SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE QUARTER ENDED OCTOBER 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)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes__X_ No___
None of the voting securities of Glenoit Corporation or Glenoit Asset
Corporation is held by non-affiliates.
As of October 3, 1998, there were 1,000 shares of Glenoit Corporation common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
1
<PAGE>
ART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
GLENOIT CORPORATION AND SUBSIDIARIES (a wholly-owned
subsidiary of Glenoit Universal, Ltd.)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 3, October 3,
1998 1998
-------------- ---------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,072,280 $ 962,802
Receivables:
Trade accounts receivable, net of allowace of $543,000 and
$2,226,000 as of January 3, 1998 and October 3, 1998,
respectively 21,216,104 52,848,560
Other receivables 174,561 164,933
Inventories 6,932,272 28,036,928
Prepaid expenses and other current assets 1,155,761 1,420,593
-------------- ---------------
Total current assets 30,550,978 83,433,816
Property, plant and equipment, net 35,141,104 45,995,153
Other assets:
Notes receivable from related party 187,500 271,824
Intangible assets, net of accumulated amortization of $1,251,002
and $1,436,000 as of January 3, 1998 and October 3, 1998,
respectively 4,420,319 26,616,408
Deferred loan costs and other, net of accumulated amortization of
$523,743 and $964,000 as of January 3, 1998 and October 3,
1998, respectively 4,929,666 5,326,174
Other assets - 359,913
-------------- ---------------
Total assets $ 75,229,567 $ 162,003,288
============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 3, October 3,
1998 1998
--------------- ---------------
LIABILITIES AND STOCKHOLDER'S DEFICIT (Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 5,961,475 $ 6,117,365
Accrued expenses 6,065,182 12,132,643
Current maturities of capital lease obligations 697,934 243,397
Due to Holdings 2,678,587 5,280,660
--------------- ---------------
Total current liabilities 15,403,178 23,774,065
Long-term debt 102,000,000 174,707,499
Capital lease obligations - less current maturities 61,685 -
Deferred income taxes 1,930,694 2,405,299
Other long-term liabilities - 258,282
--------------- ---------------
Total liabilities 119,395,557 201,145,145
--------------- ---------------
Commitments and contingencies
Stockholder's deficit:
Common stock, $.01 par value, 1,000 shares authorized, issued
and outstanding as of January 3, 1998 and October 3, 1998 10 10
Additional paid-in capital 1,361,713 1,461,713
Accumulated deficit ( 45,295,099 ) ( 39,677,385 )
Accumulated other comprehensive income ( 232,614 ) ( 926,195 )
--------------- ---------------
Total stockholder's deficit ( 44,165,990 ) ( 39,141,857 )
--------------- ---------------
Total liabilities and stockholder's deficit $ 75,229,567 $ 162,003,288
=============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- -------------------------------------
October 4, October 3, October 4, October 3,
1997 1998 1997 1998
-------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 48,262,698 $ 45,126,817 $ 120,821,914 $ 133,066,909
Cost of sales 29,568,355 31,919,884 77,958,622 91,073,159
-------------- --------------- ---------------- ----------------
Gross profit 18,694,343 13,206,933 42,863,292 41,993,750
-------------- --------------- ---------------- ----------------
Operating expenses:
Selling 3,568,832 3,910,112 9,646,405 11,173,760
Administrative 2,773,216 2,011,487 6,725,045 6,951,888
Research and development 529,425 562,173 1,487,977 1,484,254
-------------- --------------- ---------------- ----------------
Total operating expenses 6,871,473 6,483,772 17,859,427 19,609,902
-------------- --------------- ---------------- ----------------
Income from operations 11,822,870 6,723,161 25,003,865 22,383,848
-------------- --------------- ---------------- ----------------
Other income (expense):
Interest expense ( 3,013,162 ) ( 3,292,375 ) ( 8,093,954 ) ( 9,608,288 )
Amortization of deferred financing costs ( 134,799 ) ( 160,411 ) ( 429,077 ) ( 479,134 )
Other ( 53,553 ) ( 177,861 ) ( 156,737 ) ( 181,567 )
-------------- --------------- ---------------- ----------------
Total other expense ( 3,201,514 ) ( 3,630,647 ) ( 8,679,768 ) ( 10,268,989 )
-------------- --------------- ---------------- ----------------
Income before income taxes and
extraordinary loss 8,621,356 3,092,514 16,324,097 12,114,859
Income tax expense 3,183,010 1,120,985 6,542,083 4,444,038
-------------- --------------- ---------------- ----------------
Income before extraordinary loss 5,438,346 1,971,529 9,782,014 7,670,821
Extraordinary loss on early extinguishment
of debt, net of tax benefit of $67,000
and $1,527,000, respectively - 117,236 2,856,884 117,236
-------------- --------------- ---------------- ----------------
Net income $ 5,438,346 $ 1,854,293 $ 6,925,130 $ 7,553,585
============== =============== ================ ================
Basic and diluted income per share:
Income before extraordinary loss $ 5,438 $ 1,971 $ 9,782 $ 7,671
Extraordinary loss on early
extinguishment of debt ( 117 ) ( 2,857 ) ( 117 )
-------------- --------------- ---------------- ----------------
Net income $ 5,438 1,854 $ 6,925 $ 7,554
============== =============== ================ ================
Weighted average shares outstanding 1,000 1,000 1,000 1,000
============== =============== ================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Consolidated Statement of Stockholder's Deficit (Unaudited)
for the nine months ended October 3, 1998
<TABLE>
<CAPTION>
Retained Accumulated
Shares of Additional Earnings Other
Common Common Paid-in (Accumulated) Comprehensive
Stock Stock Capital Deficit) Income Total
---------- ---------- ------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of
January 3, 1998 1,000 $ 10 $ 1,361,713 $ ( 45,295,099 ) $ ( 232,614 ) $ ( 44,165,990 )
Net Income 7,553,585 7,553,585
Stock compensation 100,000 100,000
Dividends ( 1,935,871 ) ( 1,935,871 )
Accumulated Other
Comprehensive
Income ( 693,581 ) ( 693,581 )
---------- ---------- ------------ ------------------ ---------------- ----------------
Balance as of
October 3, 1998 1,000 $ 10 $ 1,461,713 $ ( 39,677,385 ) $ ( 926,195 ) $ ( 39,141,857 )
========== ========== ============ ================== ================ ================
</TABLE>
Consolidated Statement of Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------------
October 4, October 3,
1997 1998
------------------ ----------------
<S> <C> <C>
Net Income $ 6,925,130 $ 7,553,585
Other comprehensive income, net of tax:
Currency translation adjustment 112,542 ( 693,581 )
------------------ ----------------
Comprehensive income $ 7,037,672 $ 6,860,004
================== ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES (a wholly-owned
subsidiary of Glenoit Universal, Ltd.)
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------
October 4, October 3,
1997 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,925,130 $ 7,553,585
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Loss on early extinguishment of debt 4,383,884 184,624
Depreciation and amortization 2,617,233 4,298,878
Stock compensation 100,000
Loss on sale of property and equipment 129,255 19,183
Effect of foreign currency exchange rate 112,542 ( 693,581 )
Changes in operating assets and liabilities:
Trade and other receivables ( 17,064,678 ) ( 17,275,358 )
Inventories ( 855,182 ) ( 2,142,465 )
Prepaid expenses and other assets 324,996 ( 317,118 )
Due to Holdings 1,535,641 2,602,073
Accounts payable 4,619,346 ( 958,647 )
Accrued expenses and other liabilities 8,986,004 4,839,579
--------------- ---------------
Net cash provided by (used in) operating activities 11,714,171 ( 1,789,247 )
--------------- ---------------
Cash flows from investing activities:
Purchases of acquired businesses, net of cash acquired ( 8,013,406 ) ( 54,428,203 )
Purchases of and additions to property, plant and equipment ( 13,314,999 ) ( 13,168,031 )
Proceeds from sale of property and equipment and refunds of
deposits 26,650 42,042
--------------- ---------------
Net cash used in investing activities ( 21,301,755 ) ( 67,554,192 )
--------------- ---------------
Cash flows from financing activities:
Payments on capital lease obligations ( 409,651 ) ( 516,222 )
Proceeds from line of credit and issuance of debt, net 25,100,000 77,707,499
Dividends paid ( 1,600,000 ) ( 1,935,871 )
Advances on notes receivable - related parties ( 84,324 )
Payment of note payable to related party ( 5,743,581 )
Payments for financing costs ( 6,920,909 ) ( 987,121 )
Purchase of senior subordinated notes ( 4,950,000 )
--------------- ---------------
Net cash provided by financing activities 10,425,859 69,233,961
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 838,275 ( 109,478 )
Cash and cash equivalents at beginning of period 48,817 1,072,280
--------------- ---------------
Cash and cash equivalents at end of period $ 887,092 $ 962,802
=============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Notes to Consolidated Financial Statements (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Glenoit Corporation and subsidiaries (collectively the "Company")
have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the nine-month period ended
October 3, 1998 are not necessarily indicative of the results that may
be expected for the fiscal year ending January 2, 1999. The unaudited
financial statements should be read in conjunction with the audited
financial statements and footnotes thereto for the fiscal year ended
January 3, 1998.
Consolidation
Prior to September 1997, the accompanying financial statements included
the accounts of Glenoit Corporation and its wholly-owned subsidiaries
Glenoit Mills, Inc. ("Mills"), Tarboro Properties, Inc. ("Tarboro"),
and Glenoit Asset Corporation, Inc. ("Glenoit Asset Corporation"). In
September 1997, Glenoit Corporation merged with Mills and Tarboro. In
addition, Glenoit Corporation's newly formed wholly-owned subsidiary,
Glenoit Corporation of Canada ("Glenoit Canada") acquired the assets of
Collins & Aikman Canada Inc. (see Note 7). Accordingly, at October 3,
1998 the accompanying financial statements include the accounts of
Glenoit Corporation and it's wholly-owned subsidiaries Glenoit Canada,
American Pacific Enterprises, Inc. (see Note 7) and Glenoit Asset
Corporation. The Company is a wholly-owned subsidiary of Glenoit
Universal, Ltd. ("Holdings").
Net Income Per Share
As of January 3, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share", which requires the
Company to present both basic and diluted earnings per share. There is
no difference between the Company's basic and diluted earnings per
share as the Company does not have any common stock equivalents.
7
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Notes to Consolidated Financial Statements (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Adoption of New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS No. 130") for the fiscal year
ending January 2, 1999. SFAS No. 130 requires the Company to display an
amount representing the total comprehensive income for the period in a
financial statement which is displayed with the same prominence as
other financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133
establishes standards related to the recording and reporting of
derivative instruments. Since the Company does not hold any derivative
instruments, SFAS No. 133 does not have any impact on the Company's
results from operation or financial position.
2. RELATED PARTY TRANSACTIONS
On March 5, 1997, the Company declared a dividend and issued a note in
the amount of approximately $5.8 million (the "Note") to a shareholder
of Holdings in satisfaction of a contingent earnout obligation of
Holdings related to the recapitalization discussed in the January 3,
1998 financial statements. This note contained a mandatory prepayment
provision which required the Company to retire the Note and accrued
interest as of the date of a bond offering of the Company. On April 1,
1997, the date of the bond offering described in Note 4, the Company
retired the Note from the proceeds of the bond offering.
On June 14, 1997, the Company declared a dividend in the amount of $1.6
million to enable Holdings to exercise an option to repurchase shares
of Holdings' common stock and to repay a note due to a shareholder of
Holdings. This transaction was related to the recapitalization
discussed in Note 2 of the Company's January 3, 1998 audited financial
statements. Additionally, as part of the same transaction, the Company
made a loan of $931,263 to an officer at an interest rate of prime plus
.5%. The principal and interest were repaid in full on August 12, 1997.
In March 1998, the Company loaned an officer $100,000 and created an
unsecured note receivable.
During June 1998, Holdings sold three officers of the Company a total
of 857.46 shares of Holdings' Class A common stock for approximately
$158,000. Holdings loaned the officers an amount equal to the sales
price and created full recourse notes receivable secured by the issued
shares. In connection with the stock issuance, the Company recorded
non-cash compensation expense of $100,000.
8
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Notes to Consolidated Financial Statements (Unaudited)
2. RELATED PARTY TRANSACTIONS (Continued)
In July 1998, Holdings settled a dispute regarding additional purchase
price owed to a shareholder associated with the recapitalization in
December 1995 discussed in Note 2 to the Consolidated Financial
Statements as of January 3, 1998. Accordingly, Holdings paid
approximately $1.9 million to the shareholder during July 1998.
These funds were paid to Holdings by the Company as a dividend.
3. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
January 3, October 3,
1998 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
Raw Materials $2,082,516 $3,540,139
Work-in-process 1,516,899 1,791,231
Finished goods 3,332,857 22,705,558
----------------- -----------------
Total inventories $6,932,272 $28,036,928
================= =================
</TABLE>
4. LONG-TERM DEBT
As of January 3, 1998 and October 3, 1998 long-term debt consisted of
the following:
<TABLE>
<CAPTION>
January 3, October 3,
1998 1998
------------ ------------
(unaudited)
<S> <C> <C>
Senior credit facility........................... $2,000,000 $79,707,499
11% Senior subordinated notes ................... 100,000,000 95,000,000
------------ ------------
Total long-term debt........................ $102,000,000 $174,707,499
------------ ------------
</TABLE>
On April 1, 1997, the Company issued $100,000,000 of senior
subordinated notes (the "Senior Subordinated Notes") in a private
placement bond offering. The Senior Subordinated Notes bear interest at
a fixed rate of 11% and mature on April 15, 2007. The Company at its
option, can prepay these notes at a price of 105.5% of the original
principal amount, beginning on April 15, 2002. The premium declines by
1.833% thereafter each year beginning on April 15 until reduced to the
original principal amount. Additionally, prior to April 15, 2000, the
Company may redeem in the aggregate up to 25% of the original aggregate
principal amount with the proceeds of one or more Public Equity
Offerings, as defined in the Indenture governing the Senior
Subordinated Notes, at a redemption price of 110% of the original
principal amount. Upon a Change of Control of
9
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Notes to Consolidated Financial Statements (Unaudited)
4. LONG TERM DEBT (Continued)
the Company, as defined in the Indenture governing the Senior
Subordinated Notes, the holder of a Senior Subordinated Note may
require the Company to redeem the note at a price of 101% of the
principal amount. Interest is payable semi-annually, and began on
October 15, 1997.
During September 1998, the Company acquired $5 million of the Senior
Subordinated Notes in the open market. These notes were subsequently
retired. In connection with this transaction, the Company recorded an
extraordinary loss of approximately $117,000, net of a tax benefit,
which consisted of the write off of a pro rata share of deferred
financing costs associated with the issuance of the Senior Subordinated
Notes.
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. On October 2, 1998, the
Facility was amended to increase the Acquisition Commitment to $76
million. On October 2, 1998, in connection with the acquisition of
American Pacific Enterprises, Inc., discussed in Note 7, the Company
borrowed approximately $55.7 million under the Acquisition Commitment.
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 October 3, 1998, the
Company had $24.0 million outstanding under the Working Capital
Commitment, and approximately $12.0 million available under the Working
Capital Commitment and up to $20.3 million available under the
Acquisition Commitment.
At the option of the Company, the Company may designate advances under
the Facility to bear interest at the Base Rate, as defined in the
Facility, plus 1% for an Acquisition Commitment Advance and .5% for a
Working Capital Commitment Advance or the Eurodollar Rate plus 2.5% for
an Acquisition Commitment Advance or 2% for a Working Capital
Commitment Advance. The Company must pay a commitment fee equal to five
eighths of one percent per year of the unused Acquisition Commitment
and one half of one percent per year of the unused Working Capital
Commitment. Additionally, the Company must pay a letter of credit fee
of two percent per year of the average available amount under the
letters of credit for each quarter such letters of credit are
outstanding. All interest, commitment fees and letter of credit fees
under the Facility are payable quarterly and began on June 30, 1997.
The principal balance of the Acquisition Commitment is repayable
quarterly commencing on March 31, 2000 in amounts equal to
one-twentieth of the aggregate principal balance then outstanding, with
the balance due on December 31, 2001. The Working Capital commitment is
due on December 31, 2001.
10
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Notes to Consolidated Financial Statements (Unaudited)
4. LONG TERM DEBT (Continued)
Prior to December 31, 1999, the Company may be required to prepay the
Acquisition Commitment and Working Capital Commitment in amounts equal
to the Net Cash Proceeds of the sale of assets, stock, debt securities
or any other Net Cash Proceeds, as defined by the Facility. The
Acquisition and Working Capital Commitments would then be permanently
reduced by such payment.
The Facility and Senior Subordinated Notes have various covenants that
require the Company to: maintain key financial ratios, restrict
corporate borrowings, limit the Company's ability to pay dividends,
limit the type and amount of certain investments which may be
undertaken by the Company, limit the Company's disposition of assets,
limit the Company's ability to enter into operating and capital leases,
and restrict the Company's ability to issue shares of its stock.
Substantially all of the Company's assets and operations are pledged as
collateral for the Facility. Holdings and Glenoit Asset Corporation
have guaranteed the Company's obligations under the Facility. Holdings
and Glenoit Asset Corporation have no substantive assets or operations
and rely on the Company to fund their obligations.
The Senior Subordinated Notes are fully and unconditionally guaranteed,
on a joint and several basis, by Glenoit Asset Corporation. Glenoit
Asset Corporation's operations consist solely of leasing certain
trademarks and other intangibles to Glenoit Corporation. Accordingly,
Glenoit Asset Corporation's assets and operations consist primarily of
intercompany assets and operations with Glenoit Corporation. Glenoit
Canada has not guaranteed the Senior Subordinated Notes. Prior to the
formation of Glenoit Canada in June 1997, all of Glenoit Corporation's
wholly-owned subsidiaries fully and unconditionally guaranteed the
Senior Subordinated Notes. For periods prior to the formation of
Glenoit Canada, the Company had no independent operations or assets
other than its investment in its subsidiaries. The financial
information of the subsidiary guarantors for these periods has been
excluded because management believes that this information is not
material to investors. Prior to the acquisition discussed in Note 7,
Glenoit Canada had no operations.
11
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Notes to Consolidated Financial Statements (Unaudited)
4. LONG-TERM DEBT (Continued)
The following tables present summarized balance sheet information of
Glenoit Corporation, Glenoit Asset Corporation, American Pacific
Enterprises, Inc. and Glenoit Canada as of October 3, 1998 and the
related summarized operating statement and cash flow statement
information for the period then ended. The Company believes that
separate financial statements and other disclosures regarding Glenoit
Asset Corporation, the sole subsidiary guarantor of the Senior
Subordinated Notes, are not material to investors. Summarized balance
sheet information, in thousands, as of October 3, 1998 is as follows
(unaudited):
<TABLE>
<CAPTION>
Glenoit
Glenoit Asset
Corporation Corporation Eliminations Sub-total
----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents ........... $ 230 $ 84 $ 314
Accounts and other receivables, net 36,595 36,595
Inventories ......................... 8,300 8,300
Other current assets ................ 1,173 -- 1,173
--------- --------- --------- ---------
Total current assets ........... 46,298 84 46,382
Property, plant and equipment, net 36,544 36,544
Other assets ........................ 109,288 35,637 (71,357) 73,568
--------- --------- --------- ---------
Total assets ................... $ 192,130 $ 35,721 $ (71,357) $ 156,494
--------- --------- --------- ---------
Accounts payable .................... 4,609 1 4,610
Other current liabilities ........... 12,754 4,009 (4,009) 12,754
--------- --------- --------- ---------
Total current liabilities ...... 17,363 4,010 (4,009) 17,364
Long-term debt ...................... 210,344 0 (35,637) 174,707
Other long-term liabilities ......... 2,639 0 2,639
Stockholders equity (deficit) ....... (38,216) 31,711 (31,711) (38,216)
--------- --------- --------- ---------
Total liabilities and equity ... $ 192,130 $ 35,721 $ (71,357) $ 156,494
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
American
Pacific
Sub-total Enterprises Canada Eliminations Consolidated
--------- ----------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ........... $ 314 $ 395 $ 254 $ 963
Accounts and other receivables, net 36,595 14,348 2,070 53,013
Inventories ......................... 8,300 18,962 775 28,037
Other current assets ................ 1,173 206 42 1,421
--------- --------- --------- ---------
Total current assets ........... 46,382 33,911 3,141 83,434
Property, plant and equipment, net 36,544 1,380 8,071 45,995
Other assets ........................ 73,568 22,517 380 (63,891) 32,574
--------- --------- --------- -------- ---------
Total assets ................... $ 156,494 $ 57,808 $ 11,592 $(63,891) $ 162,003
--------- --------- --------- -------- ---------
Accounts payable .................... 4,610 1,115 392 6,117
Other current liabilities ........... 12,754 1,870 3,033 17,657
--------- --------- --------- ---------
Total current liabilities ...... 17,364 2,985 3,425 23,774
Long-term debt ...................... 174,707 174,707
Other long-term liabilities ......... 2,639 25 2,664
Stockholders equity (deficit) ....... (38,216) 54,823 8,142 (63,891) (39,142)
--------- --------- --------- -------- ---------
Total liabilities and equity ... $ 156,494 $ 57,808 $ 11,592 $(63,891) $ 162,003
--------- --------- --------- -------- ---------
</TABLE>
12
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Notes to Consolidated Financial Statements (Unaudited)
4. LONG-TERM DEBT (Continued)
Summarized operating statements information, in thousands, for the nine
months ended October 3, 1998 is as follows (unaudited):
<TABLE>
<CAPTION>
Glenoit
Glenoit Asset Glenoit
Corporation Corporation Eliminations Sub-total Canada Eliminations Consolidated
----------- ----------- ------------ --------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ................. $ 123,895 $ 123,895 9,172 $ 133,067
Cost of sales ............. 83,898 83,898 7,175 91,073
--------- --------- -------- ---------
Gross profit .............. 39,997 39,997 1,997 41,994
Operating expenses ........ 18,619 10 18,629 981 19,610
Royalty income (expense) (7,874) 7,874 -- -- --
--------- --------- --------- -------- ---------
Income from operations .... 13,504 7,864 21,368 1,016 22,384
Interest expense (income) . 11,252 (1,727) 9,525 83 9,608
Other expense (income) .... (6,245) 6,235 (10) 207 464 661
Income taxes .............. 826 3,356 4,182 262 4,444
Extraordinary loss, net ... 117 -- -- 117 -- -- 117
--------- --------- --------- --------- -------- --------- ---------
Net income ........... $ 7,554 $ 6,235 $ (6,235) $ 7,554 $ 464 $ (464) $ 7,554
--------- --------- --------- --------- -------- --------- ---------
</TABLE>
Summarized cashflow statement information, in thousands, for the period
ended October 3, 1998 is as follows (unaudited):
<TABLE>
<CAPTION>
Glenoit
Glenoit Asset Glenoit
Corporation Corporation Eliminations Sub-total Canada Eliminations Consolidated
----------- ----------- ------------ --------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cashflows from operating activities ... $(11,583) $ 9,591 $ (1,992) $ 203 $ (1,789)
Cashflows used in investing
activities ....................... (64,618) (64,618) (2,936) (67,554)
Cashflows from financing activities ... 76,175 (9,583) 66,592 2,642 69,234
-------- -------- -------- -------- --------
Net decrease in cash .................. (26) 8 (18) (91) (109)
Cash at beginning of period ........... 651 76 727 345 1,072
-------- -------- -------- -------- --------
Cash at end of period ................. $ 625 $ 84 $ 709 $ 254 $ 963
-------- -------- -------- -------- --------
</TABLE>
13
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Notes to Consolidated Financial Statements (Unaudited)
4. LONG-TERM DEBT (Continued)
Summarized balance sheet information, in thousands, as of October 4,
1997 is as follows (unaudited):
<TABLE>
<CAPTION>
Glenoit Consolidated
Glenoit Asset Domestic
Corporation Corporation Eliminations Operations Canada Eliminations Consolidated
----------- ----------- ------------ ---------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ......... $ 67 $ 67 $ 134 $ 753 $ 887
Accounts and other receivables, net 36,011 36,011 3,735 39,746
Inventories ....................... 8,501 8,501 923 9,424
Other current assets .............. 765 -- -- 765 20 -- 785
--------- --------- --------- --------- --------- --------- ---------
Total current assets ......... 45,344 $ 67 45,411 5,431 50,842
Property, plant and equipment, net 24,758 24,758 5,346 30,104
Other assets ...................... 41,390 22,798 (45,663) 18,525 (9,165) 9,360
--------- --------- --------- --------- --------- --------- ---------
Total assets ................. $ 111,492 $ 22,865 $ (45,663) $ 88,694 $ 10,777 $ (9,165) $ 90,306
--------- --------- --------- --------- --------- --------- ---------
Accounts payable .................. 7,587 7,587 1,088 8,675
Other current liabilities ......... 15,277 164 (164) 15,277 417 -- 15,694
--------- --------- --------- --------- --------- --------- ---------
Total current liabilities .... 22,864 164 (164) 22,864 1,505 24,369
Long-term debt .................... 107,100 107,100 107,100
Other long-term liabilities ....... 24,739 (22,798) 1,941 1,941
Stockholders equity (deficit) ..... (43,211) 22,701 (22,701) (43,211) 9,272 (9,165) (43,104)
--------- --------- --------- --------- --------- --------- ---------
Total liabilities and equity . $ 111,492 $ 22,865 $ (45,663) $ 88,694 $ 10,777 $ (9,165) $ 90,306
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
Summarized operating statements information, in thousands, for the nine
months ended October 4, 1997 is as follows (unaudited):
<TABLE>
<CAPTION>
Glenoit Consolidated
Glenoit Asset Domestic Glenoit
Corporation Corporation Eliminations Operations Canada Eliminations Consolidated
----------- ----------- ------------ ---------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ................. $ 119,134 $ 119,134 1,688 120,822
Cost of sales ............. 76,752 -- 76,752 1,207 -- 77,959
--------- --------- --------- --------- --------- --------- ---------
Gross profit .............. 42,382 42,382 481 42,863
Operating expenses ........ 17,755 9 17,764 95 17,859
Royalty income (expense) (3,846) 3,846 -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Income from operations .... 20,781 3,837 24,618 386 25,004
Interest expense (income) . 9,381 (1,307) 8,074 20 8,094
Other expense (income) .... (3,011) 3,344 333 52 201 586
Income taxes .............. 4,629 1,800 6,429 113 6,542
Extraordinary loss, net ... 2,857 -- -- 2,857 -- -- 2,857
--------- --------- --------- --------- --------- --------- ---------
Net income ........... $ 6,925 $ 3,344 $ (3,344) $ 6,925 $ 201 $ (201) $ 6,925
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
Summarized cashflow statement information, in thousands, for the period
ended October 4, 1997 is as follows (unaudited):
<TABLE>
<CAPTION>
Glenoit Consolidated
Glenoit Asset Domestic Glenoit
Corporation Corporation Eliminations Operations Canada Eliminations Consolidated
----------- ----------- ------------ ---------- ------ -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cashflows from operating activities ... $ 7,352 $ 3,508 $ 10,860 $ 854 $ 11,714
Cashflows used in investing
activities ....................... (21,201) (21,201) (101) (21,302)
Cashflows from financing activities ... 13,957 (3,531) -- 10,426 -- 10,426
-------- -------- ----- -------- -------- ---- --------
Net decrease in cash .................. 108 (23) 85 753 838
Cash at beginning of period ........... (41) 90 -- 49 -- 49
-------- -------- ----- -------- -------- ---- --------
Cash at end of period ................. $ 67 $ 67 0 $ 134 $ 753 0 $ 887
-------- -------- ----- -------- -------- ---- --------
</TABLE>
14
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Notes to Consolidated Financial Statements (Unaudited)
4. LONG-TERM DEBT (Continued)
On April 1, 1997, the Company utilized the proceeds from the 11% Senior
Subordinated Notes to retire the Company's existing debt with financial
institutions, which included the balance of an $80 million senior
credit facility (the Term A and B Notes and the working capital line of
credit) (the "Old Facility") and a $15 million 12.5% Senior
Subordinated Note payable (the $15 Million Senior Subordinated Note").
Additionally, on April 1, 1997, the Company retired a note to a
shareholder of Holdings in the amount of approximately $5.8 million. As
a result of the Company's payoff of these obligations, the Company
charged to earnings $2,884,000 of net deferred loan costs and a
$1,500,000 prepayment penalty related to the $15 million Senior
Subordinated Note. During the first quarter of 1997, the Company
recognized an extraordinary loss from the early extinguishment of debt
of $2,857,000, which is net of a tax benefit of $1,527,000 related to
these charges.
5. COMMITMENTS AND CONTINGENCIES
Holdings is a holding company and as a result does not have any
substantive assets or operations that generate revenues or cash flows.
Accordingly, Holdings relies on the Company's distribution of dividends
in order to fund its operations and meet its obligations, including its
interest and principal payments.
Holdings has obligations with a face amount of approximately $28.6
million, bearing interest at stated rates between 5% to 12.5%, to
shareholders ("Shareholder Notes") with principal due in 2004 and 2005.
These obligations are not reflected in the Company's accompanying
balance sheets or income statements. Subject to existing debt
restrictions, Shareholder Notes with a face amount of approximately
$9.7 million contain certain acceleration clauses. At the option of
Holdings, subject to the Company's existing debt restrictions, the
interest may be paid by the issuance of additional notes or in cash.
However, Holdings must pay interest in cash on certain of the
Shareholder Notes if defined levels of consolidated cash flows of
Holdings are attained. Annual interest payments during the next five
years are approximately $2 million in 1998, and approximately $2.6
million per year thereafter, excluding interest on notes that may be
issued to pay interest. Assuming Holdings makes all interest payments
related to the Shareholder Notes with additional notes, the Company's
ultimate distribution of dividends in order for Holdings to meet its
existing debt obligations is expected to be approximately $63 million
beginning December 2004 through December 2005. However, the Company may
be required to declare dividends in order for Holdings to fund certain
of its obligations in cash as discussed above. Such amounts could
approximate $3 million in the aggregate and are due through December
2004, if the defined levels of consolidated cash flow of Holdings are
met.
15
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Notes to Consolidated Financial Statements (Unaudited)
6. INCOME TAXES
The Company's and Holdings' federal income tax returns for the years
ended January 1, 1994 and December 31, 1994, have been examined by the
Internal Revenue Service ("IRS"). The IRS has assessed taxes, penalties
and interest relating to the deductibility of certain expenses claimed
as deductions by the Company. The Company is currently in the process
of responding to the IRS. In the opinion of management, adequate
provision has been made in the accompanying financial statements for
its income tax obligations; however, should the Company be responsible
for all taxes, penalties and interest assessed by the IRS, the Company
would be required to pay an additional amount of approximately $1.6
million over amounts currently accrued. The Company believes that the
proposed adjustments by the IRS are inappropriate and intends to
vigorously contest these assessments.
Holdings has an indemnification agreement with a shareholder with
respect to certain tax obligations. While tax obligations are the
expense and liability of the Company and Holdings, the indemnification
agreement provides for an additional contribution of capital to
Holdings from this shareholder via reductions of long-term obligations
due the shareholder from Holdings.
The Company and Holdings, have entered into a Tax Sharing Agreement
whereby the Company will pay Holdings its respective pro rata share of
the total consolidated tax liability or receive its respective pro rata
share of the total consolidated tax refund, as set forth in the tax
sharing agreement. Under the Tax Sharing Agreement, the Company and
Holdings are treated as separate tax groups.
7. ACQUISITIONS
On October 2, 1998, the Company acquired all the capital stock of
American Pacific Enterprises, Inc. ("APE") for approximately $38.2
million, subject to post-closing adjustment. In addition, approximately
$16.6 million of indebtedness of APE was extinguished by the Company in
connection therewith. The purchase agreement also includes additional
payments to the former owners of APE if certain earning targets for
APE's operations are met during 1998 and 1999. These payments could
exceed $5 million per year or $10 million in total if these targets are
met or exceeded. A portion of these payments may be recorded as
compensation expense during 1998 and 1999. APE is a leading designer,
importer and marketer of decorative textile home furnishings,
principally quilts and specialty decorative bedding items. The
acquisition has been accounted for as a purchase. Since the acquisition
closed on the last business day of the
16
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Notes to Consolidated Financial Statements (Unaudited)
7. ACQUISITIONS (Continued)
third quarter, there was no impact to the earnings of the Company,
however, APE's assets and liabilities are reflected in the consolidated
balance sheet as of October 3, 1998.
The preliminary purchase price allocation attributed approximately
$31.0 million to net working capital items, approximately $1.4 million
to property, plant and equipment and approximately $22.4 million to
goodwill. Goodwill is expected to be amortized over 25 years.
The following unaudited proforma summary of consolidated results of
operations have been prepared as if the acquisition of APE occurred at
the beginning of the periods presented. In connection with the
allocation of purchase price, the Company wrote up APE's inventory by
an estimated $3.0 million to reflect fair market value. This write-up
of inventory will negatively impact gross margin during the Company's
fourth quarter of 1998 and possibly first quarter of 1999 as that
inventory is sold. This one-time nonrecurring adjustment, currently
estimated at $1.9 million, net of tax, is not reflected in the proforma
results presented below. The proforma operating results below do not
reflect any potential compensation expense related to the additional
consideration that may be paid as previously discussed. The proforma
operating results for the nine months ended October 4, 1997 also
reflect the issuance of the Senior Subordinated Notes as of the
beginning of the fiscal year.
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------
October 4, October 3,
1997 1998
---- ----
(Unaudited)
<S> <C> <C>
Net sales $163,200,000 $186,100,000
------------ ------------
Income before extraordinary item 10,400,000 10,000,000
------------ ------------
Net income 10,400,000 9,900,000
========== =========
Basic and diluted income before
extraordinary item per share 10,400 10,000
------ ------
Basic and diluted net income per share 10,400 9,900
====== =====
</TABLE>
These proforma results do not purport to be indicative of the results
that would have actually been obtained if APE had been acquired as of
January 4, 1997.
Effective August 30, 1997, Glenoit Corporation through Glenoit Canada,
acquired certain assets and certain liabilities of Collins & Aikman
Canada, Inc. for cash consideration of approximately $8.2 million. The
acquisition has been accounted for as a purchase and, accordingly, the
operating results of the acquired business have been included in the
results of operations since the acquisition date. The purchase price
allocation attributed approximately $3.4 million to net working capital
items, approximately $4.4 million to property, plant and equipment and
approximately $ .4 million to goodwill. For the first
17
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
Notes to Consolidated Financial Statements (Unaudited)
7. ACQUISITIONS (Continued)
eight months of 1997, the acquired business had sales of approximately
$9.7 million. Net income and basic and diluted income per share for the
nine months ended October 4, 1997 as presented in the accompanying
unaudited consolidated statements of income would not differ
significantly on a proforma basis adjusted for this acquisition.
18
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
On December 13,1995, Glenoit Universal, Ltd. ("Holdings") formed a wholly owned
subsidiary, Glenoit Corporation (the Company), formerly Glenoit Intermediate,
Inc. and exchanged all of the issued and outstanding stock of Glenoit Mills,
Inc. and subsidiary ("Mills") for all of the issued and outstanding shares of
common stock of Glenoit Corporation. The Company is engaged primarily in the
manufacture of fabric ("Fabric Division") and household rugs ("Consumer Products
Division") with plants in North Carolina, Canada and Tennessee. The Company
offers a wide range of textile products to customers in retail, apparel, and
automotive industries throughout North America.
Recent Developments
On October 2, 1998, the Company acquired all the capital stock of American
Pacific Enterprises, Inc. ("APE") for approximately $38.2 million, subject to
post-closing adjustment. In addition, approximately $16.6 million of
indebtedness of APE was extinguished by the Company in connection therewith. APE
is a leading designer, importer and marketer of decorative textile home
furnishings, principally quilts and decorative bedding items. The Company
believes that the acquisition of APE will expand its current product offerings
to the large retailers, further penetrate the specialty retailing segment and
diversify product sourcing capabilities beyond North America to include Chinese
suppliers. Since the acquisition occurred on the last business day of the third
quarter, there was no impact to the Company's results of operating as discussed
below.
On August 31, 1998, the Company announced that it is expanding its presence in
the home fashions arena with the launch of a new home textiles division, Madison
Landing. This division will supply decorative pillows, table linens, duvets and
other fashion accessories to the retail industry.
Results of Operations
Net sales for the quarter ended October 3, 1998, decreased to $45.1 million or
6.5% compared to $48.3 million during the comparable quarter in the prior year.
The decrease in net sales resulted from lower unit volume in the Fabric Division
due to recent retail softness in the product category. Net sales in the Consumer
Products Division increased approximately 8.3% during the third quarter of 1998
compared to 1997 as a result of increased unit volume.
Net sales year to date through October 3, 1998 were $133.1 million compared to
$120.8 million for the first nine months of the prior year. This increase of
$12.2 million or 10.1% related to increased sales in outerwear/activewear fabric
as well as household rugs. Glenoit Canada, which was acquired in September,
1997, reported sales of $8.4 million for the first eight months of 1998 which
also contributed to the year-to-date increase.
Gross profit for the quarter ended October 3, 1998, was $13.2 million or 29.3%
of net sales compared to $18.7 million or 38.7% of net sales for the same period
last year. Gross profit year-
19
<PAGE>
to-date October 3, 1998 was $42.0 million or 31.6% of net sales compared to
$42.9 million or 35.5% of net sales for the first nine months of the prior year.
The decrease of $5.5 million and $ .9 million, respectively, are attributable to
the decreased unit volume in the Fabric Division during the third quarter
slightly offset by gains in the Consumer Products Division. The decrease in unit
volume in the Fabric Division resulted in lower absorption of overhead costs
including increased levels of depreciation as a result of the Company's capital
expenditure program.
Operating expenses for the quarter ended October 3, 1998, were $6.5 million or
14.4% of net sales compared to $6.9 million or 14.2% of net sales in the third
quarter of the prior year. Operating expenses for the nine months ended October
3, 1998 increased to $19.6 million from $17.9 million for the same period in the
prior year. The third quarter of 1997 includes approximately $ .6 million of
costs related to accruals for several unrelated claims made by former employees.
Year-to-date dollar increases over the prior year were primarily in sales
related categories such as commissions and compensation related costs as well as
expenses incurred by Glenoit Canada.
Operating income was $6.7 million for the quarter ended October 3, 1998 compared
to $11.8 million in the prior year. This represents a decrease of $5.1 million
for the quarter and resulted from the factors described above.
Operating income decreased to $22.4 million for the first nine months of 1998
over the same nine months of 1997. This decrease relates to the unit volume
decreases in the Fabric Division during the third quarter of 1998 described
above offset by the improved operating results in the Consumer Products
Division.
Interest expense for the quarter ended October 3, 1998, was $3.3 million
compared to $3.0 million for the same period last year. Interest expense year to
date October 3, 1998 was $9.6 compared to $8.1 million for the first nine months
of 1997. Interest expense has increased, primarily during the first quarter of
1998, due to higher levels of debt and a higher effective borrowing rate
relating to senior subordinated debt issued at the end of the first quarter of
1997.
The Company recognized a loss of approximately $ .1 million, net of an income
tax benefit, during September 1998 related to the purchase of Senior
Subordinated Notes with a face amount of $5 million. The Company recorded an
extraordinary loss on the early extinguishment of debt of $2.9 million related
to the refinancing of the Company's debt which took place on April 1, 1997.
Net income for the quarter ended October 3, 1998, was $1.9 million compared to
net income of $5.4 million the prior year. Net income for the first nine months
of 1998 was $7.6 million compared to $6.9 million for the same period in the
prior year.
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.
20
<PAGE>
On April 1, 1997, the Company issued $100 million of senior subordinated notes
(the "Notes"). Concurrently with the issuance of the Notes, the Company entered
into a $70 million senior credit facility ("the New Credit Facility") with a
syndicate of lenders led by BNP, pursuant to which the Company obtained
available credit (i) up to $45.0 million for working capital and general
corporate purposes (the "Working Capital Commitment"), subject to a Borrowing
Base, and (ii) up to $25.0 million for acquisitions (the "Acquisition
Commitment"). The Company also prepaid all outstanding indebtedness under the
Old Facility. On October 2, 1998, the new Credit Facility was amended to
increase the Acquisition Commitment to $76 million. On October 2, 1998, the
Company borrowed approximately $55.7 million under the Acquisition Commitment in
connection with the APE Acquisition. At October 3, 1998, there were borrowings
of $24.0 million under the Working Capital Commitment and approximately $12.0
million available to borrow under the Working Capital Commitment and up to $20.3
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 October 3, 1998, Holdings has
obligations with a face amount of $28.6 million, bearing interest at stated
rates between 5% to 12.5%, to shareholders with principal due in 2004 and 2005.
For further discussion see Note 5 of the Unaudited Consolidated Financial
Statements.
On March 5, 1997, the Company declared a dividend and issued a note in the
amount of approximately $5.8 million to a shareholder of Holdings in
satisfaction of a contingent earnout obligation of Holdings as discussed in Note
2 to the Unaudited Consolidated Financial Statements.
In July 1998, Holdings settled a dispute regarding additional purchase price
owed to a shareholder associated with the recapitalization in December 1995
discussed in Note 2 to the Consolidated Financial Statements as of January 3,
1998. Accordingly, Holdings paid approximately $1.9 million to the shareholder
during July 1998. These funds were paid to Holdings by the Company as a
dividend.
21
<PAGE>
During September 1998, the Company acquired $5 million of the Senior
Subordinated Notes in the open market. These notes were subsequently retired. In
connection with this transaction, the Company recorded an extraordinary loss of
approximately $117,000, net of a tax benefit, which consisted of the write off
of a pro rata share of deferred financing costs associated with the Senior
Subordinated Notes.
During the nine months ended October 3, 1998, net cash used in operating
activities was $1.7 million, which resulted from the Company increasing its
working capital to meet its seasonal requirements. Excluding the purchase of
APE, receivables increased by $17.3 million, inventories and other assets
increased by $2.5 million. Accrued liabilities increased by $4.8 million, due
primarily to sales and compensation related costs. Accounts payable decreased by
$1.0 million related to decreased raw material purchases and tax related
accruals increased $2.6 million.
Capital Improvements
Capital expenditures for the nine months ended October 3, 1998 were $13.2
million. These additions were primarily in the Fabric Division for additions of
knitting and blending equipment as well as updating the manufacturing technology
in the newly acquired Canadian operation. Expenditures were also made for
upgrades to management information systems.
Seasonality
The Company's business is seasonal in nature. Generally, there is increased
retail demand for garments and rugs during the fall (back-to-school) and
December holiday selling seasons. Consequently, demand for the Company's
products is generally higher during the Company's second and third fiscal
quarters when such products are produced for these selling seasons.
Inflation
The Company believes that inflation has not had a material impact on the results
of operations presented.
Impact of Year 2000 Compliance
The Company has evaluated its Year 2000 risk in three separate categories,
information technology systems ("IT"), non-IT systems ("Non-IT") and third party
relationships in which the Company has a material relationship ("Third Party
Risk"). The Company has developed a plan in which the risks in each of these
categories are being addressed and reviewed by the appropriate level of
management as follows:
Due to conversions already in progress to improve operating performance, the
Company considers the IT systems risk to be minimal. Management expects the
conversions and the review of its IT systems to be completed by March 1999 and,
accordingly, a contingency plan for IT risks
22
<PAGE>
has not been developed. However, should the remaining review indicate a
contingency plan is needed, the Company will react accordingly.
Non-IT systems involve embedded technologies such as microcontrollers or
microprocessors. Examples of Non-IT systems include telephones, security systems
and computer controlled manufacturing equipment. The Company's review of Non-IT
systems is ongoing with expected completion by May 1999. To date, management
believes the Non-IT risks are minimal. Any costs of addressing Non-IT risks are
included in normal upgrade and replacement expenditures which were planned
outside of the Company's Year 2000 review. Since these risks are believed to be
minimal, a contingency plan for Non-IT risks has not been developed. However,
should the remaining review indicate a contingency plan is needed, the Company
will react accordingly.
The Company's review of its Third Party Risk includes detailed reviews of
critical relationships with suppliers and business partners, such as banking
institutions and key raw material suppliers. The Third Party Risk review is
ongoing and is expected to be completed by June 1999. The Company presently does
not expect the risk associated with or costs of addressing the Company's Third
Party Risk to be material.
The Company is currently in the process of analyzing APE's system in the same
manner discussed above. In connection with its due diligence work, the Company
is aware of system improvements needed to enhance operating performance.
Year 2000 Compliance will be ancillary in connection with these enhancements.
The Company's greatest Year 2000 risk would manifest itself in a critical third
party's system malfunction where the Company would suffer business interruption
until the supplier corrected the problem or an alternative supply was found. At
this point in the Company's review, it is not aware of any potential situations
which may cause this scenario to occur, but will formulate a contingency plan
should its review indicate it is necessary to do so.
There can be no assurance that these conclusions will be achieved and actual
results could differ from those anticipated. Specific factors that might cause
differences include, but are not limited to, the ability of the third parties
with which the Company has material relationships to modify or convert their
systems to be Year 2000 compliant, the ability of the Company to complete its
conversions on schedule, and similar uncertainties.
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition, including in
particular, the likelihood of the Company's success in developing and expanding
its business. These statements are based upon a number of assumptions and
estimates, which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur which will
affect the Company's results. The forward looking statements in this Form 10-Q
are intended to be subject to the safe harbor protection provided by Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 (the
"Safe Harbor Acts").
23
<PAGE>
PART II - Other Information
ITEM 2: Legal Proceedings
There have been no material developments in legal proceedings involving the
Company or its subsidiaries since the Company's Annual Report on Form 10-K
for the year ended January 3, 1998.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Glenoit Corporation is hereby
incorporated by reference to Exhibit 3.1 to Glenoit Corporation's
Registration Statement on Form S-4 (Registration No. 333-42411)
filed on December 16, 1997.
3.2 By-Laws of Glenoit Corporation are hereby incorporated by
reference to Exhibit 3.2 to Glenoit Corporation's Registration
Statement on Form S-4 (Registration No. 333-42411) filed on
December 16, 1997.
3.3 Certificate of Incorporation of Glenoit Asset Corporation is
hereby incorporated by reference to Exhibit 3.3 of Amendment No. 1
to Glenoit Asset Corporation's Registration Statement of Form S-4
(Registration No. 333-42411-01) filed February 4, 1998.
3.4 By-Laws of Glenoit Asset Corporation are hereby incorporated by
reference to Exhibit 3.4 of Amendment No. 1 to Glenoit Asset
Corporation's Registration Statement of Form S-4 (Registration No.
333-42411-01) filed February 4, 1998.
4.1 Indenture dated as of April 1, 1997 between Glenoit Corporation,
the Subsidiary Guarantors (as defined therein) and United States
Trust Company of New York is hereby incorporated by reference to
Exhibit 4.1 to Glenoit Corporation's Registration Statement on
Form S-4 (Registration No. 333-42411) filed on December 16, 1997.
4.2 Purchase Agreement dated as of March 26, 1997 among Glenoit
Corporation, the Subsidiary Guarantors (as defined therein),
Salomon Brothers Inc. and CIBC Wood Gundy Securities Corp. is
hereby incorporated by reference to Exhibit 4.2 to Glenoit
Corporation's Registration Statement on Form S-4 (Registration No.
333-42411) filed on December 16, 1997.
4.3 Registration Agreement dated as of March 26, 1997 among Glenoit
Corporation, the Subsidiary Guarantors (as defined therein),
Salomon Brothers Inc. and CIBC Wood Gundy Securities Corp. is
hereby incorporated by reference to Exhibit 4.3 to Glenoit
Corporation's Registration Statement on Form S-4 (Registration No.
333-42411) filed on December 16, 1997.
24
<PAGE>
10.1 Second Amended and Restated Credit Agreement dated as of April 1,
1997 among Glenoit Corporation, the banks, financial institutions
and other institutional lenders listed on the signature pages
thereto as the Restatement Lenders, the Banque Nationale de Paris,
as Administrative Agent for the Lender Parties (as defined
therein) is hereby incorporated by reference to Exhibit 10.1 to
Glenoit Corporation's Registration Statement on Form S-4
(Registration No. 333-42411) filed on December 16, 1997.
10.2 Supply Agreement dated February 1, 1997 by and between the Company
and Sterling Fibers, Inc. is hereby incorporated by reference to
Exhibit 10.2 of Amendment No. 1 to Glenoit Corporation's
Registration Statement on Form S-4 (Registration No. 333-42411)
filed on February 4, 1998.
10.3 Employment Agreement dated October 28, 1997 by and among the
Company, Glenoit Universal, Inc. and Thomas J. O'Gorman is hereby
incorporated to reference to Exhibit 10.3 of Amendment No. 1 to
Glenoit Corporation's Registration Statement on Form S-4
(Registration No. 333-42411) filed on February 4, 1998.
10.4 Employment Agreement dated August 5, 1996 by and between the
Company and Lester D. Sears is hereby incorporated by reference to
Exhibit 10.4 of Amendment No. 1 to Glenoit Corporation's
Registration Statement on Form S-4 (Registration No. 333-42411)
filed on February 4, 1998.
10.5 Stockholders Agreement dated as of December 14, 1995 by and among
Glenoit Universal, Inc., Citicorp Venture Capital, John Mowbray
O'Mara, Banque Nationale de Paris, The Equitable Life Assurance
Society of the United States, the Seller, Soannes Investment
Corporation, Thomas J. O'Gorman and certain other parties thereto
to is hereby incorporated by reference to Exhibit 10.5 of
Amendment No. 1 to Glenoit Corporation's Registration Statement on
Form S-4 (Registration No. 333-42411) filed on February 4, 1998.
10.6 Second Amendment and Waiver to the Credit Agreement, dated October
2, 1998, among Glenoit Corporation, the banks, financial
institutions and other institutional lenders parties to the Credit
Agreement and Banque Nationale de Paris as Agent is hereby
incorporated by reference to Exhibit 4.1 of Glenoit Corporation's
Form 8-K filed on October 16, 1998.
10.7 Stock Purchase Agreement dated October 2, 1998 among Glenoit
Corporation, American Pacific Enterprises, Inc., Steven J. Block,
Jeffrey J. Block and Gregory D. Block is hereby incorporated by
reference to Exhibit 2.1 of Glenoit Corporation's Form 8-K filed
on October 16, 1998.
21.1 Subsidiaries of Glenoit Corporation is hereby incorporated by
reference to Exhibit 21.1 to Glenoit Corporation's Registration
Statement on Form S-4 (Registration No. 333-42411) filed on
December 16, 1997.
27.1 Financial Data Schedules.
(b) Reports on Form 8-K
On October 16, 1998, the Company filed on Form 8-K information
regarding the acquisition of the capital stock of American Pacific
Enterprises, Inc. which occurred on October 2, 1998.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: November 11, 1998
GLENOIT CORPORATION
By /s/ Lester D. Sears
----------------------------
Lester D. Sears
Executive Vice President and
Chief Financial Officer
(On behalf of the Registrant
and as Principal Financial
and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: November 11, 1998
GLENOIT ASSET CORPORATION
By /s/ Lester D. Sears
----------------------------
Lester D. Sears
Executive Vice President and
Chief Financial Officer
(On behalf of the Registrant
and as Principal Financial
and Accounting Officer)
26
<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 nine months ending October 3, 1998, and such is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001047368
<NAME> GLENOIT CORPORATION AND SUBSIDIARIES
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> OCT-03-1998
<CASH> 963
<SECURITIES> 0
<RECEIVABLES> 55,075
<ALLOWANCES> 2,226
<INVENTORY> 28,037
<CURRENT-ASSETS> 83,434
<PP&E> 69,938
<DEPRECIATION> 23,943
<TOTAL-ASSETS> 162,003
<CURRENT-LIABILITIES> 23,774
<BONDS> 174,707
0
0
<COMMON> 0
<OTHER-SE> (39,142)
<TOTAL-LIABILITY-AND-EQUITY> 162,003
<SALES> 133,067
<TOTAL-REVENUES> 133,067
<CGS> 91,073
<TOTAL-COSTS> 91,073
<OTHER-EXPENSES> 19,610
<LOSS-PROVISION> (139)
<INTEREST-EXPENSE> 9,608
<INCOME-PRETAX> 12,115
<INCOME-TAX> 4,444
<INCOME-CONTINUING> 7,671
<DISCONTINUED> 0
<EXTRAORDINARY> (117)
<CHANGES> 0
<NET-INCOME> 7,554
<EPS-PRIMARY> 7.554
<EPS-DILUTED> 7.554
</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 nine months ending October 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> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> OCT-03-1998
<CASH> 84
<SECURITIES> 0
<RECEIVABLES> 0
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 35,721
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<OTHER-EXPENSES> 10
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,727)
<INCOME-PRETAX> 9,591
<INCOME-TAX> 3,356
<INCOME-CONTINUING> 6,235
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,235
<EPS-PRIMARY> 6.235
<EPS-DILUTED> 6.235
</TABLE>
