to, see "Item 1: BUSINESS - - Legal
Proceedings".
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
8
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MEETINGS
Glenoit Corporation is a privately held company with no established public
trading market for its equity securities. The equity securities are held by
Glenoit Universal, Ltd. ("Holdings"). Glenoit Asset Corporation is a wholly
owned subsidiary of Glenoit Corporation.
Glenoit Corporation will be permitted (but will not be obligated) to make
certain payments to Holdings, including payments (i) in respect of principle and
interest of debt obligations of Holdings, (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 and
restrictive covenants in the agreements governing the Company's credit facility
and 11% Senior Subordinated Notes.
During fiscal 1997, the Company distributed $7.3 million to Holdings. No
such distributions were made during fiscal 1996.
9
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
Set forth below are selected historical consolidated financial data of the
Company for the periods indicated. The historical consolidated financial data of
the Company prior to December 13, 1995 reflect the historical results of Glenoit
Mills, Inc. and subsidiary ("Mills"). The selected historical financial data of
the Company as of and for the years ended December 30, 1995, January 4, 1997 and
January 3, 1998 has been derived from the Consolidated Financial Statements of
the Company included elsewhere herein. The selected historical financial data of
the Company as of and for the years ended January 1, 1994 and December 31, 1994
has been derived from the Consolidated Financial Statements of the Company not
included herein. The selected consolidated financial data set forth below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and related notes thereto included elsewhere in this Annual
Report.
<TABLE>
<CAPTION>
Fiscal Year
-----------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales ...................................... $62,527 $72,469 $93,840 $121,751 $146,921
Cost of sales .................................. 43,035 49,594 67,249 86,525 98,061
--------- --------- --------- --------- ---------
Gross profit ................................... 19,492 22,875 26,591 35,226 48,860
Operating expenses ............................. 13,691(a) 12,550 16,235 18,045 22,933
--------- --------- --------- --------- ---------
Income from operations ......................... 5,801 10,325 10,356 17,181 25,927
Interest expense, net .......................... 973 2,208 3,745 9,125 10,938
Other expense (income) ......................... (171) 83 166 589 733
Income tax expense ............................. 2,050 2,850 3,083 3,354 5,390
--------- --------- --------- --------- ---------
Income before extraordinary loss ............... 2,949 5,184 3,362 4,113 8,866
Extraordinary loss, net of tax benefit ......... -- -- 2,407(b) -- 2,857(c)
--------- --------- --------- --------- ---------
Net income ..................................... $2,949 $5,184 $955 $4,113 $6,009
========= ========= ========= ========= =========
Other Data:
Depreciation and amortization .................. $1,124 $1,491 $1,946 $3,097 $3,863
Capital expenditures ........................... 838 1,394 5,239 1,679 19,606
Cash flows from operating activities ........... 7,013 142 181 6,429 23,706
Cash flows used in investing activities ........ (838) (1,201) (13,076) (1,388) (27,763)
Cash flows from financing activities ........... (6,259) 1,247 13,533 (6,014) 5,080
EBITDA(d) ...................................... 7,096 11,733 12,136 19,689 29,056
Adjusted EBITDA(e) ............................. 10,532 11,733 12,136 20,990 29,056
Balance Sheet Data:
Cash and cash equivalents ...................... $196 $384 $1,023 $49 $1,072
Working capital(f) ............................. 2,844 5,925 17,735 13,340 15,148
Total assets ................................... 14,860 21,317 50,946 49,497 75,230
Total liabilities(g) ........................... 5,906 27,547 97,857 92,295 119,396
Stockholder's equity (deficit) ................. 8,954 (6,231) (46,911) (42,798) (44,166)
</TABLE>
(a) Included in "Operating expense" during fiscal 1993 is a one time charge of
$3,436,000 relating to the charge-off of a product supply agreement with a
related party and an investment in a related party.
(b) During fiscal 1995, the Company recognized an extraordinary loss, net of
income tax benefit of $1,240,000, as a result of the early retirement of
the Company's debt obligations. See Notes 4 and 6 to the Consolidated
Financial Statements.
(c) During April 1997, the Company recognized an extraordinary loss, net of
income tax benefit of $1,527,000, as a result of the refinancing of the
Company's debt in connection with the Initial Offering. See Note 6 to the
Consolidated Financial Statements.
(d) EBITDA represents income before extraordinary loss plus income tax expense,
interest expense (net), depreciation and amortization. The Company believes
that EBITDA provides useful information regarding the Company's ability to
service its debt; however, EBITDA does not represent cash flow from
operations, as defined by generally accepted accounting principles and
should not be considered as a substitute for net income as an indicator of
the Company's operating performance or cash flow as a measure of liquidity.
The definition of EBITDA presented herein differs from the definition of
EBITDA in the Indenture. EBITDA has not been adjusted to reflect certain
costs and expenses payable to related parties prior to fiscal 1996, which
were substantially reduced as a result of the Recapitalization. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
(e) Adjusted EBITDA represents EBITDA (See Note (d) above), plus (i) for fiscal
1993, a one time charge of $3,436,000 relating to the charge-off of a
product supply agreement with a related party and an investment in a
related party (See Note
10
<PAGE>
(a) above) and (ii) for fiscal 1996, (A) moving expenses of approximately
$320,000 incurred to relocate the Company's Consumers Product Division and
(B) fees of approximately $980,000 for a consulting project related to
process improvement and cash flow management. Adjusted EBITDA is presented
because the Company believes that it provides useful information regarding
the Company's ability to incur and service debt; however, Adjusted EBITDA
does not represent cash flow from operations as defined by generally
accepted accounting principles and should not be considered as a substitute
for net income as an indicator of the Company's operating performance or
cash flow as a measure of liquidity.
(f) Working capital represents consolidated current assets less consolidated
current liabilities.
(g) The Company's fiscal 1994 balance sheet includes indebtedness of Holdings
which has been accounted for as indebtedness of the Company under the
"push-down" method of accounting. This debt was paid off on December 13,
1995. The "push-down" method requires that debt of Holdings, which was
guaranteed and collateralized by the assets of the Company, be treated for
accounting purposes as debt of the Company. See Note 1 to the Consolidated
Financial Statements.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company's net sales grew from $93.8 million in fiscal 1995 to $146.9
million in fiscal 1997 primarily as a result of rapidly growing demand for the
Company's performance-oriented pile fabrics, which were first introduced in
1993. This demand has been driven by a growing emphasis on outdoor activities
and styling related to outdoor activities. The Company has responded by
developing a line of performance-oriented micro-fiber fabrics, which the Company
believes offer superior performance characteristics in comparison to competing
fleece fabrics. The Company has also invested heavily to upgrade its fabric
manufacturing facilities and increase capacity. In September 1995, the Company
increased manufacturing capacity by 140,000 square feet with the addition of the
Jacksboro, Tennessee facility acquired in the Borg Acquisition, which the
Company upgraded and converted to produce higher margin micro-fiber products. In
addition, effective August 30, 1997 the Company, through its wholly-owned
subsidiary, Glenoit Corporation of Canada ("GCC"), acquired certain assets and
liabilities of Collins & Aikman Canada, Inc.
Results of Operations
The following table sets forth selected results of operations expressed in
millions of dollars and as a percentage of total net sales for fiscal years
1995, 1996 and 1997.
<TABLE>
<CAPTION>
Fiscal Year
-----------
1995 1996 1997
----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Fabric Division .................. $50.2 53.5% $79.4 65.2% $107.1 72.9%
Consumer Products Division ....... 43.6 46.5 42.3 34.8 39.8 27.1
----- ---- ----- ---- ------ ----
Total net sales ................ 93.8 100.0 121.7 100.0 146.9 100.0
Cost of sales ...................... 67.2 71.7 86.5 71.1 98.1 66.8
----- ---- ----- ---- ------ ----
Gross profit ..................... 26.6 28.3 35.2 28.9 48.8 33.2
Operating expenses ................. 16.2 17.3 18.0 14.8 22.9 15.6
----- ---- ----- ---- ------ ----
Income from operations ........... 10.4 11.0 17.2 14.1 25.9 17.6
Interest expense, net .............. 3.7 4.0 9.1 7.5 10.9 7.4
Other expense ...................... 0.2 0.1 0.6 0.5 .7 0.5
Income tax expense ................. 3.1 3.3 3.4 2.7 5.4 3.7
----- ---- ----- ---- ------ ----
Income before extraordinary loss ... 3.4 3.6 4.1 3.4 8.9 6.0
Extraordinary loss ................. 2.4 2.6 -- -- 2.9 2.0
----- ---- ----- ---- ------ ----
Net income ..................... $1.0 1.0% $4.1 3.4% $6.0 4.0%
====- ==== ====- ==== ====== ====
</TABLE>
Fiscal 1997 compared to Fiscal 1996
Net sales for fiscal 1997 increased to $146.9 million or 20.7% compared to
$121.7 million for fiscal 1996. Fabric Division sales increased $27.7 million or
34.9% over prior year due to both increased unit volume in the Company's
performance-oriented fabrics in sportswear and outerwear and an improved average
selling price which reflects an improved sales mix over the prior year. Sales in
the Fabric Division were also positively impacted by the acquisition made by GCC
which generated sales of $4.2 million from the acquisition date through January
3, 1998. Fabric Division sales offset a decline in sales in the Consumer
Products Division which occurred primarily in the second quarter as a result of
a unit volume shortfall as well as a promotional mix in the third quarter which
yielded lower selling prices.
Gross profit for fiscal 1997 was $48.8 million or 33.2% of net sales
compared with $35.2 million or 28.9% of net sales for the prior year. This
increase of $13.6 million or 38.7% resulted from increased unit volume and
higher average selling prices in the Fabric Division. The improved results in
the Fabric Division were partially offset by the margin effect of a second
quarter decline in sales volume and the third quarter promotional mix in the
Consumer Products Division.
Operating expenses for fiscal 1997 were $22.9 million or 15.6% of net sales
compared to $18.0 million or 14.8% of net sales in the prior year. Dollar
increases over the prior year were primarily in sales related categories such as
commissions and credit collection expense as well as the acquisition by GCC
which reported operating expenses of $.3 million. Accruals for pension,
professional fees, and profit related compensation plans increased over the
prior year.
Operating income was $25.9 million for fiscal 1997 compared to $17.2
million in the prior year. This increase, resulting from the factors described
above, represents an increase of $8.7 million or 50.9%.
12
<PAGE>
Interest expense in fiscal 1997 was $10.9 million compared to $9.1 million
for the same period last year. Interest expense has increased due to higher
levels of debt and a higher effective borrowing rate as a result of the issuance
of the $100 million 11% Senior Subordinated Notes ("the Initial Offering").
Net income for fiscal 1997 was $6.0 million (including the effect of an
extraordinary loss on early extinguishment of debt of $2.9 million, net of an
income tax benefit, related to the refinancing of the company's debt which took
place at April 1, 1997) compared to $4.1 million for fiscal 1996.
Fiscal Year 1996 Compared to Fiscal Year 1995
Net sales for fiscal 1996 were $121.7 million, an increase of $27.9 million
or 29.7% over 1995. This sales growth resulted from increased sales in the
Fabric Division which was partially offset by a small sales decline in the
Consumer Products Division. Fabric Division sales increased by $29.2 million, or
58.2%, primarily driven by increased unit sales of the Company's
performance-oriented fabrics in sportswear, outerwear, accessories and home
textile products, as well as increased unit sales of faux fur fabrics for the
women's and children's coat markets. In addition, the Fabric Division's average
sales price increased as higher-priced performance fabrics became a larger
portion of the sales mix. The addition of the Jacksboro facility for a full year
provided the Company with the capacity for an additional $18.4 million of fabric
sales over 1995. In the Consumer Products Division, unit volume remained stable
but unit average sales prices declined slightly due to increased sales of
promotional items by certain of the Company's major customers.
Gross profit for fiscal 1996 was $35.2 million, an increase of $8.6 million
or 32.5% over 1995. As a percent of net sales, gross profit was 28.9% compared
with 28.3% in the prior year. The Company derived benefits from lower raw
material prices and increased sales volume. Additionally, the Company's purchase
of a facility in Tarboro, North Carolina (which was formerly leased from a
related party) in connection with the Recapitalization resulted in net lease
cost savings of approximately $0.4 million in fiscal 1996. These factors more
than offset the costs of integrating the Jacksboro facility and moving the
operations of the Consumer Products Division into a separate facility in
Tarboro. The cost of this move was approximately $0.3 million.
Operating expenses for fiscal 1996 were $18.0 million, an increase of $1.8
million or 11.1% over fiscal 1995. Operating expenses as a percent of net sales
declined from 17.3% in fiscal 1995 to 14.8% in fiscal 1996. The dollar increase
in operating expenses resulted from growth in sales-related expenses (primarily
commissions), increased research and development expenditures in the Consumer
Products Division, and costs of approximately $1.0 million for consulting
services. Operating expenses declined as a percent of net sales primarily due to
the reduction of certain costs following the Recapitalization. These costs
primarily consisted of management fees and consulting fees to related parties
and associated travel and other expenses of approximately $1.4 million in fiscal
1995 which were not incurred in fiscal 1996.
Income from operations for fiscal 1996 was $17.2 million, an increase of
$6.8 million over fiscal 1995. Income from operations as a percent of net sales
was 14.1% in fiscal 1996 compared with 11.0% in fiscal 1995. The increase in
operating income as a percent of net sales was attributable to the factors
resulting in the increase in gross margin and the decrease in operating expenses
as a percent of net sales discussed above.
Net interest expense for fiscal 1996 was $9.1 million compared with $3.7
million in fiscal 1995. The increase of $5.4 million resulted from increased
borrowing incurred in connection with the Recapitalization.
Net income for fiscal 1996 was $4.1 million, an increase of $3.2 million
over fiscal 1995. Net income in 1995 was reduced by an extraordinary loss of
$2.4 million, net of taxes, related to early extinguishment of debt as a part of
the Recapitalization.
Fiscal Year 1995 Compared to Fiscal Year 1994
Net sales for fiscal 1995 were $93.8 million, an increase of $21.4 million
or 29.5% over fiscal 1994. The majority of the increase came from the Fabric
Division where sales increased by $17.9 million or 55.4%. Fabric sales grew
primarily as a result of increased unit sales and average sales price for the
Company's higher-priced performance-oriented fabrics. The addition of the
Jacksboro facility for the last three months of the year provided the Company
with the capacity for an additional $5.7 million of fabric sales. Sales in the
Consumer Products Division increased by $3.4 million due to increased unit sales
of both kitchen rugs and welcome mats with stable average unit prices.
Gross profit for fiscal 1995 was $26.6 million, an increase of $3.7 million
or 16.2% over the prior year. As a percent of net sales, gross profit in fiscal
1995 was 28.3% compared to 31.6% for fiscal 1994. The decrease in gross margin
resulted from significant raw material price increases for polyester fiber and,
to a lesser extent, acrylic fiber, which was partially offset by production
efficiencies associated with increased sales.
13
<PAGE>
Operating expenses for fiscal 1995 were $16.2 million, an increase of $3.7
million or 29.4% over the prior year. As a percent of net sales, operating
expenses were 17.3% in fiscal 1995 which was unchanged from fiscal 1994. The
dollar increases in operating expenses resulted mainly from sales-related
expenditures, primarily commissions.
Income from operations for fiscal 1995 was $10.4 million, a slight increase
over the prior year. As a percent of net sales, income from operations in fiscal
1995 was 11.0% compared to 14.3% in fiscal 1994. The decrease in operating
income as a percent of net sales was attributable to the factors resulting in
the decrease in gross margin discussed above.
Interest expense for fiscal 1995 was $3.7 million compared to $2.2 million
for fiscal 1994. The increase in interest expense was due primarily to
additional borrowings in support of increased working capital requirements as a
result of the higher level of sales, as well as significant capital expenditures
to upgrade the Jacksboro facility acquired in the Borg Acquisition.
Net income for fiscal 1995 was $1.0 million, a decrease of $4.2 million
compared to fiscal 1994. Net income in fiscal 1995 was reduced by an
extraordinary loss of $2.4 million, net of taxes, related to early
extinguishment of debt as part of the Recapitalization.
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 Initial Offering, 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 Credit Facility. At January 3, 1998, there were borrowings of $2.0 million
under the Working Capital Commitment and approximately $16.8 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 January 3, 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 11 of the Consolidated Financial Statements.
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 consolidated financial statements.
Additionally, on June 14, 1997, the Company paid a dividend in the amount of
$1.6 million to enable its parent to exercise an option to repurchase stock and
to retire a related note due to the shareholder from whom the stock was
repurchased. This transaction took place pursuant to a leveraged
recapitalization agreement consummated in December 1995 and was anticipated in
both the bond indenture and the senior credit agreement now in effect.
During fiscal 1997, net cash provided by operating activities was $23.7
million. Accounts and other receivables decreased by $ 1.0 million, inventories
and other current assets decreased by $2.1 million. Accrued liabilities
increased by $3.2 million, due
14
<PAGE>
primarily to accrued interest on senior subordinated notes and the previously
mentioned profit related compensation plans. Accounts payable increased by $2.1
million and "Due to Parent" increased $.9 million related to accrued federal
taxes.
During fiscal 1996, cash provided by operating activities was $6.4 million.
Changes in operating assets resulted in a use of $0.5 million. Increases in
receivables and a decrease in payables required $2.3 million and $3.0 million,
respectively. Cash was provided by changes in accrued expenses of $1.3 million,
changes in inventories and prepaid expenses totaling $1.0 million and a change
in the amount due to/from parent of $2.6 million.
During fiscal 1995 net cash provided by operating activities was $0.2
million. Changes in operating assets resulted in a use of $6.6 million which
consisted of increases in inventory of $2.1 million, increases in receivables of
$3.2 million, and increases in prepaid expenses and receivables due from parent
of $2.4 million. These were offset by increases in accounts payable and accrued
expenses of $1.1 million.
Capital Improvements
Capital expenditures for the year ended January 3, 1998 were $19.6 million.
These additions were primarily in the Fabric Division for additions of knitting
and blending equipment to increase capacity as well as a plant expansion in
Tarboro, N. C. Expenditures were also made for upgrades to management
information systems. During fiscal 1995 and 1996, the Company's capital
expenditures were $5.2 million and $1.7 million, respectively. These additions
included upgrading equipment in the Fabric Division (including the Jacksboro,
Tennessee facility acquired in the Borg Acquisition) to accommodate the growth
in micro-fiber products, as well as upgrading plant and equipment in the
Consumer Products Division.
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 its
results of operations for the three fiscal years ended January 3, 1998 due to
the relatively low rates of inflation during this period.
Forward-Looking Statements
This Form 10-K 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-K
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").
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements of Glenoit Corporation and
Subsidiaries included herein and listed on the indices to the Consolidated
Financial Statements and Financial Statement Schedule as set forth in Item 14 of
this Form 10-K.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
15
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages as of January 3, 1998, and a
brief account of the business experience of each director and executive officer
of the Company. Under the terms of the Stockholders Agreement (as defined), the
board of directors of Holdings will be the same as the board of directors of the
Company. See "Certain Relationships and Related Transactions--Stockholders
Agreement." The Company's By-laws, provide that each director shall hold office
for a term of one (1) year or until his or her successor is elected and
qualified.
Name Age Position
---- --- --------
Thomas J. O'Gorman.................. 63 President, Chief Executive Officer
and Director
Larry Levine........................ 64 President and Chief Operating
Officer--Fabric Division
Robert B. Dale(1)................... 49 President and Chief Operating
Officer--Consumer Products Division
Lester D. Sears..................... 48 Executive Vice President and Chief
Financial Officer
John Mowbray O'Mara................. 69 Director
Saleem Muqaddam..................... 50 Director
Isaac Schapira...................... 44 Director
Joseph M. Silvestri................. 35 Director
(1) Mr. Dale resigned from the Company effective as of July 1, 1997.
Thomas J. O'Gorman. Mr. O'Gorman has served as the President, Chief
Executive Officer and a Director of the Company since 1991. Mr. O'Gorman has
been in the textile industry since 1956 and has served as the General Manager of
the Menswear Business of Milliken & Co.; President of Knit-Away; and President
of the Denim, Corduroy and Blended Fabrics Divisions of Burlington Industries,
Inc., and Burlington's International Denim operations headquartered in London.
Subsequently, Mr. O'Gorman was the President and a Director of Greenwood Mills
Marketing Company, Inc. Mr. O'Gorman has served on the Market Committee of the
American Textile Manufacturers Institute and as a member of the Steering
Committee of Crafted With Pride in the U.S.A. Council.
Larry Levine. Mr. Levine joined the Company in 1991 as Vice President of
Marketing for the Company's Fabric Division and was promoted to President of the
Fabric Division in 1996. Mr. Levine previously served as the President of Fabric
View Ltd., a textile and marketing company, and was a Vice President and a
founder of Monterey Mills, Inc.
Robert B. Dale. Prior to joining the Company in August 1995 as President
and Chief Operating Officer of the Consumer Products Division, Mr. Dale served
25 years in the textile industry in various capacities, including
President/Corporate Officer of the Bedding Division at Fieldcrest Canon Inc.
("Fieldcrest"); President of Fieldcrest's St. Mary's Brand Division; Executive
Vice President of Fieldcrest's Karastan Bigelow Carpet Division; and Fieldcrest
Brand National Sales Manager. Mr. Dale is currently on the Board of Directors of
the Home Products Fashion Association. Mr. Dale resigned from the Company
effective as of July 1, 1997.
Lester D. Sears. Mr. Sears joined the Company in 1996 as Executive Vice
President and Chief Financial Officer. From 1989 to 1996, Mr. Sears was the
Executive Vice President, Chief Financial Officer and an equity owner of Perfect
Fit Industries, Inc., a privately held company. Prior to 1989, Mr. Sears was
employed in various positions including as Controller of the Consumer Products
Division of Springs Industries, Inc.; Vice President and Controller of Mill
Fabrics, Inc.; and as a certified public accountant for Deloitte, Haskins and
Sells.
John Mowbray O'Mara. Mr. O'Mara has been a management consultant and
private investor since January 1990. From July 1990 to May 1993, he served as
Chairman of the Executive Committee of Quality Care Systems, Inc., a provider of
computer-based "expert" medical cost containment systems. From August 1988
through December 1989, Mr. O'Mara served as Chairman of the Board and Chief
Executive Officer of Global Natural Resources, Inc. Prior to serving as Chairman
of Global Natural Resources, Inc., Mr. O'Mara spent 22 years as an investment
banker, serving most recently as Managing Director for Chase Securities Inc., a
subsidiary of The Chase Manhattan Bank. Mr. O'Mara is a director of Baldwin &
Lyons, Inc., Plantronics, Inc. and The Midland Company.
Saleem Muqaddam. Mr. Muqaddam has served as a Vice President of CVC and its
affiliated investment companies since 1989. Previously he spent 15 years with
Citibank, N.A. and its affiliates in senior management positions. Mr. Muqaddam
is a director of Pamida Holdings Corporation, Plantronics, Inc., Chromcraft
Remington Inc. and Fairwood Corporation.
16
<PAGE>
Isaac Schapira. Mr. Schapira has served as a director of Stirling
Investment Holdings, Inc. since December 1994. In addition, Mr. Schapira is the
President of Glenoit (U.K.) Limited, and has been in this position for over 15
years.
Joseph M. Silvestri. Mr. Silvestri has been a director of the Company since
his appointment by CVC in 1994. Mr. Silvestri has been employed by CVC since
1990 and has been a Vice President since 1995. Mr. Silvestri served as Assistant
Vice President of CVC from 1990 to 1995. Mr. Silvestri serves on the Board of
Directors of International Media Group, Triumph Group, Polyfibron Technologies,
Inc., Frozen Specialties, Inc. and Euramax International, Inc.
Compensation of Directors
The Company's Board of Directors receive no compensation for their service
as directors. Directors are reimbursed for their out-of-pocket expenses in
connection with their travel to and attendance at meetings of the Board of
Directors or committees thereof.
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth certain information for the fiscal year
ended January 3, 1998, concerning cash and non-cash compensation earned by the
Chief Executive Officer and the three other most highly compensated executive
officers of the Company whose combined salary and bonus exceeded $100,000 during
such year.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Other Annual
--------- ------------
Annual Compensation Compensation Compensation
------------------- ------------ ------------
Fiscal Restricted
Name Principal Position Year Salary($) Bonus($) Stock Award ($) ($)
---- ------------------ ------ --------- -------- --------------- ---
<S> <C> <C> <C> <C> <C> <C>
Thomas J. O'Gorman........ Chief Executive Officer 1997 $400,000 $800,000 $182,787(5) $ --
1996 406,250 615,271 106,250(1)
Larry Levine.............. President & Chief Operating 1997 203,077 332,423 --
Officer - Fabric Division 1996 204,846 213,100
Robert B. Dale(4)......... President & Chief Operating 1997 300,000 37,500 --
Officer - Consumer Products Div. 1996 305,769 37,120
Lester D. Sears(2)........ Executive Vice President & 1997 172,932 141,077
Chief Financial Officer 1996 69,808 50,000 35,000(3)
</TABLE>
(1) Amount shown reflects deferred compensation from 1992 through 1995
which Mr. O'Gorman elected to receive in 1996.
(2) Employed as of August 5, 1996.
(3) Amount shown reflects a signing bonus under the employment agreement
with Mr. Sears. See "--Employment Agreements."
(4) Mr. Dale resigned from the Company effective as of July 1, 1997.
(5) In August 1997, Mr. O'Gorman was granted 1,286.211 options for
restricted shares of Holdings' Class A common stock at an exercise price of
$37,500. Mr. O'Gorman exercised the shares immediately. At the time of exercise,
the Company estimated fair market value for the shares to be $220,287. See "Item
12: Security Ownership of Certain Beneficial Owners and Management" for total
shares owned by Mr. O'Gorman.
Defined Benefit Plan
The Company's retirement benefit provides a maximum monthly benefit
regardless of the employees compensation level of $2,000. The normal retirement
benefit is 45% of the average final compensation of the employee, reduced pro
rata for each year of service less than 25 years.
Employment Agreements
Mr. O'Gorman has an employment agreement (the "O'Gorman Agreement") with
the Company dated as of October 28, 1997, as amended, which expires on January
1, 2001. The O'Gorman Agreement provides for Mr. O'Gorman's employment as
17
<PAGE>
Chief Executive Officer and President or Chairman, if so elected, of Holdings
and the Company at an annual salary of $400,000 and a bonus based on the
financial performance of the Company. Mr. O'Gorman's employment may be
terminated by him on 12-months' notice to the Company. In the event the Company
were to terminate Mr. O'Gorman for other than "Cause" (as defined therein), Mr.
O'Gorman would be entitled to severance payments consisting of a pro-rated
portion of his annual bonus for the year of termination and his annual salary
and other benefits for 12 months following the date of such termination. The
O'Gorman Agreement also provides that he will not compete with the Company
during the employment term and for a period of 18 months following termination.
Mr. Sears has an employment agreement (the "Sears Agreement") dated as of
August 5, 1996 which expires on December 31, 1999, subject to one year renewals
thereafter unless either party elects not to renew at least six months prior to
the termination date. The Sears Agreement provides for Mr. Sears' employment as
Executive Vice President and Chief Financial Officer of the Company at an annual
salary of $165,000 and a bonus of $50,000 for the year ended December 31, 1996.
The salary is subject to a minimum increase each year of 5% and future minimum
bonus payments will be the lesser of (x) 66.7% of Mr. Sear's base salary and (y)
a fixed percentage of the Company's EBITDA. The fixed percentage is calculated
by dividing $50,000 by the Company's EBITDA for the fiscal year ending December
31, 1995. In addition to the payments provided therein, Mr. Sears received an
initial cash payment of $35,000. Mr. Sears' employment may be terminated by him
or the Company at any time. In the event Mr. Sears' employment is terminated
other than for "Cause" (as defined therein) or Mr. Sears terminates his
employment for "Good Reason" (as defined therein), Mr. Sears will receive as a
severance payment a cash lump sum in the amount of (A) the base salary at its
then current annual rate and (B) the highest annual bonus paid to or accrued by
the Company for the term of the agreement.
18
<PAGE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Holdings owns 100% of the Company's common stock. The following table sets
forth, as of January 3, 1998, certain information with respect to each class of
Holdings Common Stock (as defined) beneficially owned by each director of the
Company, all officers and directors of the Company as a group, and each person
known to the Company to own beneficially more than 5% of Holdings Common Stock
of any such class. Unless otherwise noted, the individuals have sole voting and
investment power. As described under "Description of Capital Stock and
Indebtedness of Holdings," certain classes of Holdings Common Stock are
convertible into other classes of Holdings Common Stock. Except as noted in the
footnotes to the table, the information in the table assumes no such conversion.
<TABLE>
<CAPTION>
Class A Class B Class C Class D Class E
-------- -------- ------- -------- -------
Name and Address Shares % Shares % Shares % Shares % Shares %
---------------- ------ --- ------ --- ------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Citicorp Venture Capital, Ltd. ..... 5,649 46.5% 17,026 78.5% -- -- -- -- -- --
399 Park Avenue
New York, New York 10043
Isaac Schapira(a) .................. 1,826 15.0 -- 3,579 100% -- -- -- --
c/o Gratch Jacobs & Brozman
950 Third Avenue
New York, New York 10022
Thomas J. O'Gorman ................. 3,112 25.6 -- -- -- -- -- -- -- --
111 West 40th Street
New York, New York 10018
The Equitable Life Assurance
Society of the ..................... 2,412(b) 16.6 -- -- -- -- -- -- 2,412(b) 100%
United States
c/o Alliance Corporate Finance
Group Incorporated
1345 Avenue of the Americas
New York, New York 10105
Banque Nationale de Paris .......... 1,715(c) 12.4 1,715(c) 7.3 -- -- -- -- -- --
499 Park Avenue
New York, New York 10022-1245
CCT Partners II, L.P.(d) ........... 997 8.2 3,005 13.8 -- -- -- -- -- --
399 Park Avenue
New York, New York 10043
Saleem Muqaddam(e) ................. 55 * 167 * -- -- -- -- -- --
c/o Citicorp Venture Capital, Ltd.
399 Park Avenue
New York, New York 10043
Joseph Silvestri(e) ................ 1 * 3 * -- -- -- -- -- --
c/o Citicorp Venture Capital, Ltd.
399 Park Avenue
New York, New York 10043
John Mowbray O'Mara ................ -- -- -- -- -- -- 20 100 -- --
623 Lake Avenue
Greenwich, Connecticut 06830
All officers and directors as a
group(e) (8 persons) ............... 4,994 41.1 170 * 3,579 100 20 100 -- --
</TABLE>
* Represents less than 1%
(a) Includes shares held by Stirling Investment Holdings, Inc., a British
Virgin Islands corporation (the "Seller"). Under Rule 13d-3 under the
Exchange Act, Mr. Schapira is deemed to beneficially own shares held by the
Seller.
(b) Includes a warrant to purchase 2,412 shares of Class A or Class E Stock
with an exercise price of $0.01 per share and an expiration date of
December 14, 2003.
(c) Includes a warrant to purchase 1,715 shares of Class A or Class B Stock
with an exercise price of $0.01 per share and an expiration date of
December 14, 2003.
(d) CCT Partners II, L.P. is a Delaware limited partnership, the limited
partners of which are employees of CVC.
(e) Does not include shares held by CVC or CCT Partners II, L.P. that may be
deemed to be beneficially owned by Messrs. Muqaddam and Silvestri. Messrs.
Muqaddam and Silvestri disclaim beneficial ownership of shares held by CVC
and CCT Partners II, L.P.
Certain stockholders of the Company have entered into the Stockholders
Agreement, which contains certain agreements relating to the composition of the
board of directors of Holdings and its subsidiaries. See "Certain Relationships
and Related Transactions--Stockholders Agreement."
19
<PAGE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Indebtedness of Management
In connection with the O'Gorman Agreement, Mr. O'Gorman received a loan in
the amount of $300,000 from the Company. Pursuant to the O'Gorman Agreement, the
loan bears a simple interest rate equal to the lowest rate in effect pursuant to
the Treasury Regulations so as to preclude the loan from bearing imputed
interest. The loan shall be due on the last day of the Employment Period (as
defined therein) or shall be forgiven if Mr. O'Gorman is still employed by the
Company on December 31, 2003.
Stockholders Agreement
Holdings is a party to a stockholders agreement dated December 14, 1995
(the "Stockholders Agreement") by and among Holdings, CVC, John Mowbray O'Mara
("O'Mara"), BNP, The Equitable Life Assurance Society of the United States
("Equitable"), the Seller, Soannes Investment Corp. ("Soannes"), Thomas J.
O'Gorman and certain other parties thereto (collectively, the "Stockholders"),
which contains certain agreements among the Stockholders relating to the
composition of the board of directors of Holdings and its subsidiaries and
limiting the manner and terms by which the Stockholders may transfer their
shares of Holdings Common Stock or warrants to purchase Holdings Common Stock.
Pursuant to the Stockholders Agreement, the Board of Directors of Holdings
will be composed at all times of five directors as follows: the Chief Executive
Officer of Holdings; two directors appointed by CVC; one director appointed by
O'Mara or the party that then holds the Holdings Common Stock owned by O'Mara on
the date of the execution of the Stockholders Agreement; one director appointed
by the Seller until such time as the Seller and Soannes together own less than
9.9% of the outstanding Holdings Common Stock, at which time the remaining
director shall be appointed by the holders of a majority of the shares of
Holdings Common Stock owned by the original parties to the Stockholders
Agreement. The composition of the boards of directors of the Company and its
subsidiaries shall be the same as the composition of the board of directors of
Holdings.
Rights Offering. The Stockholders Agreement provides the stockholders with
the right to participate ratably, in accordance with their fully-diluted common
equity ownership, in all additional offerings of Holdings Common Stock or
preferred stock, if any, or of securities exercisable, convertible or
exchangeable for or into Holdings Common Stock (other than certain offerings
permitted by the Stockholders Agreement relating primarily to then outstanding
options and warrants and a public offering of Holdings Common Stock having an
aggregate value of at least $20 million).
Right of First Offer. If a Stockholder wishes to transfer any Holdings
Common Stock or if BNP or Equitable wish to transfer their warrants, Holdings
must first be given the opportunity to purchase all of Holdings Common Stock or
warrants offered (but not less than all) at the same price and on the same terms
as those proposed by the Stockholder transferee. Each other Stockholder may
elect to purchase its pro rata share (but not less than all of its pro rata
share) of Holdings Common Stock or warrants at the same price and on the same
terms, but only in the event that Holdings does not exercise its right to
purchase such Common Stock or warrants.
Tag Along Rights. In the event that CVC proposes to sell Holdings Common
Stock which would result in CVC, O'Gorman and certain related investors
collectively owning less than 50% of the then outstanding Holdings Common Stock
(other than in a registered public offering or other permitted transaction), the
other Stockholders will have the option to participate in the proposed sale on
the same terms and conditions as CVC, with the participating Stockholders each
selling a pro rata number of shares.
Sale of Holdings. If the board of directors of Holdings and holders of a
majority of the Holdings Common Stock then outstanding approve the sale of
Holdings (an "Approved Sale"), each Stockholder has agreed to (i) consent to
such sale and raise no objections against it, (ii) waive any dissenter's rights
and other similar rights and (iii) if such Approved Sale includes the sale of
Holdings Common Stock, each Stockholder will sell all of such Stockholder's
Holdings Common Stock on the terms and conditions approved by the board of
directors of Holdings and holders of the majority of the Holdings Common Stock
then outstanding.
20
<PAGE>
Registration Rights Agreement
Holdings is a party to a registration rights agreement (the "Holdings
Registration Rights Agreement") by and among Holdings and the Stockholders.
Pursuant to the terms of the Holdings Registration Rights Agreement CVC, BNP and
Equitable have the right to require Holdings, at the sole expense of Holdings
and subject to certain limitations, to register under the Securities Act all or
part of the shares of Holdings Common Stock (the "Registrable Securities") held
by them. CVC is entitled to demand three long-form registrations and unlimited
short-form registrations, while BNP and Equitable are entitled to demand one
long-form registration and unlimited short-form registrations; provided,
however, that no registration may be demanded within six months of the effective
date of a previous demand registration. Additionally, CVC is entitled to demand
one shelf registration.
All Stockholders are entitled to an unlimited number of "piggyback"
registrations, with Holdings paying all expenses of the offering, whenever
Holdings proposes to register its Common Stock under the Securities Act (except
in the case of an initial public offering).
Pursuant to the Holdings Registration Rights Agreement, Holdings has agreed
to indemnify all holders of Registrable Securities against certain liabilities,
including liabilities under the Securities Act.
Tax Sharing Agreement
Holdings, the Company and GAC will be included in the consolidated United
States federal income tax return of Holdings. Holdings, the Company and GAC have
entered into a Tax Sharing Agreement whereby the Company and GAC will pay
Holdings their respective pro rata share of the total consolidated tax
liability, as set forth in the Tax Sharing Agreement. Under the Tax Sharing
Agreement the Company and GAC are treated as separate tax groups for purposes of
the agreement. The Tax Sharing Agreement provides that if the Company or GAC has
losses that are absorbed by the rest of the consolidated tax group, the Company,
as the case may be, cannot carry those losses forward to offset its own future
taxable income. In the event that the Company and its subsidiaries are included
in a joint, combined, consolidated or unitary state or local income or franchise
tax return with Holdings, the Company will make payments to Holdings in a manner
consistent with that described above for federal tax purposes. Under the
Indenture, the Company will be permitted to make payments to Holdings under the
Tax Sharing Agreement; provided, however, that certain amendments to the Tax
Sharing Agreement will be required if more than a nominal amount of gross income
is generated by Holdings or any subsidiary of Holdings (other than Mills).
Importance of B&D License Agreement; CVC's Interest in B&D; Possible Sale of B&D
A substantial majority of the products sold by the Consumer Products
Division are manufactured, marketed and sold under a license agreement with B&D.
See "Business--Licenses and Trademarks." Although the Company has the right to
perpetually renew the license agreement for successive one-year terms (subject
to certain conditions), the loss of this license or a deterioration in B&D's
business could have a material adverse effect on the Company's business,
financial condition and results of operations.
CVC, the Company's largest shareholder, has an interest in B&D as a result
of CVC's purchase in 1991 of certain notes of Papercraft Corporation
("Papercraft"), the then-parent company of B&D, while Papercraft was the subject
of a bankruptcy proceeding in the Western District of Pennsylvania. During the
bankruptcy proceeding, a committee of certain other creditors of Papercraft (the
"Committee") sought to have CVC's claim equitably subordinated to the claims of
other creditors. In October 1995, the bankruptcy court denied the Committee's
request for equitable subordination, but limited CVC's claim to the purchase
price of the Papercraft notes (resulting in CVC receiving an 11% interest in the
reorganized entity, which emerged from bankruptcy as BDK Holdings Inc. ("BDK")),
rather than the face value of the notes (which would result in CVC receiving a
41% interest in BDK). CVC has appealed the bankruptcy court's decision,
asserting that the court erred in establishing and applying a new and previously
unrecognized rule which prohibited CVC from purchasing the notes without first
disclosing to the sellers and the other creditors that it intended to purchase
the notes and that it had a representative on the Papercraft board. The
Committee has also filed an appeal contesting the bankruptcy court's decision
not to equitably subordinate CVC's claim. In addition, CVC believes that the
board of directors of BDK may be seeking to sell the company and has filed a
complaint with the bankruptcy court seeking to prohibit any sale of the disputed
interest in BDK until all appeals of the bankruptcy court's decision have been
exhausted.
The Company believes that its relationship with B&D is excellent and has no
reason to believe that the matters relating to CVC's interest in BDK or any sale
of BDK will have a material adverse effect on the Company's business, financial
condition or results of operations.
21
<PAGE>
PART IV:
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
The financial statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K
None
(c) 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.
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.
22
<PAGE>
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 Schedule.
(d) Schedules
Not applicable.
23
<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, in the city of New
York, state of New York, on March 5, 1998.
GLENOIT CORPORATION
By /s/ THOMAS J. O'GORMAN
-----------------------------------------------
Thomas J. O'Gorman
President, Chief Executive Officer and Director
(principal executive officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas J. O'Gorman and Lester D. Sears his true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities (including his capacity as a director and/or officer of Glenoit
Corporation to sign any and all amendments (including post-effective amendments)
to this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report and
power of attorney have been signed by the following persons on behalf of the
registrant on March 5, 1998 in the capacities indicated:
By /s/ THOMAS J. O'GORMAN
---------------------------------
Thomas J. O'Gorman
President, Chief Executive
Officer and Director
(principal executive officer)
By /s/ LESTER D. SEARS
---------------------------------
Lester D. Sears
Executive Vice President and Chief
Financial Officer (principal
financial and accounting officer)
By /s/ JOHN MOWBRAY O'MARA
---------------------------------
John Mowbray O'Mara
Director
By /s/ SALEEM MUQADDAM
---------------------------------
Saleem Muqaddam
Director
By /s/ ISAAC SCHAPIRA
---------------------------------
Isaac Schapira
Director
By /s/ JOSEPH M. SILVESTRI
---------------------------------
Joseph M. Silvestri
Director
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the 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, in the city of New
York, state of New York, on March 5, 1998.
GLENOIT ASSET CORPORATION
By /s/ THOMAS J. O'GORMAN
---------------------------------
Thomas J. O'Gorman
President, Chief Executive Officer
and Director (principal executive
officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas J. O'Gorman and Lester D. Sears his true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities (including his capacity as a director and/or officer of Glenoit
Corporation to sign any and all amendments (including post-effective amendments)
to this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Annual
Report and power of attorney have been signed by the following persons on behalf
of the registrant on March 5, 1998 in the capacities indicated:
By /s/ THOMAS J. O'GORMAN
---------------------------------
Thomas J. O'Gorman
President, Chief Executive Officer
and Director (principal
executive officer)
By /s/ LESTER D. SEARS
---------------------------------
Lester D. Sears
Executive Vice President, Assistant
Secretary (principal
financial and accounting officer)
By /s/ PETER J. WINNINGTON
---------------------------------
Peter J. Winnington
Secretary and Vice President
By /s/ THOMAS L. HARRELL
---------------------------------
Thomas L. Harrell
Assistant Treasurer
25
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants ................................. F-2
Consolidated Balance Sheets as of January 4, 1997
and January 3, 1998 ............................................ F-3
Consolidated Statements of Income for the years ended
December 30, 1995, January 4, 1997 and January 3, 1998 ......... F-5
Consolidated Statements of Stockholder's Deficit
for the years ended December 30, 1995,
January 4, 1997, and January 3, 1998 ........................... F-6
Consolidated Statements of Cash Flows for the
years ended December 30, 1995, January 4, 1997
and January 3, 1998 ............................................ F-7
Notes to Consolidated Financial Statements ........................ F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Glenoit Corporation
We have audited the accompanying consolidated balance sheets of Glenoit
Corporation and subsidiary (the "Company"), a wholly-owned subsidiary of Glenoit
Universal, Ltd., as of January 4, 1997 and January 3, 1998, and the related
consolidated statements of income, stockholder's deficit, and cash flows for the
years ended December 30, 1995, January 4, 1997 and January 3, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Glenoit
Corporation and subsidiary as of January 4, 1997 and January 3, 1998, and the
consolidated results of their operations and their cash flows for the years
ended December 30, 1995, January 4, 1997 and January 3, 1998, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
February 3, 1998
F-2
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 4, January 3,
1997 1998
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ........................... $48,817 $1,072,280
Receivables:
Trade accounts receivable, net of allowance of
$470,000 and $543,000 as of January 4, 1997
and January 3, 1998, respectively ........... 18,615,029 21,216,104
Other receivables .............................. 349,980 174,561
Inventories ........................................ 7,535,920 6,932,272
Deferred tax asset ................................. 300,824 776,560
Prepaid expenses and other current assets .......... 750,340 379,201
------------ ------------
Total current assets ...................... 27,600,910 30,550,978
------------ ------------
Property, plant and equipment:
Land ................................................ 340,923 720,511
Buildings and improvements .......................... 6,717,146 8,482,548
Machinery and equipment ............................. 21,632,224 32,802,578
Computer equipment .................................. 711,220 1,258,476
Furniture and fixtures .............................. 681,327 817,495
Leasehold improvements .............................. 397,884 411,276
Equipment under capital leases ...................... 1,636,246 1,636,246
Construction-in-progress ............................ 9,356,955
------------ ------------
Total ..................................... 32,116,970 55,486,085
Less accumulated depreciation and amortization ...... (17,687,558) (20,344,981)
------------ ------------
Net property, plant and equipment ......... 14,429,412 35,141,104
------------ ------------
Other assets:
Notes receivable from related party ................. 211,500 187,500
Intangible assets, net of accumulated amortization of
$1,015,755 and $1,251,002 as of
January 4, 1997 and January 3, 1998,
respectively ..................................... 4,246,737 4,420,319
Deferred loan costs and other, net of accumulated
amortization of $660,673 and $523,743
as of January 4, 1997 and January 3, 1998,
respectively ..................................... 3,008,762 4,929,666
------------ ------------
Total assets .............................. $49,497,321 $75,229,567
============ ============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-3
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 4, January 3,
1997 1998
------------- -------------
<S> <C> <C>
Liabilities and Stockholder's Deficit
Current liabilities:
Accounts payable ......................................... $2,994,133 $5,961,475
Accrued expenses ......................................... 777,554 1,635,657
Accrued compensation ..................................... 1,464,622 2,105,825
Accrued interest ......................................... 403,128 2,323,700
Current maturities of long-term debt ..................... 6,316,239 --
Current maturities of capital lease obligations .......... 571,037 697,934
Due to Holdings .......................................... 1,734,023 2,678,587
------------- -------------
Total current liabilities ...................... 14,260,736 15,403,178
Long-term debt--less current maturities ....................... 75,683,761 102,000,000
Capital lease obligations--less current maturities ............ 814,403 61,685
Deferred income taxes ......................................... 1,536,739 1,930,694
------------- -------------
Total liabilities .............................. 92,295,639 119,395,557
------------- -------------
Commitments and contingencies
Stockholder's deficit:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding as January 4, 1997
and January 3, 1998 ................................... 10 10
Additional paid-in capital ............................... 1,161,713 1,361,713
Accumulated deficit ...................................... (43,960,041) (45,295,099)
Currency translation adjustment .......................... (232,614)
------------- -------------
Total stockholder's deficit .................... (42,798,318) (44,165,990)
------------- -------------
Total liabilities and stockholder's deficit .... $49,497,321 $75,229,567
============= =============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-4
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended
-----------
December 30, January 4, January 3,
1995 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net sales .............................. $93,840,334 $121,750,833 $146,920,759
Cost of sales .......................... 67,249,156 86,525,495 98,061,440
------------- ------------- -------------
Gross profit ................. 26,591,178 35,225,338 48,859,319
------------- ------------- -------------
Operating expenses:
Selling ........................... 8,872,334 10,262,349 12,309,451
Administrative .................... 5,488,617 5,635,692 8,780,595
Research and development .......... 1,874,306 2,146,627 1,842,639
------------- ------------- -------------
Total operating expenses ..... 16,235,257 18,044,668 22,932,685
------------- ------------- -------------
Income from operations ................. 10,355,921 17,180,670 25,926,634
------------- ------------- -------------
Other income (expense):
Interest expense, net ............. (3,744,810) (9,124,655) (10,938,341)
Amortization of deferred financing
costs .......................... (225,429) (641,806) (645,621)
Other ............................. 59,085 52,932 (86,853)
------------- ------------- -------------
Total other expense .......... (3,911,154) (9,713,529) (11,670,815)
------------- ------------- -------------
Income before income taxes and
extraordinary loss .................. 6,444,767 7,467,141 14,255,819
Income tax expense ..................... 3,082,934 3,354,504 5,390,412
------------- ------------- -------------
Income before extraordinary loss ....... 3,361,833 4,112,637 8,865,407
Extraordinary loss on early
extinguishment of debt, net of tax
benefit of $1,240,000 for the year
ended December 30, 1995 and
$1,527,000 for the year ended
January 3, 1998 ..................... 2,407,006 2,856,884
------------- ------------- -------------
Net income ............................. $954,827 $4,112,637 $6,008,523
============= ============= =============
Basic and diluted income per share:
Income before extraordinary loss .. $3,362 $4,113 $8,865
Extraordinary loss on early
extinguishment of debt ....... (2,407) (2,856)
------------- ------------- -------------
Net income ........................ $955 $4,113 $6,009
============= ============= =============
Weighted average shares outstanding 1,000 1,000 1,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-5
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
for the years ended December 30, 1995,
January 4, 1997 and January 3, 1998
<TABLE>
<CAPTION>
Retained
Shares of Additional Earnings Currency
Common Common Paid-in (Accumulated Translation
Stock Stock Capital Deficit) Adjustment Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31,
1994 ............................. 1,000 $ 10 $ 139,990 $ (6,370,703) $ (6,230,703)
Combination of Tarboro
Properties, Ltd. ................. 1,021,723 1,021,723
Net income .......................... 954,827 954,827
Property dividends .................. (2,170,541) (2,170,541)
Cash dividends ...................... (40,486,261) (40,486,261)
------------ ------------ ------------ ------------ ------------ ------------
Balance as of December 30,
1995 ............................. 1,000 10 1,161,713 (48,072,678) (46,910,955)
Net income .......................... 4,112,637 4,112,637
------------ ------------ ------------ ------------ ------------ ------------
Balance as of January 4, 1997 ....... 1,000 10 1,161,713 (43,960,041) (42,798,318)
Net income .......................... 6,008,523 6,008,523
Dividends ........................... (7,343,581) (7,343,581)
Stock compensation .................. 200,000 200,000
Currency translation adjustment ..... (232,614) (232,614)
------------ ------------ ------------ ------------ ------------ ------------
Balance as of January 3, 1998 ....... 1,000 $ 10 $ 1,361,713 $(45,295,099) $ (232,614) $(44,165,990)
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-6
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
-----------
December 30, January 4, January 3,
1995 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $954,827 $4,112,637 $6,008,523
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on early extinguishment of debt ....................... 3,647,006 4,383,884
Deferred income taxes ...................................... 264,311 (278,396) (81,781)
Depreciation and amortization .............................. 1,946,085 3,096,902 3,861,613
Loss (gain) on sale of property and equipment .............. (22,311) 234,020
Stock compensation ......................................... 200,000
Effect of foreign currency exchange rate ................... (232,614)
Changes in operating assets and liabilities, net of
acquired operating assets and liabilities:
Trade and other receivables .............................. (3,210,376) (2,329,232) 1,025,410
Inventories .............................................. (2,124,194) 315,796 1,678,022
Prepaid expenses and other ............................... (800,049) 660,715 443,589
Due to/from parent ....................................... (1,639,029) 2,555,722 944,564
Accounts payable ......................................... 836,296 (2,957,528) 2,079,009
Accrued expenses and other liabilities ................... 306,277 1,274,230 3,161,820
------------- ------------- -------------
Net cash provided by operating
activities ........................................... 181,154 6,428,535 23,706,059
------------- ------------- -------------
Cash flows from investing activities:
Purchases of acquired businesses ............................... (7,836,137) (8,209,333)
Purchases of and additions to property, plant and
equipment .................................................... (5,239,490) (1,704,631) (19,605,752)
Proceeds from sale of property and equipment and
refunds of deposits .......................................... 316,400 52,300
------------- ------------- -------------
Net cash used in investing activities .................. (13,075,627) (1,388,231) (27,762,785)
------------- ------------- -------------
Cash flows from financing activities:
Advances on notes receivable-related parties ................... (1,297,787)
Collections of notes receivable-related parties ................ 888,328
Combination of Tarboro Properties, Ltd. ........................ 303,574
Payments on capital lease obligations .......................... (155,806) (362,668) (625,821)
Proceeds from line of credit and issuance of debt .............. 93,281,453 8,200,000 124,600,000
Payments on line of credit and debt ............................ (27,137,681) (14,633,768) (104,600,000)
Payments for financing costs ................................... (6,283,760) (35,137) (6,950,409)
Net change in advances from factor on accounts
receivable ................................................... (5,578,598)
Increase in due to parent ...................................... 817,330
Dividends paid ................................................. (40,486,261) (1,600,000)
Payment of note payable to related party ....................... (5,743,581)
------------- ------------- -------------
Net cash provided by (used in) financing
activities ........................................... 13,533,462 (6,014,243) 5,080,189
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents .......................................... 638,989 (973,939) 1,023,463
Cash and cash equivalents at beginning of year ................... 383,767 1,022,756 48,817
------------- ------------- -------------
Cash and cash equivalents at end of year ......................... $1,022,756 $48,817 $1,072,280
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
On December 13, 1995, Glenoit Universal, Ltd., ("Holdings") formed a
wholly-owned subsidiary, Glenoit Corporation, 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. Accordingly, the accompanying financial
statements of Glenoit Corporation and subsidiaries (the "Company") reflect the
historical results of Mills prior to December 13, 1995. The Company is engaged
primarily in the manufacture of fabric and household rugs with plants in eastern
North Carolina, eastern Tennessee and Ontario, Canada. The Company offers a wide
variety of textile products to customers in the retail, apparel, and automotive
industries throughout the United States.
Basis of Presentation
On December 13, 1995, Holdings acquired all of the issued and outstanding
stock of Tarboro Properties, Ltd. ("Tarboro"), a company related through common
ownership. Tarboro formerly owned the Company's plants located in eastern North
Carolina. Holdings accounted for the acquisition similar to a
pooling-of-interests and, accordingly, has restated all financial data for the
year ended December 30, 1995 as of January 1, 1995.
On December 13, 1995, Holdings contributed all of the issued and
outstanding stock of Tarboro, with a carryover basis of $1,021,723, to the
Company. In accordance with the accounting followed by Holdings, the Company has
recorded the contribution as of January 1, 1995 at Tarboro's basis. Further, the
results of operations of Tarboro have been included with the Company since
January 1, 1995.
In September 1997, Glenoit Corporation's newly formed wholly-owned
subsidiary, Glenoit Corporation of Canada ("Glenoit Canada"), acquired certain
assets and liabilities of Collins & Aikman Canada, Inc. (see Note 3). In
addition, Glenoit Corporation merged with Glenoit Mills, Inc. and Tarboro in
September 1997. Accordingly, as of January 3, 1998, the consolidated financial
statements presented include the amounts of Glenoit Corporation and its
wholly-owned subsidiaries Glenoit Canada and Glenoit Asset Corporation.
As of December, 1994, the Company guaranteed and its assets were primary
collateral under certain obligations of Holdings. This debt was reflected
("pushed down") as debt of the Company. Accordingly, the Company has reflected
the related interest expense, amortization of the debt issue costs and
extraordinary losses from early extinguishment of this debt in its financial
statements. As described in Note 6, the obligations were paid off by Holdings
during 1995.
Principles of Consolidation
All material intercompany accounts and transactions are eliminated. The
Company reports its operations on a fifty-two/fifty-three week fiscal year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Flow Statements
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. During 1996, the
Company entered into a capital lease of $1,636,246, which is a noncash investing
and financing activity.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
F-8
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
Property, Plant and Equipment
Property, plant and equipment is stated at cost; property, plant and
equipment obtained through purchase business combinations is stated at estimated
fair value as of the date of acquisition. Property and equipment under capital
leases are initially recorded at the lower of the present value of the future
minimum lease payments or the fair value of the related equipment.
Depreciation (which includes the amortization of capital leased assets) is
computed using the straight-line method over the related asset's estimated
useful life as follows:
Buildings and improvements............................ 20 to 40 years
Machinery and equipment............................... 5 to 12 years
Computer equipment.................................... 5 years
Furniture and equipment............................... 5 to 12 years
Deferred Loan Costs
Deferred loan costs, primarily composed of loan origination costs and legal
fees, are amortized over the term of the related loan agreement using the
straight-line method.
Intangible Assets
Intangible assets principally represent the amount by which the costs of
acquired net assets exceeded their related fair value (goodwill) as of the date
of acquisition. Goodwill is being amortized on a straight-line basis over lives
of twenty and forty years. The carrying value of goodwill will be reviewed if
the facts and circumstances suggest that it is impaired. If this review
indicates that goodwill will not be recoverable as determined based on the
undiscounted cash flows of the entity acquired over the remaining amortization
period, the Company will adjust the carrying value of goodwill.
Net Sales
The Company recognizes a sale when title passes to the customer (usually at
the date of shipment). Amounts which are determined to be uncollectible are
charged to operating expense. Sales returns and allowances are recorded against
sales based on management's estimates of sales returns. Net sales from customers
in excess of 10% of consolidated net sales in the respective year is as follows:
December 30, 1995 January 4, 1997
----------------- ---------------
Customer A......................... 10% 11%
Customer B......................... 11% 9%
No single customer accounted for greater than 10% of consolidated net sales
during the year ended January 3, 1998.
Research and Development Costs
Research and development costs are charged to expense as incurred.
F-9
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes pursuant to Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
Net Income Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", as of January 3, 1998, which requires the Company to
present both basic and diluted earnings per share. Basic earnings per common
share is based upon the weighted average number of common shares outstanding in
the respective year. Diluted earnings per share is based upon the weighted
average number of common shares outstanding and dilutive common stock
equivalents in the respective year. There is no difference between the Company's
basic and diluted earnings per share as the Company does not have any common
stock equivalents outstanding.
Concentration of Credit Risk
The Company's principal financial instruments subject to potential
concentration of credit risk are cash and cash equivalents and trade accounts
receivable. The Company places cash deposits with federally insured financial
institutions; however, at times deposits have exceeded the amounts insured by
the Federal Deposit Insurance Corporation. The concentration of credit risk with
respect to trade accounts receivable is limited due to the large number of
customers and their dispersion across different geographic locations. Although
the Company does not require collateral for unpaid balances, credit losses have
been within management's expectations.
Fair Values of Financial Instruments
On January 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" ("FAS No. 107"). The Company's primary financial
instruments subject to the provisions of FAS No. 107 are debt instruments. The
fair values of these instruments are based on market quotations for similar
instruments and present value calculations using market interest rates. Based on
the Company's calculation of fair value, the Company believes there was no
material difference between the carrying value and fair value of these
instruments at January 4, 1997. As of January 3, 1998, the Company estimates the
fair value of its debt instruments to be approximately $108,000,000.
Foreign Currency
Foreign currency activity is reported in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation" ("FAS No.
52"). FAS No. 52 generally provides that the assets and liabilities of foreign
operations be translated at the current exchange rate as of the end of the
accounting period and that revenues and expenses be translated using average
exchange rates. The resulting translation adjustments arising from foreign
currency translations are accumulated as a separate component of stockholder's
deficit. Gains and losses resulting from foreign currency transactions are
recognized in income.
Adoption of New Accounting Pronouncements
The Company will adopt Statement of Financial Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") for its 1998 fiscal year. SFAS No. 131 requires the Company to report
selected information about operating segments in its financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This statement is
not expected to have a material impact on the Company's financial statements.
F-10
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies (Continued)
The Company will adopt Statement of Financial Standards No. 130 "Reporting
Comprehensive Income" ("SFAS No. 130") for its 1998 fiscal year. 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. Upon adoption, all prior period data
presented will be restated to conform to the provisions of SFAS No. 130. This
statement is not expected to have a material impact on the Company's financial
statements.
2. Recapitalization
On December 13, 1995, Holdings completed a series of transactions in order
to consummate a leveraged recapitalization (the "Recapitalization"). The Company
obtained two new financing arrangements: an $80 million credit facility from a
financial institution and a $15 million note from another financial institution.
The Company used the proceeds from these borrowings to pay off all of the
Company's outstanding debt as of December 13, 1995 (see Note 6 for further
discussion of this financing and payoff of the Company's debt) and to terminate
the Company's factor agreement (see Note 4). In addition, the Company paid a
cash dividend of $40,486,261 to Holdings.
3. Acquisitions
On September 9, 1995, the Company, through a wholly-owned subsidiary,
acquired certain assets and liabilities of Borg Textiles Corporation ("Borg"), a
manufacturer of textile goods in Jacksboro, Tennessee, in a transaction
accounted for as a purchase business combination for cash consideration of
approximately $7.8 million. The purchase price allocation attributed
approximately $1.8 million to net working capital items, approximately $2.7
million to property, plant and equipment and $3.3 million to goodwill. The
goodwill is being amortized over a twenty year life. The results of operations
of the acquired business have been included in the consolidated financial
statements since the acquisition date.
The following unaudited pro forma summary of consolidated results of
operations has been prepared as if Borg had been acquired as of January 1, 1995.
Year ended
----------
December 30,
1995
--------------
Net sales ..................................................... $108,161,000
=============
Income before extraordinary loss .............................. $2,205,000
=============
Net loss ...................................................... $(202,000)
=============
Basic and diluted income per share before extraordinary loss .. $2,205
=============
Basic and diluted net loss per share .......................... $(202)
=============
The pro forma results do not purport to be indicative of the results that
would have actually been obtained if Borg had been acquired as of January 1,
1995.
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 years
ended December 28, 1996 and December 23, 1995, the acquired business had sales
of approximately $11.6 million and $9.6 million, respectively. Net income and
basic and diluted income per share for the periods presented in the accompanying
consolidated statements of income would not differ significantly on a pro forma
basis adjusted for this acquisition.
F-11
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Factor Receivables
On December 13, 1995, the Company terminated its agreement with a factor
for total cash consideration of approximately $9,160,000. The consideration paid
included the repayment of $4,283,000 to the factor for advances and related
interest previously borrowed, the repurchase of $4,727,000 of accounts
receivable previously sold to the factor under the factor agreement, and a
termination fee of $150,000. The Company has accounted for this termination fee
as an extraordinary loss on the early extinguishment of debt.
Prior to December 13, 1995, the Company's factor agreement called for the
factor to purchase substantially all trade receivables without recourse up to
maximums established by the factor for each customer account. Receivables
purchased in excess of these limitations were subject to recourse in the event
of nonpayment by the customer. The factor agreement, as amended on June 14,
1994, allowed for advances up to 95% of the factored receivables with interest
charged on the net advances at 1% over the prime rate.
5. Inventories
Inventories are summarized as follows:
January 4, January 3,
1997 1998
---------- ----------
Raw materials ............................ $2,567,060 $2,082,516
Work-in-progress ......................... 1,432,577 1,516,899
Finished goods ........................... 3,536,283 3,332,857
---------- ----------
Total Inventories ................... $7,535,920 $6,932,272
========== ==========
6. Long-Term Debt
At January 4, 1997 and January 3, 1998, long-term debt consisted of the
following:
January 4, January 3,
1997 1998
----------- ------------
Senior credit facilities:
Term A Note Payable ...................... $28,000,000 --
Term B Note Payable ...................... 25,000,000 --
Revolving credit facility ................ 14,000,000 $2,000,000
----------- ------------
Total senior credit facilities ......... 67,000,000 2,000,000
Senior Subordinated Note Payable at 12.5% ... 15,000,000 --
Senior Subordinated Notes at 11% ............ 100,000,000
----------- ------------
Total .................................. 82,000,000 102,000,000
Less: current maturities .................... (6,316,239)
----------- ------------
Total long-term debt ................... $75,683,761 $102,000,000
=========== ============
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 are
redeemable 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
F-12
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Long-Term Debt (Continued)
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 January 3, 1998, the Company had $2.0 million outstanding
under the Working Capital Commitment, had approximately $ 16.8 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 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 subsudiary
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 January
3, 1998 and the related summarized operating statement and cash flow statement
information for the year 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 January
3, 1998 is as follows:
F-13
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Long-Term Debt (Continued)
<TABLE>
<CAPTION>
Consolidated
Glenoit Glenoit Asset Domestic Glenoit
Corporation Corporation Eliminations Operations Canada Eliminations Consolidated
----------- ----------- ------------ ---------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ............. 651 76 727 345 1,072
Accounts and other receivables, net ... 19,046 19,046 2,345 21,391
Inventories ........................... 6,259 6,259 673 6,932
Other current assets .................. 1,119 1,119 37 1,156
------- ------ ------- ------- ----- ------ -------
Total current assets ............. 27,075 76 27,151 3,400 30,551
Property, plant and equipment, net ... 29,490 29,490 5,651 35,141
Other assets .......................... 43,844 26,054 (52,183) 17,715 428 (8,605) 9,538
------- ------ ------- ------- ----- ------ -------
Total assets ..................... 100,409 26,130 (52,183) 74,356 9,479 (8,605) 75,230
======= ====== ======= ======= ===== ====== =======
Accounts payable ...................... 5,337 1 5,338 623 5,961
Accrued expenses ...................... 8,958 651 (651) 8,958 484 9,442
------- ------ ------- ------- ----- ------ -------
Total current liabilities ........ 14,295 652 (651) 14,296 1,107 15,403
Long-term debt ........................ 102,000 102,000 102,000
Other long-term liabilities ........... 28,047 (26,054) 1,993 1,993
Stockholders equity (deficit) ......... (43,933) 25,478 (25,478) (43,933) 8,372 (8,605) (44,166)
Total liabilities and equity ------- ------ ------- ------- ----- ------ -------
(deficit) ..................... 100,409 26,130 (52,183) 74,356 9,479 (8,605) 75,230
======= ====== ======= ======= ===== ====== =======
</TABLE>
Summarized operating statements information, in thousands, for the year
ended January 3, 1998 is as follows:
<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 ............................. 142,689 142,689 4,232 146,921
Cost of sales ......................... 94,668 94,668 3,394 98,062
------- ------ ------ ------- ------ ---- -------
Gross profit .......................... 48,021 48,021 838 48,859
Operating expenses .................... 22,586 12 22,598 334 22,932
Royalty income (expense) .............. (7,610) 7,610
------- ------ ------ ------- ------ ---- -------
Income from operations ................ 17,825 7,598 25,423 504 25,927
Interest expense (income) ............. 12,757 (1,817) 10,940 (2) 10,938
Other expense (income) ................ (5,707) 6,120 413 (11) 331 733
Income taxes .......................... 1,909 3,295 5,204 186 5,390
Extraordinary loss, net ............... 2,857 2,857 2,857
------- ------ ------ ------- ------ ---- -------
Net income ....................... 6,009 6,120 (6,120) 6,009 331 (331) 6,009
======= ====== ====== ======= ====== ==== =======
</TABLE>
Summarized cashflow statement information, in thousands, for the year ended
January 3, 1998 is as follows:
<TABLE>
<CAPTION>
Consolidated
Glenoit Glenoit Asset Domestic Glenoit
Corporation Corporation Eliminations Operations Canada Eliminations Consolidated
----------- ----------- ------------ ---------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cashflows from operating activities ... 15,874 6,078 21,952 1,754 23,706
Cashflows used in investing
activities ....................... (26,354) (26,354) (1,409) (27,763)
Cashflows from financing activities ... 11,172 (6,092) 5,080 5,080
------ ------ --- ------- ------ --- -------
Net increase (decrease) in cash ....... 692 (14) 678 345 1,023
Cash at beginning of period ........... (41) 90 49 49
------ ------ --- ------- ------ --- -------
Cash at end of period ................. 651 76 727 345 1,072
====== ====== === ======= ====== === =======
</TABLE>
F-15
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Long-Term Debt (Continued)
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 (see Note 10). 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. The Company has 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 changes.
At the option of the Company, the Company could designate the Term A and
Term B portions of the Old Facility to bear interest at the Base Rate (which is
defined as the higher of the bank's prime rate or one-half of one percent above
the Federal Funds Rate) plus 1.75% and 2.25%, respectively, or the LIBOR rate
plus 3.25% and 3.75%, respectively. The working capital line of credit portion
of the Old Facility bore interest at the Base Rate plus 1.5% or the LIBOR rate
plus 3%. The $15 Million Senior Subordinated Note bore interest at 12.5%.
On December 13, 1995, the Company utilized the proceeds from the Old
Facility and the $15 Million Senior Subordinated Note to pay off the Company's
then existing debt with financial institutions, including $4.8 million of debt
issued in connection with the 1995 acquisition described in Note 3. As a result
of the Company's payoff of these debts, the Company charged to earnings
$1,218,000 of net deferred loan costs and $2,279,000 paid as a prepayment
penalty related to the then existing debt. The Company recognized an
extraordinary loss from the early extinguishment of debt of $3,497,000 related
to these charges in 1995.
During the years ended December 30, 1995, January 4, 1997, and January 3,
1998 the Company paid $3,870,000, $8,730,000, and $9,017,000 respectively, in
cash for interest.
7. Leases
The Company leases certain equipment and facilities under operating leases
that expire through December 2005. Rent expense was $2,797,000, $3,640,000 and $
4,075,000 during the years ended December 30, 1995, January 4, 1997, and January
3, 1998 respectively.
On January 1, 1995, the Company entered into a lease with a company, whose
shareholders are indirectly shareholders of Holdings, for a warehouse in
Tarboro, North Carolina. On December 13, 1995, the Company through its
wholly-owned subsidiary Mills, acquired the warehouse from this company for a
purchase price of approximately $1,263,000, which approximated its net carrying
value. As a result, the Company was released from obligation under this lease
effective December 13, 1995. Rent expense related to this facility during 1995
was $458,000.
As of January 3, 1998 future net minimum lease payments under capital
leases and future minimum rental payments required under operating leases that
have initial or remaining noncancelable terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
----------- -----------
<S> <C> <C>
1998 $ 747,000 $ 3,552,000
1999 62,250 3,543,000
2000 3,537,000
2001 2,934,000
2002 2,067,000
Thereafter.............................................................. 3,965,000
----------- -----------
Total minimum lease payments....................................... 809,250 $19,598,000
===========
Less amounts representing interest, calculated at the Company's
incremental borrowing rate......................................
49,631
----------
Present value of net minimum lease payments............................. 759,619
Current maturities of capital lease obligations......................... (697,934)
----------
Capital lease obligations--less current obligations...................... $ 61,685
==========
</TABLE>
F-15
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Income Taxes
The provision, including tax benefits on extraordinary losses, for federal,
state and foreign income taxes consist of the following components:
December 30, January 4, January 3,
1995 1997 1998
----------- ----------- -----------
Current:
Federal ............. $ 1,455,623 $ 3,260,957 $ 2,867,333
State ............... 123,000 371,943 891,521
Foreign ............. 186,339
----------- ----------- -----------
1,578,623 3,632,900 3,945,193
----------- ----------- -----------
Deferred:
Federal ............. 339,551 (263,662) 730,402
State ............... (75,240) (14,734) (812,183)
----------- ----------- -----------
264,311 (278,396) (81,781)
----------- ----------- -----------
Total .......... $ 1,842,934 $ 3,354,504 $ 3,863,412
=========== =========== ===========
The 1995 and 1997 provisions for federal and state income taxes has been
allocated to income before income taxes and extraordinary loss, and the
extraordinary loss on early extinguishment of debt.
A reconciliation of the provision for income taxes to the federal statutory
rate of 34% is as follows:
<TABLE>
<CAPTION>
December 30, January 4, January 3,
1995 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income tax expense ........ $951,000 $2,539,000 $3,356,000
State income taxes, net of federal benefit .. 107,000 275,000 191,000
Contingencies and nondeductible expenses .... 709,000 475,000 307,000
Other ...................................... 75,934 65,504 9,412
---------- ---------- ----------
Income tax expense .......................... $1,842,934 $3,354,504 $3,863,412
========== ========== ==========
</TABLE>
Undistributed earnings of the Company's foreign subsidiary amounted to
approximately $330,000 at January 3, 1998. These earnings are considered to be
indefinitely reinvested and, accordingly, no U. S. federal and state income
taxes have been provided. Upon distribution of these earnings in the form of
dividends or otherwise, the Company would be subject to additional income taxes.
F-16
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Income Taxes (Continued)
Deferred income taxes reflect the tax effects of differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. The significant components of the Company's deferred tax assets
and liabilities at January 4, 1997 and January 3, 1998 are as follows:
January 4, January 3,
1997 1998
----------- -----------
Deferred tax assets:
Capital loss carry forwards .................. $416,440 $416,440
Accrued liabilities .......................... 141,366 305,778
Asset valuation allowances ................... 138,473 179,500
State net operating losses ................... -- 561,430
Other ........................................ 20,985 139,554
----------- -----------
Gross deferred assets ........................ 717,264 1,602,702
Valuation allowance .......................... (416,440) (416,440)
----------- -----------
Deferred tax assets .......................... $300,824 $1,186,262
Less: Noncurrent portion .................... (409,702)
----------- -----------
Current deferred tax assets .................. 300,824 776,560
----------- -----------
Deferred tax liabilities:
Depreciation and amortization ................ $1,515,248 $2,248,599
Other ........................................ 21,491 91,797
----------- -----------
Deferred tax liabilities ..................... 1,536,739 2,340,396
Less: Noncurrent deferred tax asset ......... (409,702)
----------- -----------
Noncurrent deferred tax liability ............ $1,536,739 $1,930,694
=========== ===========
A deferred tax asset is required to be recognized for the tax benefit of
deductible temporary differences and net operating loss carryforwards. A
valuation allowance is recognized if it is more likely than not that some or all
of the deferred tax asset will not be realized. The valuation allowance was
provided for the charge-off of an investment in 1993 which is a capital loss
realizable as an offset against capital gains in future periods. Subsequent to
the mergers in September 1997 discussed in Note 1, the Company generated a net
operating loss of approximately $11.3 million at the state level.
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 federal
consolidated tax liability or receive its respective pro rata share of the total
consolidated federal 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.
The Company's and Holdings' federal income tax returns for 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. It is reasonably possible that the Company's current estimate of
its obligations related to the IRS assessment will change in the near term.
The Company's state income tax returns for the years ended January 1, 1994
and December 31, 1994, have been examined by the New York Department of Finance.
In April 1997, the New York Department of Finance assessed taxes and interest in
the amount of approximately $130,000. The Company is currently in the process of
responding to the New York Department of Finance. The Company believes that the
proposed adjustments made by the New York Department of Finance are
inappropriate and intends to vigorously contest these assessments.
F-17
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. 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.
During the years ended December 30, 1995, January 4, 1997, and January 3,
1998 the Company paid $3,486,000, $2,952,000, and $ 2,033,000 respectively,
in cash for taxes.
9. Employee Benefit Plans
The Company has non-contributory pension plans covering substantially all
of its employees. The benefits are based on years of service and the employee's
compensation during the years of credited service. The Company's funding policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Assets of the plan are managed by a trustee and invested in
marketable securities, money market instruments, and mutual funds. The following
sets forth the plans' status based on actuarial studies as of January 4, 1997
and January 3, 1998:
<TABLE>
<CAPTION>
January 4, January 3,
1997 1998
------------ ------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$7,878,842 and $9,987,225 , respectively ....................... $8,362,919 $10,209,432
============ ============
Projected benefit obligation for service rendered to date ......... $9,905,860 $11,716,828
Plan assets at fair value ......................................... 9,242,634 12,043,836
------------ ------------
Plan assets in excess of projected benefit obligation (projected
benefit obligation in excess of plan assets) ................... (663,226) 327,008
Unrecognized prior service cost ................................... 474,714 322,825
Unrecognized net asset being amortized over 12 years (salaried) and
9 years (non-salaried) ......................................... (325,462) (210,983)
Unrecognized (gain) loss .......................................... 364,639 (433,353)
------------ ------------
Prepaid pension cost (accrued pension) included in other current
assets (accrued expenses) ...................................... $(149,335) $5,497
============ ============
<CAPTION>
December 30, January 4, January 3,
1995 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net pension cost includes the following components:
Service cost--benefits earned during the period ................ $432,085 $530,689 $499,795
Interest cost on projected benefit obligations ................. 556,019 666,149 734,657
Actual return on plan assets ................................... (1,452,735) (972,441) (1,541,513)
Net amortization and deferral of unrecognized net
gain (loss) ................................................. 952,598 344,316 842,319
----------- ----------- -----------
Net periodic pension expense for year .......................... $487,967 $568,713 $535,258
=========== =========== ===========
</TABLE>
A weighted average discount rate of 7.5% and a 4.5% rate of increase in
future compensation levels was used in determining the actuarial present value
of the projected benefit obligations for both 1996 and 1997. The expected
long-term rate of return of pension plan assets was 8% for both 1996 and 1997.
F-18
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Employee Benefit Plans (Continued)
In 1995, the Company established a defined contribution plan (the "Plan")
for all hourly employees in Tennessee. Under the Plan, the Company must
contribute 2.5% of employee salaries to the Plan each plan year. Contributions
were approximately $20,000 and $65,000 during the years ended January 4, 1997
and January 3, 1998, respectively. In 1997, the Company established a defined
contribution plan (the "1997 Plan") for all other domestic employees not covered
by the Plan. Under the 1997 Plan, the Company matches contributions made by the
employees at 50% up to a maximum of 3% of the employees earnings. Contributions
made by the Company were approximately $240,000 during 1997. Amounts contributed
under the Plan and the 1997 Plan are invested by a trustee in a variety of
investment options, including marketable securities and mutual funds.
10. Related Party Transactions
The Company has an unsecured 4% note receivable from an officer with a face
amount of $300,000. The note will be forgiven by the Company under certain
circumstances and, accordingly, the Company is recognizing compensation expense
over the term of the note, which is expected to be December 31, 2005. The
unamortized balance at January 4, 1997 and January 3, 1998 was $211,500 and
$187,500 respectively.
During 1995, the Company loaned a shareholder of Holdings a total of
$1,297,787 in the form of notes receivable bearing interest at rates ranging
from 4% to 9%. During 1995, the shareholder repaid $888,328 of these notes. On
December 13, 1995, the Company distributed a noncash dividend of $2,170,541,
which represented the balance of these notes at the distribution date and
certain other receivables and assets to Holdings.
During the year ended December 30, 1995, the Company sold approximately
$645,000 in merchandise to a company owned indirectly by a shareholder of
Holdings. During the years ended December 30, 1995 and January 4, 1997, the
Company paid a total of approximately $650,000 and $175,000, respectively, to
companies under common ownership and related parties for management and
consulting fees.
Included in other receivables at January 4, 1997 are receivables of
approximately $297,000 from companies indirectly owned by a shareholder of
Holdings.
All expenses of the Company are reflected in the Consolidated Financial
Statements. No costs are incurred by Holdings on behalf of the Company. As
discussed in Note 8, the Company has a tax sharing agreement with Holdings
whereby the Company will pay Holdings its respective prorata share of the total
federal consolidated tax liability or receive its respective prorata share of
the total federal consolidated tax refund. The impact to the Company is recorded
in the "Due from Parent" or "Due to Parent" accounts.
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 related to the
Recapitalization discussed in Note 2. 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 Company
retired the Note with proceeds from the bond offering described in Note 6.
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.
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 August 1997, Holdings granted an officer of the Company 1,286.211
options for shares of Holdings' Class A common stock at an exercise price of
$37,500 in the aggregate. The officer exercised the options immediately;
however, the stock is restricted and subject to certain vesting requirements. On
December 30, 1997, Holdings removed all vesting requirements and the Company
recorded non-cash compensation expense of approximately $200,000 during the
fourth quarter of 1997.
F-19
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Glenoit Universal, Ltd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. 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.
As of January 3, 1998, 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. They include the sale of stock in a registered public
offering, certain mergers and certain changes of existing shareholder ownership.
At the option of Holdings, subject to the Company's existing debt restrictions
(Note 6), 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 pays 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.
From time to time, the Company is involved in litigation which arises in
the ordinary course of business. Management believes the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
F-20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet and consolidated statement of operations
for the fiscal year ending January 3, 1998, and such is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001047368
<NAME> GLENOIT CORPORATION
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JAN-03-1998
<CASH> 1,072
<SECURITIES> 0
<RECEIVABLES> 21,759
<ALLOWANCES> 543
<INVENTORY> 6,932
<CURRENT-ASSETS> 30,551
<PP&E> 55,486
<DEPRECIATION> 20,345
<TOTAL-ASSETS> 75,230
<CURRENT-LIABILITIES> 15,403
<BONDS> 102,000
0
0
<COMMON> 0
<OTHER-SE> (44,166)
<TOTAL-LIABILITY-AND-EQUITY> 75,230
<SALES> 146,921
<TOTAL-REVENUES> 146,921
<CGS> 98,061
<TOTAL-COSTS> 98,061
<OTHER-EXPENSES> 22,933
<LOSS-PROVISION> (240)
<INTEREST-EXPENSE> 10,938
<INCOME-PRETAX> 14,256
<INCOME-TAX> 5,390
<INCOME-CONTINUING> 8,866
<DISCONTINUED> 0
<EXTRAORDINARY> (2,857)
<CHANGES> 0
<NET-INCOME> 6,009
<EPS-PRIMARY> 6.009
<EPS-DILUTED> 6.009
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet and consolidated statement of operations
for the fiscal year ending January 3, 1998, and such is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001051260
<NAME> GLENOIT ASSET CORPORATION
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JAN-03-1998
<CASH> 76
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 76
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,130
<CURRENT-LIABILITIES> 652
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 25,478
<TOTAL-LIABILITY-AND-EQUITY> 26,130
<SALES> 0
<TOTAL-REVENUES> 7,610
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,817)
<INCOME-PRETAX> 9,415
<INCOME-TAX> 3,295
<INCOME-CONTINUING> 6,120
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,120
<EPS-PRIMARY> 6.120
<EPS-DILUTED> 6.120
</TABLE>
