--------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
-----------
(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 1, 2000
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)
<TABLE>
<S> <C>
Delaware 13-3862561
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
Glenoit Asset Corporation
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 51-0343206
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
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 1, 2000, there were 1,000 shares of Glenoit Corporation
common stock outstanding.
-----------
DOCUMENTS INCORPORATED BY REFERENCE: NONE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
II-1
<PAGE>
GLENOIT CORPORATION
Amendment No. 1 on Form 10-K/A
to the
Annual Report on Form 10-K
for the fiscal year ended January 1, 2000
This Amendment No. 1 on Form 10-K/A (this "Amendment") is being filed by
Glenoit Corporation and Glenoit Asset Corporation (together the "Company") to
amend Item 14 of the Company's Annual Report on Form 10-K for the year ended
January 1, 2000 filed on April 17, 2000. This Amendment is to revise Note 7 to
the Consolidated Financial Statements to correctly state the balance sheet,
income statement and cashflows for the Company's Subsidiary Guarantors and
Subsidiary Non-Guarantors for the periods presented. Also included in this
filing is Schedule II -- Valuation and Qualifying Accounts for the years ended
January 1, 2000, January 2, 1999 and January 3, 1998 as well as the related
Report of Independent Accountants. Pursuant to Rule 12b-25 of the SEC Rules,
the complete text of Item 14, as amended, is set forth herein.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: June 5, 2000
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)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: June 5, 2000
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)
II-3
<PAGE>
PART IV:
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements
(1) The financial statements listed in the accompanying Index to
Consolidated Financial Statements on F-1 are filed as part of this
Annual Report on Form 10-K.
(2) Schedule II -- Valuation and Qualifying Accounts
(b) Reports on Form 8-K
On February 26, 1999, the Company filed on Form 8-K information
regarding the acquisition of the capital stock of Ex-Cell Home
Fashions, Inc. which occurred on February 12, 1999. On April 27, 1999
the Company filed an amendment to this Form 8-K to include required
financial information related to the acquisition.
(c) Exhibits
<TABLE>
<S> <C>
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.
</TABLE>
22
<PAGE>
<TABLE>
<S> <C>
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
10.8 Third Amendment and Waiver to the Credit Agreement, dated October 30, 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
incorporated by reference to Exhibit 10.8 of Glenoit Corporation's Form 10-K filed
on April 1, 1999.
10.9 Third Amended and Restated Credit Agreement, dated February 12, 1999, 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
February 26, 1999.
10.10 Stock Purchase Agreement dated February 12, 1999, among Glenoit Corporation,
Ex-Cell Home Fashions, Inc., Arnold Angerman, Irving Angerman, Samuel Samelson
and two trusts is hereby incorporated by reference to Exhibit 2.1 of Glenoit
Corporation's Form 8-K filed on February 26, 1999.
10.11 Amendment No. 2 to the Third Amended and Restated Credit Agreement, dated as
of June 29, 1999, among Glenoit Corporation, the banks, financial institutions and
other institutional lenders and Banque Nationale de Paris as Agent is hereby
incorporated by reference to Exhibit 10.11 of Glenoit Corporation's Form 10-Q filed
on August 24, 1999.
10.12 Amendment No. 3 to the Third Amended and Restated Credit Agreement, dated as
of August 20, 1999, among Glenoit Corporation, the banks, financial institutions and
other institutional lenders and Banque Nationale de Paris as Agent is hereby
incorporated by reference to Exhibit 10.12 of Glenoit Corporation's Form 10-Q filed
on August 24, 1999.
10.13 Amendment No. 4 to the Third Amended and Restated Credit Agreement, dated as
of October 29, 1999, among Glenoit Corporation, the banks, financial institutions
and other institutional lenders and Banque Nationale de Paris as Agent is hereby
incorporated by reference to Exhibit 10.13 of Glenoit Corporation's Form 10-Q filed
on November 23, 1999.
10.14 Amendment No. 5 to the Third Amended and Restated Credit Agreement, dated as
of November 19, 1999, among Glenoit Corporation, the banks, financial institutions
and other institutional lenders and Banque Nationale de Paris as Agent is hereby
incorporated by reference to Exhibit 10.14 of Glenoit Corporation's Form 10-Q filed
on November 23, 1999.
10.15 Amendment No. 6 to the Third Amended and Restated Credit Agreement, dated as
of March 16, 2000, among Glenoit Corporation, the banks, financial institutions and
other institutional lenders and Banque Nationale de Paris as Agent.
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.
</TABLE>
(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 April 14, 2000.
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 April 14, 2000 in the capacities indicated:
<TABLE>
<S> <C>
By /s/ THOMAS J. O'GORMAN President, Chief Executive Officer and Director
------------------------------- (principal executive officer)
Thomas J. O'Gorman
By /s/ LESTER D. SEARS Executive Vice President and Chief Financial Officer
------------------------------- (principal financial and accounting officer)
Lester D. Sears
By /s/ JOHN MOWBRAY O'MARA Director
-------------------------------
John Mowbray O'Mara
By /s/ SALEEM MUQADDAM Director
-------------------------------
Saleem Muqaddam
By /s/ ISAAC SCHAPIRA Director
-------------------------------
Isaac Schapira
By /s/ JOSEPH M. SILVESTRI Director
-------------------------------
Joseph M. Silvestri
</TABLE>
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 April 14, 2000.
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 April 14, 2000 in the capacities indicated:
<TABLE>
<S> <C>
By /s/ THOMAS J. O'GORMAN President, Chief Executive Officer and Director
------------------------------- (principal executive officer)
Thomas J. O'Gorman
By /s/ PETER J. WINNINGTON Secretary and Vice President
-------------------------------
Peter J. Winnington
By /s/ WILLIAM S. RYMER Treasurer
-------------------------------
William S. Rymer
</TABLE>
25
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Accountants ........................................................ F-2
Consolidated Balance Sheets as of January 2, 1999 and January 1, 2000 .................... F-3
Consolidated Statements of Operations for the years ended January 3, 1998, January 2,
1999 and January 1, 2000................................................................ F-5
Consolidated Statements of Stockholder's Deficit for the years ended January 3, 1998,
January 2, 1999 and January 1, 2000 .................................................... F-6
Consolidated Statements of Comprehensive Income (Loss) for the years ended January 3,
1998, January 2, 1999 and January 1, 2000 .............................................. F-6
Consolidated Statements of Cash Flows for the years ended January 3, 1998, January 2, F-7
1999 and January 1, 2000
Notes to Consolidated Financial Statements ............................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholder of
Glenoit Corporation
In our opinion, the consolidated financial statements listed in the index
appearing on F-1 present fairly, after the revision described in Note 7, in all
material respects, the financial position of Glenoit Corporation and its
subsidiaries (the "Company"), a wholly-owned subsidiary of Glenoit Universal,
Ltd., as of January 1, 2000 and January 2, 1999, and the results of their
operations and their cash flows for each of the years ended January 1, 2000,
January 2, 1999 and January 3, 1998 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the index appearing under item 14(a)(2)
on page 22, presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 7 to the
financial statements, the Company's violation of certain provisions of its debt
agreements raises substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Notes 1 and 7. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Raleigh, North Carolina
March 21, 2000, except as to Note 1 and
the first fourteen paragraphs and last
two paragraphs of Note 7 for which the
date is April 14, 2000 and the
fifteenth paragraph of Note 7 for
which the date is May 30, 2000
F-2
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, Ltd.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 2, January 1,
1999 2000
---------------- ----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ............................................................... $ 339,700 $ 2,015,080
Receivables:
Trade accounts receivable, net of allowance of $2,360,000 and $5,470,000 as of
January 2, 1999 and January 1, 2000, respectively .................................... 29,666,112 27,639,925
Other receivables ..................................................................... 364,996 2,396,339
Inventories ............................................................................. 19,734,042 50,974,925
Deferred tax asset ...................................................................... 2,981,306 3,406,960
Prepaid expenses and other current assets ............................................... 816,173 1,012,441
------------- -------------
Total current assets ................................................................. 53,902,329 87,445,670
------------- -------------
Property, plant and equipment:
Land .................................................................................... 698,891 1,233,290
Buildings and improvements .............................................................. 10,619,144 14,677,246
Machinery and equipment ................................................................. 48,510,929 67,259,267
Computer equipment ...................................................................... 4,207,744 7,617,064
Furniture and fixtures .................................................................. 940,409 1,728,944
Leasehold improvements .................................................................. 670,027 2,624,780
Construction-in-progress ................................................................ 3,276,432 1,055,176
------------- -------------
Total ................................................................................ 68,923,576 96,195,767
Less accumulated depreciation and amortization .......................................... (19,815,265) (28,494,090)
------------- -------------
Net property, plant and equipment .................................................... 49,108,311 67,701,677
------------- -------------
Other assets:
Notes receivable from related party ..................................................... 266,821 246,810
Intangible assets, net of accumulated amortization of $1,735,000 and $3,185,000 as of
January 2, 1999 and January 1, 2000, respectively ..................................... 35,715,233 50,933,860
Deferred loan costs and other, net of accumulated amortization of $1,181,000 and
$2,836,000 as of January 2, 1999 and January 1, 2000, respectively .................... 5,195,653 9,293,032
Other ................................................................................... 510,716 1,324,424
------------- -------------
Total assets ......................................................................... $ 144,699,063 $ 216,945,473
============= =============
</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 2, January 1,
1999 2000
---------------- ----------------
<S> <C> <C>
Liabilities and Stockholder's Deficit
Current liabilities:
Accounts payable ...................................................................... $ 2,888,602 $ 10,061,519
Accrued expenses ...................................................................... 5,389,816 6,408,338
Accrued compensation .................................................................. 5,208,116 4,274,474
Accrued interest ...................................................................... 2,701,102 3,224,475
Current maturities of long-term debt .................................................. -- 237,681,953
Payable to related party .............................................................. 8,521,000 --
Due to Holdings ....................................................................... 1,752,143 2,462,933
------------- -------------
Total current liabilities .......................................................... 26,460,779 264,113,692
Long-term debt -- less current maturities .............................................. 160,707,499 --
Deferred income taxes .................................................................. 3,382,058 5,840,012
Other .................................................................................. 504,196 6,125,933
------------- -------------
Total liabilities .................................................................. 191,054,532 276,079,637
------------- -------------
Commitments and contingencies
Stockholder's deficit:
Common stock, $.01 par value, 1,000 shares authorized, issued and outstanding as of
January 2, 1999 and January 1, 2000 ................................................. 10 10
Additional paid-in capital ............................................................ 1,461,713 1,461,713
Accumulated deficit ................................................................... (46,966,633) (60,255,036)
Accumulated other comprehensive loss .................................................. (850,559) (340,851)
------------- -------------
Total stockholder's deficit ........................................................ (46,355,469) (59,134,164)
------------- -------------
Total liabilities and stockholder's deficit ........................................ $ 144,699,063 $ 216,945,473
============= =============
</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 OPERATIONS
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------
January 3, January 2, January 1,
1998 1999 2000
--------------- --------------- ------------------
<S> <C> <C> <C>
Net sales ................................................................... $ 146,920,759 $ 172,042,207 $ 294,724,697
Cost of sales ............................................................... 98,061,440 123,696,704 212,154,943
------------- ------------- --------------
Gross profit ............................................................ 48,859,319 48,345,503 82,569,754
------------- ------------- --------------
Operating expenses:
Selling ................................................................... 12,309,451 15,024,758 23,837,975
Administrative ............................................................ 8,780,595 16,115,200 35,057,507
Research and development .................................................. 1,842,639 1,736,106 4,070,252
Restructuring charge ...................................................... -- -- 13,100,000
------------- ------------- --------------
Total operating expenses ................................................ 22,932,685 32,876,064 76,065,734
------------- ------------- --------------
Income from operations ...................................................... 25,926,634 15,469,439 6,504,020
------------- ------------- --------------
Other income (expense):
Interest expense, net ..................................................... (10,938,341) (13,941,672) (25,089,954)
Amortization of deferred financing costs .................................. (645,621) (690,656) (1,654,778)
Other ..................................................................... (86,853) (147,624) 921,113
------------- ------------- --------------
Total other expense ..................................................... (11,670,815) (14,779,952) (25,823,619)
------------- ------------- --------------
Income (loss) before income taxes and extraordinary loss .................... 14,255,819 689,487 (19,319,599)
Income tax expense (benefit) ................................................ 5,390,412 307,915 (6,031,196)
------------- ------------- --------------
Income (loss) before extraordinary loss ..................................... 8,865,407 381,572 (13,288,403)
Extraordinary loss on early extinguishment of debt, net of tax benefit of
$1,527,000 for the year ended January 3, 1998 and $67,000 for the
year ended January 2, 1999 ................................................ 2,856,884 117,236 --
------------- ------------- --------------
Net income (loss) ........................................................... $ 6,008,523 $ 264,336 $ (13,288,403)
============= ============= ==============
</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 years ended January 3, 1998, January 2, 1999 and January 1, 2000
<TABLE>
<CAPTION>
Accumulated
Shares of Additional Other
Common Common Paid-in Accumulated Comprehensive
Stock Stock Capital Deficit Income Total
----------- -------- ------------ ----------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
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
Accumulated other comprehensive
loss ............................. (232,614) (232,614)
----- --- ---------- ------------- ---------- -------------
Balance as of January 3, 1998 ..... 1,000 10 1,361,713 (45,295,099) (232,614) (44,165,990)
Net income ........................ 264,336 264,336
Dividends ......................... (1,935,870) (1,935,870)
Stock compensation ................ 100,000 100,000
Accumulated other comprehensive
loss ............................. (617,945) (617,945)
----- --- ---------- ------------- ---------- -------------
Balance as of January 2, 1999 ..... 1,000 10 1,461,713 (46,966,633) (850,559) (46,355,469)
Net loss .......................... (13,288,403) (13,288,403)
Accumulated other comprehensive
income ........................... 509,708 509,708
----- --- ---------- ------------- ---------- -------------
Balance as of January 1, 2000 ..... 1,000 $10 $1,461,713 $ (60,255,036) $ (340,851) $ (59,134,164)
===== === ========== ============= ========== =============
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------
January 3, 1998 January 2, 1999 January 1, 2000
----------------- ----------------- ----------------
<S> <C> <C> <C>
Net income (loss) ............................ $6,008,523 $ 264,336 $ (13,288,403)
Other comprehensive income (loss), net of tax:
Currency translation adjustment ............. (147,710) (392,395) 323,665
---------- ---------- -------------
Comprehensive income (loss) .................. $5,860,813 $ (128,059) $ (12,964,738)
========== ========== =============
</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
---------------------------------------------------
January 3, January 2, January 1,
1998 1999 2000
---------------- --------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................................... $ 6,008,523 $ 264,336 $ (13,288,403)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Loss on early extinguishment of debt ................................ 4,383,884 184,624 --
Deferred income taxes ............................................... (81,781) (753,382) (1,171,129)
Depreciation and amortization ....................................... 3,861,613 6,415,650 12,278,527
Restructuring charge ................................................ -- -- 13,100,000
Loss (gain) on sale of property and equipment ....................... 234,020 19,497 (198,843)
Stock compensation .................................................. 200,000 100,000 --
Effect of foreign currency exchange rate ............................ (232,614) (617,945) 509,708
Changes in operating assets and liabilities, net of acquired
operating assets and liabilities:
Trade and other receivables ........................................ 1,025,410 6,112,704 4,225,713
Inventories ........................................................ 1,678,022 6,345,582 (13,202,475)
Prepaid expenses and other ......................................... 443,589 (640,061) (1,296,249)
Due to Holdings .................................................... 944,564 (926,444) 710,790
Accounts payable ................................................... 2,079,009 (4,415,003) 2,079,071
Accrued expenses and other liabilities ............................. 3,161,820 5,699,801 (7,865,271)
-------------- ------------- --------------
Net cash provided by (used in) operating activities .............. 23,706,059 17,789,359 (4,118,561)
-------------- ------------- --------------
Cash flows from investing activities:
Purchases of acquired businesses ....................................... (8,209,333) (55,671,337) (59,649,243)
Purchases of and additions to property, plant and equipment ............ (19,605,752) (17,901,934) (7,529,821)
Proceeds from sale of property and equipment and refunds of
deposits ............................................................. 52,300 55,542 1,750,706
-------------- ------------- --------------
Net cash used in investing activities ............................ (27,762,785) (73,517,729) (65,428,358)
-------------- ------------- --------------
Cash flows from financing activities:
Payments on capital lease obligations .................................. (625,821) (759,619) --
Proceeds from line of credit and issuance of debt ...................... 124,600,000 80,707,499 181,583,168
Payments on line of credit and debt .................................... (104,600,000) (17,000,000) (104,608,713)
Payments for financing costs ........................................... (6,950,409) (987,121) (5,752,156)
Advances on notes receivable -- related party .......................... -- (79,099) --
Dividends paid ......................................................... (1,600,000) (1,935,870) --
Purchase of senior subordinated notes .................................. -- (4,950,000) --
Payment of note payable to related party ............................... (5,743,581) -- --
-------------- ------------- --------------
Net cash provided by financing activities ........................ 5,080,189 54,995,790 71,222,299
-------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents ............. 1,023,463 (732,580) 1,675,380
Cash and cash equivalents at beginning of year .......................... 48,817 1,072,280 339,700
-------------- ------------- --------------
Cash and cash equivalents at end of year ................................ $ 1,072,280 $ 339,700 $ 2,015,080
============== ============= ==============
</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 (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. During 1997, Mills
was merged into the Company. The Company has two operating segments: (i)
Decorative Home Furnishings which designs, manufactures, imports and
distributes decorative textile home furnishings and (ii) a domestic
manufacturer and marketer of specialty fabrics, primarily for the apparel
industry, known as "sliver-knit" pile fabrics ("Fabric Division"). The
Company's two most recent acquisitions (see Note 3), American Pacific
Enterprises, Inc. ("APE") and Ex-Cell Home Fashions, Inc. ("Ex-Cell"), are part
of the Decorative Home Furnishings segment.
Basis of Presentation
Subsequent to January 1, 2000, the Company was in violation of certain
covenants of its senior credit facility and senior subordinated notes (See Note
7). This matter raises substantial doubt about the Company's ability to
continue as a going concern. The Company is currently in negotiations with its
senior lenders and is reviewing alternative financing and strategic options to
address the defaults outstanding as well as reduce the Company's overall
leverage. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Principles of Consolidation
On October 2, 1998, the Company acquired all the capital stock of APE (see
Note 3). On February 12, 1999, the Company acquired all of the outstanding
shares of capital stock of Ex-Cell (see Note 3). Accordingly, as of January 1,
2000, the consolidated financial statements presented include the amounts of
Glenoit Corporation and its wholly-owned subsidiaries Glenoit Canada, Glenoit
Asset Corporation, APE and Ex-Cell.
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. An estimate
which could change by a material amount in the near term is the estimated
allowance for obsolescence and lower of cost or market for inventory.
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 1998, the
Company accrued approximately $8.5 million as additional purchase price of APE,
which is a non-cash investing activity. This amount was paid during April 1999.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
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.
F-8
<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)
Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized and
depreciated over their estimated useful lives. Upon disposition, the asset and
related accumulated depreciation accounts are relieved and any related gain or
loss is credited or charged to other income (expense).
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable, in accordance with the provisions of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. Accordingly, when
indicators of impairment are present, the Company evaluates the carrying value
of property, plant and equipment, and intangibles in relation to operating
performance.
Depreciation is primarily computed using the straight-line method over the
related asset's estimated useful life as follows:
<TABLE>
<S> <C>
Buildings and improvements ......... 20 to 40 years
Machinery and equipment ............ 5 to 12 years
Computer equipment ................. 3 to 7 years
Furniture and equipment ............ 3 to 12 years
</TABLE>
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 to twenty-five 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 generally 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.
Where the right of return exists under guaranteed sales arrangements, revenue
is recognized when the products are sold by the retailer. One customer for each
of the years ended January 2, 1999 and January 1, 2000 accounted for
approximately 11% of consolidated net sales. One additional customer for the
year ended January 1, 2000 accounted for approximately 10% of consolidated net
sales. 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.
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.
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)
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 and present
value calculations using market interest rates. As of January 2, 1999 and
January 1, 2000, the Company estimates the fair value of its debt instruments
to be approximately $155,000,000 and $178,000,000, respectively.
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
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"). FAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. The FASB recently delayed the required implementation of FAS No.
133 until fiscal year 2000. During 1999, the Company entered into an interest
rate hedge agreement but does not expect the implementation of FAS No. 133 to
have a material impact on the Company's consolidated financial position,
results of operations, or cashflows.
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 and to terminate the
Company's factor agreement. In addition, the Company paid a cash dividend of
$40,486,261 to Holdings.
3. ACQUISITIONS
Effective August 30, 1997, Glenoit Corporation through a wholly-owned
subsidiary, Glenoit Corporation of Canada ("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 year ended
December 28, 1996, the acquired business had
F-10
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. ACQUISITIONS (Continued)
sales of approximately $11.6 million. Net income for the periods presented in
the accompanying consolidated statements of income would not differ
significantly on a pro forma basis adjusted for this acquisition.
On October 2, 1998, the Company acquired all the capital stock of American
Pacific Enterprises, Inc. ("APE") for approximately $39.1 million, including
fees and expenses, 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. For fiscal 1998, approximately
$12.3 million was paid to the former owners and current employees during April
1999. Of this amount, approximately $3.5 million was paid to current employees
and was expensed during 1998. The remaining $8.8 million was recorded as
additional purchase price. Based on APE's operating results for 1999, there was
no additional compensation expense or purchase price recorded. 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 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 $31.8
million to net working capital items, approximately $1.3 million to property,
plant and equipment and approximately $31.4 million to goodwill. Goodwill is
being amortized on a straight-line basis over 25 years.
On February 12, 1999, the Company acquired all the outstanding shares of
capital stock of Ex-Cell Home Fashions, Inc. ("Ex-Cell") in a single
transaction for approximately $44.1 million, including fees and expenses,
subject to post-closing adjustments. In addition, approximately $6.8 million of
debt of Ex-Cell was extinguished by the Company in connection therewith. 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. Ex-Cell is engaged in the design,
manufacture, importation and distribution of textile home furnishings,
principally shower curtains, table linens and decorative pillows. The purchase
price allocation attributed approximately $15.1 million to net working capital
items, approximately $22.8 million to property, plant and equipment, $7.1
million to long term liabilities including deferred income taxes and
approximately $20.1 million to goodwill. Goodwill is being amortized on a
straight-line basis over 25 years.
The following unaudited proforma summary of consolidated results of
operations have been prepared as if the acquisitions of APE and Ex-Cell
occurred at the beginning of the periods presented. In connection with the
allocation of APE's purchase price, the Company wrote up APE's inventory by an
estimated $3.4 million. This write-up of inventory negatively impacted gross
margin during the Company's fourth quarter of 1998 as this inventory was sold.
This one-time nonrecurring adjustment of $2.0 million, net of tax, is not
reflected in the proforma results presented below. In connection with the
allocation of Ex-Cell's purchase price, the Company wrote up Ex-Cell's
inventory by approximately $2.2 million. This write-up negatively impacted
gross margin during the Company's first nine months of 1999. The impact of this
write-up is not reflected in the proforma results presented below. Certain
costs associated with the former shareholders of Ex-Cell are also excluded from
the proforma results.
<TABLE>
<CAPTION>
Years Ended
-------------------------------
January 2, January 1,
1999 2000
--------------- ---------------
(Unaudited)
<S> <C> <C>
Net sales ................. $304,600,000 $ 303,500,000
============ =============
Net income (loss) ......... 4,900,000 (12,100,000)
============ =============
</TABLE>
These unaudited pro forma results do not purport to be indicative of the
results that would have actually been obtained if APE and Ex-Cell had been
acquired as of January 4, 1998 or results of future periods.
F-11
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
January 2, January 1,
1999 2000
-------------- -------------
<S> <C> <C>
Raw materials .................. $ 2,843,387 $ 9,269,434
Work-in-progress ............... 1,933,812 4,985,545
Finished goods ................. 14,956,843 36,719,946
----------- -----------
Total Inventories .............. $19,734,042 $50,974,925
=========== ===========
</TABLE>
5. FACTOR AGREEMENTS
Ex-Cell has a factoring arrangement whereby substantially all of its
accounts receivable are assigned and sold without recourse. During November
1999, the Company entered into a factoring agreement for its Fabric Division
whereby all pre-approved accounts are assigned without recourse. The Company
does retain credit risks on customer orders that were not approved by the
factor. As of January 1, 2000, the Company retained credit risk of
approximately $1.5 million related to accounts not approved for credit under
these two agreements.
6. RESTRUCTURING CHARGE
On February 25, 1999, the Company's Board of Directors approved a plan to
close one of its manufacturing operations of the Fabric Division. In connection
with this activity, the Company discontinued operations at its leased Tennessee
facility and terminated substantially all of the associates at that facility.
The Company ceased substantially all operations in the facility on or about May
28, 1999. During the first quarter of fiscal 1999, the Company recorded a
restructuring charge totaling $13.1 million of which $3.2 million related to
the write-off of the goodwill, $1.8 million to cover the write-down of
machinery and equipment to fair market value and the remainder for the costs of
operating leases and severance and other personnel costs related to the
termination of approximately 225 associates. Management reviewed its original
write-down of fixed assets and compared the actual results of asset sales to
original appraised values as well as reviewed any remaining asset values. In
connection with this review, as of January 1, 2000, management determined that
the write down of machinery and equipment should be increased to $3.4 million.
Management also reviewed the anticipated requirements for operating leases and
determined this amount should decrease by $1.6 million as a result of certain
leased equipment being transferred to its other manufacturing facilities and
placed in service. The components of the reserves for this facility are as
follows (in thousands):
<TABLE>
<CAPTION>
Original Reserve Usage Adjustment Remaining Reserve
------------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C>
Anticipated expenditures related to operating leases
For plant and equipment ............................... $7,323 $ (1,348) $ (1,586) $4,389
Anticipated severance benefits ......................... 850 (850) 0 0
------ -------- -------- ------
$8,173 $ (2,198) $ (1,586) $4,389
====== ======== ======== ======
</TABLE>
7. LONG-TERM DEBT
As of January 2, 1999 and January 1, 2000 long-term debt consisted of the
following:
<TABLE>
<CAPTION>
January 2, January 1,
1999 2000
-------------- ---------------
<S> <C> <C>
Senior credit facility .......... $ 65,707,499 $142,681,953
11% Senior subordinated notes ... 95,000,000 95,000,000
------------ ------------
Total long-term debt ............ $160,707,499 $237,681,953
Less current portion ............ -- 237,681,953
------------ ------------
$160,707,499 $ --
============ ============
</TABLE>
F-12
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. LONG-TERM DEBT (Continued)
On April 1, 1997, the Company issued $100,000,000 of senior subordinated
notes (the "Senior Subordinated Notes") in a private placement bond offering.
The Senior Subordinated Notes bear interest at a fixed rate of 11% and mature
on April 15, 2007. The Company at its option, can prepay these notes at a price
of 105.5% of the original principal amount, beginning on April 15, 2002. The
premium declines by 1.833% thereafter each year beginning on April 15 until
reduced to the original principal amount. Additionally, prior to April 15,
2000, the Company may redeem in the aggregate up to 25% of the original
aggregate principal amount with the proceeds of one or more Public Equity
Offerings, as defined in the Indenture governing the Senior Subordinated Notes,
at a redemption price of 110% of the original principal amount. Upon a Change
of Control of the Company, as defined in the Indenture governing the Senior
Subordinated Notes, the holder of a Senior Subordinated Note may require the
Company to redeem the note at a price of 101% of the principal amount. Interest
is payable semi-annually, and began on October 15, 1997.
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 was 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 APE, discussed in Note 3, the Company borrowed approximately
$55.7 million under the Acquisition Commitment.
As further discussed in Note 3, the Company acquired all outstanding
shares of capital stock of Ex-Cell on February 12, 1999. In connection with
that acquisition, the Company amended and restated the Facility to increase the
borrowing availability to $200 million. The additional availability was reduced
to $175 million in connection with the June, 1999 amendment discussed below and
is currently comprised of (i) $65.0 million as the Working Capital Commitment,
subject to the Borrowing Base as defined, (ii) $40.0 million Term A loan and
(iii) $70.0 million Term B loan. The borrowings under both the Working Capital
Commitment and Term A loan, as amended, bear interest at the Base Rate plus
2.25% or the Eurodollar Rate plus 3.50%. Advances under the Term B loan bear
interest at the Base Rate plus 3.00% or the Eurodollar Rate plus 4.25%.
Beginning in July 1999, the interest rate charged on the Term A and
Working Capital Commitment borrowings could decrease by 1.0% if certain
financial ratios are met. Principal payments on the Term A and Term B loans
began on September 30, 1999 at a total of $1.7 million per quarter and increase
over the lives of the loans. Borrowings under the Term A loan and Working
Capital Commitment are required to be fully repaid by December 31, 2003 and
borrowings under the Term B loan are required to be fully repaid by June 30,
2004. On the date of the Ex-Cell acquisition, the Term A and Term B loans were
fully drawn. The bank also extended up to a total of $5.0 million in letters of
credit to the Company; however, the amount is limited to the amount of the
unused Working Capital Commitment. During November 1999, the Company prepaid a
total of approximately $1.0 million outstanding under the Term A and Term B
loans with excess cash proceeds from the sale of fixed assets related to the
previously discussed plant closure. At January 1, 2000, the Company had
approximately $37.0 million outstanding under the Working Capital Commitment,
and approximately $9.1 million available under the Working Capital Commitment.
The Facility and Senior Subordinated Notes have various covenants, as well
as cross-acceleration provisions, 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.
As of June 29, 1999, the Company's senior lenders waived the Company's
requirement to maintain and meet certain financial covenants contained in the
Facility for the period ending July 3, 1999. In connection with obtaining the
waiver, the
F-13
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. LONG-TERM DEBT (Continued)
Working Capital Commitment was reduced from $90 million to $65 million and
certain financial covenants were amended including an amendment to require
monthly testing of the Company's total leverage and senior leverage ratios. The
Company was not in compliance with these ratios for the month of July, 1999
and, accordingly, received a waiver for such non-compliance as well as amended
the August, 1999 and September, 1999 covenants on August 20, 1999. In
connection with these waivers and amendments, the Company paid a fee to the
banking group of $440,000. As a result of a temporary shutdown of two
facilities in Tarboro, N.C. caused by Hurricane Floyd during September, 1999,
the Company was not in compliance with the revised covenants as of October 2,
1999 and received a waiver for such non-compliance as of October 29, 1999. On
November 19, 1999, the Company received a waiver which eliminated the
requirement to meet certain financial covenants for the month of October and
amended existing covenants for November and December 1999 as well as created
monthly covenants for January and February 2000. The Company paid a fee to the
banking group of $440,000 in connection with obtaining these waivers and
amendments.
As of January 1, 2000, the Company was in compliance with its covenants
related to both the New Credit Facility and the Notes. On February 23, 2000,
the Company failed to repay approximately $2 million of borrowings outstanding
under the Working Capital Commitment that was required as a result of an
insufficient borrowing base which resulted in a default under the New Credit
Facility. The insufficient borrowing base was the result of missed shipments
during the last week of January 2000 as a result of a blizzard in Eastern North
Carolina that closed operating facilities and restricted shipments. On March
16, 2000, the Company's lenders waived this default until April 10, 2000 and
limited the Company's availability under the Working Capital Commitment to
approximately $48.3 million, including $3.3 million specifically for letters of
credit, with a view towards negotiating mutually acceptable modifications to
the facility prior to April 10, 2000. The Company and its lenders have been
unable to negotiate such modifications to date and, as of April 11, 2000, the
Company was in default under the New Credit Facility as a result of the
termination of the above waiver. In accordance with terms of the New Credit
Facility, the Company's lenders notified the Company on April 13, 2000 that
such lenders were exercising their election to prohibit the Company from making
the interest payments of approximately $5.3 million due under the Senior
Subordinated Notes on April 15, 2000. Accordingly, as of April 15, 2000, the
Company will be in default under the terms of the Senior Subordinated Notes due
to its failure to make the April 15, 2000 interest payment. As a result of the
above defaults, all of the Company's borrowings under the Senior Subordinated
Notes and New Credit Facility are classified as current liabilities.
It is anticipated that for the first quarter ended April 1, 2000, the
Company will be in default of certain financial covenants under the New Credit
Facility which had not previously been adjusted under the waivers and
amendments received prior to January 1, 2000. The Company is currently in
negotiations with its senior lenders to conform its financial covenants and
borrowing needs to its current business plan. Even though discussions are
ongoing, there can be no assurance that the Company will obtain the necessary
amendments and waivers or as to the terms thereof. The Company is currently
reviewing alternative financing and strategic options to attempt to address
both the defaults outstanding under the New Credit Facility and the Senior
Subordinated Notes as well as reduce the Company's overall leverage. The
Company has until May 15, 2000 to make the outstanding interest payment due
under the Senior Subordinated Notes to cure the anticipated Event of Default;
however, the Company does not expect to make this payment on a timely basis
unless the Company's lenders rescind their election to prohibit such payment
and the Company has sufficient liquidity. The Senior Subordinated Notes also
contain a cross-acceleration clause under which they become due and payable in
the event that the Company's senior lenders demand payment of the New Credit
Facility.
Barring an intervening acceleration of the indebtedness under the New
Credit Facility or an insolvency proceeding, the Company believes it has
sufficient liquidity to meet its current cash needs through approximately May
15, 2000 as a result of not paying the $5.3 million of outstanding interest due
on the Senior Subordinated Notes as of April 15, 2000. 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.
F-14
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. LONG-TERM DEBT (Continued)
During June 1999, the Company entered into an interest rate cap agreement
which caps the maximum Eurodollar rate to be paid by the Company at 6.5% on an
$82.5 million notional amount. The Company paid approximately $820,000 to enter
into this agreement.
Substantially all of the Company's domestic and Canadian assets and
operations are pledged as collateral for the New Credit Facility. Holdings and
Glenoit Asset Corporation have guaranteed the Company's obligations under the
New Credit 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, and the domestic
operations of APE and Ex-Cell (together the "Subsidiary Guarantors"). 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. 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 3, Glenoit Canada had no operations.
Subsequent to filing its Annual Report on Form 10-K for the year ended
January 1, 2000, the Company noted that the wholly-owned foreign subsidiaries
of APE and Ex-Cell (all located in the Far East) were not guarantors of the
Senior Subordinated Notes. Accordingly, the financial data for these entities
have been reclassified from the "Subsidiary Guarantors" as previously presented
and included with Glenoit Canada to represent the "Subsidiary Non-Guarantors".
Total assets, net income and cash flows from operations for these reclassified
entities were $6.2 million, $2.6 million and $3.9 million, respectively, for
fiscal 1999. As of January 2, 1999, total assets for the foreign subsidiary of
APE as well as net income and cash flow from operations were immaterial. The
following tables present summarized balance sheet information of Glenoit
Corporation, the Subsidiary Guarantors and the Subsidiary Non-Guarantors as of
January 1, 2000 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 the Subsidiary
Guarantors, are not material to investors. Summarized balance sheet
information, in thousands, as of January 1, 2000 is as follows:
<TABLE>
<CAPTION>
Glenoit Subsidiary Subsidiary
Corporation Guarantors Non-Guarantors Eliminations Consolidated
------------- ------------ ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents .............. $ 69 $ (136) $ 2,082 $ 2,015
Accounts and other
receivables, net ...................... 11,897 15,400 2,739 30,036
Inventories ............................ 9,128 37,835 4,012 50,975
Other current assets ................... 6,297 (2,138) 260 4,419
--------- -------- -------- ----------- ---------
Total current assets ................ 27,391 50,961 9,093 87,445
Property, plant and equipment, net ..... 33,785 23,723 10,194 67,702
Investments in subsidiaries ............ 109,508 9,449 -- $ (118,957) --
Other assets ........................... 74,121 49,623 796 (62,742) 61,798
--------- -------- -------- ----------- ---------
Total assets ........................ $ 244,805 $133,756 $ 20,083 $ (181,699) $ 216,945
========= ======== ======== =========== =========
Accounts payable ....................... $ 3,408 $ 4,075 $ 2,578 $ 10,061
Accrued expenses ....................... 235,976 22,707 (4,630) 254,053
--------- -------- -------- ----------- ---------
Total current liabilities ........... 239,384 26,782 (2,052) 264,114
Long-term debt ......................... 59,624 3,118 $ (62,742)
Other long-term liabilities ............ 4,590 7,240 135 11,965
Stockholders equity (deficit) .......... (58,793) 99,734 18,882 (118,957) (59,134)
--------- -------- -------- ----------- ---------
Total liabilities and
equity (deficit) ................... $ 244,805 $133,756 $ 20,083 $ (181,699) $ 216,945
========= ======== ======== =========== =========
</TABLE>
F-15
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. LONG-TERM DEBT (Continued)
Summarized operating statements information, in thousands, for the year ended
January 1, 2000 is as follows:
<TABLE>
<CAPTION>
Glenoit Subsidiary Subsidiary
Corporation Guarantors Non-Guarantors Eliminations Consolidated
------------- ------------ ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales ........................... $ 114,923 $163,595 $27,244 $ (11,037) $ 294,725
Cost of sales ....................... 85,625 117,210 20,357 (11,037) 212,155
--------- -------- ------- --------- ---------
Gross profit ........................ 29,298 46,385 6,887 0 82,570
Operating expenses .................. 37,436 36,956 1,674 76,066
Royalty income (expense) ............ (7,184) 7,184 0 0 0
--------- -------- ------- --------- ---------
Income (loss) from operations ....... (15,322) 16,613 5,213 0 6,504
Interest expense (income) ........... 26,721 (1,875) 244 25,090
Other expense (income) .............. 800 (10) (57) 733
Equity earnings of subsidiaries ..... 14,379 2,612 -- (16,991) --
Income tax expense (benefit) ........ (15,176) 7,415 1,730 -- (6,031)
--------- -------- ------- --------- ---------
Net income (loss) ................... $ (13,288) $ 13,695 $ 3,296 $ (16,991) $ (13,288)
========= ======== ======= ========= =========
</TABLE>
Summarized cash flow statement information, in thousands, for the year ended
January 1, 2000 is as follows:
<TABLE>
<CAPTION>
Glenoit Subsidiary Subsidiary
Corporation Guarantors Non-Guarantors Eliminations Consolidated
------------- ------------ ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities ............... $ (19,278) $ 12,084 $3,075 $ (4,119)
Cashflows used in investing activities ............. (62,374) (2,909) (145) (65,428)
Cash flows from (used in) financing activities ..... 81,682 (9,490) (970) 71,222
--------- -------- ------ -------------- ---------
Net increase (decrease) in cash .................... 30 (315) 1,960 1,675
Cash at beginning of period ........................ 39 179 122 340
--------- -------- ------ -------------- ---------
Cash at end of period .............................. $ 69 $ (136) $2,082 $ 2,015
========= ======== ====== ============== =========
</TABLE>
F-16
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. LONG-TERM DEBT (Continued)
Summarized balance sheet information, in thousands, as of January 2, 1999 is as
follows:
<TABLE>
<CAPTION>
Glenoit Subsidiary Subsidiary
Corporation Guarantors Non-Guarantor Eliminations Consolidated
------------- ------------ --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents .............. $ 39 $ 179 $ 122 $ 340
Accounts and other
receivables, net ..................... 17,373 10,998 1,660 30,031
Inventories ............................ 5,766 13,307 661 19,734
Other current assets ................... 3,588 163 46 3,797
--------- -------- ------- ---------
Total current assets ................ 26,766 24,647 2,489 53,902
Property, plant and equipment, net ..... 39,800 1,189 8,119 49,108
Investment in subsidiaries ............. 95,184 -- -- (95,184) --
Other assets ........................... 17,805 79,176 378 (55,670) 41,689
--------- -------- ------- ------- ---------
Total assets ........................ $ 179,555 $105,012 $10,986 $ (150,854) $ 144,699
========= ======== ======= ========== =========
Accounts payable ....................... 1,617 920 352 2,889
Other current liabilities .............. 10,713 12,605 254 23,572
--------- -------- ------- ---------
Total current liabilities ........... 12,330 13,525 606 26,461
Long-term debt ......................... 208,869 5,393 2,115 (55,670) 160,707
Other long-term liabilities ............ 3,862 25 3,887
Stockholders equity (deficit) .......... (45,506) 86,094 8,240 (95,184) (46,356)
--------- -------- ------- ---------- ---------
Total liabilities and equity ........ $ 179,555 $105,012 $10,986 $ (150,854) $ 144,699
========= ======== ======= ========== =========
</TABLE>
Summarized operating statements information, in thousands, for the year ended
January 2, 1999 is as follows:
<TABLE>
<CAPTION>
Glenoit Subsidiary Subsidiary
Corporation Guarantors Non-Guarantor Eliminations Consolidated
------------- ------------ --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales ........................ $143,858 $ 17,423 $10,761 $172,042
Cost of sales .................... 100,906 14,219 8,572 123,697
-------- -------- ------- --------
Gross profit ..................... 42,952 3,204 2,189 48,345
Operating expenses ............... 23,991 7,772 1,113 32,876
Royalty income (expense) ......... (9,155) 9,155 -- --
-------- -------- ------- --------
Income from operations ........... 9,806 4,587 1,076 15,469
Interest expense (income) ........ 16,202 (2,394) 134 13,942
Other expense (income) ........... 420 236 182 838
Income tax expense (benefit) ..... (2,188) 2,222 274 308
Earnings of subsidiaries ......... 5,009 -- -- (5,009) --
Extraordinary loss, net .......... 117 -- -- -- 117
-------- -------- ------- ------ --------
Net income ....................... $ 264 $ 4,523 $ 486 $ (5,009) $ 264
======== ======== ======= ======== ========
</TABLE>
F-17
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. LONG-TERM DEBT (Continued)
Summarized cash flow statement information, in thousands, for the year ended
January 2, 1999 is as follows:
<TABLE>
<CAPTION>
Glenoit Subsidiary Subsidiary
Corporation Guarantors Non-Guarantors Eliminations Consolidated
------------- ------------ ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Cashflows from (used in) operating activities ..... $ (5,232) $ 22,211 $ 810 $ 17,789
Cashflows used in investing activities ............ (70,358) (3,160) (73,518)
Cashflows from (used in) financing activities ..... 74,978 (22,108) 2,127 54,997
--------- --------- -------- -------------- ---------
Net increase(decrease) in cash .................... (612) 103 (223) (732)
Cash at beginning of period ....................... 651 76 345 1,072
--------- --------- -------- -------------- ---------
Cash at end of period ............................. $ 39 $ 179 $ 122 $ 340
========= ========= ======== ============== =========
</TABLE>
On April 1, 1997, the Company utilized the proceeds from the 11% Senior
Subordinated Notes to retire the Company's existing debt with financial
institutions, which included the balance of an $80 million senior credit
facility (the Term A and B Notes and the working capital line of credit) (the
"Old Facility") and a $15 million 12.5% Senior Subordinated Note payable (the
"$15 Million Senior Subordinated Note"). Additionally, on April 1, 1997, the
Company retired a note to a shareholder of Holdings in the amount of
approximately $5.8 million. As a result of the Company's payoff of these
obligations, the Company charged to earnings $2,884,000 of net deferred loan
costs and a $1,500,000 prepayment penalty related to the $15 million Senior
Subordinated Note. During the first quarter of 1997, the Company recognized an
extraordinary loss from the early extinguishment of debt of $2,857,000, which
is net of a tax benefit of $1,527,000 related to these charges.
During the years ended January 3, 1998, January 2, 1999 and January 1,
2000, the Company paid $9,017,000, $13,570,000, and $24,413,000 respectively,
in cash for interest.
8. LEASES
The Company leases certain equipment and facilities under operating leases
that expire through August 2008. Rent expense was $4,075,000, $4,410,000 and
$4,218,000 during the years ended January 3, 1998, January 2, 1999 and January
1, 2000, respectively.
As of January 1, 2000, future minimum rental payments required under
operating leases that have initial or remaining noncancelable terms in excess
of one year, including amounts reflected in the restructuring charge discussed
in Note 6, are as follows:
<TABLE>
<S> <C>
2000 ................................... $ 6,428,000
2001 ................................... 4,105,000
2002 ................................... 2,697,000
2003 ................................... 1,788,000
2004 ................................... 1,499,000
Thereafter ............................. 2,672,000
-----------
Total minimum lease payments ......... $19,189,000
===========
</TABLE>
F-18
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. INCOME TAXES
The provision, including tax benefits on extraordinary losses, for
federal, state and foreign income taxes consist of the following components:
<TABLE>
<CAPTION>
January 3, January 2, January 1,
1998 1999 2000
-------------- -------------- ----------------
<S> <C> <C> <C>
Current:
Federal ............. $2,867,333 $1,157,800 $ (4,706,766)
State ............... 891,521 (412,308) (919,414)
Foreign ............. 186,339 248,805 766,113
---------- ---------- ------------
3,945,193 994,297 (4,860,067)
---------- ---------- ------------
Deferred:
Federal ............. 730,402 (483,903) (2,565,531)
State ............... (812,183) (294,311) 1,392,924
Foreign ............. -- 24,832 1,478
---------- ---------- ------------
(81,781) (753,382) (1,171,129)
---------- ---------- ------------
Total ............. $3,863,412 $ 240,915 $ (6,031,196)
========== ========== ============
</TABLE>
The 1997 and 1998 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. Included in income (loss)
before income taxes are foreign earnings of $517,000, $760,000 and $5,000,000
in fiscal 1997, 1998 and 1999 respectively.
A reconciliation of the provision for income taxes to the federal
statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
January 3, January 2, January 1,
1998 1999 2000
------------ ------------ ----------------
<S> <C> <C> <C>
Statutory federal income tax expense (benefit) ..... $3,356,000 $ 171,786 $ (6,568,664)
State income taxes, net of federal benefit ......... 191,000 (466,368) (606,813)
Contingencies and nondeductible expenses ........... 307,000 522,487 333,418
Increase in valuation allowance .................... -- -- 895,467
Other .............................................. 9,412 13,010 (84,604)
---------- ---------- ------------
Income tax expense (benefit) ....................... $3,863,412 $ 240,915 $ (6,031,196)
========== ========== ============
</TABLE>
Undistributed earnings of the Company's foreign subsidiary amounted to
approximately $8.2 million at January 1, 2000.
F-19
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. 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 2, 1999 and January 1, 2000 are as follows:
<TABLE>
<CAPTION>
January 2, January 1,
1999 2000
-------------- ---------------
<S> <C> <C>
Deferred tax assets:
Capital loss carryforwards .............. $ 431,723 $ --
Accrued liabilities ..................... 1,963,663 4,329,538
Asset valuation allowances .............. 221,132 162,803
Federal net operating losses ............ -- 4,706,766
State net operating losses .............. 763,331 1,059,594
Inventory ............................... 562,810 1,424,068
Other ................................... 71,503 42,068
---------- ------------
Gross deferred assets ................... 4,014,162 11,724,837
Valuation allowance ................... (431,723) (895,468)
---------- ------------
Deferred tax assets ..................... 3,582,439 10,829,369
Less: Noncurrent portion ................ (601,133) (7,422,409)
---------- ------------
Current deferred tax assets ........... $2,981,306 $ 3,406,960
========== ============
Deferred tax liabilities:
Depreciation and amortization ........... $3,926,856 $ 10,415,206
Unremitted foreign earnings ............. -- 2,789,402
Other ................................... 56,335 57,813
---------- ------------
Deferred tax liabilities ................ 3,983,191 13,262,421
Less: Noncurrent deferred tax asset ..... (601,133) (7,422,409)
---------- ------------
Noncurrent deferred tax liability ..... $3,382,058 $ 5,840,012
========== ============
</TABLE>
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 net operating losses generated in North Carolina and New York
which are not currently anticipated to be utilized.
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.
During 1998, the Company settled the previously outstanding examination
and assessment that resulted from the Internal Revenue Service's ("IRS") review
of the Company's and Holding's income tax returns for January 1, 1994 and
December 31, 1994. The Company paid approximately $798,000 in tax, penalty and
interest in connection with this settlement. This amount had been previously
accrued for.
The Company's state income tax returns for the years ended January 1, 1994
through January 3, 1998, have been examined by the New York Department of
Finance. In December 1999, the Company settled with the New York Department of
Finance and paid a total of approximately $230,000 including tax and interest.
This amount had been previously accrued for.
F-20
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. 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 January 3, 1998, January 2, 1999 and January 1,
2000, the Company paid $2,033,000, $1,150,000, and $933,000 respectively, in
cash for taxes.
10. EMPLOYEE BENEFIT PLANS
The Company has a non-contributory defined benefit pension plan covering
substantially all employees located in its North Carolina and New York
operations hired prior to May 1, 1997. Glenoit Canada maintains a defined
benefit plan for substantially all of its hourly employees. The benefits for
both plans are based on years of service and the employee's compensation during
the years of credited service. The Company's policy is to contribute annually
the maximum amount that can be deducted for federal income tax purposes. Assets
of the plans are managed by a trustee and invested in marketable securities,
money market instruments and mutual funds.
<TABLE>
<CAPTION>
Years Ended
------------------------------
January 2, January 1,
1999 2000
--------------- --------------
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year ............... $ 11,931,128 $ 14,635,374
Service cost .......................................... 679,609 728,728
Interest cost ......................................... 894,151 972,007
Actuarial losses/(gains) .............................. 1,555,994 (1,377,741)
Benefits paid ......................................... (425,508) (489,513)
------------ ------------
Benefit obligation at end of year ..................... $ 14,635,374 $ 14,468,855
============ ============
Change in plan assets:
Fair value of plan assets at beginning of year ........ $ 12,100,951 $ 13,437,670
Actual return on plan assets .......................... 1,160,288 542,395
Company contributions ................................. 601,939 620,191
Benefits paid ......................................... (425,508) (489,513)
------------ ------------
Fair value of plan assets at end of year .............. $ 13,437,670 $ 14,110,743
============ ============
Funded status of the plans:
Funded status at end of year .......................... $ (1,197,704) $ (358,112)
Unrecognized transition asset ......................... (96,504) --
Unrecognized prior service cost ....................... 250,976 188,324
Unamortized net actuarial losses ...................... 927,737 48,250
------------ ------------
Accrued benefit cost .................................. $ (115,495) $ (121,538)
============ ============
</TABLE>
<TABLE>
<CAPTION>
January 3, January 2, January 1,
1998 1999 2000
------------ ------------ ---------------
<S> <C> <C> <C>
Net pension cost includes the following components:
Service cost -- benefits earned during the period .............. $ 512,293 $ 679,609 $ 728,728
Interest cost on projected benefit obligations ................. 757,142 894,151 972,007
Expected return on plan assets ................................. (757,907) (943,864) (1,043,820)
Net amortization and deferral of unrecognized net gain (loss) .. 37,410 (38,475) (30,681)
---------- ---------- ------------
Net periodic pension expense for year .......................... $ 548,938 $ 591,421 $ 626,234
========== ========== ============
</TABLE>
F-21
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. EMPLOYEE BENEFIT PLANS (Continued)
A weighted average discount rate of 6.75% and 7.50% for 1998 and 1999,
respectively, and a 4.5% rate of increase in future compensation levels were
used in determining the actuarial present value of the projected benefit
obligations for both 1998 and 1999. The expected long-term rate of return of
pension plan assets was 8% for both 1998 and 1999.
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 up to 50% up to a
maximum of 3% of the employee's earnings. Contributions made by the company
were approximately $325,000 and $451,000 during 1998 and 1999, respectively.
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. In connection with the acquisition of Glenoit Canada, the Company
established a defined contribution plan for salaried employees in which Company
contributions are based on years of service. Total contributions made by the
Company were approximately $35,000 and $39,000 during 1998 and 1999,
respectively.
11. 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 2, 1999 and January 1, 2000 was $163,500 and
$139,500 respectively.
During the year ended January 2, 1999, the Company paid $200,000 to
related parties for management and consulting fees.
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 9, 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 to Holdings" account.
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 7.
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.
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.
F-22
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
11. 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. 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.
12. OPERATING SEGMENTS
Description of Segments
The Company has two operating segments: (i) Decorative Home Furnishings
which designs, manufacturers, imports and distributes decorative textile home
furnishings and (ii) a domestic manufacturer and marketer of specialty fabrics,
primarily for the apparel industry, known as "sliver knit" pile fabrics
("Fabric Division").
Measurement of Segment Profit
The Company evaluates performance and allocates resources based on
operating income of each division. The accounting policies of the reportable
segments are the same as described in Note 1 and exclude any costs associated
with the Company's corporate administrative and finance functions.
Factors Management Used to Identify the Reportable Segments
The Company's reportable segments are business units that offer different
products and each are managed separately. The following tables present
operating results and other financial information utilized by management in
analyzing each operating division. All amounts are in thousands.
<TABLE>
<CAPTION>
Fiscal Years
-------------------------------------
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Net Sales
Decorative Home Furnishings ......... $ 39,796 $ 65,363 $221,755
Fabric .............................. 107,125 106,679 74,640
Intercompany ........................ 0 0 (1,670)
-------- -------- --------
Consolidated ..................... $146,921 $172,042 $294,725
======== ======== ========
Operating income (loss)
Decorative Home Furnishings ......... $ 6,751 $ 2,733 $ 19,519
Fabric .............................. 27,815 21,162 (3,942)
Corporate/Other ..................... (8,639) (8,426) (9,073)
-------- -------- --------
Consolidated ..................... $ 25,927 $ 15,469 $ 6,504
======== ======== ========
Depreciation and amortization
Decorative Home Furnishings ......... $ 743 $ 1,174 $ 5,938
Fabric .............................. 1,535 3,452 4,086
Corporate/Other ..................... 1,584 1,790 2,254
-------- -------- --------
Consolidated ..................... $ 3,862 $ 6,416 $ 12,278
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of
------------------------
January 2, January 1,
1999 2000
------------ -----------
<S> <C> <C>
Inventory and accounts receivable
Decorative Home Furnishings ......... $35,900 $70,183
Fabric .............................. 13,500 8,432
------- -------
Consolidated ...................... $49,400 $78,615
======= =======
</TABLE>
F-23
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. OPERATING SEGMENTS (Continued)
Note 7 identifies sales and assets of the Company's Canadian operation.
There were no other material sales or assets outside of the United States.
Major Customers
During fiscal 1997, the top three customers of the Decorative Home
Furnishings segment accounted for approximately 26%, 19% and 12% of that
segment's net sales.
During 1998, the top three customers of the Decorative Home Furnishings
segment accounted for approximately 36%, 14% and 11% of that segment's net
sales.
During 1999, the top two customers both accounted for 14% of that
segment's net sales.
13. 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 1, 2000, Holdings has obligations with a face amount of
approximately $32.6 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 $9.8 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 7), 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
$2.6 million per year, 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.
APE is a party to a copyright infringement and unfair business practices
litigation with a competitor. The competitor has filed suit claiming damages in
excess of $8 million. The suit is in the early stages of discovery and the
potential liability, if any, to the Company cannot be determined. Management
believes that the competitor's case is without merit and intends to vigorously
contest this lawsuit. Accordingly, no provision has been made in the Company's
financial statements.
From time to time, the Company is involved in various other litigation
which arises in the ordinary course of business. After consultation with its
legal counsel, 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-24
<PAGE>
GLENOIT CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Glenoit Universal, LTD.)
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 1, 2000, January 2, 1999, and January 3, 1998
(In Thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Cost/ Other End
Description of Period Expenses Adjustments Deductions of Period
---------------------------------------------------- ------------ ------------ --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
1999
Allowance for Sales Returns, Discounts and Doubtful
Accounts ........................................ $2,360 $10,269 $ 0 $ 7,159(A) $5,470
====== ======= ======== ======== ======
Allowance for Excess and Obsolete Inventory (B) ... $2,534 $ 1,303 $ 2,887(C) $ 1,555 $5,169
====== ======= ======== ======== ======
1998
Allowance for Sales Returns, Discounts and Doubtful
Accounts ........................................ $ 543 $ 4,197 $ 1,760(C) $ 4,140(A) $2,360
====== ======= ======== ======== ======
Allowance for Excess and Obsolete Inventory (B) ... $ 419 $ 750 $ 1,546(C) $ 181 $2,534
====== ======= ======== ======== ======
1997
Allowance for Sales Returns, Discounts and Doubtful
Accounts ........................................ $ 470 $ 323 $ 0 $ 250(A) $ 543
====== ======= ======== ======== ======
Allowance for Excess and Obsolete Inventory (B) ... $ 216 $ 535 $ 0 $ 332 $ 419
====== ======= ======== ======== ======
</TABLE>
---------
(A) Represents actual write-off of sales returns, discounts, and uncollectible
accounts which were applied against the reserve.
(B) The Company maintains a reserve for excess or obsolete inventory and for
lower of cost or market adjustments. As part of the Company's inventory
management, slow moving items are identified and prices are reduced until
the items are liquidated. These adjustments to the reserves are charged
directly to cost of sales. When goods are liquidated, these sales are
reflected in net sales and cost of sales.
(C) Represents opening balance sheet amounts in connection with the
acquisitions of Ex-Cell on February 12, 1999 and APE on October 2, 1998.
1
