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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report for the period from January 4, 1998 to January 2, 1999
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Commission file number 1-6687
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JOHNSTON INDUSTRIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 11-1749980
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Thirteenth Street, Columbus, Georgia 31901
(Address of principal executive offices) (Zip Code)
(706) 641-3140
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.10 Par Value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation 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. [ ]
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The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on March 22, 1999 was $13,821,139. The
aggregate market value was computed by reference to the closing price of the
stock on the New York Stock Exchange on such date.
For purposes of this response, executive officers, directors and Redlaw
Industries, Inc. are deemed to be affiliates of the Registrant and the holdings
by non-affiliates was computed as 5,670,211 shares.
The number of shares outstanding of the Registrant's Common Stock as of March
22, 1999 was 10,721,872 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
The Registrant's Proxy Statement for its 1999 Annual Meeting of Stockholders,
which will be filed pursuant to Regulation 14A within 120 days of the close of
the Registrant's fiscal year is incorporated by reference in answer to Part III
but only to the extent indicated in Part III herein.
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PART I.
ITEM 1. BUSINESS
GENERAL
Johnston Industries, Inc. ("Johnston") is a consolidated entity which
includes its direct wholly owned operating subsidiary, Johnston Industries
Alabama, Inc. ("JI Alabama"), and its indirect wholly owned subsidiaries,
Johnston Industries Composite Reinforcements, Inc. ("JICR"), and Greater
Washington Investments, Inc. ("GWI") (collectively, the "Company").
Prior to April 3, 1996, consolidated financial statements included the
accounts of Johnston, its wholly owned subsidiaries, Southern Phenix Textiles,
Inc. ("Southern Phenix") and Opp and Micolas Mills, Inc. ("Opp and Micolas"),
JICR,, and its then majority-owned subsidiary, Jupiter National, Inc.
("Jupiter") and Jupiter's wholly-owned subsidiaries, Wellington Sears Company
("Wellington") and GWI, (for such periods, collectively, the "Company").
The Company is a leading designer, manufacturer and marketer of
finished and unfinished (greige) cotton, synthetic and blended fabrics used in
a broad range of industrial and consumer applications. The Company's products
are sold to a number of "niche" markets, including segments of the home
furnishings, hospitality, industrial, automotive and specialty markets.
Management believes that it is one of the largest domestic manufacturers of
fabrics used for upholstery backing, automotive belts and hoses, and abrasive
applications. In addition, the Company reprocesses and markets waste textile
fiber and off-quality fabrics for sale to a broad range of specialty markets.
The Company also manufactures fabrics used in engineered composite materials
serving primarily the recreation and construction markets.
The Company conducts its operations through four business units: (i)
the Greige Fabrics Division, (ii) the Finished Fabrics Division, (iii) the
Fiber Products Division, and (iv) JICR as follows:
Greige Fabrics Division. The Greige Fabrics Division manufactures
cotton, synthetic and poly-cotton (blended) unfinished (unbleached, undyed)
fabric. The Greige Fabrics product line includes upholstery backing
manufactured for the home furnishings market, decorative and print base
unfinished goods (upholstery, window treatment and bedding) for the home
furnishings and hospitality markets and fabric used in a variety of products
manufactured for such automotive and industrial applications as belts, hosing
and abrasives. Management believes this division's diversified product line and
range of markets to which it sells enable it to mitigate the effects of a
long-term decline in any single market. This division's competitive strengths
include its (i) long standing relationships with key customers, (ii) proven
product quality as evidenced by numerous "Supplier of the Year" and "Preferred
Supplier" designations awarded by its customers, (iii) high level of operating
efficiency and flexibility resulting from significant capital investment which
enable this unit to foster innovative new products and to respond quickly to
changing market demands while minimizing manufacturing overheads and (iv)
ability to target traditionally more stable markets which have been served by
domestic fabric manufacturers such as the industrial and home furnishings
markets.
Finished Fabrics Division. The Finished Fabrics Division is a
vertically integrated manufacturer of finished (dyed, treated or coated) fabrics
through the application of value-added dyeing and finishing processes to greige
fabrics manufactured by this division. The vertically integrated nature of this
division offers the potential for significant cost savings, allowing the
spinning, weaving, dyeing, and finishing of fabric in one facility. The Finished
Fabrics product line includes finished upholstery fabrics manufactured for the
mid-priced home furnishings market, the contract seating (i.e., stadium and
theater) market and the outdoor decorative (lawn and patio furniture) upholstery
market, premium napery (table linen products) for the home and hospitality
markets, print cloth for the
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home and hospitality (top of the bed) markets and coated industrial (filtration
and bagging) markets and automotive (seating components, speaker covers, and
lining) products. This unit's competitive strengths include its (i)
state-of-the-art air jet spinning, yarn dyeing, cloth dyeing and finishing
applications and wide-width weaving capability on its dobby looms, (ii)
vertically integrated structure which enables the Company to provide a diverse
product offering with shorter lead times, allowing the Company to adapt rapidly
to changes in customer preferences and (iii) focus on traditionally more stable
markets which have been served by domestic textile manufacturers such as the
industrial and home furnishings segments.
Fiber Products Division. The Fiber Products Division reprocesses and
markets waste textile fiber and off-quality fabrics converting millions of
pounds of waste, which might otherwise be sent to landfills, into raw materials
that can be recycled in the textile manufacturing process or used as a low cost
substitute in a wide range of consumer and industrial applications. The
applications include padding (used in a variety of applications from mattresses
to sound proofing in automobiles), clean and reprocessed fiber reintroduced
into the textile yarn manufacturing process, wiper cloth and reworked
off-quality textile products, such as towels and sheets. This unit's
competitive strengths include its (i) position as the only captive fiber
reprocessing facility of its size owned by a domestic textile product
manufacturer and (ii) focus on the higher margin bedding and absorbent cotton
market segments.
JI Composite Reinforcements. JICR produces a variety of non-crimp
multi-axial fabrics from fiberglass, carbon and aramid fibers, which are sold
to specialty markets. JICR's products are used in engineered composite
materials to replace traditional fiberglass and metal components when superior
performance or specific weight characteristics are required. JICR serves the
recreation market with materials used in skis, snowboards, hockey sticks,
baseball bats, sailing and power yachts and the construction markets with
materials used in utility and lighting poles, bridges, oil well platforms and
infrastructure rehabilitation projects, such as structural bridge column
repair, utility pole repair and pipe rehabilitation.
In order to maintain its leadership position in the evolving textile
industry and to continually improve customer service, the Company has invested
from fiscal 1991 to fiscal 1998 approximately $130 million to upgrade,
modernize and expand plant operations and reduce production bottlenecks,
establishing state-of-the-art vertically integrated, flexible manufacturing
capabilities with low cost structures. The Company's Greige Fabrics operations
are highly flexible as many of its current fabrics may be produced at more than
one of its three manufacturing facilities. This division allocates such
production to its facilities based on the technological features of the
equipment needed, available capacity and to maximize throughput efficiency. In
addition to producing fabric in a greige state or a variety of finished states,
the Company can produce fabrics in a broad range of widths, including 125 inch
width jacquard fabric which the Company believes only one other manufacturer
can provide.
RECENT HISTORY AND DEVELOPMENTS
The Company was incorporated in 1987 as a successor to a New York
corporation of the same name formed in 1948. The Company's principal offices
are located at 105 Thirteenth Street, Columbus, Georgia 31901, telephone number
(706) 641-3140.
Prior to March 1996, the Company conducted its operations through its
wholly owned subsidiaries, Opp and Micolas, Southern Phenix, JICR, and one
majority-owned subsidiary, Jupiter. Each of the four business units operated
with a great deal of autonomy. During this time, Southern Phenix, and, to a
lesser degree, Opp and Micolas, enjoyed long-standing reputations as innovative
textile manufacturers serving niche markets.
In 1987, the Company acquired a 28.4% interest in Jupiter, a publicly
traded company engaged in venture capital investments. Over time, and as
Jupiter invested in textile operations, the Company gradually increased its
ownership until it reached 54.2% in January, 1995. On March 28, 1996, the
Company acquired the outstanding minority interest of Jupiter for a total
purchase consideration of $45.9
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million dollars, funded substantially from new bank borrowings. Also in March
1996, the Company acquired the T. J. Beall Company ("TJ Beall"), a specialized
textile waste broker, for a combination of preferred stock and the conversion of
certain outstanding indebtedness from TJ Beall into intercompany obligations. In
connection with these acquisitions, the Company's organizational structure was
altered centralizing the sales and marketing functions for all units at the
corporate level and removing much of the control over operations from unit level
managers. However, the Company did not consolidate the basic administrative
functions, such as accounting and management information services of the
acquired operations.
Subsequently, the Company determined that the organizational changes
introduced upon the acquisition of Jupiter, together with the failure to take
appropriate measures to consolidate overlapping administrative functions,
contributed to disappointing operating performance from certain of the
Company's textile operations including TJ Beall. These factors, along with
delays and shortfalls in liquidating the venture capital portfolio of Jupiter,
adversely restricted the Company's liquidity and its ability to successfully
capitalize on the opportunities created by the acquisitions.
In order to reinvigorate entrepreneurial spirit and bottom line
accountability among the Company's employees, the Company realigned its
operations into its four current business units during 1997 (the "1997
Realignment") and established measures to achieve substantial cost reductions,
principally through the elimination of redundant administrative functions and
the divestiture of unprofitable operations. The new structure aligned sales,
marketing, production and administration by product-oriented operating
divisions, with the Company's corporate headquarters coordinating strategies,
finance and capital allocations and identifying and capitalizing on synergistic
opportunities among the units. The Company has continued to build upon the
foundation of the 1997 Realignment during 1998. Significant elements of the
1997 Realignment include:
- - Reinstitute Divisional Accountability. The new management team
determined that the 1996 centralization of the sales and marketing
forces of the Company and the transfer of key operational management
from the Company's business units to corporate headquarters blurred
profit and managerial responsibility at the divisional level.
Operational and sales management have now been reassigned to the
business units, with each unit having a president responsible for
delivering business unit profits.
- - Reduce Operating Costs. In Fiscal 1997 and 1998, the Company
consolidated or sold unprofitable, non-core operations and assets
acquired in the Jupiter and TJ Beall acquisitions. In addition,
management decreased the Company's number of business units from five
to four and reduced divisional general and administrative staffs;
redistributed products at each facility; centralized certain support
functions such as management information services; and simplified the
manufacturing process by redesigning certain Finished Fabrics product
lines. This program eliminated approximately 325 jobs (primarily in
the third and fourth quarters of fiscal 1997) without impairing the
quality of the Company's products or sacrificing profitable sales.
- - Improve Management Information Systems. The Company is currently
installing an integrated procurement, inventory, manufacturing
management and customer order system at both the Finished Fabrics and
the Fiber Products Divisions and is re-engineering many of the
associated business processes around this system. When this project is
completed, management believes its access to divisional information
and key decision-making tools will be significantly enhanced and many
computer processes will be streamlined. The second phase of the
implementation at the Finished Fabrics Division was placed in
operation in July 1998. Both divisions are expected to be fully
operational by August 1999.
- - Improve Product Line Management. During 1997 and 1998, management
focused considerable attention and resources on improving product line
profitability and identifying opportunities to strengthen its market
position in its key niche markets. As a result, the Company
strategically exited certain product lines or elements of product
lines, and has successfully obtained price
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increases for other lines. Product line profitability has also been
enhanced by significant cost savings, including negotiating lower
brokerage commissions and better management of sample production and
product design parameters.
On September 29, 1997 and in conjunction with the 1997 Realignment,
the Company's management reached an agreement to sell the assets of TJ Beall to
a member of the Beall family. The sale was executed for consideration including
surrender of the Series 1996 Preferred Stock, which had been issued as part of
the purchase consideration of the TJ Beall acquisition, and execution of a
promissory note in the amount of $1,500,000 payable in annual installments over
5 years. This divestiture eliminated an operation which had been unprofitable
during the Company's brief ownership and also eliminated large cyclical cash
requirements inherent in the gin mote business.
CUSTOMERS AND BACKLOG
The Company sells its products to approximately 3,500 customers with
net sales to the single largest customer accounting for 5%, 6%, and 5% of total
sales for the fiscal years ended January 2, 1999, January 3, 1998 and December
28, 1996.
The Company traditionally manufactures approximately 75% of its
production against firm orders with finishing, packaging and other
specifications generally determined by its customers. At January 2, 1999, the
Company's backlog of orders was approximately $49.4 million compared to $69.4
million at January 3, 1998 and $88.5 million at December 28, 1996.
Historically, the Company's backlog of orders is completed and realized as
sales in approximately 2 1/2 months.
The reduced order backlog at January 2, 1999, as compared to January
3, 1998, includes the impact of currency and economic difficulties in Eastern
Europe, Asia and South America as well as the resulting reduction in domestic
demand. The 1998 year end order backlog for outdoor furniture fabrics was much
lighter compared to prior years as certain customers switched to low cost Asian
imports. Demand has slowed significantly for the Company's upholstery substrate
fabrics which were sold by its customers to eastern European markets. Although
consolidated order backlog returned to $66.7 million by February 27, 1999,
management believes that world and domestic economic conditions will impact
demand through at least the first two quarters of 1999, and perhaps longer for
certain markets.
The decrease in backlog of orders from December 28, 1996 to January 3,
1998 resulted largely from the Company's elimination of unprofitable operations
and products during 1997 including TJ Beall which was sold in September 1997.
Open orders for TJ Beall were $16.3 million at December 28, 1996.
For the year ended January 2, 1999, the Company's production
facilities operated at approximately 66% of normal aggregate capacity.
Management believes the Company's production capability is sufficient to
accommodate existing and new production orders.
PRODUCTS
The Company's Finished Fabrics and Greige Fabrics Divisions provide
products for the home and hospitality, automotive and industrial segments of
the textile industry, as well as a variety of miscellaneous products. The home,
hospitality and industrial products manufactured by the Finished Fabrics and
Greige Fabrics Divisions include a variety of woven and non-woven fabrics,
including some proprietary applications. Such products include all cotton
fabrics, cotton/polyester blended fabrics, all polyester fabrics and other
products manufactured from blends and various synthetic and natural fibers. The
finished fabrics manufactured for these market segments include woven and
printed upholstery fabrics for indoor and outdoor use, ticking and filler cloth
for mattresses, finished premium napery (table linens) and coated, rubber
goods, filtration, scrim, bagging and footwear fabrics. The Greige Fabrics
Division manufactures upholstery backing, top of the bed fabrics, decorative
and print base unfinished goods, window and napery
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unfinished goods and, for the industrial segment, abrasives, filtration media,
wipecloth and certain footwear fabrics.
The Company's Fiber Products Division markets a variety of waste
textile fiber and fabric reclamation products comprised of, for example,
padding used in a variety of applications, cleaned and reprocessed fiber and
off-quality towels and sheets (sold primarily in Africa). Cleaned and
reprocessed fibers provide a cost advantage for use in certain products and can
be sold as raw fiber or in a variety of manufactured states from yarn through
woven and bonded non-woven fabrics.
JICR manufactures fabrics, which are sold in specialty markets and
used in engineered composite materials, consisting of a variety of non-crimp
multi-axial fabrics manufactured from fiberglass, carbon and aramid fibers.
Composite reinforcement fabrics produced by the Company include its proprietary
Vectorply(R) fabrics. The Company's composite reinforcement fabrics are used in
a variety of industrial, transportation, marine and sporting goods
applications, from sea walls and roof panels to motor campers and heavy trucks
to large yachts and off-shore racing boats to water skis, baseball bats and
hockey sticks.
For the year ended January 2, 1999, approximately 77% of the Company's
fabric was manufactured for the home furnishings and industrial segments of the
textile market; the balance was for the automotive segment, basic apparel,
including commercial uniform manufacturers (ducks, twills and bull denims), and
specialty markets, which in 1998 primarily involved sales of yarn, recycled
textile fibers and composite reinforcement fabrics. The following table sets
forth the percentage of sales by product type:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
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<S> <C> <C> <C>
Automotive 4% 3% 3%
Industrial 22% 25% 24%
Home Furnishings 55% 49% 53%
Apparel 2% 4% 2%
Specialty Markets 17% 19% 17%
Miscellaneous 0% 0% 1%
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
Outside of the United States, the Company principally markets its
products in Europe, Canada, and Mexico primarily through its direct sales
force. For the year ended January 2, 1999, the international direct sales
volume constituted approximately 7% of sales. Although no assurances can be
given that its plans will be successful, the Company's is exploring
opportunities to expand its sales into international markets.
MANUFACTURING
Since its establishment in 1948, the Company has positioned itself as
a leader in the textile industry as evidenced by numerous awards it has
received. For example, the Company was selected by Textile World Magazine as
its 22nd Annual Model Mill in 1994, recognizing the Company's (i) outstanding
performance, (ii) aggressive management approach to product and market
innovation and (iii) strategic commitment to capital spending and high-tech
operations. In 1995, the Company's Opp Mill was selected as "Outstanding Greige
Mill" by a leading international independent consulting firm. In addition, the
Company has been selected "Supplier of the Year" or preferred supplier by
various customers on numerous occasions over the years and received America's
Textile International's first annual Award for Innovation in 1996.
In order to improve customer service and maintain its leadership
position in the constantly evolving textile industry, the Company has
maintained an aggressive capital improvement program across all of its units
for the past few years. For fiscal 1991 through 1998, the Company invested
approximately $130 million to upgrade and modernize plant operations and to
reduce bottlenecks, establishing state-of-the-art, vertically integrated,
flexible manufacturing capabilities with low cost structures. Of these
expenditures, capital
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improvement for the year ended January 2, 1999 was $9.1 million compared to
$10.4 million at January 3, 1998 and $20.5 million for the year ended December
28, 1996. The Company's extensive capital expenditure program over this period
has resulted in the conversion of substantially all of its mills to open-end or
air jet spinning and shuttleless weaving. Future capital expenditures will be
driven by market opportunities evaluated against the cost of funds.
The Company spins its own yarn primarily using Rieter(R) and
Schlafhorst(R) open-end automatic rotor spinning machines, Murata(R) air jet
spinning machines and some ring spinning equipment. Open-end and air jet are
fully automated spinning processes which yield an excellent quality yarn that
is produced using highly efficient processes. Fabric is manufactured on a
variety of shuttleless looms using rapier, projectile and air jet technologies,
as well as a few shuttle looms. Additionally, the Company manufactures
non-woven (stitchbond, chima, and weft insertion warp knitted) fabrics using a
variety of specialized machines. As of January 2, 1999, the Company's mills
have an annual capacity of approximately 186 million linear yards of woven
fabric (approximately 104 million pounds), 6 million pounds of non-woven
(stitchbond, chima and weft insertion warp knitted) fabric, approximately 137
million linear yards of value-added finishing, approximately 3 million pounds
of sales yarn, approximately 12 million pounds of non-woven fabric and
composite reinforcements fabrics manufactured from man-made synthetic fibers,
approximately 67 million pounds of waste textile fiber and fabric reclamation,
and approximately 53 million pounds of bonded non-woven fabric (manufactured
through reclamation of textile waste products).
The Company's mix of a variety of types of equipment, each with
distinct capabilities, permits it to produce many products in either a "greige"
state (i.e., unbleached and undyed as taken from the loom), a "finished" or
converted state (e.g., dyed, treated and/or coated) or both. Greige fabrics are
sold directly to manufacturers which have their own converting departments or
finishing facilities and to fabric converters who dye and print unfinished
fabrics and, in some instances, are finished internally on a contract basis by
the Finished Fabrics Division.
DISTRIBUTION AND MARKETING
The Company's marketing activities, which are organized by operating
division and by product, utilize in-house sales personnel, commissioned sales
agents and independent brokers. In the aggregate, the Company employs a 43
person in-house sales force and utilizes approximately 32 commissioned sales
agents and brokers. For the year ended January 2, 1999, approximately 84% of
revenues were generated by in-house sales personnel, with 16% generated by
commissioned sales agents and independent brokers. Fabrics sold through
in-house personnel include home furnishings, abrasive, napery, rubber products,
filtration, duck, wipe cloth, reprocessed waste products and various industrial
fabrics. Mattress pads, certain of the Company's upholstery fabrics, and a
significant portion of composite reinforcement fabrics are sold through
commissioned sales agents.
In addition to its various employed and independent sales people,
approximately 30 Company personnel provide support services such as design,
technical support, customer services, and coordination of production with the
mill.
COMPETITION
The Company's competition consists of numerous companies, a limited
number of which compete with the Company in a substantial portion (more than
fifty percent) of the product groups serviced by the Company. The competing
companies in each of its product groups include a number of companies which are
larger and have significantly greater resources than the Company. Although
market shares vary substantially from product to product within a group, the
Company believes that there are several competitors with greater sales than it
in each product group. There are individual products for which the Company is
the market leader as well as others for which it does not have a significant
market share. Competitive factors include product quality, service, design and
price. Management believes that service is an important positive competitive
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factor for the Company's operations. Management also believes that competition
from domestic manufacturers has intensified over the last several years and
will continue to increase in the future.
Although management believes that, in general, the Company is not
directly affected by foreign competition; from time to time, there is an
indirect effect. Recently, certain of the Company's outdoor furniture and home
furnishings products have experienced competition from imports. While such
direct foreign competition arose only recently, management believes that such
competition may not be permanent and that the Company has sufficient
competitive advantages to regain market share over the long term.
Periodically, when total domestic textile sales volume is reduced as a result
of increased imports, the companies that are directly affected (generally
fashion and apparel manufacturers) search for sales volume in other product
groups to replace their lost volume. Historically, this has resulted in
increased competition and price pressures with respect to certain fabrics, most
notably in lower margin commodity fabrics which may be produced by a number of
the Company's competitors.
RAW MATERIALS
The Company utilizes cotton, polyester and other natural and synthetic
fibers in its manufacturing operations. Currently, the supplier for most of its
polyester fiber is Wellman, Inc., formerly Fiber Industries, Inc. ("Wellman").
The Company does not have a long-term agreement with Wellman and does not
maintain long-term supply contracts with Wellman or any other synthetic fiber
suppliers. Other potential suppliers of polyester include DuPont and
Hoechst-Celanese, as well as a number of other domestic and foreign sources. The
Company purchases cotton through approximately ten established merchants with
whom it has long standing relationships. The majority of the Company's purchases
are executed using "on-call" contracts. These on-call arrangements are used to
insure that an adequate supply of cotton is available for the Company's
requirements. Under on-call contracts, the Company agrees to purchase specific
quantities for delivery on specific dates, with pricing to be determined at a
later time. Prices are set according to prevailing prices, as reported by the
New York Cotton Exchange, at the time of the Company's election to fix specific
contracts. Management believes that adequate supplies of cotton, polyester and
its other fiber needs are available in the open market and should supplies of
cotton, polyester or other fibers cease to be available from any of the
Company's principal suppliers, management does not expect any significant
difficulty in obtaining fibers from one or more other suppliers.
EMPLOYEES
As of February 27, 1998, the Company had approximately 2,600 full-time
employees, none of whom is covered by collective bargaining agreements. The
Company believes its relations with its employees are good.
INVESTMENT ACTIVITIES
The investment activities of the Company were acquired in connection
with its acquisition of Jupiter on March 28, 1996 and are principally conducted
through Johnston's indirect wholly-owned subsidiary, GWI. The Company's plan is
to effect the divestiture of its non-textile industry investments. Since the
March 28, 1996 acquisition, twelve investments have been sold with six
remaining as of January 2, 1999. These remaining investments include debt
securities with maturities ranging from 1999 to 2004, equity securities, and
one real estate investment. No additional funding or investment of any
significant amount is contemplated while such investments are held for sale.
Because of the speculative nature of GWI's investments, and the lack of any
ready market for most of its investments when purchased, there is minimal
liquidity and a significantly greater risk of loss on each investment than is
the case with traditional investment companies. The carrying value of the
remaining six securities included (i) five investments totaling $3.3 million,
which were recorded as assets held for sale on the balance sheet at January 2,
1999 plus (ii) one
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investment totaling $1 million which was recorded as a note receivable on the
balance sheet at January 2, 1999. This note receivable was subsequently paid in
full during March 1999. The "fair value" reflects the value expected to be
realized by the Company upon sale of the securities after consideration of the
Company's plans to liquidate the venture capital segment.
THIS REPORT CONTAINS CERTAIN "FORWARD LOOKING STATEMENTS." THESE
STATEMENTS ARE AN ATTEMPT TO PREDICT FUTURE OCCURENCES AND ARE INTENDED TO BE
COVERED BY THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. FORWARD LOOKING STATEMENTS ARE IDENTIFIED BY WORDS SUCH AS
"BELIEVES," "EXPECTS," "ANTICIPATES" AND SIMILAR EXPRESSIONS.
RISK FACTORS AND INVESTMENT CONSIDERATIONS
The Company wishes to caution readers that the following important
factors, among others, in some cases have affected, and in the future could
affect, the Company's actual results and could cause the Company's actual
consolidated results for the first quarter of 1999, and beyond, to differ
materially from those expressed in any forward-looking statements made by, or
on behalf of, the Company:
The Company believes it has benefited and continues to benefit
substantially from the skills, experience and efforts of its senior management.
The loss of the services of members of the Company's senior management could
have a material adverse effect on the Company's business and prospects. For
Biographies of Executive Officers, See Executive Officers of Johnston
Industries, Inc. below and for Biographies of Directors, See the Registrant's
Definitive Proxy Statement for the 1999 Annual Meeting of Shareholders.
Additional or related factors which could affect the Company's actual
results and could cause the Company's actual consolidated results for the first
quarter of 1999, and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company include:
The effects of, and changes in, trade, monetary and fiscal
policies, laws and regulations, other activities of governments,
agencies and similar organizations, and social and economic
conditions, such as trade restrictions or prohibitions, inflation and
monetary fluctuations, import and other changes or taxes, the ability
or inability of the Company to obtain, or hedge against, foreign
currency, foreign exchange rates and fluctuations in those rates, loss
of international contracts or lower international revenue resulting
from increased expenses associated with overseas operations, the
impact of foreign labor laws and disputes, adverse effects arising out
of political unrest, terrorist activity, nationalizations and unstable
governments and legal systems, and intergovernmental disputes and the
possibility of a decline in domestic demand as a result of any of the
foregoing;
Continued or increased pressure to change the selling prices
for the Company's products, and the resulting effects on margins, the
Company's actions in connection with continued and increasing
competition in many product areas, including, but not limited to,
price competition and fluctuating demand for certain textile products
by one or more textile customers;
Difficulties or delays in the development, production,
testing and marketing of products, including, but not limited to, a
failure to ship new products, the failure of customers to accept these
products or technologies when planned, any defects in products and a
failure of manufacturing economies to develop when planned;
Occurrences affecting the Company's ability to reduce product
and other cost, and to increase productivity;
10
<PAGE> 11
Inability to offset pricing competition with production
efficiencies and economies of scale; under-utilization of the
Company's plants and factories resulting in production inefficiencies
and higher costs; start-up expenses and inefficiencies and delays and
increased depreciation costs in connection with the start of
production in new plants and expansions;
Continued or increased dumping of low priced textile products
into the US markets by predatory foreign producers;
The amount, and rate of growth in, the Company's selling,
general and administrative expenses, and the impact of unusual items
resulting from the Company's ongoing evaluation of its business
strategies, asset valuations and organizational structures;
The potential adverse effect of significant upward
fluctuation of raw material costs as specifically experienced in 1995
and 1996 plus difficulties in obtaining raw materials, supplies, power
and natural resources and any other items needed for the production of
products;
The acquisition of fixed assets and other assets, including
inventories and receivables, and the making or incurring of any
expenditures and expenses, including, but not limited to, depreciation
and research and development expenses, any revaluation of assets or
related expenses and the amount of, and any changes to, tax rates;
Unexpected losses in connection with the disposition of
investments formerly made by Jupiter and GWI, unanticipated write down
of the value of such investments due to among other things their
limited liquidity, and/or an inability to dispose of one or more of
such investments due to the nature or character of such investments
involving, without limitation, the liquidity of such investment, the
lack of a market for such investment, and whether the Company's
investment represents a minority interest in such enterprise;
The costs and other effects of legal and administrative cases
and proceedings (whether civil, such as environmental and
product-related, or criminal), settlements and investigations, claims,
and changes in those items, developments or assertions by or against
the Company relating to intellectual property rights and intellectual
property licenses, adoptions of new, or changes in, accounting
policies and practices and the application of such policies and
practices;
The effects of changes within the Company's organization or
in compensation and benefit plans, the ability of participants of the
employee stock purchase plan to satisfy obligations under the plan
guaranteed by the Company, any activities of parties with which the
Company has an agreement or understanding, including any issues
affecting any investment or joint venture in which the Company has an
investment, the amount, type and cost of the financing which the
Company has, and any changes to that financing; and
The ability to integrate any future acquisitions into the
Company's existing operations and unexpected difficulties or problems
with such acquired entities including inadequate production equipment,
inadequate production capacity or quality, outdated or incompatible
technologies or an inability to realize anticipated synergies and
efficiencies, whether within anticipated time frames or at all.
11
<PAGE> 12
EXECUTIVE OFFICERS OF JOHNSTON INDUSTRIES, INC.
HAROLD HARVEY, age 58, has served as President of the Greige Fabrics
Division since the first quarter of 1999. Prior to that time he was the
Principal of Harvey TMC International, a textile consulting firm, since 1994.
Mr. Harvey was the Chief Executive Officer of Carrington Viyella from 1992 until
1994 and Chief Executive Officer of John Foster and Sons plc from 1988 until
1992. For more than five years prior to that time, he had served in various
consulting and textile management positions.
WILLIAM I. HENRY, age 58, has served as President of the Finished
Fabrics Division since February 5, 1998. Prior to that time, he served as
Executive Vice President from May 12, 1997 to February 5, 1998, Vice President
of Operations from April 1996 to May 12, 1997, and Vice President of Product
and Operations Planning from January 1993 to April 1996. For more than five
years prior he had served as Vice President, Operations of Southern Phenix.
OWEN J. HODGES, III, age 44, has served as President of the Fiber
Products Division since February 5, 1998. Prior to that time, he served as Vice
President - Manufacturing of the Company from April 1996 to February 1998 and
Vice President - Operations of Wellington Sears since its formation in November
1992. For more than three years prior, Mr. Hodges was Vice President of
Manufacturing for the Custom Fabrics Division of WestPoint Pepperell.
DONALD L. MASSEY, age 53, has served as President of Johnston
Industries Composite Reinforcements, Inc. since February 5, 1998. Prior to that
time, he served as Executive Vice President from May 12, 1997 to February 5,
1998 and as Vice President of the Company and President-Home Furnishings-Sales
and Marketing of Johnston Industries Alabama, Inc. from April 1996 to May 12,
1997. Mr. Massey was President and CEO of Johnston Industries Composite
Reinforcements, Inc. from March 31, 1992 until March 31, 1996. From December 1,
1990 until March 30, 1992, Mr. Massey was President and CEO of Fiber and
Fabrics Marketing, and for more than 5 years prior to that, he served as Senior
Vice President for world sales of denim for Dominion Textiles.
JAMES J. MURRAY, age 38, has served as Executive Vice President and
Chief Financial Officer since September 22, 1997. Prior to that time, he was
Managing Director of Corporate Transaction Services for KPMG LLP since March
1996 and had served in a variety of capacities with KPMG LLP from January 1984
to March 1996. Prior to that time, Mr. Murray was a tax accountant in private
industry.
D. CLARK OGLE, age 52, has served as President and Chief Executive
Officer since March 20, 1998. Prior to that time, Mr. Ogle served as Managing
Director of National Strategic and Operational Improvement Consulting for KPMG
LLP. From April 1987 to October 1996, he served as CEO for a number of
companies including Victory Markets, Inc., Teamsports, Inc., WSR Corporation,
Consumer Markets, Inc., and Peter J. Schmitt Co., Inc. Mr. Ogle was Executive
Vice President and Chief Operating Officer, then President and Chief Executive
Officer, of Scrivner, Inc. for more than five years prior to that time.
F. FERRELL WALTON, age 54, has served as Vice President, Secretary and
Treasurer of the Company since November 14, 1997 and prior to that time, had
served as Secretary and Treasurer from September, 1994 to November 14, 1997.
Mr. Walton served as Director of Financial Operations for the Company from
April 1, 1993 to September, 1994 and for more than five years prior to that
time was Vice President, Finance of Opp and Micolas.
12
<PAGE> 13
ITEM 2. PROPERTIES
Set forth below is a listing of facilities owned and leased by the
Company for each division describing the principal use and approximate size, in
square feet, of each facility.
<TABLE>
<CAPTION>
FACILITY LOCATION PRINCIPAL USE FLOOR OWNED/
SPACE IN LEASED
SQ FT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Johnston Industries, Inc.
Executive Offices Columbus, Georgia Admin. Offices 20,000 Owned
NY Sales Office New York, New York Sales/Marketing 10,000 Leased
- -------------------------------------------------------------------------------------------------------
Greige Fabrics Division
Opp Plant Opp, Alabama Manufacturing/ 339,000 Owned
Warehousing
Micolas Plant Opp, Alabama Manufacturing/ 430,000 Owned
Warehousing
Columbus Plant Columbus, Georgia Manufacturing/ 572,000 Owned
Warehousing
Warehouse Opp, Alabama Warehousing 92,000 Leased
- -------------------------------------------------------------------------------------------------------
Finished Fabrics Division
Marketing & Sales Ctr. Valley, Alabama Sales/Marketing 23,000 Owned
Southern Phenix Plant Phenix City, Alabama Manufacturing/ 629,000 Owned
Warehousing
Stitchbond Plant Phenix City, Alabama Manufacturing 76,000 Owned
Shawmut Plant Valley, Alabama Manufacturing/ 493,000 Owned
Warehousing
Cusseta Plant (1) Columbus, Georgia Warehousing 54,000 Owned
Textest Valley, Alabama UL Testing Lab 5,000 Owned
State Docks Warehouse Phenix City, Alabama Warehousing 83,000 Leased
- -------------------------------------------------------------------------------------------------------
Fiber Products Division
Utilization Plant Valley, Alabama Manufacturing 175,000 Owned
Lantuck Plant Lanett, Alabama Manufacturing 42,000 Leased
Langdale Plant Valley, Alabama Warehousing/ 441,000 Owned
Light Mfg.
DeWitt Plant DeWitt, Iowa Manufacturing 115,000 Owned
- -------------------------------------------------------------------------------------------------------
JICR
Stitchbond Plant (2) Phenix City, Alabama Manufacturing
Warehouse Phenix City, Alabama Warehousing 26,000 Leased
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) See Properties Held for Disposition below for further discussion of
Cusseta Plant.
(2) JICR leases approximately 37,000 of the 76,000 square foot Stitchbond
Plant which is shared with the Finished Fabrics Division.
13
<PAGE> 14
Set forth below is the manufacturing capacity of each operating
division by product line and the average percent of capacity operated for the
year ended January 2, 1999 for each division and the Company as a whole.
<TABLE>
<CAPTION>
(Units Presented in Millions)
- ---------------------------------------------------------------------------------------------------------
PRODUCT GREIGE FINISHED FIBER JICR TOTAL
UNIT FABRICS FABRICS PRODUCTS
DIVISION DIVISION DIVISION
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weaving Capacity
Linear Yards 137 49 186
Pounds 73 31 104
Sales Yarn Capacity
Pounds 3 3
Non-Woven Capacity
Pounds 6 53 12 71
Waste Textile and Fiber Reclamation
Pounds 67 67
Value Added Finishing Capacity
Linear Yards 137 137
Percent Capacity Utilization - 1998 78% 61% 64% 50% 66%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
ENVIRONMENTAL
The Company is subject to regulation under federal, state, and local
laws and regulations governing pollution and protection of human health and the
environment, including air emissions, water discharges, management and cleanup
of solid and hazardous substances and wastes. The Company believes that its
facilities and operations are in material compliance with all existing
applicable laws and regulations. The Company cannot, at this time, estimate the
impact of any future laws or regulations on its future operations or future
capital expenditure requirements. The Company is not aware of any pending
federal or state legislation that would have a material impact on the Company's
financial position, results of operations or capital expenditure requirements.
PROPERTIES HELD FOR DISPOSITION
The Finished Fabrics Division's former Cusseta Plant in Columbus,
Georgia is presently listed for sale with a commercial real estate broker. This
facility, which had once been a fabric coating operation and more recently used
for warehousing, is located at 628 5th Street in Columbus, Georgia, and
includes a 54,000 square foot brick building located on a parcel of land
approximately 5.3 acres in size.
14
<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS
The Company is periodically involved in legal proceedings arising out
of the ordinary conduct of its business. Management does not expect that the
resolution of these proceedings will have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
During 1997, management became aware of certain industrial espionage activities
that targeted the Company and several other textile manufacturers, allegedly
carried out by agents of a large competitor. On October 8, 1998, the Company
filed suit in Alabama seeking recourse for damages and losses resulting from
these alleged activities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during the quarter ended January 2, 1999.
15
<PAGE> 16
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock has traded on the New York Stock Exchange
under the symbol "JII" since December 1987. The following table indicates the
high and low closing sales prices for the common stock as quoted on the New
York Stock Exchange composite tape for the periods indicated below.
<TABLE>
<CAPTION>
INCLUDES NYSE TRADING ONLY PRICE RANGE
-------------------------- -----------
HIGH LOW
---- ---
<S> <C> <C>
Quarter Ended:
January 2, 1999 $4 $2 13/16
October 3, 1998 4 5/8 3
July 4, 1998 6 4 9/16
April 4, 1998 6 1/16 4 5/16
January 3, 1998 $6 3/4 $4 1/4
September 27, 1997 6 13/16 5 1/2
June 28, 1997 8 1/8 6 1/8
March 29, 1997 8 3/8 7
</TABLE>
Holders of common stock are entitled to such dividends as may be
declared and paid out of funds legally available for payment of dividends. The
Company's amended bank credit agreement permits the Company to pay dividends on
its common stock provided it is in compliance with various covenants and
provisions contained therein, which among other things, limits dividends and
restricts investments to the lesser of: (a) 20% of total assets of the Company,
on a fully consolidated basis, as of the date of determination thereof; (b) $5
million plus 50% of cumulative consolidated net income for the period
commencing on January 1, 1997, minus 100% of cumulative consolidated net loss
for the consolidated entities for such period, as calculated on a cumulative
basis as of the end of each fiscal quarter of the consolidated entities with
reference to the financial statements for such quarter. Regular quarterly
dividends were paid from September 28, 1990 to June 28, 1997. No dividends have
been paid since August, 1997, when the Company suspended dividend payments. The
Company does not expect to resume the payment of dividends for the forseeable
future. The number of shareholders of record at January 2, 1999 was
approximately 700.
16
<PAGE> 17
JANUARY 2, 1999
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data
for the years ended January 2, 1999, January 3, 1998 and December 28, 1996, the
six month period ended December 30, 1995 and for each of the full fiscal years
in the two year period ended June 30, 1995. The statement of operations data
for the years ended January 2, 1999, January 3, 1998 and December 28, 1996 and
the balance sheet data as of January 3, 1999 and January 2, 1998 have been
derived from the Company's consolidated financial statements included elsewhere
in this report. This data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
consolidated financial statements and the notes thereto.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR YEAR YEAR SIX MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED JUNE 30,
JAN. 2, JAN.3, DEC. 28, DEC. 30 ---------------------
1999 (1) 1998 (1) 1996 1995 (2) 1995 (3) 1994
--------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net sales $ 283,724 $ 332,537 $ 321,883 $ 148,773 $ 262,279 $ 159,904
Income (loss) from continuing operations (608) (8,622) (2,183) (6,348) 6,889 7,409
Income (loss) from discontinued operations -- 126 5,582 158 986 (914)
Extraordinary loss -- -- (527) -- -- --
Net income (loss) (608) (8,496) 2,872 (6,190) 7,875 6,495
Dividends on preferred stock -- (82) (125) -- -- --
Net income (loss) available to common stockholders $ (608) $ (8,578) $ 2,747 $ (6,190) $ 7,875 $ 6,495
Earnings (loss) per common share-basic:
Income (loss) from continuing operations $ (.06) $ (.82) $ (.22) $ (.60) $ .65 $ .68
Income (loss) from discontinued operations .-- .01 .53 .01 .09 (.08)
Extraordinary loss .-- .-- (.05) .-- .-- .--
Earnings (loss) per common share $ (.06) $ (.81) $ .26 $ (.59) $ .74 $ .60
Income (loss) from continuing operations
to sales % (.21)% (2.59)% (.68)% (4.27)% 2.63% 4.63%
Net income (loss) to sales % (.21)% (2.55)% .89% (4.16)% 3.00% 4.06%
Net income (loss) available to common stockholders
to sales % (.21)% (2.58)% .85% (4.16)% 3.00% 4.06%
BALANCE SHEET DATA:
Total assets $ 219,539 $ 234,788 $ 269,264 $ 240,539 $ 232,402 $ 140,194
Long-term debt - less current maturities 51,109 61,688 144,191 110,755 83,560 36,216
Stockholders' equity 48,274 49,124 59,192 55,179 63,427 59,808
OTHER DATA:
Equity per share $ 4.50 $ 4.57 $ 5.53 $ 5.22 $ 5.93 $ 5.51
Dividends per share .-- .200 .400 .200 .390 .345
Depreciation and amortization 19,895 21,370 19,715 8,874 13,766 10,202
Capital expenditures 9,136 10,363 20,527 17,781 21,448 12,701
Return on beginning assets (.26)% (3.13)% 1.19% (2.66)% 5.62% 4.77%
Return on beginning equity (1.24)% (14.35)% 5.20% (.96)% 13.17% 10.79%
</TABLE>
- ---------------
(1) Earnings per common share-diluted are not presented as they are either
antidilutive in periods for which a loss is presented or immaterial.
17
<PAGE> 18
(2) Effective September 1995, the Company's year end closing date was
changed to the Saturday closest to December 31. Therefore, the
Company's transition period 1995 ended on December 30, 1995.
(3) The operations of Jupiter, a majority-owned subsidiary, have been
included in the consolidated financial statements from January 1, 1995
forward. On March 28, 1996 Jupiter became a wholly owned subsidiary of
the Company.
Note: See Notes 2, 3, and 4 of the consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations for discussion of certain transactions impacting
the years ended January 2, 1999, January 3, 1998 and December 28,
1996.
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The operations of Johnston Industries, Inc. ("Johnston") include its
direct wholly owned operating subsidiary, Johnston Industries Alabama, Inc.,
and its indirect wholly owned subsidiaries, Johnston Industries Composite
Reinforcements, Inc. ("JICR"), and Greater Washington Investments, Inc. ("GWI")
(collectively, the "Company").
Prior to April 3, 1996, the consolidated financial statements included
the accounts of Johnston, its wholly owned subsidiaries, Southern Phenix
Textiles, Inc. ("Southern Phenix"), Opp and Micolas Mills, Inc. ("Opp and
Micolas"), and JICR; its majority owned subsidiary, Jupiter National, Inc.
("Jupiter") and Jupiter's wholly owned subsidiaries, Wellington Sears Company
("Wellington"), Pay Telephone America, Ltd., and GWI.
On April 3, 1996, after the acquisition by Johnston of T.J. Beall
Company ("TJ Beall" and the "TJ Beall Acquisition") and of the minority
interest in Jupiter, Jupiter was merged into Opp and Micolas. In June 1996, the
name of Opp and Micolas was changed to JI Alabama; Southern Phenix and
Wellington were merged into JI Alabama and JICR, TJ Beall and GWI became
subsidiaries of JI Alabama.
During the second quarter of 1997, the Company's management embarked
on a restructuring (the "1997 Realignment") which further integrated operations
of the former Wellington Sears Division into the Company's operations and
eliminated the administrative infrastructure of the Wellington Sears Division.
The 1997 Realignment included (i) the Company's decision to cease weaving
operations at Wellington's historic Langdale Plant, which included buildings
dating back to 1866, (ii) the alignment of manufacturing operations of
Wellington's Columbus Plant with the former Opp and Micolas Division to form
the Greige Fabrics Division and (iii) alignment of Wellington's Shawmut
Finishing and Textest plants with the former Southern Phenix Division to form
the Finished Fabrics Division. The resulting structure of JI Alabama includes
three divisions which are the Greige Fabrics Division, the Finished Fabrics
Division, and the Fiber Products Division plus one operating subsidiary, JICR.
The 1997 Realignment vested greater operating autonomy at the division level
and returned sales and marketing functions to the division level.
On September 29, 1997 and in conjunction with the 1997 Realignment,
the Company's management reached an agreement to sell the assets of TJ Beall to
a member of the Beall family. The sale was executed for consideration including
surrender of the series 1996 preferred stock, which had been used to finance
the TJ Beall Acquisition, and issuance, by the buyer, of a promissory note in
the amount of $1.5 million payable in annual installments over 5 years. This
divestiture eliminated an operation which had been unprofitable during the
Company's brief ownership and also eliminated large cyclical cash requirements
inherent in the gin mote business.
The Company's GWI subsidiary was a "small business development
company" under the Small Business Investment Act of 1958 ("1958 Act"). On
September 26, 1996, the Company repaid $14.5 million of subordinated debentures
issued by GWI and guaranteed by the United States Small Business Administration
(the "SBA"), plus accrued interest thereon. On April 25, 1997, in consideration
of the Company's exit of venture capital investment activities, the Board of
Directors of GWI voted to return the SBIC license held by GWI to the SBA. At
January 2, 1999, the Company's total assets attributable to the remaining
portfolio investment activities were approximately $3.65 million and all other
assets, which are attributable to its textile operations, were approximately
$215.9 million.
The Company has developed, implemented and continues to follow a
business strategy designed to build upon its 1997 Realignment initiatives and
to grow revenues and EBITDA (earnings before interest, taxes, depreciation and
amortization). The key elements for implementing these strategies include (i)
focus on
19
<PAGE> 20
niche market opportunities, (ii) leverage customer relationships, (iii)
rationalize product offerings, and (iv) continued improvement in operating
efficiencies.
RESULTS OF OPERATIONS
YEAR ENDED JANUARY 2, 1999 COMPARED WITH THE YEAR ENDED JANUARY 3, 1998
The results of operations for the year ended January 2, 1999 reflect
continuing improvement following on the 1997 Realignment. The third and fourth
quarters of 1998 marked the first profitable quarters for the Company since the
first quarter of 1997. The full impact of the 1998 improvements, however, was
mitigated in part by several factors including general weakness in domestic
textile markets resulting from economic conditions in Asia and to a lesser
degree, in South America, weakness in indirect exports due to currency and
financial instability in Russia and Eastern Europe, the residual effects of
relocating production of certain upholstery fabrics from the closed Langdale
facility to other of the Company's facilities, and disruption of operations due
to a tornado which struck Greige Fabric's Opp Mill in April 1998.
Net sales for the year ended January 2, 1999 were $283.7 million
compared to $332.5 million for the year ended January 3, 1998, declining by
$48.8 million or approximately 14.7%. Changes in net sales by major market were
as follows (in millions):
<TABLE>
<CAPTION>
Increase (Decrease)
------------------
<S> <C>
Automotive $ 1.7
Industrial (7.5)
Home Furnishings (20.1)
Apparel (5.5)
Specialty Markets (15.9)
Miscellaneous (1.5)
-------
Total Change in Annual Net Sales $ (48.8)
=======
</TABLE>
- - Sales of automotive fabrics, which grew by 17.9% in 1998, reflect an
increase for a long-standing product of the Company, which has been on the
decline for several years. Additionally, 1998 included increased sales of
a relatively new seat support fabric.
- - During 1998, sales of industrial fabrics declined by 10.7%. Demand for
fabrics sold to rubber products customers fell by approximately $3 million
as two of the Company's customers lost sales volume to their competitors
and another rubber products customer experienced a labor strike. Sales of
fabrics for abrasives customers declined by $2 million, largely the result
of one customer's planned shut down to convert and upgrade their
production line. Sales to other industrial customers including footwear,
filtration, and coated fabrics also declined as the latter half of 1998
reflected softness in demand.
- - Sales of home furnishings fabrics fell by 11.5% in 1998 reflecting an
approximate $17 million decline in sales of certain substrate fabrics
which were sold by the Company's customers into Russia and Eastern Europe
where currency and economic difficulties prevailed. The Company's
discontinuance of certain unprofitable fabrics for window products caused
reduced sales of $4.6 million. During 1998, several customers for outdoor
furniture fabrics began purchasing low cost Asian imports which reduced
sales of such fabrics by $3.8 million. These declines were offset in part
by growth in sales of napery fabrics and increased sales for certain
residential upholstery fabrics.
- - During 1997, the Greige Fabrics Division capitalized on certain short-term
opportunities to sell apparel fabrics at attractive margins. These
opportunities concluded in early 1998 resulting in reduced sales of
apparel fabrics of $5.5 million.
- - Sales to specialty markets declined by 25% reflecting elimination of
unprofitable operations and products associated with the 1997 Realignment.
TJ Beall recorded sales of $13.9 million prior to its sale in September
1997 and the Fiber Products Division recorded revenues of $5.7 million for
sales yarn prior to closure of the Langdale facility late in 1997. These
revenue declines were partially mitigated by growth of $1.6 million in
other areas of the Fiber Products Division's business plus 33% growth in
sales for JICR.
20
<PAGE> 21
- - Sales of miscellaneous fabrics were reduced by 63.7% as the Finished
Fabrics Division discontinued several unprofitable products which were
characterized by short runs and low margins. Miscellaneous fabrics now
account for less than 1% of the Company's total revenues.
The Company's backlog of customer orders was $49.4 million at January
2, 1999 compared to $69.4 million at January 3, 1998. The reduced order backlog
at January 2, 1999 includes the impact of currency and economic difficulties in
Eastern Europe, Asia and South America as well as the resulting reduction in
domestic demand. The 1998 year end order backlog for outdoor furniture fabrics
was much lighter compared to prior years as certain customers switched to low
cost Asian imports. Demand has slowed significantly for the Company's
upholstery substrate fabrics which were sold by its customers to eastern
European markets. Although consolidated order backlog returned to $66.7 million
by February 27, 1999, management believes that world and domestic economic
conditions will impact demand through at least the first two quarters of 1999,
and perhaps longer for certain markets.
Gross margin improved to 13.6% for 1998 from 11.2% for 1997. This 2.4%
increase reflects the impact of LIFO income of $2.6 million, the majority of
which was recorded in the fourth quarter of 1998. The increase in gross margin
also includes the elimination of unprofitable operations and products beginning
mid-year in 1997, increased manufacturing efficiencies during 1998, and
reduction in raw material prices. These improvements in gross margin were
somewhat offset by lower capacity utilization in the second half of 1998
resulting from decreased market demand. The 1997 Realignment included closure
of the Langdale facility, elimination of certain unprofitable product lines,
and relocation of selected manufacturing equipment and products to the Southern
Phenix Facility and to the Micolas Facility. During the first quarter of 1998,
the Finished Fabrics Division incurred the negative impact of costs for
administering the phase out of the discontinued products plus inefficiencies
associated with absorption of the relocated production. The second, third and
fourth quarters of 1998 reflect continued improvement following the
transitional activities which were substantially completed during the first
quarter of 1998. Contributing in part to the improvement in margins was the
reclassification of $817 thousand in costs for corporate human resources
functions, which were included in costs of sales for 1997, but have been
included in general and administrative costs for 1998.
Selling, general and administrative expenses for 1998 decreased by
$898 thousand compared to 1997. Beginning in April 1997 and continuing through
April 1998, the Company incurred professional fees associated with the 1997
Realignment. This net improvement is principally due to reduced expenses for
professional services in 1998 coupled with administrative savings realized upon
integration of Wellington Sears into the Greige and Finished Fabrics Divisions
as part of the 1997 Realignment, but also includes additional costs for human
resources functions as described above.
Restructuring and impairment charges resulting from the 1997
Realignment were substantially completed in 1997. An additional $168 thousand
was recorded in 1998 for severance costs associated with positions which were
not scheduled for termination until early 1998, but was offset by a favorable
adjustment of $75 thousand to the impairment reserve for Jupiter's former
office building, which was sold in February of 1998.
Interest expense was reduced by $586 thousand to $13.4 million in 1998
from $14 million in 1997. Changes in interest expense include both reduced
average borrowings and increased average rates associated with the March 30,
1998 amendment to the bank credit agreement, as discussed below. Obligations
under the Company's bank credit agreement were reduced by $10.7 million from
$137 million at January 3, 1998 to $126.3 million at January 2, 1999.
Additionally, the $550 thousand mortgage associated with Jupiter's former
office in Rockville, Maryland, was discharged upon its sale in February 1998.
21
<PAGE> 22
YEAR ENDED JANUARY 3, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 28, 1996
Continuing Operations
Net sales for the year ended January 3, 1998 were $332.5 million
compared to $321.9 million for the year ended December 28, 1996 reflecting an
increase of $10.6 million or approximately 3.3%. Changes in net sales by major
market were as follows (in millions):
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
<S> <C>
Automotive $ (1.4)
Industrial 1.0
Home Furnishings 8.5
Apparel 6.8
Specialty Markets (3.8)
Miscellaneous (.5)
----------
Total Change in Annual Net Sales $ 10.6
==========
</TABLE>
- - Net sales in the automotive market declined by $1.4 million reflecting
weaker demand for the Company's automotive products resulting in part from
changing manufacturing processes of automotive manufacturers.
- - Sales of industrial fabrics remained at the reduced level exhibited in
1996, growing by only $1 million for the year while sales of home
furnishing fabrics grew by $8.5 million.
- - Apparel fabrics sales increased by $6.8 million as the Company capitalized
on certain profitable opportunities resulting from changes in apparel
styling which played to strengths in the Company's manufacturing
capabilities. While such styling changes and the related increased demand
are not expected to be permanent, apparel sales for 1997 grew by
approximately 126% over 1996.
- - Sales to specialty markets declined by $3.8 million including declines of
$2.3 million in woven goods, $1.1 million in fiber goods and $400 thousand
in composite reinforcement goods. These changes reflect the Company's woven
operations emphasis on core industrial and home furnishings markets plus
soft markets for cleaned fiber and garnet grades experienced by the Fiber
Products Division coupled with a shortage of certain raw materials and loss
of a customer.
- - Sales to miscellaneous markets, which for 1997 represent 0.3% of the total
sales, declined by $502 thousand from the prior year.
The Company's sales backlog was $69.4 million and $88.5 million at
January 3, 1998 and December 28, 1996, respectively. The decrease primarily
reflects the sale of T.J. Beall on September 29, 1997 which represented $16.3
million of the total backlog at December 28, 1996. To a lesser degree, open
orders at year end also declined as a result of the Company's discontinuing of
certain unprofitable window covering products late in 1997 plus the Company's
exit of sales yarn business at the Langdale facility where manufacturing
activities ceased in the fourth quarter of 1997.
Cost of sales increased in 1997 to $295.3 million from $284.8 million
for the year ended December 28, 1996, largely due to the increase in sales
discussed above. The gross margin declined slightly to approximately 11.2% for
the 1997 fiscal year compared to approximately 11.5% for the 1996 fiscal year.
Raw material costs, which remained at very high levels well into 1996, had
significant negative impact on the gross margin for 1996. Fiscal year 1997
included operational inefficiencies associated with closure of the Langdale
facility and relocation of selected equipment and products to other of the
Company's facilities which reduced gross margin for 1997. Offsetting in part the
negative effect of these factors was the reclassification of certain product
development and sample costs which for some divisions were included in cost of
sales for 1996, but
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which for all divisions were charged to selling costs during
1997. This reclassification of expense causes a minor disparity when comparing
gross margin between 1997 and 1996.
Selling, general and administrative expenses of $27.6 million for 1997
increased $2.8 million from $24.8 million in 1996. The increase is comprised of
an increase of $1.4 million in selling expenses and an increase of $1.4 million
in general and administrative expenses. The increased selling expenses reflects
inclusion of sample costs and product development costs which had previously
been classified as cost of sales for some but not all divisions. Increased
general and administrative expenses primarily resulted from significant
consulting fees incurred in 1997 in connection with the 1997 Realignment.
Management's decision to end manufacturing operations at the Company's
historic Langdale facility and dispose of T.J. Beall was a significant part of
the 1997 Realignment. This decision resulted in the transfer of selected
equipment and products from the Langdale facility to newer and more efficient
facilities within the Company and also resulted in recording of restructuring
and impairment charges totaling $6.3 million during 1997. Charges directly
related to the Langdale facility included write-downs in valuation of property
assets of $2.6 million, employee severance accruals of $140 thousand and $249
thousand for costs to relocate production equipment. The 1997 restructuring
charges also included impairment losses of $180 thousand and $11 thousand for a
retail store and for the Tarboro facility, respectively, both of which were
ultimately sold during 1997 plus a $253 thousand impairment loss for Jupiter's
former office building in Rockville, Maryland which was held for sale at January
3, 1998 and subsequently sold on February 27, 1998. Other 1997 restructuring
charges included the write off of $2 million in goodwill associated with the
T.J. Beall acquisition, $551 thousand in costs associated with an abandoned
software implementation and $275 thousand in severance accruals resulting from
realignment of divisions of JI Alabama.
In connection with the Jupiter Acquisition, the Company decided to
close the manufacturing facility located in Tarboro, North Carolina, which had
been operated by Jupiter's Wellington Sears subsidiary (the "Tarboro Facility")
in an effort to realign and consolidate certain operations, concentrate capital
resources on more profitable operations and better position itself to achieve
its strategic corporate objectives. All activities related to the closing of the
Tarboro Facility were substantially completed in January 1997. The Tarboro
Facility, which was sold in December 1997, was recorded at its estimated net
realizable value at December 28, 1996. During the year ended December 28, 1996,
the Company recorded restructuring charges totaling $4.7 million which included
$1.6 million related to write-downs of accounts receivable and inventory, $705
thousand for severance costs, $625 thousand for relocating production equipment,
$915 thousand for actual operating losses and $879 thousand for other costs
related to the operation. Of these restructuring costs, $1.8 million was
recorded in the purchase accounting for the Jupiter Acquisition, with the
remaining $2.9 million recorded as an expense on the consolidated statement of
operations. Also, in 1996, the Company recorded a $200 thousand impairment
charge on Jupiter's former office building in Rockville, Maryland.
Net interest expense increased $2.2 million for fiscal year 1997 to
$13.2 million from $11 million for the fiscal year 1996. The increase was due to
higher average borrowings during fiscal 1997 as compared to the 1996 fiscal
year.
On March 28, 1996, the Company signed an agreement with a syndicate of
banks (the "Bank Credit Agreement") to provide financing required to consummate
the merger with Jupiter, to refinance certain existing indebtedness, to pay
related fees and expenses, and to finance the ongoing working capital
requirements of the Company. Such refinancing of existing indebtedness included
existing credit agreements of Wellington, which when paid, were subject to
prepayment penalties of approximately $850 thousand, and which resulted in an
extraordinary loss on early extinguishment of debt of $527 thousand net of
income tax of $323 thousand.
The 1997 income tax benefit was at an effective rate of 26% versus a
1996 income tax provision at an effective rate of 36%. The reduced rate for the
1997 income tax benefit was mainly due to the write-off of goodwill related to
the T.J. Beall acquisition, which was not deductible for income tax purposes.
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Discontinued Operations
Concurrent with the Jupiter Acquisition, the Company's management made
the decision to discontinue the venture capital investment segment of Jupiter's
operation. The segment was accounted for as a discontinued operation from April
1996 through June 1997 when the remaining investment portfolio was reclassified
as a part of continuing operations. All prior periods have been restated
accordingly. For fiscal year 1997, a loss from discontinued operations of $11
thousand was recorded net of benefit for income taxes of $5 thousand compared to
1996 when income from discontinued operations was $6.6 million net of taxes of
$6.2 million and minority interest of $1.5 million. For the year ended December
28, 1996, net realized investment portfolio gain of $30.9 million was primarily
due to gains realized on the sale of the Company's investment in EMC
Corporation, Viasoft, Fuisz Technologies and Zoll Medical during the year ended
December 28, 1996. (See Note 2 of the consolidated financial statements for
further discussion.)
In connection with the 1996 Jupiter Acquisition and after considering
the Company's plans to liquidate the Jupiter investment portfolio, the Company
recorded a loss on disposal of the Jupiter investment portfolio of $1 million,
net of income tax benefit of $2.5 million, which included a write down of the
carrying value of the investment portfolio in the amount of $4.4 million, a gain
of $1.6 million on sale of Pay Telephone America, Ltd., and a reserve of $625
thousand for phase out of Jupiter's operations. During 1997, a gain on disposal
of $137 thousand was recorded, net of taxes of $60 thousand, in settlement of
actual charges against reserves included in the 1996 loss on disposal. (See Note
2 of the consolidated financial statements for further discussion.)
YEAR 2000
As a result of computer programs which historically were written using
a two rather than four digit convention to define the year component of dates, a
concern commonly known as the Year 2000 ("Year 2000") issue has arisen globally.
Computer programs and equipment that use a two digit convention may not be able
to differentiate between the 20th and 21st centuries (e.g. "00" could be either
1900 or 2000). This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Year 2000 Plan - In 1997, the Company began systematic replacement of
legacy software applications, both purchased and developed in-house, with
purchased software as to which the vendor has represented to be Year 2000
compliant or the vendor has indicated that subsequent releases will be Year 2000
compliant prior to July 1999. During 1998, the Company appointed a Year 2000
Coordinator, assembled a Year 2000 Team, and prepared a Year 2000 Plan. The
Company's Year 2000 Plan is subject to modification and is revised periodically
as additional information is developed.
The Company's plan to resolve potential Year 2000 problems involved the
following four phases: assessment, remediation, testing, and implementation.
Contingency plans, including data back-up, disaster recovery, and possible
modifications to procurement and production scheduling, will be developed during
the second half of 1999. Assessment of significant computer application systems
was completed in 1998. All systems were considered to be vulnerable until
objective data could be obtained and in the case of packaged software, until
vendor certification was obtained to support our assessment. Several of the
Company's computer application systems were determined to be Year 2000 compliant
and the remainder were identified for replacement or remediation.
The majority of the Company's application systems are being completely
replaced by packaged systems represented as being Year 2000 compliant. The
largest replacement project began in August 1997 for the Company's Finished
Fabrics Division. Replacement for the Fiber Products Division, which is
considerably less sophisticated than the Finished Fabrics systems, began in
November 1998. Once software is replaced or reprogrammed, a working model is
prepared and work proceeds to testing and implementation. These phases run
concurrently for different systems. The replacements, as identified
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above, are expected to be completed by August 1999. For the remaining computer
application systems which will not be replaced, remediation is underway and
subsequent testing is expected to be complete by October 1999. All told,
management believes that lines of code for systems requiring remediation, as
opposed to replacement, represent only a small percentage of the total lines of
computer code in service.
For personal computers which are critical to operations or which are
part of decision support systems, the hardware, operating systems, and
application software are being reviewed for compliance. The Company intends to
upgrade or replace all such systems once they are identified as out of
compliance.
Year 2000 Exposure for Products - Based on a review of its product
line, the Company has determined that all of the products it has sold and will
continue to sell contain no electronic or computerized components which would
require remediation to be Year 2000 compliant. Accordingly, the Company believes
that it does not have material exposure as it relates to the Company's products.
Third Party Readiness - The Company has material relationships with
third parties whose failure to be Year 2000 compliant could have material
adverse impacts on the Company's business, operations or financial condition.
Third parties considered by the Company's Year 2000 Team to be in this category
("Key Business Partners") include critical suppliers, significant customers,
financial institutions, and utility providers. In conjunction with
identification of Key Business Partners, the Company's assessment of Year 2000
risk included evaluation of production equipment, building systems, and critical
services provided by Key Business Partners.
Production (manufacturing) and building (telephone, alarm, fire
control, climate control, etc.) equipment is being investigated for compliance.
Additionally, the Company screens all purchases to insure that new equipment
acquisitions are compliant. The Key Business Partner representing each model of
equipment in use is being contacted to determine (a) if the equipment contains
any hardware or software with Year 2000 exposure, (b) if any equipment with Year
2000 exposure is non-compliant, and (c) if upgrades or enhancements will be
provided for all non-compliant equipment. To date, the majority of Key Business
Partners representing production and building equipment have been contacted and
most have responded. The Company is not presently aware of any equipment at risk
for which remedial upgrades or enhancements will not be available. Contingency
plans will be prepared for any vulnerable equipment for which remediation is not
available on a timely basis, practical, or possible.
Vendors and suppliers of raw materials, operating supplies, utilities,
plus financial and other critical services are being surveyed for Year 2000
readiness, and the Company's Year 2000 Team is meeting with those who are
identified as Key Business Partners. Responses from vendors and suppliers of
less critical importance to our business are being evaluated and follow-up
action is being taken by the Company as it deems appropriate. A majority of the
Company's Key Business Partners for these goods and services have been contacted
and many have responded.
Significant customers identified by the Company's Year 2000 Team as Key
Business Partners are being contacted for the purpose of assessing Year 2000
preparedness. The Company is not presently aware of any customer identified as a
Key Business Partner who has been determined to be at risk and whose failure as
a result of Year 2000 exposure would materially impact the Company's business,
operations or financial condition.
To date, the Company is not aware of any Key Business Partner who has
been identified as vulnerable and whose failure as a result would materially
impact the Company's business, operations or
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financial condition. Although no assurance can be given that acceptable
alternatives can be developed to mitigate a failure of business partners to
achieve Year 2000 compliance, the Company will monitor business partners for
exposure and to the extent practicable, contingency plans will be evaluated for
any critical business partner who may be vulnerable.
Year 2000 Risks and Costs
As a result of the upgrades described above and assuming the projects
in progress are completed in a satisfactory manner, the Company believes that
the Year 2000 issue will not pose significant operational problems for the
Company's computer systems and that it will be prepared in time to minimize any
material impact to the Company's business, operations or financial condition.
Failure to achieve a timely state of readiness or failure of a Key Business
Partner or other third party to effectively remediate their affected systems
could have a materially adverse impact on the Company's business operations, or
financial condition. The Company anticipates completing the Year 2000 project no
later than October 1999.
The cost of addressing the Year 2000 issues has been and will continue
to be substantially absorbed in the budget for improvement in management
information systems and by normal costs for administrative and technical
employees. The Company does not anticipate incurring significant third party
costs to test or reprogram systems, however the Company has from time to time
retained contract programmers and consultants to work on discrete projects or
review aspects of the Company's information systems, and will continue this
practice into the foreseeable future. Management believes that the cost of Year
2000 modifications will not have a material effect on its business, operations
or financial condition.
The Company has a high level of dependence on computer application
systems, which are used to drive the business, and manufacturing equipment,
which may include advanced computerized controls. The Company believes that a
number of Key Business Partners also rely on such systems and equipment. There
can be no guarantee that the software replacement projects will be successful or
that the vendors supplying software to the Company will provide new software
releases that are Year 2000 compliant. In addition, there can be no assurances
that there will not be problems identified when screening production and support
equipment, and ancillary systems and that such problems will not have a material
effect on the Company's business, operations or financial condition.
Additionally, as the Company relies on representations given by its Key Business
Partners and other third parties, there can be no assurances that all such
representations are accurate and effective in identifying Key Business Partners
and other third parties potentially at risk and that unidentifiable risk will
not have a material adverse impact on the Company's business, operations or
financial condition.
EFFECTS OF INFLATION
Management does not believe that inflation has had a material impact on
the results of operations for the periods presented, except as related to
sharply escalating raw material costs which began in 1995 and extended into
1996. While these increased raw material costs had a significant impact on the
Company and the industry during 1996, raw material prices returned to
traditional levels during 1997 and have exhibited deflationary trends during
1998. Management believes that, while no assurances can be given, the Company
can generally offset the effects of inflation by increasing prices if
competitive conditions permit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary needs for capital resources have been funded by
(a) borrowings under its bank credit agreement, which was entered into on March
28, 1996 (the "Bank Credit Agreement") and thereafter amended several times to
modify certain covenants, the latest amendment of which was executed on April 1,
1999, and (b) a $10 million leasing program with Boeing Capital, which was
entered into on September 28, 1998. Borrowings under the Bank Credit Agreement
were used to finance the purchase of the outstanding public shares of Jupiter
(as discussed above), to refinance certain indebtedness, and to pay related
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<PAGE> 27
fees and expenses related to the foregoing, and available borrowings will be
used as needed to finance working capital and capital expenditures in the
future. The leasing program has been utilized to facilitate installation of
certain new manufacturing equipment without drawing on available borrowings
under the Bank Credit Agreement.
The Bank Credit Agreement is comprised of two term loan facilities and
a revolving credit facility. Term loan facility A ("Term Loan A") is a $40
million facility with an amended maturity date of July 2000. Principal is
repayable for the Company's year ending as follows: 1999 - $6.9 million, and
2000 - $20.1 million. At January 2, 1999 and January 3, 1998, the blended
interest rate on these borrowings was 9.06% and 8.40%, respectively, which is
based on a Base Rate, the prime commercial lending rate, plus 1.75% and 1.25%,
respectively, and is subject to change at the Company's option to a rate based
on the London Interbank Offered Rate ("LIBOR") plus 3.50% and 2.50%,
respectively. As of January 2, 1999 and January 3, 1998 the borrowings
outstanding under Term Loan A were $27 million and $29.4 million, respectively.
Term loan facility B ("Term Loan B") is a $40 million facility with an
amended maturity date of July 2000. Principal is repayable for the Company's
year ending as follows: 1999 - $.5 million, and 2000 - $32.3 million. At January
2, 1999 and January 3, 1998, the blended interest rate on these borrowings was
9.56% and 8.90%, respectively, and is based on a Base Rate, as defined, plus
2.25% and 1.75%, respectively, and is subject to change at the Company's option
to a rate based on LIBOR, plus 4.00% and 3.00%, respectively. As of January 2,
1999 and January 3, 1998, the borrowings outstanding under Term Loan B were
$32.4 million and $33.6 million respectively.
The revolving credit facility (the "Revolving Credit Facility")
provides up to $80 million in borrowing, with an amended maturity date of July
2000. Principal amounts outstanding are due and payable at final maturity. The
interest rate on these borrowings ranges from 8.40% to 9.25% and from 8.25% to
9.75% at January 2, 1999 and January 3, 1998, respectively, which is based on a
Base Rate, as defined, plus 1.50% and 1.25%, respectively, and is subject to
change at the Company's option to a rate based on LIBOR plus 3.00% and 2.50% ,
respectively. Commitment fees are payable quarterly at 1/2 of 1%, based on the
unused portion of the facility.
The Bank Credit Agreement has been amended several times to modify
certain covenants, the latest amendment of which was executed on April 1, 1999
(the "1999 Amendment"). Although the Company was in compliance with existing
covenants at January 2, 1999, it has anticipated the need for amendments to
cover periods beyond January 2, 1999, without which, technical noncompliance
with certain financial covenants was considered to be imminent. In addition to
covenant modifications, the 1999 amendment also includes an increase in interest
rates of 1/2% to take effect April 4, 1999.
In addition to limited covenant modifications, which were effective
through January 2, 1999, and increased interest rates, a March 30, 1998
amendment (the "March 1998 Amendment") required the Company to adopt new cash
management procedures during the second quarter of 1998, which included
establishment of a lock-box with instruction for customers to remit payments
directly to the lock-box. Deposits into the lock-box are applied daily against
the Revolving Credit Facility, which, in general, management believes to have
enhanced the Company's availability under the Revolving Credit Facility. As a
result of this lock-box arrangement, Generally Accepted Accounting Principles
require the Company to classify the Revolving Credit Facility, which has a
maturity date of July 1, 2000, as a current liability. Pursuant to the March
1998 Amendment, the Company agreed that a collateral monitoring arrangement
should be put into effect whereby the Company is required, through an
independent collateral monitoring agent, to report certain financial data on a
periodic basis to the lenders.
Substantially all assets are pledged as collateral for the borrowings
under the Bank Credit Agreement. The amended Bank Credit Agreement requires the
Company to maintain certain financial ratios and specified levels of tangible
net worth and places a limit on the Company's level of capital expenditures and
type of mergers or acquisitions. The amended Bank Credit Agreement permits the
Company to pay dividends on its common stock provided it is in compliance with
various covenants and provisions contained therein, which
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among other things, limits dividends and restricts investments to the lesser of:
(a) 20% of total assets of the Company, on a fully consolidated basis, as of the
date of determination thereof; or (b) $5 million plus 50% of cumulative
consolidated net income for the period commencing on January 1, 1997, minus 100%
of cumulative consolidated net loss for the consolidated entities for such
period, as calculated on a cumulative basis as of the end of each fiscal quarter
of the consolidated entities with reference to the financial statements for such
quarter. Accordingly, at January 2, 1999, the Company is not permitted to
declare and pay dividends.
(See Note 10 of the consolidated financial statements for an expanded
discussion of financing agreements.)
The net cash provided by operating activities for the year ended
January 2, 1999 was $16.4 million. The cash provided by operating activities for
the year ended January 2, 1999 reflects a net loss of $608 thousand total
adjustments for non-cash expenses of $21.9 million and net cash used for changes
in the components of working capital of $4.9 million.
Capital expenditures for the years ended January 2, 1999 and January 3,
1998 were $9.1 million and $10.4 million, respectively. Heightened review of
proposed capital expenditures has resulted in a decreased level of capital
investment during both 1998 and 1997 in response to the Company's scheduled
repayments of outstanding debt and in accordance with management's goal of
deleveraging the Company.
During 1998, the Company repaid principal on Term Loans A and B
totalling $3.6 million while reducing obligations under its revolving credit
facility by $7.1 million for a total decrease in obligations under the Bank
Credit Facility of $10.7 million. Dividends were paid through the second quarter
of 1997 when the Company suspended dividends, subject to re-evaluation by the
Board of Directors on a quarterly basis, in consideration of operating results
and constrained liquidity.
Operating improvements resulting from the 1997 Realignment, which
contributed to improvements in cash generations, were offset during the latter
half of 1998 by economic conditions, both domestic and global, which resulted
indirectly in heightened competition and were reflected in reduced revenues.
Cash provided by operating activities was used proportionately for debt service
and for a prudent level of capital spending. Initiatives to strengthen margins
through improved operating efficiencies and product rationalization have begun
to enhance operating results, however, management remains focused in these areas
with the goal of enhancing liquidity through further improvements in operating
results coupled with continued efforts to reduce debt and debt service
requirements. In addition to these initiatives, management continues to evaluate
alternative financing arrangements which would enhance liquidity while enabling
growth through the Company's ability to generate positive cash flow.
Although compliance with financial covenants under the 1999 Amendment
to the Bank Credit Agreement must be monitored closely, management believes that
funds generated from operations and funds available under the Credit Agreement
will be sufficient to satisfy the Company's liquidity requirements for at least
the next year. As discussed above, the Company entered into a leasing program
during 1998 and management is actively pursuing other financing arrangements
in order to enhance the Company's liquidity.
From time to time the Company received unsolicited indications of
interest relating to the acquisition of the Company or certain assets of the
Company by others. While management and the Board of Directors reviews each
offer in accordance with the appropriate discharge of their fiduciary duties to
the shareholders of the Company, neither the Company or any of its operations
are for sale as management does not believe that an appropriate value is likely
to be received given current market conditions.
OTHER MATTERS
The Company is periodically involved in legal proceedings arising out
of the ordinary conduct of its business. Management does not expect that the
resolution of these proceedings will have a material adverse
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effect on the Company's consolidated financial position, results of operations
or liquidity. During 1997, management became aware of certain industrial
espionage activities that targeted the Company and several other textile
manufacturers, allegedly carried out by agents of a large competitor. On October
8, 1998, the Company filed suit in Alabama seeking recourse for damages and
losses resulting from these alleged activities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
and changes in commodity prices. Exposure to interest rate risk relates to
variable rate obligations under the Company's Bank Credit Agreement which
permits the Company to allocate its total obligations between prime and LIBOR
rate basis. Interest rate swap agreements are utilized to manage overall
borrowing costs and reduce exposure to adverse fluctuations in interest rates.
Two interest rate swap agreements are currently in place under which the Company
pays an average of certain LIBOR based variable rates on $38 million notional
principal. These agreements, which expire on June 4, 1999, also contain interest
rate caps which further limit interest rate exposures. If interest rates related
to the Company's LIBOR obligations increased by 100 basis points over the rates
in effect at January 2, 1999, interest expense, after considering the effects of
interest rate swap agreements, would increase by approximately $870 thousand in
1999. These amounts were determined by considering the impact of hypothetical
interest rates on the Company's borrowing cost and interest rate swap
agreements. The analyses do not consider the effects of the overall reduced debt
levels anticipated in 1999. Further, in the event of a change of such magnitude,
management would likely take actions to further mitigate its interest rate
exposures. An April 1, 1999 amendment to the Company's bank credit agreement
includes an increase in interest rates of 1/2% to take effect on April 4, 1999.
The Company purchases cotton through approximately ten established
merchants with whom it has long standing relationships. The majority of the
Company's purchases are executed using "on-call" contracts. These on-call
arrangements are used to insure that an adequate supply of cotton is available
for the Company's requirements. Under on-call contracts, the Company agrees to
purchase specific quantities for delivery on specific dates, with pricing to be
determined at a later time. Prices are set according to prevailing prices, as
reported by the New York Cotton Exchange, at the time of the Company's election
to fix specific contracts.
Cotton on-call with a fixed price at January 2, 1999 was valued at $7.4
million, and is scheduled for delivery early in 1999. At January 2, 1999, the
Company had unpriced contracts for deliveries between April 1, 1999 and July 1,
2000. Based on the prevailing price at January 2, 1999, the value of these
commitments are approximately $14 million for deliveries between April and
December of 1999 and approximately $9 million for deliveries between January and
July of 2000. As commodity price aberrations are generally short-term in
nature, and have not historically had a significant long-term impact on
operating performance, financial instruments are not used to hedge commodity
price risk.
The Company does not utilize financial instruments for trading or
other speculative purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated balance sheets as of January 2, 1999 and
January 3, 1998, the related consolidated statements of operations,
comprehensive operations, stockholders' equity and cash flows for the years
ended January 2, 1999, January 3, 1998 and December 28, 1996, notes thereto and
Independent Auditors' Reports are reproduced in Exhibit 13(a). Supplementary
Data under the caption "Quarterly Information" is reproduced in Exhibit 13(b).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On May 27, 1998, (a) the Company determined not to renew the engagement
of Deloitte & Touche LLP ("Deloitte"), the Company's auditors, who were
previously engaged as the principal accountant to audit the consolidated
financial statements of the Company and (b) selected KPMG LLP ("KPMG") as the
Company's principal accountant and replacement for Deloitte. The Audit Committee
of the Company's Board of Directors recommended that Deloitte's engagement not
be renewed and that KPMG be engaged to replace Deloitte, and the Board of
Directors approved this recommendation effective May 27, 1998.
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The reports of Deloitte on the consolidated financial statements of the
Company as of and for the fiscal years ended January 3, 1998 and December 28,
1996 contained no adverse opinion or disclaimer of opinion, nor were such
financial statements qualified or modified as to uncertainty, audit scope or
accounting principles.
During the Company's two most recent fiscal years and the subsequent
interim period preceding the replacement of Deloitte, there were no
disagreements with Deloitte on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of Deloitte, would have
caused it to make a reference to the subject matter of the disagreement(s) in
connection with its report. Further, Deloitte did not advise the Company during
the Company's two most recent fiscal years or during the subsequent interim
period preceding the Company's decision not to extend Deloitte's engagement:
(a) that the internal controls necessary for the Company to develop reliable
financial statements did not exist;
(b) that information had come to its attention that had led it to no longer be
able to rely on management's representations, or that had made it unwilling
to be associated with the financial statements prepared by management;
(c) of the need to expand significantly the scope of its audit, or that
information had come to its attention during the two most recent fiscal
years or any subsequent period that if further investigated might (i)
materially have impacted the fairness or reliability of either: a
previously issued audit report or the underlying financial statements, or
the financial statements issued or to be issued covering the fiscal
period(s) subsequent to the date of the most recent financial statements
covered by an audit report or (ii) have caused it to be unwilling to rely
on management's representations or be associated with the Company's
financial statements; or
(d) that information had come to its attention that it had concluded materially
impacts the fairness or reliability of either (i) a previously issued audit
report or the underlying financial statements, or (ii) the financial
statements issued or to be issued covering the fiscal period(s) subsequent
to the date of the most recent financial statements covered by an audit
report.
Deloitte was authorized by the Company to respond fully to inquiries of
KPMG.
During the two most recent fiscal years and during the interim period
prior to engaging KPMG, neither the Company nor anyone on its behalf consulted
KPMG regarding either: (a) the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements, and
neither a written report nor oral advice was provided to the Company that KPMG
concluded was an important factor considered by the Company in reaching a
decision as to accounting, auditing, or financial reporting issues; or (b) any
matter that was the subject of either a disagreement or any other event
described above.
On June 1, 1998, and at the Company's request, Deloitte furnished a
letter to the Securities and Exchange Commission stating whether or not it
agreed with the above statement. A copy of that letter is included as an exhibit
to the Company's Form 8-K, which was filed with the Securities and Exchange
Commission on June 2, 1998.
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PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF JOHNSTON INDUSTRIES, INC.
The information required by Item 10 is incorporated by reference from
the information in the Registrant's Proxy Statement (to be filed pursuant to
Regulation 14A) for its 1999 annual meeting of stockholders, except as to
biographical information on Executive Officers which is contained in Item 1 of
this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from
the information in the Registrant's Proxy Statement (to be filed pursuant to
Regulation 14A) for its 1999 annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from
the information in the Registrant's Proxy Statement (to be filed pursuant to
Regulation 14A) for its 1999 annual meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from
the information in the Registrant's Proxy Statement (to be filed pursuant to
Regulation 14A) for its 1999 annual meeting of stockholders.
31
<PAGE> 32
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a)(1) Consolidated Financial Statements
The consolidated financial statements are filed herewith within Exhibit
13(a), as provided in Item 8 hereof:
-Consolidated Balance Sheets as of January 2, 1999 and January 3, 1998.
- Consolidated Statements of Operations for the years ended January 2,
1999, January 3, 1998 and December 28, 1996.
- Consolidated Statements of Comprehensive Operations for the years
ended January 2, 1999, January 3, 1998 and December 28, 1996.
- Consolidated Statements of Stockholders' Equity for the years ended
January 2, 1999, January 3, 1998 and December 28, 1996.
- Consolidated Statements of Cash Flows for the years ended January 2,
1999, January 3, 1998 and December 28, 1996.
- Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
The following report and consolidated financial statement schedules are
filed herewith as Exhibit 13(a).
- Independent Auditors' Reports
- Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have
been omitted because such schedules are not required under the related
instructions or are inapplicable or because the information required is
included in the Consolidated Financial Statements or notes thereto.
(a)(3) Reports on Form 8-K
There were no reports on Form 8-K during the last quarter of the year
ended January 2, 1999.
32
<PAGE> 33
(a)(4) Listing of Exhibits
The exhibits listed below are filed with or incorporated by reference
into this annual report on Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
3.1(a) Certificate of Incorporation of Registrant (7).
3.1(b) Certificate of Amendment of Registrant's Certificate of
Incorporation dated December 20, 1993 (7).
3.2 By-Laws of Registrant (7).
10.2 Third Amended and Restated Credit and Security Agreement dated
as of January 31, 1995 among Johnston Industries, Inc.,
Southern Phenix Textiles, Inc., Opp and Micolas Mills, Inc.,
The Chase Manhattan Bank, N. A., NationsBank of North
Carolina, N. A. and Comerica Bank [Exhibit 10] (6)
+10.3 Registrant's Executive Insurance Plan, as amended and restated
effective May 21, 1984(7).
+10.4 Letter to Participants dated March 1, 1989 in Registrant's
Executive Insurance Plan setting forth revisions thereto
[Exhibit 10.3(b)] (7).
+10.5 Registrant's Salaried Employees, Pension Plan, as amended and
restated effective July 1, 1989 [Exhibit 10.4] (2).
+10.6 Amended and Restated Stock Incentive Plan for Key Employees of
the Registrant and its Subsidiaries (7).
+10.7 Employee Stock Purchase Plan effective October 15, 1990 (with
1991 and 1992 amendments) [Exhibit 10.5(b)(i)] (3).
+10.8 Amendment dated October 29, 1992 to Employee Stock Purchase
Plan [Exhibit 10.5(b)(ii)] (4).
+10.9 Amendment dated December 17, 1993 to Employee Stock Purchase
Plan [Exhibit 10.9(b)(iii)] (7).
+10.10 Amendment dated January 24, 1995 to Employee Stock Purchase
Plan [Exhibit 10.9(b)(iii)] (7).
+10.11 Employment Agreement with Gerald B. Andrews dated as of
October 17, 1992 [Exhibit 10.6(b)] (4).
+10.12 Employment Agreement with David L. Chandler effective as of
January 1, 1990 [Exhibit 10.6(d)(1)] (3).
+10.13 Trust Agreement dated as of February 12, 1991, with Chemical
Bank & Trust Company and David L. Chandler [Exhibit
10.6(d)(2)] (3).
+10.14 Employment Agreement with Roger J. Gilmartin dated April 22,
1993 [Exhibit 10.6(d)] (4)
+10.16 Employment Agreement with W. I. Henry dated as of January 1,
1993 [Exhibit 10.6(f)] (4).
+10.17 Employment Agreement with John W. Johnson dated January 27,
1993 [Exhibit 10.6(g)] (4).
+10.18 Johnston Industries, Inc. Deferred Payment Plan Trust
Agreement dated as of October 17, 1992 with First Alabama Bank
& Trust Company [Exhibit 10.7] (4)
+10.19 Employment Agreement with Larry L. Galbraith dated May 31,
1995. (9)
+10.20 Employment Agreement with L. Allen Hinkle dated May 26, 1995.
(9)
10.21 Agreement and Plan of Merger, dated August 16, 1995, among and
between Johnston Industries, Inc., JI Acquisition Corp., and
Jupiter National, Inc. [Exhibit 99.3] (8).
10.22 Bank Credit Agreement dated as of March 28, 1996 among
Johnston Industries, Inc., Wellington Sears Company, Southern
Phenix Textiles, Inc., Opp and Micolas Mills, Inc., Johnston
Industries Composite Reinforcements, Inc., T.J. Beall Company
and the banks named therein, The Chase Manhattan Bank, N.A as
Administrative Agent, Chase Securities, Inc. as Arranger, and
Nationsbank, N.A. as Syndication Agent. (9)
10.23 Amendment # 1 dated June 28, 1996 to Bank Credit Agreement.
(10)
10.24 Amendment # 2 dated February 28, 1997 to Bank Credit
Agreement. (10)
+10.25 Employment Agreement with James J. Murray dated September 15,
1997. (11)
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
10.26 Amendment #3 dated December 18, 1997 to Bank Credit Agreement.(12)
+10.27 Employment Agreement with D. Clark Ogle dated March 20, 1998. (12)
10.28 Amendment #4 dated March 30, 1998 to Bank Credit Agreement. (12)
10.29 Amendment #5 dated July 10, 1998 to Bank Credit Agreement. (13)
10.30 Amendment #6 dated December 22, 1998 to Bank Credit Agreement.
10.31 Amendment #7 dated April 1, 1999 to Bank Credit Agreement.
11 Statement of Computation of Per Share Earnings for the years
ended January 2, 1999, January 3, 1998 and December 28, 1986.
13(a) Consolidated balance sheets as of January 2, 1999 and January
3, 1998, the related consolidated statements of operations,
comprehensive operations, stockholders' equity and cash flows
for the years ended January 2, 1999, January 3, 1998 and
December 28, 1996, notes thereto and Independent Auditors'
Reports and related financial statement schedule.
13(b) Supplementary Data captioned "Quarterly Information"
21 List of Subsidiaries of Registrant.
23(a) Consent of KPMG LLP.
23(b) Consent of Deloitte & Touche LLP
27 Financial Data Schedule as of January 2, 1999 (for SEC use only)
</TABLE>
- --------------------------------------------------------------------------------
(1) Previously filed with the Company's Annual Report on Form 10-K for the
year ended June 30, 1990.
(2) Previously filed with the Company's Annual Report on Form 10-K for the
year ended June 30, 1991.
(3) Previously filed with the Company's Annual Report on Form 10-K for the
year ended June 30, 1992.
(4) Previously filed with the Company's Annual Report on Form 10-K for the
year ended June 30, 1993.
(5) Previously filed with the Company's Annual Report on Form 10-K for the
year ended June 30, 1994.
(6) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.
(7) Previously filed with the Company's Annual Report on Form 10-K for the
year ended June 30, 1995.
(8) Previously filed with the Company's Form 8-K on August 21, 1995.
(9) Previously filed with the Company's Annual Report on Form 10-K for the
transition period ended December 30, 1995.
(10) Previously filed with the Company's Annual Report on Form 10-K for the
year ended December 28, 1996.
(11) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended September 27, 1997.
(12) Previously filed with the Company's Annual Report on Form 10-K for the
year ended January 3, 1998.
(13) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended October 3, 1998.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to Form 10-K pursuant to Item 14(c).
34
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
JOHNSTON INDUSTRIES, INC.
Date: March 30, 1999 By: /s/ D. Clark Ogle
------------------------------------------
D. Clark Ogle
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ D. Clark Ogle President and March 30, 1999
- ------------------------ Chief Executive Officer
D. Clark Ogle (Principal Executive Officer)
/s/ J. Reid Bingham Director March 30, 1999
- ------------------------
J. Reid Bingham
/s/ Allyn P. Chandler Director March 30, 1999
- ------------------------
Allyn P. Chandler
/s/ John A. Friedman Director March 30, 1999
- ------------------------
John A. Friedman
/s/ William J. Hart Director March 30, 1999
- ------------------------
William J. Hart
/s/ Gaines R. Jeffcoat Director March 30, 1999
- ------------------------
Gaines R. Jeffcoat
/s/ James J. Murray Chief Financial Officer March 30, 1999
- ------------------------ (Principal Accounting Officer)
James J. Murray
/s/ C. Philip Stanley Director March 30, 1999
- ------------------------
C. Philip Stanley
- --------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 1
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 10.30
AMENDMENT # 6 DATED DECEMBER 22, 1998 TO BANK CREDIT AGREEMENT
- --------------------------------------------------------------------------------
AMENDMENT NO. 6
TO
CREDIT AGREEMENT
AMENDMENT NO. 6, dated as of December 22, 1998, among Johnston
Industries, Inc., a Delaware Corporation ("Johnston"), Johnston Industries
Alabama, Inc., an Alabama corporation formerly known as Opp and Micolas Mills,
Inc. ("Johnston Alabama"), J.I. Georgia, Inc., a Georgia corporation formerly
known as T.J. Beall Company ("JIG"), and Johnston Industries Composite
Reinforcements, Inc., an Alabama corporation ("JICR", and collectively with
Johnston, Johnston Alabama and JIG, the "Borrowers" and each individually, a
"Borrower"), NationsBank, N.A., as Syndication Agent, The Chase Manhattan Bank,
the successor by merger to The Chase Manhattan Bank, N.A., as Agent for the
banks party hereto ("Banks") and as Collateral Monitoring Agent ("Agent"), to
the Credit Agreement dated as of March 28, 1996 among Johnston, Wellington Sears
Company ("Wellington"), Southern Phenix Textiles, Inc. ("Phenix"), Opp and
Micolas Mills, Inc. ("Opp"), T.J. Beall Company ("TJB") and JICR, the banks
named therein, The Chase Manhattan Bank, N.A., as Administrative Agent, Chase
Securities, Inc., as Arranger and NationsBank, N.A., as Syndication Agent, as
amended by Amendment No. 1 dated as of June 28, 1996, Amendment No. 2 dated as
of February 28, 1997, Amendment No. 3 dated as of December 18, 1997, Amendment
No. 4 dated as of March 28, 1998 and Amendment No. 5 dated as of July 10, 1998
(collectively, the "Credit Agreement"). All capitalized terms used herein but
not otherwise defined herein shall have the meanings given them in the Credit
Agreement.
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, a credit facility in an
aggregate amount of up to $160,000,000 is available to the Borrowers on the
terms and conditions set forth therein;
WHEREAS, pursuant to Amendment No. 5 to Credit Agreement referred to
above, the Borrowers entered into collateral monitoring arrangements for the
benefit of the Banks and certain cash management arrangements to facilitate and
implement such collateral monitoring arrangements; and
WHEREAS, the Borrowers and the Banks have agreed to amend in certain
respects such collateral monitoring arrangements as hereinafter set forth.
NOW, THEREFORE, each Bank, the Agent, the Syndication Agent and each
Borrower, on a joint and several basis, hereby agree as follows:
1. Amendments to Section 7.01(b)(v) - Affirmative Covenants. Section
7.01(b)(v) of the Credit Agreement is hereby amended by:
(a) adding the following sentence immediately after the second sentence
thereof: "Notwithstanding the foregoing, such $400,000 aggregate amount in the
Exempt Accounts may be increased up to a maximum aggregate amount not to exceed
$750,000 at any one time on a cumulative basis solely to enable the Borrowers to
deposit in the payroll accounts included in the Exempt Accounts such monies as
are necessary to pre-
1
<PAGE> 2
fund such payroll accounts in such amounts and at such times as may be required
to satisfy the requirements of the applicable paying banks when the payment of
such payroll expenses is made utilizing the Automated Clearinghouse payment
system."; and
(b) by adding the following sentence at the end of such clause (v):
"Each Borrower hereby acknowledges and agrees that to the extent that such
Borrower directly receives any payments or other items that should have been
deposited in a Lockbox Account or a Blocked Account or receives any other
payments (including, without limitation, tax refunds and rebates), such payments
and other items shall be held as the Banks' property by such Borrower, as
trustee of an express trust for the Banks' benefit, and such Borrower shall
immediately deliver to the bank identified in Exhibit M such payments and other
items for deposit in the Blocked Account."
2. Amendments to Section 7.02 - Negative Covenants. Section 7.02(r) of
the Credit Agreement is hereby amended by adding the following after the last
word thereof: ", or such increased amount as may be permitted pursuant to the
terms and conditions of Section 7.01(b)(v)".
3 . Amendments to Exhibits to the Credit Agreement. (a) Exhibit M to
the Credit Agreement is hereby amended by deleting from the Blocked Accounts,
Concentration Account No. _____ of Johnston at Regions Bank, Birmingham,
Alabama. A copy of Exhibit M, as amended, is attached hereto and is hereby
substituted for Exhibit M to the Credit Agreement.
(b) Exhibit P to the Credit Agreement is hereby amended by
adding to the Exempt Accounts, Account No. _____ at Regions Bank, Birmingham,
Alabama. A copy of Exhibit P, as amended, is attached hereto and is hereby
substituted for Exhibit P to the Credit Agreement.
4. Representations, Warranties and Covenants of the Borrowers. Each
Borrower hereby represents and warrants to each Bank that on and as of the date
hereof (i) the representations and warranties of the Borrowers contained in the
Credit Agreement and any other Loan Document delivered in connection therewith
to which it is a party are true and correct and apply to the Borrowers hereto
with the same force and effect as though made on and as of the date hereof, (ii)
the Borrowers are in compliance with all covenants contained in the Credit
Agreement (as amended hereby), and (iii) no Default or Event of Default has
occurred and is continuing under the Credit Agreement (as amended hereby) or any
other Loan Document delivered in connection therewith to which it is a party,
after giving effect to this Amendment.
To the extent any claim or off-set may exist as of the date hereof, each
Borrower, on behalf of itself and its successors and assigns, hereby forever and
irrevocably (a) releases each Bank, the Agent and the Syndication Agent and
their respective officers, representatives, agents, attorneys, employees,
successors and assigns (collectively, the "Released Parties"), from any and all
claims, demands, damages, suits, cross-complaints and causes of action of any
kind and nature whatsoever, whether known or unknown and wherever and howsoever
arising, and (b) waives any right of off-set such Borrower may have against any
of the Released Parties.
5. Conditions Precedent to Amendment No.6. The obligation of the Banks
and the Agent to enter into this Amendment shall be subject to the Agent having
received from the Borrowers, prior to or simultaneously with the execution and
delivery of this Amendment, the following:
(a) Amendment No. 1 to Lockbox Account Agreement, duly executed by
the Borrowers and the bank identified on Exhibit M, pursuant
which the Concentration Account identified in paragraph 4(b)
of the Lockbox Agreement shall be amended to refer to Account
No. ___________;
(b) Amendment No. 1 to Blocked Account Agreement, duly executed by
the Borrowers and the bank identified on Exhibit M, pursuant
to which Account No. ____________ shall be deleted as Blocked
Account; and
(c) A Pledged Account Letter, duly executed by the Borrowers, with
respect to Account No. ____________.
2
<PAGE> 3
6. Pledged Account Letter. The Borrowers agree that the Pledged
Account Letter referred to in Paragraph 5(c), to be executed and
delivered to the Agent simultaneously with this Amendment, shall
be held by the Agent until (i) a Default or an Event of Default
has occurred and is continuing, or (ii) the occurrence of a
Material Adverse Change, as determined by the Required Banks. In
either case, upon such event or occurrence, the Agent may, and
upon the request of the Required Banks shall, release such Pledged
Account Letter to the banks or other financial institutions to
which such Letter has been addressed, and the Borrowers each
hereby expressly authorize such release by the Agent.
7. Credit Agreement in Full Force and Effect. Except as expressly
modified hereby, the Credit Agreement shall remain unchanged and in full force
and effect as executed and each Borrower hereby confirms and reaffirms all of
the terms and conditions of the Credit Agreement.
8. Entire Understanding. The Credit Agreement and this Amendment
contain the entire understanding of and supersede all prior agreements, written
and verbal, among the Banks, the Agent, the Syndication Agent and the Borrowers
with respect to the subject matter hereof and shall not be modified except in
writing executed by the parties hereto.
9. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to its
conflict of laws principles.
10. Counterparts. This Amendment may be executed in counterparts, each
of which shall be deemed an original, and together which shall constitute one
and the same instrument.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
THE BORROWERS:
JOHNSTON INDUSTRIES, INC. JOHNSTON INDUSTRIES
ALABAMA, INC.
By: By:
---------------------- -------------------------------
Name: Name:
Title: Title:
J.I. GEORGIA, INC. JOHNSTON INDUSTRIES COMPOSITE
REINFORCEMENTS, INC.
By: By:
---------------------- -------------------------------
Name: Name:
Title: Title:
THE AGENT:
THE CHASE MANHATTAN BANK
By:
---------------------
Name:
Title:
THE SYNDICATION AGENT:
NATIONSBANK, N.A.
By:
---------------------
Name:
Title:
4
<PAGE> 5
THE LENDERS:
THE CHASE MANHATTAN BANK BANK OF AMERICA
(F/K/A NATIONSBANK, N.A.)
By: By:
---------------------- -------------------------------
Name: Name:
Title: Title:
REGIONS BANK COMERICA BANK
By: By:
---------------------- -------------------------------
Name: Name:
Title: Title:
VAN KAMPEN PRIME RATE THE SUMITOMO BANK, LIMITED
INCOME TRUST
By: By:
---------------------- -------------------------------
Name: Name:
Title: Title:
By:
-------------------------------
Name:
Title:
MERRILL LYNCH, PEARCE, DK ACQUISITION PARTNERS, L.P.
FENNER & SMITH INCORPORATED
By: By:
---------------------- -------------------------------
Name: Name:
Title: Title:
FIRST UNION N.B.
(F/K/A CORESTATES BANK, N.A.)
By:
----------------------
Name:
Title:
5
<PAGE> 1
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 10.31
AMENDMENT # 7 DATED APRIL 1, 1999 TO BANK CREDIT AGREEMENT
- -------------------------------------------------------------------------------
AMENDMENT NO. 7
TO
CREDIT AGREEMENT
AMENDMENT NO. 7, dated as of April 1, 1999, among Johnston
Industries, Inc., a Delaware corporation ("Johnston"), Johnston Industries
Alabama, Inc., an Alabama corporation formerly known as Opp and Micolas Mills,
Inc. ("Johnston Alabama"), J.I. Georgia, Inc., a Georgia corporation formerly
known as T.J. Beall Company ("JIG"), and Johnston Industries Composite
Reinforcements, Inc., an Alabama corporation ("JICR", and collectively with
Johnston, Johnston Alabama and JIG, the "Borrowers" and each individually, a
"Borrower"), NationsBank, N.A., as Syndication Agent, The Chase Manhattan Bank,
the successor by merger to The Chase Manhattan Bank, N.A., as Agent for the
lenders party hereto ("Lenders") and as Collateral Monitoring Agent ("Agent"),
and the Lenders, to the Credit Agreement, dated as of March 28, 1996, among
Johnston, Wellington Sears Company, Southern Phenix Textiles, Inc., Opp and
Micolas Mills, Inc., T.J. Beall Company and JICR, the banks named therein, The
Chase Manhattan Bank, N.A., as Administrative Agent, Chase Securities, Inc., as
Arranger, and NationsBank, N.A., as Syndication Agent, as amended by Amendment
No. 1 dated as of June 28, 1996, Amendment No. 2 dated as of February 28, 1997,
Amendment No. 3 dated as of December 18, 1997, Amendment No. 4 dated as of March
30, 1998, Amendment No. 5 dated as of July 10, 1998, and Amendment No. 6 dated
as of December 22, 1998 (collectively, the "Credit Agreement"). All capitalized
terms used but not otherwise defined herein shall have the meanings given them
in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, a credit facility
is available to the Borrowers on the terms and conditions set forth therein; and
WHEREAS, the Borrowers have requested, and the Lenders have
agreed, subject to the terms and conditions hereinafter set forth, to (i) amend
certain provisions of the Credit Agreement and (ii) modify certain of the
Borrowers' covenants set forth in the Credit Agreement, and the Borrowers
further wish to confirm and reaffirm their joint and several obligations under
the Credit Agreement as amended hereby.
NOW, THEREFORE, each Lender, the Agent, the Syndication Agent
and each Borrower, on a joint and several basis, hereby agree as follows:
1. Amendment to Section 1.01 - Certain Defined Terms. Section 1.01 of
the Credit Agreement is amended hereby as follows:
1
<PAGE> 2
(a) The definition of "Applicable Margin" is hereby amended
(i) by deleting the table contained therein in its entirety and substituting the
following in lieu thereof:
<TABLE>
<CAPTION>
Revolver Term Loan A
-------- -----------
Debt Ratio LIBOR Base Rate LIBOR Base Rate
---------- ----- --------- ----- ---------
<S> <C> <C> <C> <C>
Less than or equal to 2.00:1 200.00 bp 75.00 bp 250.00 bp 100.00 bp
Greater than 2.00:1 but 225.00 bp 75.00 bp 275.00 bp 100.00 bp
less than or equal to 2.75:1
Greater than 2.75:1 but 250.00 bp 100.00 bp 300.00 bp 125.00 bp
less than or equal to 3.50:1
Greater than 3.50:1 but 300.00 bp 150.00 bp 350.00 bp 175.00 bp
less than or equal to 4.25:1
Greater than 4.25:1 350.00 bp 200.00 bp 400.00 bp 225.00 bp
</TABLE>
and (ii) by deleting clause [2] thereof in its entirety and substituting the
following in lieu thereof:
"[2] with respect to Term Loan B: (a) if such Loan is a Eurodollar
Loan, four hundred fifty (450) basis points (4.50%), and (b) if such
Loan is a Base Rate Loan, two hundred seventy-five (275) basis points
(2.75%)."
The Borrowers agree that the foregoing rate increases shall become
effective on April 4, 1999 and that all outstanding Debt of the Borrowers under
the Credit Agreement and the Notes shall be subject to the repricing set forth
herein on April 4, 1999, notwithstanding anything to the contrary contained in
the Credit Agreement.
(b) The definition of "Fixed Charge Coverage Ratio" is hereby
amended by adding "(which, for purposes hereof, shall include only expenditures
actually made)" immediately following "Consolidated Capital Expenditures" in
clause (a)(ii) thereof.
(c) The following defined terms are hereby added to Section
1.01 of the Credit Agreement:
"Milliken Proceeds" shall mean all monies paid or payable to
any of the Borrowers resulting from or arising out of the action
originally brought by Johnston and Johnston Alabama against Milliken &
Company, Inc., R.A. Taylor & Associates, Inc., Global Intellectual
Network, Inc., Justin D. Waldrop, JDW Consulting and Rodney A. Taylor,
et al., in the Circuit Court for Russell County, Alabama, whether
obtained by enforcement of a judgment or paid in settlement thereof or
otherwise, net of legal fees and expenses and after taking into account
all incremental taxes payable by or assessed against any of the
Borrowers in connection with any such judgment or settlement."
"Term Loan A Commitment Percentage" has the meaning assigned
to that term in SECTION 2.06(a)."
"Term Loan B Commitment Percentage" has the meaning assigned
to that term in SECTION 2.06(a)."
2
<PAGE> 3
2. Amendment to Section 2.06 - Prepayments. Section 2.06(a) of the
Credit Agreement is hereby amended by deleting the last sentence thereof and
substituting the following in lieu thereof:
"Each application of such prepayment to the principal
installments of the Term Loans shall be made to Term Loans A
and to Term Loans B on a pro rata basis in accordance with the
Term Loan A Commitment Percentage and the Term Loan B
Commitment Percentage and, once so applied, shall be applied
pro rata to the principal installments of Term Loans A and
Term Loans B in inverse order of their maturities, and in
accordance with the Banks' respective Term Loan A Commitment
or Term Loan B Commitment, as the case may be. For purposes
hereof, "Term Loan A Commitment Percentage" and "Term Loan B
Commitment Percentage" shall mean a percentage, the numerator
of which is an amount equal to the aggregate of all Term Loan
A Commitments or Term Loan B Commitments, as the case may be,
and the denominator of which is an amount equal to the
aggregate amount of all Term Loan A Commitments and Term Loan
B Commitments."
3. Amendment to Section 2.07 - Mandatory Prepayment. Section 2.07 of
the Credit Agreement is hereby amended by (i) inserting a new paragraph (d) as
follows:
"(d) Any Milliken Proceeds received by the Borrowers shall be
applied to discharge the Loans as follows:
(1) First, to the principal installments of the
Term Loans in inverse order of maturities
until the Term Loans shall have been paid in
full; and
(2) Second, to the Revolving Credit Loans until
the Revolving Credit Loans have been paid in
full."
and (ii) by deleting the original paragraph (d) thereof in its entirety and
substituting the following in lieu thereof:
"(e) The Borrowers shall make all mandatory prepayments due
hereunder to the Agent, for the account of the Banks, in amount(s) due
within five (5) days after the occurrence of an event triggering the
mandatory prepayment hereunder. Each application of such mandatory
prepayment to the principal installments of the Term Loans as set forth
in clauses (a), (b) and (d) hereof shall be made to Term Loans A and to
Term Loans B on a pro rata basis in accordance with the Term Loan A
Commitment Percentage and the Term Loan B Commitment Percentage and,
once so applied, shall be applied pro rata to the principal
installments of Term Loans A and Term Loans B in inverse order of their
maturities, and in accordance with the Banks' respective Term Loan A
Commitment or Term Loan B Commitment, as the case may be."
4. Amendment to Section 7.03 - Financial Covenants. Section 7.03 of the
Credit Agreement is hereby amended by deleting the paragraphs referred to below
in their entirety and to substituting the following in lieu thereof:
"(b) Capital Expenditures. Permit Consolidated Capital
Expenditures to exceed (i) $18,600,000 for the fiscal year ending
January 1, 2000, provided that (A) Consolidated Capital Expenditures
consisting of direct cash purchases or related disbursements during
such fiscal year shall not exceed $11,500,000 in the aggregate, and (B)
the computation of Consolidated Capital Expenditures for and/or
incurred with respect to Operating Leases during such fiscal year shall
include the notional value of equipment leased pursuant to such
Operating Leases during such fiscal year; and (ii) $20,000,000 for the
fiscal year ending December 31, 2000, of which no more than $5,500,000
may be committed for expenditure but not expended during the period
from January 2, 2000 through April 1, 2000."
"(c) Consolidated Funded Debt. Incur or permit Consolidated
Funded Debt to exceed (i) $139,000,000 at any time through July 3,
1999, (ii) $137,000,000 at any time from July 4, 1999 through
3
<PAGE> 4
October 2, 1999, (iii) $133,000,000 at any time from October 3, 1999
through January 1, 2000 and (iv) $129,000,000 at any time from and
after January 2, 2000."
"(d) Consolidated Tangible Net Worth. Permit its Consolidated
Tangible Net Worth, at any time, to be less than the amount set forth
below:
<TABLE>
<CAPTION>
Period: Amount:
------ ------
<S> <C>
1/3/99 - 4/3/99 $34,900,000
4/4/99 - 7/3/99 $34,000,000
7/4/99 - 10/2/99 $33,400,000
10/3/99 - 1/1/00 $34,100,000
1/2/00 and at all times thereafter $70,000,000"
</TABLE>
"(e) Leverage Ratio. Permit the Leverage Ratio, as determined
at the end of each fiscal quarter, to be greater than the ratio set
forth opposite the following periods:
<TABLE>
<CAPTION>
Period: Ratio:
------ -----
<S> <C>
1/3/99 - 4/3/99 3.95:1.00
4/4/99 - 7/3/99 3.96:1.00
7/4/99 - 10/2/99 3.85:1.00
10/3/99 - 1/1/00 3.65:1.00
1/2/00 and at all times thereafter 2.00:1.00"
</TABLE>
"(g) Interest Coverage Ratio. Permit the Interest Coverage
Ratio, as determined at the end of each fiscal quarter, to be less than
the ratio set forth opposite the following periods:
<TABLE>
<CAPTION>
Period: Ratio:
------ -----
<S> <C>
1/3/99 - 4/3/99 0.70:1.00
4/4/99 - 7/3/99 0.65:1.00
7/4/99 - 10/2/99 0.63:1.00
10/3/99 - 1/1/00 0.58:1.00
1/2/00 and at all times thereafter 3.00:1.00"
</TABLE>
"(h) Fixed Charge Coverage Ratio. Permit the Fixed Charge
Coverage Ratio, as determined at the end of each fiscal quarter, to be
less than the ratio set forth opposite the following periods:
<TABLE>
<CAPTION>
Period: Ratio:
------ -----
<S> <C>
1/3/99 - 4/3/99 1.42:1.00
4/4/99 - 7/3/99 1.20:1.00
7/4/99 - 10/2/99 0.90:1.00
10/3/99 - 1/1/00 0.75:1.00
1/2/00 and at all times thereafter 1.50:1.00"
</TABLE>
"(i) Debt Ratio. Permit the Debt Ratio, as determined at the
end of each fiscal quarter, to be greater than the ratio set forth
opposite the following periods:
<TABLE>
<CAPTION>
Period: Ratio:
------ -----
<S> <C>
1/3/99 - 4/3/99 4.55:1.00
4/4/99 - 7/3/99 4.65:1.00
7/4/99 - 10/2/99 4.70:1.00
10/3/99 - 1/1/00 4.60:1.00
1/2/00 and at all times thereafter 3.00:1.00"
</TABLE>
4
<PAGE> 5
2. Representations, Warranties and Covenants of the Borrowers. Each
Borrower hereby represents and warrants to each Lender that on and as of the
date hereof (i) the representations and warranties of the Borrowers contained in
the Credit Agreement and any other Loan Document delivered in connection
therewith to which it is a party are true and correct and apply to the Borrowers
hereto with the same force and effect as though made on and as of the date
hereof, (ii) the Borrowers are in compliance with all covenants contained in the
Credit Agreement (as amended hereby), and (iii) no Default or Event of Default
has occurred and is continuing under the Credit Agreement (as amended hereby) or
any other Loan Document delivered in connection therewith to which it is a
party, after giving effect to this Amendment. To the extent any claim or off-set
may exist as of the date hereof, each Borrower, on behalf of itself and its
successors and assigns, hereby forever and irrevocably (a) releases each Lender,
the Agent and the Syndication Agent and their respective officers,
representatives, agents, attorneys, employees, successors and assigns
(collectively, the "Released Parties"), from any and all claims, demands,
damages, suits, cross-complaints and causes of action of any kind and nature
whatsoever, whether known or unknown and wherever and howsoever arising, and (b)
waives any right of off-set such Borrower may have against any of the Released
Parties.
3. Amendment Fee. Borrowers agree to pay to the Agent, for the benefit
of each Lender that executes and delivers this Amendment, a fee equal to 1/4 of
1% of the Revolving Credit Commitment plus 1/4 of 1% of the Term Loan A
Commitment and the Term Loan B Commitment respectively outstanding as of the
date hereof ("Amendment Fee"), together with the costs and expenses (including,
without limitation, reasonable attorneys' fees) incurred by the Agent for the
preparation, negotiation and delivery of this Amendment, in consideration for
the Lenders' agreement to enter into this Amendment, which shall be due and
payable upon the execution of this Amendment, and which Amendment Fee shall be
deemed earned when paid.
4. Payment of Fees. The Amendment Fee shall be paid to the Agent, for
the account of each Lender that executes and delivers this Agreement pro rata in
accordance with its respective percentage share of the Commitment outstanding at
the time of payment.
5. Conditions Precedent to Amendment No. 7. The obligation of the
Lenders and the Agent to enter into this Amendment shall be subject to the Agent
having received from the Borrowers, prior to or simultaneously with the
execution and delivery of this Amendment, the following:
(a) Amendment No. 2 to the Amended and Restated Security
Agreement executed by the Borrowers in the form of
Exhibit A hereto, providing for the inclusion of the
Milliken Proceeds as Collateral.
(b) UCC-3 financing statements amending the UCC-1
financing statements filed in connection with the
Amended and Restated Security Agreement to reflect
the inclusion of the Milliken Proceeds as Collateral.
6. Credit Agreement in Full Force and Effect. Except as expressly
modified hereby, the Credit Agreement shall remain unchanged and in full force
and effect as executed and each Borrower hereby confirms and reaffirms all of
the terms and conditions of the Credit Agreement.
7. Entire Understanding. The Credit Agreement and this Amendment
contain the entire understanding of and supersede all prior agreements, written
and verbal, among the Lenders, the Administrative Agent, the Syndication Agent
and the Borrowers with respect to the subject matter hereof and shall not be
modified except in writing executed by the parties hereto.
8. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to its
conflict of laws principles.
5
<PAGE> 6
9. Counterparts. This Amendment may be executed in counterparts, each
of which shall be deemed an original, and together which shall constitute one
and the same instrument.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
THE BORROWERS:
JOHNSTON INDUSTRIES, INC. JOHNSTON INDUSTRIES
ALABAMA, INC.
By: By:
----------------------------- -----------------------
Name: Name:
Title: Title:
J.I. GEORGIA, INC. JOHNSTON INDUSTRIES COMPOSITE
REINFORCEMENTS, INC.
By: By:
----------------------------- -----------------------
Name: Name:
Title: Title:
THE AGENT:
THE CHASE MANHATTAN BANK
By:
-----------------------------
Name:
Title:
THE SYNDICATION AGENT:
NATIONSBANK, N.A.
By:
-----------------------------
Name:
Title:
7
<PAGE> 8
-8-
THE LENDERS:
THE CHASE MANHATTAN BANK BANK OF AMERICA
(F/K/A NATIONSBANK, N.A.)
By: By:
----------------------------- -----------------------
Name: Name:
Title: Title:
REGIONS BANK COMERICA BANK
By: By:
----------------------------- -----------------------
Name: Name:
Title: Title:
VAN KAMPEN PRIME RATE THE SUMITOMO BANK, LIMITED
INCOME TRUST
By: By:
----------------------------- -----------------------
Name: Name:
Title: Title:
By: By:
----------------------------- -----------------------
Name: Name:
Title: Title:
MERRILL LYNCH, PEARCE, DK ACQUISITION PARTNERS,
FENNER & SMITH INCORPORATED L.P.
By: By:
----------------------------- -----------------------
Name: Name:
Title: Title:
FIRST UNION N.B.
(F/K/A CORESTATES BANK, N.A.)
By:
-----------------------------
Name:
Title:
<PAGE> 1
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
The weighted average number of common and common share equivalents on a basic
and diluted basis are as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR YEAR YEAR
ENDED ENDED ENDED
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
---------- ---------- ------------
<S> <C> <C> <C>
Weighted average common shares outstanding 10,722 10,562 10,413
Shares issued from assumed exercise of
Incentive stock options 135 211 201
Shares issued from assumed exercise of
Nonqualified stock options (1) 28 58 88
-------- -------- --------
Weighted average number of shares outstanding,
As adjusted 10,885 10,831 10,702
======== ======== ========
Loss from continuing operations $ (608) $ (8,622) $ (2,183)
Income (Loss) from discontinued operations -- 126 5,582
Extraordinary loss -- -- 527
-------- -------- --------
Net Income (Loss) $ (608) $ (8,496) $ 2,872
Dividends on Preferred Stock -- (82) (125)
-------- -------- --------
Net Income (Loss) available to common stockholders $ (608) $ (8,578) $ 2,747
======== ======== ========
Earnings (Loss) per common share-basic:
Loss from continuing operations $ (.06) $ (.82) $ (.22)
Discontinued operations .-- .01 .53
Extraordinary loss .-- .-- (.05)
-------- -------- --------
Earnings (Loss) per common share $ (.06) $ (.81) $ .26
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
(1) Shares issued from assumed exercise of options included the number of
incremental shares which result from applying the "treasury stock
method" for options.
Note: Earnings per share is not presented on a diluted basis as the effect of
potentially dilutive securities was either anti-dilutive due to net
losses or immaterial for the periods presented.
<PAGE> 1
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 13(A)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND
DECEMBER 28, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Report of KPMG LLP for the Year ended January 2, 1999................................................ F-1
Report of Deloitte & Touche LLP
for the Years ended January 3, 1998 and December 28, 1996................................... F-2
Consolidated Balance Sheets.......................................................................... F-3
Consolidated Statements of Operations................................................................ F-4
Consolidated Statements of Comprehensive Operations.................................................. F-5
Consolidated Statements of Stockholders' Equity...................................................... F-6
Consolidated Statements of Cash Flows................................................................ F-7 to F-8
Notes to the Consolidated Financial Statements....................................................... F-9 to F-23
</TABLE>
<PAGE> 2
Independent Auditors' Report
The Board of Directors and Stockholders
Johnston Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Johnston
Industries, Inc. and subsidiaries (the "Company") as of January 2, 1999 and the
related consolidated statements of operations, comprehensive operations,
stockholders' equity, and cash flows for the year ended January 2, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Johnston
Industries, Inc. and subsidiaries as of January 2, 1999, and the results of
their operations and their cash flows for the year ended January 2, 1999, in
conformity with generally accepted accounting principles.
/s/KPMG LLP
KPMG LLP
Atlanta, Georgia
March 5, 1999, except for
note 10, as to which the date
is April 1, 1999
F-1
<PAGE> 3
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Johnston Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Johnston
Industries, Inc. and subsidiaries (the "Company") at January 3, 1998 and the
related consolidated statements of operations, comprehensive operations,
stockholders' equity, and cash flows for the years ended January 3, 1998 and
December 28, 1996. Our audits also included the financial statement schedule
listed in the Index at Item 14. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at January 3, 1998 and
December 28, 1996, and the results of its operations and its cash flows for the
years ended January 3, 1998 and December 28, 1996, in conformity with generally
accepted accounting principles. Also in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As described in Note 2 to the consolidated financial statements, as of December
28, 1996, net assets of discontinued operations and assets held for sale -
Jupiter included $6,140,000 of the Company's investments recorded at their
estimated fair market values based on estimates by the Company's Board of
Directors. The 1996 estimates were established in the absence of readily
ascertainable market values. Losses related to Board-valued investments for the
year ended December 28, 1996, were $7,084,000.
We have reviewed the procedures used in arriving at the estimates of value of
such securities and have inspected underlying documentation and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of valuation, those
estimated values may differ significantly from the values that would have been
used had a ready market for these investments existed, and the difference could
be material to the Company's consolidated financial statements.
S/s DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 6, 1998
March 30, 1998 (As to Note 10)
April 1, 1999 (As to Note 17)
F-2
<PAGE> 5
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 2, 1999 AND JANUARY 3, 1998
(in thousands, except per share amounts)
==============================================================================
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,231 $ 2,284
Accounts and notes receivable net of allowance for
doubtful accounts of $1,442 and $2,176 34,768 34,283
Inventories 58,079 51,083
Assets held for sale 3,788 5,010
Income taxes receivable -- 4,838
Deferred income taxes 1,249 406
Prepaid expenses and other 3,111 4,409
--------- ---------
Total current assets 102,226 102,313
Property, plant and equipment-net 99,486 113,783
Goodwill - net of accumulated amortization of $1,728 and $1,096 10,845 11,477
Intangible asset-pension 1,651 1,882
Other assets 5,331 5,333
--------- ---------
Total assets $ 219,539 $ 234,788
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,867 $ 17,088
Accrued expenses 9,859 10,264
Revolving credit facility 66,954 73,995
Current maturities of long-term debt 9,989 3,393
Income taxes payable 479 --
--------- ---------
Total current liabilities 101,148 104,740
Long-term debt - less current maturities 51,109 61,688
Other liabilities 8,878 9,022
Deferred income taxes 10,130 10,214
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 per share; authorized,
20,000 shares; issued 12,468 1,246 1,246
Additional paid-in capital 21,445 21,445
Retained earnings 33,850 34,458
--------- ---------
Total 56,541 57,149
Less treasury stock; 1,746 shares and 1,725 shares (8,267) (8,025)
--------- ---------
Total stockholders' equity 48,274 49,124
--------- ---------
Total liabilities and stockholders' equity $ 219,539 $ 234,788
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 6
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996
(in thousands, except per share amounts)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 283,724 $ 332,537 $ 321,883
--------- --------- ---------
Costs and expenses:
Cost of sales 245,278 295,338 284,850
Selling, general and administrative 26,718 27,616 24,755
Amortization of goodwill 632 680 547
Restructuring and impairment charges 93 6,273 3,091
--------- --------- ---------
Total costs and expenses 272,721 329,907 313,243
--------- --------- ---------
Income from operations 11,003 2,630 8,640
Other expenses (income):
Interest expense 13,420 14,006 11,315
Interest income (703) (795) (272)
Other-net 392 1,681 (558)
--------- --------- ---------
Total other expenses - net 13,109 14,892 10,485
Realized and unrealized investment gain (loss) (19) 561 (3,725)
Equity in earnings of equity investments 326 -- --
--------- --------- ---------
Loss from continuing operations before benefit for income taxes (1,799) (11,701) (5,570)
Benefit for income taxes (1,191) (3,079) (1,815)
--------- --------- ---------
Loss before minority interest (608) (8,622) (3,755)
Minority interest in loss of consolidated subsidiary -- -- 1,572
--------- --------- ---------
Loss from continuing operations (608) (8,622) (2,183)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations of Jupiter National,
[less applicable income taxes (benefit) of ($5) and $6,190] net
of minority interest in income of $1,455 in 1996 -- (11) 6,562
Income (loss) on disposal of Jupiter National, including provision of
$628 in 1996 for operating losses during phase-out period [less
applicable taxes (benefit) of $60 and ($2,504)] -- 137 (980)
--------- --------- ---------
Income from discontinued operations -- 126 5,582
Extraordinary item (less applicable tax benefit of $323) -
loss on early extinguishment of debt -- -- 527
--------- --------- ---------
Net income (loss) (608) (8,496) 2,872
Dividends on preferred stock -- (82) (125)
--------- --------- ---------
Net income (loss) available to common stockholders $ (608) $ (8,578) $ 2,747
========= ========= =========
Earnings (loss) per common share-basic and diluted:
Loss from continuing operations $ (0.06) $ (0.82) $ (0.22)
Discontinued operations -- 0.01 0.53
Extraordinary loss -- -- (0.05)
========= ========= =========
Net income (loss) per common share-basic and diluted $ (0.06) $ (0.81) $ 0.26
========= ========= =========
Weighted average number of common shares outstanding 10,722 10,562 10,413
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 7
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996
(in thousands)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
----- ------- -------
<S> <C> <C> <C>
Net income (loss) $(608) $(8,496) $ 2,872
----- ------- -------
Other comprehensive income, before tax:
Minimum pension liability adjustment -- (754) (2,073)
----- ------- -------
Other comprehensive income (loss) before benefit for
income tax related to items of other comprehensive income (608) (9,250) 799
----- ------- -------
Benefit for income tax related to items of other
comprehensive income -- (276) (797)
----- ------- -------
Comprehensive income (loss) $(608) $(8,974) $ 1,596
===== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 8
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996
(in thousands, except per share amounts)
================================================================================
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED PAID-IN RETAINED MINIMUM
STOCK COMMON STOCK CAPITAL EARNINGS TREASURY STOCK PENSION
------------ -------------- --------- -------- --------------- LIABILITY
SHARES AMOUNT SHARES AMOUNT AMOUNT AMOUNT SHARES AMOUNT ADJUSTMENT TOTAL
------ ----- ------ ------ --------- -------- ------ ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - December 30, 1995 -- $ -- 12,427 $1,243 $ 17,293 $ 46,505 1,862 $ (8,108) $(1,754) $ 55,179
Exercise of options -- -- 23 2 70 -- -- -- -- 72
Conversion of Jupiter options -- -- -- -- 2,958 -- -- -- -- 2,958
Purchase of treasury stock -- -- -- -- -- -- 271 (2,241) -- (2,241)
Issuance of treasury stock -- -- -- -- -- -- (46) 92 -- 92
Issuance of preferred shares 325 3 -- -- 3,247 -- -- -- -- 3,250
Net income -- -- -- -- -- 2,872 -- -- -- 2,872
Minimum pension liability
adjustment, net of taxes of $797 -- -- -- -- -- -- -- -- 1,276 1,276
Dividends paid - common stock
($0.40 per share) -- -- -- -- -- (4,141) -- -- -- (4,141)
Dividends paid - preferred stock
($0.50 per share) -- -- -- -- -- (125) -- -- -- (125)
---- --- ------ ------ -------- -------- ------ -------- ------- --------
BALANCE - December 28, 1996 325 3 12,450 1,245 23,568 45,111 2,087 (10,257) (478) 59,192
Exercise of options -- -- 18 1 74 -- (17) 32 -- 107
Issuance of treasury stock -- -- -- -- -- -- (345) 2,200 -- 2,200
Cancellation of preferred shares (325) (3) -- -- (2,197) -- -- -- -- (2,200)
Net loss -- -- -- -- -- (8,496) -- -- -- (8,496)
Minimum pension liability --
adjustment, net of taxes of $276 -- -- -- -- -- -- -- -- 478 478
Dividends paid - common stock --
($0.20 per share) -- -- -- -- -- (2,075) -- -- -- (2,075)
Dividends paid - preferred stock --
($0.25 per share) -- -- -- -- -- (82) -- -- -- (82)
---- --- ------ ------ -------- -------- ------ -------- ------- --------
BALANCE - January 3, 1998 -- -- 12,468 1,246 21,445 34,458 1,725 (8,025) -- 49,124
Purchase of treasury stock -- -- -- -- -- -- 21 (242) -- (242)
Net loss -- -- -- -- -- (608) -- -- -- (608)
---- --- ------ ------ -------- -------- ------ -------- ------- --------
BALANCE - January 2, 1999 -- $-- 12,468 $1,246 $ 21,445 $ 33,850 1,746 $ (8,267) $ -- $ 48,274
==== === ====== ====== ======== ======== ====== ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 9
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996
(in thousands)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
---------- ---------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
CONTINUING OPERATIONS:
Net loss from continuing operations $ (608) $ (8,622) $ (2,183)
Adjustments to reconcile net loss from continuing operations
to net cash provided by continuing operations:
Depreciation 19,263 20,690 19,168
Amortization of goodwill 632 680 547
Amortization of deferred financing costs 1,671 843 529
Restructuring and impairment charges -- 5,609 200
Provision for bad debts 507 1,490 245
Loss on disposal of fixed assets 119 292 90
Net unrealized (gain) loss on portfolio investments 19 (478) 3,725
Undistributed income in equity investments (326) -- --
Minority interest in loss of consolidated subsidiary -- -- (1,572)
Changes in operating assets and liabilities:
Accounts and notes receivable 508 (47) 2,550
Inventories (6,996) 13,063 (4,063)
Deferred income taxes (927) 783 2,538
Prepaid expenses and other assets (751) (2,056) 93
Accounts payable (1,916) (6,363) 4,856
Accrued expenses (339) 303 (1,439)
Income taxes receivable 5,317 (3,176) (2,878)
Other liabilities 94 (1,887) 190
Other-net 121 738 --
-------- -------- --------
Total adjustments 16,996 30,484 24,779
-------- -------- --------
Net cash provided by continuing operations 16,388 21,862 22,596
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations -- (11) 6,562
Gain (loss) on disposal of discontinued operations -- 137 (980)
Changes in operating assets and liabilities for
discontinued operating activities -- 1,929 (705)
Items not affecting cash, net -- -- (12,722)
-------- -------- --------
Net cash provided by (used in) discontinued operations -- 2,055 (7,845)
-------- -------- --------
Net cash provided by operating activities 16,388 23,917 14,751
-------- -------- --------
INVESTING ACTIVITIES:
CONTINUING OPERATIONS:
Additions to property, plant and equipment (9,136) (10,363) (20,527)
Decrease in non-operating accounts payable (1,305) (2,458) (5,899)
Proceeds from sale and leaseback of equipment 3,557 -- --
Proceeds from sale of Jupiter assets 830 932 --
Proceeds from sale of Tarboro assets -- 2,330 --
Purchase of majority interest in Jupiter -- -- (37,693)
Purchase of T.J. Beall Company, net of cash acquired -- -- 333
-------- -------- --------
Net cash used in continuing operations (6,054) (9,559) (63,786)
-------- -------- --------
</TABLE>
Continued
F-7
<PAGE> 10
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996
(in thousands)
===============================================================================
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
---- ---- ----
<S> <C> <C> <C>
INVESTING ACTIVITIES (CONTINUED):
DISCONTINUED OPERATIONS:
Additions to property, plant and equipment -- -- (291)
Proceeds from sale of investment -- -- 38,113
--------- -------- ---------
Net cash provided by discontinued operations -- -- 37,822
--------- -------- ---------
Net cash used in investing activities (6,054) (9,559) (25,964)
FINANCING ACTIVITIES:
CONTINUING OPERATIONS:
Principal payments of long-term debt (153,059) (17,173) (112,398)
Proceeds from issuance of long-term debt 141,914 5,500 160,544
Borrowing under line-of-credit agreements -- -- 4,750
Repayments under line-of-credit agreements -- -- (18,000)
Purchase of treasury stock (242) -- (2,241)
Proceeds from issuance of common stock -- 36 164
Dividends paid -- (2,157) (4,266)
Extraordinary item, loss on early extinguishment of debt -- -- (850)
--------- -------- ---------
Net cash provided by (used in) continuing operations (11,387) (13,794) 27,703
DISCONTINUED OPERATIONS:
Principal payments of long-term debt -- -- (16,379)
Proceeds from issuance of long-term debt -- -- 138
--------- -------- ---------
Net cash used in discontinued operations -- -- (16,241)
--------- -------- ---------
Net cash provided by (used in) financing activities (11,387) (13,794) 11,462
--------- -------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,053) 564 249
CASH AND CASH EQUIVALENTS:
Beginning of Year 2,284 1,720 1,471
--------- -------- ---------
End of Year $ 1,231 $ 2,284 $ 1,720
========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the twelve months for:
Interest $ 12,365 $ 13,582 $ 13,291
========= ======== =========
Income taxes $ (5,579) $ (654) $ 4,374
========= ======== =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES - The Company acquired
TJ Beall Company in exchange for preferred stock (see Note 3) in 1996. During
1997, the Company sold TJ Beall back to a member of the Beall Family in exchange
for the preferred stock and a note receivable in the amount of $1,500.
In June 1997, the Company contributed 345 shares of treasury stock, totaling
$2,200 to the Company's defined benefit penions plans.
See Notes to Consolidated Financial Statements
Concluded
F-8
<PAGE> 11
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28,
1996
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES.
ORGANIZATION - The January 2, 1999 consolidated financial statements include the
accounts of Johnston Industries, Inc. ("Johnston"), its direct wholly owned
subsidiary, Johnston Industries Alabama, Inc. ("JI Alabama") and its indirect
wholly owned subsidiaries, Johnston Industries Composite Reinforcements, Inc.
("JICR"), JI Georgia, Inc., formerly T.J. Beal Company ("TJB"), and Greater
Washington Investments ("GWI") (collectively, the "Company"). All significant
intercompany accounts and transactions have been eliminated.
Prior to April 3, 1996, the consolidated financial statements included
the accounts of Johnston, its wholly owned subsidiaries, Southern Phenix
Textiles, Inc. ("Southern Phenix"), Opp and Micolas Mills, Inc. ("Opp and
Micolas"), and JICR; its majority owned subsidiary, Jupiter National, Inc.
("Jupiter") and Jupiter's wholly owned subsidiaries, Wellington Sears Company
("Wellington"), Pay Telephone America, Ltd., and GWI.
On April 3, 1996, after the acquisition by Johnston of the minority
interest in Jupiter (see Note 2), Jupiter was merged into Opp and Micolas. In
June 1996, the name of Opp and Micolas was changed to JI Alabama; Southern
Phenix and Wellington were merged into JI Alabama and JICR, TJB and GWI became
subsidiaries of JI Alabama. On September 29, 1997, the Company sold
substantially all of the assets of TJB (see Note 3).
OPERATIONS - Johnston and its wholly owned subsidiaries are diversified
manufacturers of woven and nonwoven fabrics used principally for home
furnishings, industrial, and to a lesser extent, basic apparel, automotive, and
other textile markets. The markets for these products are located principally
throughout the continental United States.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS - The Company classifies all highly liquid investments with a
maturity of three months or less as cash equivalents.
INVENTORIES - The Company's inventories of finished goods, work-in-process, and
raw materials are generally stated at the lower of cost (using the last-in,
first-out ("LIFO") cost flow assumption) or market. However, JICR's inventories
and all of the Company's parts and supplies are stated at the lower of cost
determined on the first-in, first-out ("FIFO") basis or market (net realizable
value).
ASSETS HELD FOR SALE - All long-lived assets for which management, having
authority to approve the actions, has committed to a plan to dispose of the
assets, whether by sale or by abandonment, are classified as "held for sale" and
reported at the lower of cost or fair value less cost to sell. Upon management's
commitment to a disposal plan, depreciation is stopped for assets included
within the plan. Subsequent revisions of estimated fair value less cost to sell
are reported as adjustments in carrying
F-9
<PAGE> 12
amount, provided that the carrying amount does not exceed the carrying amount of
the asset before an adjustment was made to reflect the decision to dispose of
the asset.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment is stated at
cost. Depreciation and amortization are computed principally using the
straight-line method over the estimated useful service lives of 20-40 years for
building, 20 years for improvements, and 3-20 years for machinery and equipment.
GOODWILL - Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, generally 20 years. The company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability will be impacted if estimated
future operating cash flows are not achieved.
REVENUE RECOGNITION - Revenue is generally recognized as products are shipped to
customers. When customers, under the terms of specific orders, request that the
Company manufacture and invoice goods on a bill-and-hold basis, the Company
recognizes revenue based on the completion date required in the order and actual
completion of the manufacturing process, because at that time, the customer is
invoiced and title and risks of ownership are transferred to the customer
pursuant to the terms of the sales contract. Those terms provide that
merchandise invoiced and held at any location by the Company, for whatever
reason, shall be at the buyer's risk, and the Company may charge for insurance
and storage at prevailing rates. Accounts receivable included bill-and-hold
receivables of $7,264 and $4,795 at January 2, 1999 and January 3, 1998,
respectively.
INCOME TAXES - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
EARNINGS (LOSS) PER SHARE - Net income per share-basic is computed based on net
income divided by the weighted average common shares outstanding during the
year. EPS is not presented on a diluted basis as the effect of potentially
dilutive securities was either anti-dilutive due to net losses or immaterial for
the periods presented.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived assets and
certain identifiable intangibles to be held and used for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. During the years ended January 2, 1999, January 3, 1998
and December 28, 1996, the Company recorded impairment charges of ($75), $5,609
and $200, respectively in connection with restructurings (see Note 4) and the
revision of prior estimates of the net realizable value of assets held for sale.
All long-lived assets held for sale are reported at the lower of cost or fair
value less cost to sell.
COMMITMENTS AND CONTINGENCIES - Liabilities for loss contingencies arising from
claims, assessments, litigation, fines and penalties, and other sources are
recorded when it is probable that a liability has been incurred and the amount
of the assessment and/or remediation can be reasonably estimated. Recoveries
F-10
<PAGE> 13
from third parties which are probable of realization are separately recorded,
and are not offset against the related environmental liability, in accordance
with FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain
Contracts".
The Company accrues for losses associated with environmental
remediation obligations when such losses are probable and reasonably estimable.
Accruals for losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study, if a
remedial feasibility study is appropriate, or required. Such accruals are
adjusted as further information develops or circumstances change. Costs of
future expenditures for environmental remediation obligations are not discounted
to their present value. Recoveries of environmental remediation costs from other
parties are recorded as assets when their receipt is deemed probable.
PENSION AND OTHER POSTRETIREMENT PLANS - In February 1998, the FASB issued SFAS
No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits", which is effective for years beginning after December 15, 1997. SFAS
No. 132 revises employers' disclosures about pension and other postretirement
benefit plans, but does not change the method of accounting for such plans. The
Company adopted SFAS No. 132, effective for the year ended January 2, 1999.
Johnston has two noncontributory qualified defined benefits pension
plans covering substantially all hourly and salaried employees. The plan
covering salaried employees provides benefit payments based on years of service
and the employees' final average ten years earnings. The plan covering hourly
employees generally provides benefits of stated amounts for each year of
service. Johnston's current policy is to fund retirement plans in an amount that
falls between the minimum contribution required by ERISA and the maximum tax
deductible contribution.
STOCK-BASED COMPENSATION - SFAS No. 123, "Accounting for Stock-Based
Compensation," established financial accounting and reporting standards for
stock-based compensation plans and fair value recognition provisions for
stock-based compensation which are elective for employee arrangements and
required for nonemployee transactions. The Company adopted SFAS No. 123 during
the fiscal year ended December 28, 1996. For the employee arrangements,
management has elected to continue with the accounting prescribed by APB Opinion
No. 25 and, accordingly, has disclosed net income and earnings per share as if
the fair value method of accounting defined in SFAS No. 123 had been applied.
COMPREHENSIVE INCOME - In February 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. The statement requires only additional disclosures
in the consolidated financial statements; it does not affect the Company's
financial position or results of operations. The Company adopted SFAS No. 130
effective for the year ended January 2, 1999. Prior year financial statements
have been reclassified to conform to the requirements of SFAS No. 130.
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE - In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") No. 98-1 "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use." This statement, which provides guidance on
accounting for the costs of computer software developed or obtained for internal
use, defines "internal use," and provides guidance for determination of capital
and expense costs. The Company adopted this statement effective for the first
quarter of 1998. The impact of adopting SOP No. 98-1 is immaterial to the
Company's consolidated financial statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June 1998, the
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting standards for
derivative instruments, including certain derivatives imbedded in other
contracts, and for hedging activities. It requires that, at adoption, hedging
relationships should be
F-11
<PAGE> 14
designated anew and that entities recognize all derivatives as either assets or
liabilities in the statement of financial position and to measure those
instruments at fair value. The accounting for changes in fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. This statement is effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999. The Company expects that there will be no
material impact as a result of its adoption of SFAS No. 133 in 1999.
RECLASSIFICATIONS - Certain prior year and prior period amounts have been
reclassified to conform to the current year presentation.
2. JUPITER NATIONAL, INC.
HISTORICAL PRESENTATION - Prior to January 1995, the Company owned a minority
interest in Jupiter and accounted for its investment using the equity method. In
January 1995, the Company purchased additional shares of Jupiter, which
increased the Company's ownership interest in the outstanding shares of Jupiter
from 49.6% to 54.2%. As a result, Jupiter became a consolidated, majority owned
subsidiary of the Company in January 1995. Minority interest was recorded for
the minority shareholders' proportionate share of the equity and earnings
(losses) of Jupiter.
ACQUISITION OF REMAINING THIRD-PARTY OWNED INTEREST - On March 28, 1996, the
Company consummated the acquisition of the remaining outstanding shares of
Jupiter at a purchase price of $33.97 per share. Total purchase consideration
was approximately $45,950 which included payments of $39,000 to stockholders and
certain holders of options to purchase common stock and the assumption of
certain Jupiter options by Johnston. Other acquisition costs included
approximately $5,488 of merger-related expenses paid by Jupiter. The acquisition
was accounted for under the purchase method of accounting as a "step
acquisition" resulting in a partial step-up in Jupiter's tangible assets. The
Company recorded goodwill of $12,447, which was assigned a life of 20 years.
DISCONTINUANCE OF THE VENTURE CAPITAL SEGMENT - Concurrent with the Jupiter
Acquisition, the Company's management made the decision to discontinue the
venture capital investment segment of Jupiter's operation. Accordingly, the
Company wrote down the carrying value of the investments by $4,380. Through June
28, 1997, the segment was accounted for as discontinued operations, and the net
assets of the discontinued segment were recorded as an asset on the consolidated
balance sheet and were expected to be disposed of by June 1997. During that
period, the results of operations for Jupiter's venture capital investment
activities were recorded as discontinued operations.
At June 29, 1997, the remaining undisposed portfolio investments were
reclassified from net assets of discontinued operations to assets held for sale
on the consolidated balance sheet, and the results of continuing operations for
their remaining portfolio investments have been reported as income from
continuing operations on the consolidated statements of operations.
F-12
<PAGE> 15
Income (loss) from discontinued operations of Jupiter includes the following
components:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
YEAR ENDED
-----------------------
JANUARY 3, DECEMBER 28,
1998 1996
---------- ------------
<S> <C> <C>
Net realized investment portfolio gain ................... $ 0 $ 30,918
Change in unrealized investment portfolio loss ........... -- (14,072)
Equity in losses ......................................... -- 201
Operating costs .......................................... 16 2,117
Interest expense ......................................... -- 321
Income tax expense (benefit) ............................. (5) 6,190
Minority interest ........................................ -- (1,455)
---- --------
Income (loss) from discontinued operations of Jupiter $(11) $ 6,562
==== ========
- ---------------------------------------------------------------------------------------
</TABLE>
INVESTMENTS AND VALUATION (1996 AND PRIOR) - Jupiter's wholly owned subsidiary,
Greater Washington Investments ("GWI"), was a small business development company
organized pursuant to the United States Small Business Investment Act of 1958.
GWI surrendered its special status during 1997. Prior to surrender of the
special status, GWI used specialized accounting policies required for investment
companies to determine the value of its portfolio of investments. Under these
policies, securities with readily available market quotations were valued at the
current market price; investments in non-publicly traded entities were valued
and recorded at estimated net realizable values as determined in good faith by
the Company's Board of Directors. Accordingly, at December 28, 1996, $6,140 of
Jupiter's investments were recorded at their estimated fair value based on
estimates by Johnston's Board of Directors after consideration of liquidation
plans. Losses related to these investments for the year ended December 28, 1996,
were $6,064.
For the year ended December 28, 1996, net realized investment portfolio
gains primarily arose from gains realized on the sale of the Company's
investment in EMC Corporation, Viasoft, Fuisz Technologies, Inc., and Zoll
Medical.
The following summarizes the aggregate carrying value of the portfolio
investments held for sale at January 2, 1999 and January 3, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
<S> <C> <C>
Debt securities ..... $1,550 $3,965
Equity securities ... 872 545
Land ................ 850 --
------ ------
$3,272 $4,510
====== ======
- --------------------------------------------------------------------------------
</TABLE>
Subsequent to the surrender of GWI's investment company status, the
Company classified its investments as available for sale and reported these
investments at estimated fair value as determined by collateral values for debt
instruments and amortized costs. The fair values of investments in equity
securities are not readily determinable and are carried at the lower of cost or
estimated net realizable value.
F-13
<PAGE> 16
3. T.J. BEALL COMPANY
On March 25, 1996, the Company acquired all of the outstanding common
stock of TJB, a broker in cotton by-products located in West Point, Georgia. The
TJB stock was acquired in exchange for 325,000 shares of nonvoting convertible
preferred stock ("Series 1996 Preferred Stock") of the Company with an estimated
value of $3,250. The Company incurred costs of approximately $115 related to the
acquisition. Dividends on the Series 1996 Preferred Stock were payable quarterly
at the rate of $.125 per share. The acquisition was accounted for under the
purchase method of accounting. Goodwill of $2,116 was recorded and was
originally assigned a useful life of 20 years. Each share of Series 1996
Preferred Stock was convertible into the Company's voting common stock, par
value $.10 per share (the "Common Stock"), on a one-for-one basis on a specified
time frame.
In September 1997, an agreement was reached culminating in the sale of
substantially all of the assets and current liabilities of TJB back to a member
of the Beall family. The sale of TJB resulted in a loss of $546, which is
recorded in other - net in the 1997 statement of operations.
4. RESTRUCTURING AND IMPAIRMENT CHARGES
The Company recorded the following restructuring and impairment
charges:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended
---------------------------------------------------------------------------------
January 2, 1999 January 3, 1998 December 28, 1996
-------------------------- ------------------------- ------------------------
Restructuring Impairment Restructuring Impairment Restructuring Impairment
------------- ---------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Langdale facility ............................ $168 $ 0 $389 $2,630 $ 0 $ 0
TJ Beall ..................................... -- -- -- 1,984 -- --
Tarboro facility ............................. -- -- -- 11 2,891 --
Other restructuring and impairment charges ... -- (75) 275 984 -- 200
---- ---- ---- ------ ------ ----
Total ................................... $168 $(75) $664 $5,609 $2,891 $200
==== ==== ==== ====== ====== ====
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LANGDALE FACILITY - In August 1997, the Company finalized its plans to cease
manufacturing operations at its Langdale Facility in an effort to further
consolidate certain manufacturing activities and concentrate on efficient and
profitable operations. The Langdale Facility contained both weaving operations
and yarn manufacturing operations. The yarn manufacturing operations were
eliminated and selected equipment and associated product offerings of the
weaving operations were relocated to other facilities. The remaining weaving
operations at the Langdale Facility were closed. The Langdale Facility was
retained for light manufacturing, warehouse, distribution, and potential future
manufacturing space of JI Alabama's Fiber Products Division. During 1997, the
Company recorded charges totaling $3,019 related to closure of the Langdale
Facility and the Outlet Store including write-downs on machinery and equipment
of $2,057, a write-down of $573 on the Langdale building and restructuring
charges of $389. During 1998, the Company recorded $168 in additional
restructuring charges related to closure of the Langdale Facility.
T.J. BEALL IMPAIRMENT - In recognition of the disappointing operating results
realized at TJB since its acquisition in March of 1996 and risks inherent in
future operations, the Company recorded restructuring charges of $1,984 in June
of 1997 for the write-off of goodwill related to the acquisition of TJB. (See
Note 3)
TARBORO FACILITY - In 1995, the Company decided to close the manufacturing
facility in Tarboro, North Carolina (the "Tarboro Facility"), which had been
operated by Jupiter's Wellington subsidiary in an effort to realign and
consolidate certain operations, concentrate capital resources on more profitable
operations, and better position itself to achieve its strategic corporate
objectives. All activities related to the closing
F-14
<PAGE> 17
of the Tarboro Facility were substantially completed in January 1997. In 1997
and 1996, the Company recorded restructuring and impairment charges totaling $11
and $4,743, respectively. Of the charges recorded in 1996, $1,852, representing
the minority interest (the portion of Wellington not owned by Johnston prior to
the Jupiter Acquisition), was recorded in the purchase accounting for the
Jupiter Acquisition with the remaining $2,891 recorded as an expense on the
consolidated statement of operations.
The plan for the closing of the Tarboro Facility called for termination
of 168 employees with various job descriptions at the facility. As of January 3,
1998, 168 employees had been terminated. Through January 3, 1998, approximately
$712 was charged to the reserves established for the closing. These costs
included $262 in severance costs. In December 1997, the Tarboro Facility was
sold resulting in net proceeds of $2,330. A gain of $405, net of taxes of $234,
was recorded on the sale.
OTHER RESTRUCTURING AND IMPAIRMENT CHARGES - In 1996, the Company recorded a
$200 write-down of the Jupiter building. In 1997, the Company recorded $275 in
restructuring charges related to the realignment of divisions. Also, in 1997,
the Company recorded impairment losses totaling $984, which includes a $552
write-down of the Company's investment in software for which the original
implementation attempt has been abandoned, an additional $253 write-down of the
Jupiter building, and a $179 write-down of the outlet store in West Point,
Georgia. In 1998, the Company recorded a favorable adjustment of $75 to the
impairment reserve for Jupiter's former office building in Rockville, Maryland,
which was sold in February 1998.
5. STEEL FABRICATION OPERATIONS
The accompanying consolidated balance sheets at January 2, 1999 and
January 3, 1998 include liabilities of $6,624 and $7,154, respectively, for the
remaining costs expected to be incurred in phasing out the Company's steel
fabrication operations. These costs are principally related to health insurance
and death benefits for former employees and are stated at the actuarially
determined discounted present value. These operations were discontinued in 1981.
In February 1994, the current operators of the facility filed a
complaint against previous owners and operators of the facility, including the
Company, claiming contamination by a former Johnston subsidiary which had
operated at the facility before its closing in 1981. During 1995, reserves of
$2,200 were established for potential additional legal costs and other costs to
be incurred in connection with the defense of this matter.
The case was settled in December 1996. The total judgment against the
Company was $904, including prejudgment interest. During 1996, approximately
$200 in legal fees were charged against the reserve and recognizing that the
actual liability would be less than originally estimated, the reserve was
reduced by $500. At December 28, 1996, the reserve balance was $596, net of
amounts due under the settlement, which were paid in January 1997. There was at
December 28, 1996, and continues to be an associated unasserted claim for
additional, as yet unspecified damages. The Company re-evaluated the contingency
during 1998 and 1997 and determined that a reserve balance of $150 was adequate
at January 2, 1999 and January 3, 1998. Accordingly, approximately $446 was
released from the reserve account and is included in other-net in the statement
of operations for 1997. Although management believes, based upon the currently
available facts, that the reserve established for this matter is reasonable, the
Company's future potential liability for response costs pursuant to the
unasserted claim cannot presently be determined with certainty.
F-15
<PAGE> 18
6. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
<S> <C> <C>
Inventories - FIFO cost flow assumption
Finished goods ............................ $33,136 $30,367
Work-in-process ........................... 8,793 10,581
Raw materials ............................. 12,317 9,093
Direct materials and supplies ............. 4,687 4,514
------- -------
58,933 54,555
Less LIFO reserve ......................... 854 3,472
------- -------
Inventories - LIFO cost flow assumption $58,079 $51,083
======= =======
- --------------------------------------------------------------------------------
</TABLE>
7. ASSETS HELD FOR SALE
Assets held for sale consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
<S> <C> <C>
Jupiter investments (see Note 2) $3,272 $4,510
Other real estate .............. 516 500
------ ------
Assets held for sale ...... $3,788 $5,010
====== ======
- --------------------------------------------------------------------------------
</TABLE>
8. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
<S> <C> <C>
Land ........................................ $ 935 $ 961
Buildings and improvements .................. 36,105 35,573
Machinery and equipment ..................... 202,680 200,089
-------- --------
239,720 236,623
Less accumulated depreciation ............... 140,234 122,840
-------- --------
Property, plant, and equipment - net ... $ 99,486 $113,783
======== ========
- --------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE> 19
9. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
<S> <C> <C>
Salaries, wages, and employee benefits ......... $5,805 $ 5,445
Taxes, other than income taxes ................. 1,008 995
Interest expense ............................... 791 742
Current portion of estimated phase-out costs
of steel fabrication operations ........... 1,150 1,150
Other .......................................... 1,105 1,932
------ -------
Accrued expenses .......................... $9,859 $10,264
====== =======
- -------------------------------------------------------------------------------
</TABLE>
10. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
<S> <C> <C>
Revolving credit facility ...................................... $ 66,954 $ 73,995
Term loans ..................................................... 59,402 63,040
Purchase money mortgage loan ................................... 913 1,000
Industrial Development Note (net of unamortized discount) ...... 439 491
Mortgage ....................................................... -- 550
Capital lease obligations ...................................... 344 --
-------- --------
Total ..................................................... 128,052 139,076
Less current maturities and revolving line of credit .. 76,943 77,388
-------- --------
Long-term debt less current maturities .................... $ 51,109 $ 61,688
======== ========
- -------------------------------------------------------------------------------------------
</TABLE>
In compliance with the Emerging Issues Task Force Issue No. 95-22,
"Balance Sheet Classification of Borrowings Outstanding under Revolving Credit
Agreements that include both a Subjective Acceleration Clause and a Lock-Box
Arrangement" the revolving credit loan in the amount of $66,954 and $73,995 was
classified as short-term debt in the financial statements at January 2, 1999 and
January 3, 1998, respectively.
The estimated fair value of long-term debt (including current
maturities) approximates book value at January 2, 1999 and January 3, 1998.
Interest rates that are currently available to the Company for issuance of debt
with similar terms, credit characteristics and remaining maturities were used to
estimate fair value of long-term debt.
REFINANCING - On March 28, 1996, the Company signed an agreement with a
syndicate of lenders (the "Bank Credit Agreement") to provide financing required
to consummate the merger with Jupiter, to refinance certain existing
indebtedness, to pay related fees and expenses, and to finance the ongoing
working capital requirements of the Company. This agreement also provided for
the consolidation of the Company's outstanding debt.
The Bank Credit Agreement is comprised of two term loan facilities and
a revolving credit facility. Term loan facility A ("Term Loan A") is a $40,000
facility with an amended maturity date of July 2000. At January 2, 1999 and
January 3, 1998, the blended interest rate on these borrowings was
F-17
<PAGE> 20
9.06% and 8.40%, respectively, which is based on a Base Rate, the prime
commercial lending rate, plus 1.75% and 1.25%, respectively, and is subject to
change at the Company's option to a rate based on the London Interbank Offered
Rate ("LIBOR") plus 3.50% and 2.50%, respectively. As of January 2, 1999 and
January 3, 1998 the borrowings outstanding under Term Loan A were $26,987 and
$29,398, respectively.
Term loan facility B ("Term Loan B") is a $40,000 facility with an
amended maturity date of July 2000. At January 2, 1999 and January 3, 1998, the
blended interest rate on these borrowings was 9.56% and 8.90%, respectively, and
is based on a Base Rate, as defined, plus 2.25% and 1.75%, respectively, and is
subject to change at the Company's option to a rate based on LIBOR, plus 4.00%
and 3.00%, respectively. As of January 2, 1999 and January 3, 1998, the
borrowings outstanding under Term Loan B were $32,415 and $33,642, respectively.
Proceeds from certain asset sales are generally applied against the
term loans in inverse order of the loan maturities.
The revolving credit facility (the "Revolving Credit Facility")
provides up to $80,000 in borrowing, with an amended maturity date of July 2000.
Principal amounts outstanding are due and payable at final maturity. The
interest rate on these borrowings ranges from 8.40% to 9.25% and from 8.25% to
9.75% at January 2, 1999 and January 3, 1998, respectively, which is based on a
Base Rate, as defined, plus 1.50% and 1.25%, respectively, and is subject to
change at the Company's option to a rate based on LIBOR plus 3.00% and 2.50%,
respectively. Commitment fees are payable quarterly at 1/2 of 1%, based on the
unused portion of the facility.
Substantially all assets are pledged as collateral for the borrowings
under the Bank Credit Agreement. The amended Bank Credit Agreement requires the
Company to maintain certain financial ratios and specified levels of tangible
net worth and places a limit on the Company's level of capital expenditures and
type of mergers or acquisitions. The amended Bank Credit Agreement permits the
Company to pay dividends on its common stock provided it is in compliance with
various covenants and provisions contained therein, which among other things,
limits dividends and restricts investments to the lesser of: (a) 20% of total
assets of the Company, on a fully consolidated basis, as of the date of
determination thereof; (b) $5,000 plus 50% of cumulative consolidated net income
for the period commencing on January 1, 1997, minus 100% of cumulative
consolidated net loss for the consolidated entities for such period, as
calculated on a cumulative basis as of the end of each fiscal quarter of the
consolidated entities with reference to the financial statements for such
quarter. Accordingly, at January 2, 1999, the Company is not permitted to
declare and pay dividends.
AMENDMENTS TO THE BANK CREDIT AGREEMENT - The Bank Credit Agreement has been
amended several times to modify certain covenants, the latest amendment of which
was executed on April 1, 1999 (the "1999 Amendment") to modify certain
covenants. Although the Company was in compliance with existing covenants at
January 2, 1999, it has anticipated the need for amendments to cover periods
beyond January 2, 1999, without which, technical noncompliance with certain
financial covenants was considered to be imminent. In addition to covenant
modifications, the 1999 amendment also includes an increase in interest rates of
1/2% to take effect April 4, 1999.
The increase in interest rates is geared to maintenance of certain
ratios. If the Company's financial position, and the related ratios improve, the
amended agreement provides for a decrease in interest rates for Term Loan A and
the Revolving Credit Facility.
In addition to limited covenant modifications, which were effective
through January 2, 1999, and increased interest rates, a March 30, 1998
amendment (the "March 1998 Amendment") required the Company to adopt new cash
management procedures during the second quarter of 1998, which included
establishment of a lock-box with instruction for customers to remit payments
directly to the lock-box. As a result of this anticipated lock-box arrangement,
Generally Accepted Accounting Principles require the Company to classify the
Revolving Credit Facility, which has a maturity date of July 1, 2000, as a
current liability. Pursuant to the March 1998 Amendment, the Company agreed that
a collateral monitoring
F-18
<PAGE> 21
arrangement should be put into effect whereby the Company is required, through
an independent collateral monitoring agent, to report certain financial data on
a periodic basis to the lenders.
The Company, which paid amendment fees as a result of the March 1998
Amendment, will be required to pay amendment fees as a result of the 1999
Amendment in an amount equal to 1/4 of 1% of Term Loan A, Term Loan B, and the
Revolving Credit Facility.
OTHER DEBT INSTRUMENTS - The following discussion relates to debt outstanding
that was not refinanced by borrowings under the Bank Credit Agreement.
PURCHASE MONEY MORTGAGE LOAN - In connection with the purchase of an office
building during 1994, Johnston obtained a Purchase Money Mortgage Loan of
$1,325. Borrowings under this loan accrue interest at the lesser of: (1) 30-day
adjustable, 60-day adjustable, or 90-day adjustable LIBOR rate plus 2.70% or (2)
the prime rate. The interest rate on this loan was 7.75% at January 2, 1999 and
8.42% at January 3, 1998. Beginning on March 31, 1994, Johnston was obligated to
make 58 consecutive quarterly payments of principal of $22 plus interest, with
all remaining principal and interest due on December 31, 2007. The Company's
office building in Columbus, Georgia is pledged as collateral under this loan
agreement.
INDUSTRIAL DEVELOPMENT NOTE - In October 1995, the Company entered into an
Industrial Development Note with the County of Chambers, Alabama, the proceeds
of which were used to purchase a building. The original principal amount is
repayable in equal annual installments of $100 beginning December 31, 1996
through December 31, 2004. At January 2, 1999 and January 3, 1998, the
unamortized discount on the note was $161 and $209 (discount based on an imputed
interest rate of 9.75%), respectively.
MORTGAGE - In connection with the purchase of the Jupiter office building, the
Company obtained a mortgage of $550. The interest rate on this loan was 7%. The
remaining principal was repaid upon sale of the building in February 1998.
DEBT MATURITIES - Aggregate scheduled repayments, resulting from the amended
credit agreement, of long-term debt excluding the revolving credit line which is
classified as short-term debt as of January 2, 1999 are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
YEAR ENDING AMOUNT
- ----------- --------
<S> <C>
1999............................................................................................. $ 9,989
2000............................................................................................. 50,042
2001............................................................................................. 164
2002............................................................................................. 162
2003............................................................................................. 170
Thereafter....................................................................................... 571
--------
$ 61,098
========
- -----------------------------------------------------------------------------------------------------------
</TABLE>
11. FINANCIAL INSTRUMENTS
The Company utilizes interest rate swaps to reduce the impact of
changes in interest rates on its floating rate debt. The Company does not
utilize financial instruments for trading or other speculative purposes. The
counterparties to these contractual arrangements are major financial
institutions with which the Company also has other financial relationships. The
Company is exposed to credit loss in the event of nonperformance by these
counterparties. However, the Company does not anticipate
F-19
<PAGE> 22
nonperformance by the other parties, and no material loss would be expected from
nonperformance by any one of such counterparties.
The swap agreements are contracts to exchange floating rate for fixed
interest payments periodically over the lives of the agreements without the
exchange of the underlying notional amounts. The notional amounts of interest
rate agreements are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The differential paid or
received on interest rate agreements is recognized as an adjustment to interest
expense.
The Company has entered into swap transactions pursuant to which it has
exchanged its floating rate interest obligations on $38,000 notional principal
amount for a fixed rate payment obligation of 6.705% per annum for the
three-year period beginning June 1996. The fixing of the interest rates for
these periods minimizes, in part, the Company's exposure to the uncertainty of
floating interest rates during this three-year period.
The fair values of interest rate instruments are the estimated amounts
that the Company would receive or pay to terminate the agreements at the
reporting date, taking into account current interest rates and the current
creditworthiness of the counterparties. At January 2, 1999 and January 3, 1998,
the Company estimates it would have paid $304 and $500, respectively, to
terminate the agreement.
It is estimated that the carrying value of the Company's other
financial instruments (see Note 10) approximated fair value at January 2, 1999
and January 3, 1998.
12. OTHER LIABILITIES
Other liabilities consisted of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
<S> <C> <C>
Long-term portion of estimated phase-out costs
of steel fabrication operations......................................... $ 5,474 $ 6,004
Additional pension liability (see Note 18)................................... 324 954
Other........................................................................ 3,080 2,064
------- -------
$ 8,878 $ 9,022
======= =======
- -----------------------------------------------------------------------------------------------------
</TABLE>
13. STOCK OPTION PLANS
EMPLOYEES' STOCK INCENTIVE PLAN - Johnston has a stock incentive plan for key
employees and non-employee directors under which Johnston may grant incentive
stock options, nonqualified stock options, stock appreciation rights, and
restricted stock. Stock appreciation rights may only be granted in conjunction
with nonqualified stock options. The maximum number of common shares which could
be issued upon exercise of options or through awards granted under this plan is
2,358,450. Incentive stock options granted under the plan are exercisable, on a
cumulative basis, at a rate of 25% each year, beginning one year after the date
of grant. Nonqualified stock options are exercisable beginning six months after
the date of grant.
F-20
<PAGE> 23
A summary of employee stock option activity is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
WEIGHTED
INCENTIVE RANGE OF AVERAGE
NONQUALIFIED STOCK EXERCISE EXERCISE
OPTIONS OPTIONS TOTAL PRICES PRICES
----------- ----------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Options outstanding at December 30, 1995............ 393,750 -- 393,750 $ 5.55 -10.17 $ 6.82
Options granted................................ 383,816 410,514 794,330 1.98 - 8.25 4.40
Options exercised.............................. -- (46,000) (46,000) 1.98 1.98
Options cancelled.............................. (63,750) -- (63,750) 10.17 10.17
----------- ----------- ----------- -------------- ---------
Options outstanding at December 28, 1996............ 713,816 364,514 1,078,330 1.98 - 8.25 4.84
Total options granted in 1997.................. 20,000 -- 20,000 7.50 7.50
Total options exercised in 1997................ -- (34,800) (34,800) 1.98 1.98
Total options cancelled in 1997................ (16,000) -- (16,000) 7.50 - 8.25 8.11
----------- ----------- ----------- -------------- ---------
Options outstanding at January 3, 1998.............. 717,816 329,714 1,047,530 1.98 - 8.25 5.15
Total options granted in 1998.................. 415,937 51,063 467,000 4.38 - 5.88 5.47
Total options cancelled in 1998................ (183,000) -- (183,000) 7.50 - 8.25 7.09
----------- ----------- ----------- -------------- ---------
Options outstanding at January 2, 1999.............. 950,753 380,777 1,331,530 7.50 - 8.25 5.00
----------- ----------- ----------- -------------- ---------
Total options exercisable at January 2, 1999... 661,816 329,714 991,530 1.98 - 8.25 4.68
=========== =========== ===========
Options available for grant at January 2, 1999...... 1,026,920
===========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options
outstanding at January 2, 1999:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACT EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------- ----- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 1.98 - 2.50 306,376 0.6 $ 2.15 306,376 $ 2.15
3.62 123,154 0.6 3.62 123,154 3.62
$ 4.375 - 8.25 902,000 7.5 6.15 562,000 6.15
----------- ----- ---------- ----------- ----------
Total 1,331,530 5.2 $ 5.00 991,530 $ 4.68
=========== ====== ========== =========== ==========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
At January 3, 1998 and December 28, 1996, 1,027,530 and 932,330 of the
outstanding options were exercisable, respectively. During 1996, the expiration
date was modified on 180,000 options previously granted to an officer of the
Company.
The estimated weighted average fair value of options granted during
1998, 1997 and 1996 was $2.91, $4.03 and $3.89 per share, respectively. The
Company applies APB No. 25 and related interpretations in accounting for its
stock incentive plan. Accordingly, no compensation cost has been recognized for
its stock incentive plan. Had compensation cost for the Company's stock
incentive plan been determined based on the fair value at the grant dates for
awards under this plan consistent with the method of SFAS No. 123, additional
compensation expense of approximately $1,254, $71 and $734 for the years ended
January 2, 1999, January 3, 1998 and December 28, 1996, respectively, would have
been recorded.
F-21
<PAGE> 24
Accordingly, the Company's net income (loss) and income (loss) per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) available to common shareholders:
As reported $ (608) $ (8,578) $ 2,747
Pro forma (1,403) (8,623) 2,282
Net income (loss) per common and common equivalent share:
As reported $ (0.06) $ (0.81) $ 0.26
Pro forma (0.13) (0.81) 0.22
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Options which are modified during the year are considered to be
re-issued options. Such modified options result in pro forma compensation
expense to the extent that the fair value of the option exceeds its intrinsic
value at the date of modification.
The fair value of options granted under the Company's stock incentive
plan was estimated on the date of grant or modification using the Black-Scholes
option pricing model with the following weighted average assumptions used:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Expected volatility......................................... 36.76% 33.65% 34.45%
Risk free interest rate..................................... 5.60% 6.24% 6.68%
Dividend yield.............................................. 0.00% 0.00% 0.40%
Expected lives in years..................................... 8.00 8.00 5.77
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
14. EMPLOYEE STOCK PURCHASE PLAN
On October 15, 1990, the Company adopted an employee stock purchase
plan under which eligible key employees and directors of the Company may
purchase shares of the Company's common stock through loans guaranteed by the
Company. Under the plan, as of January 2, 1999, 26 key employees and directors
currently have outstanding loans of $5,585 related to the purchase of 614,932
shares of the Company's common stock. To purchase stock, participants generally
execute five-year full recourse demand promissory notes with a third-party
lender. The notes generally bear interest at prime plus .25%.
The third-party lender has the right to recover the loan proceeds from
the participant's personal assets, including the purchased stock in the event of
default. The participants may not sell their shares until they have made
arrangements to pay off their loans with the proceeds from the sale of the stock
or by settling the loans with other personal assets. In the event of default,
the Company's exposure is limited to the amount by which a participant's loan
balance exceeds the market value of the underlying stock less recoveries by the
Company from the participant. As of January 2, 1999, the market value of the
purchased stock was $1,922. The Company has no obligation to repurchase the
stock from the participant.
At January 2, 1999 and January 3, 1998, the Company had guaranteed plan
participants' borrowings totaling approximately $5,585 and $5,830, respectively.
During 1996 the Company
F-22
<PAGE> 25
made a payment of approximately $198 to a third party lender in connection with
a default on a participant's loan.
The Company has the discretion to reimburse the participants for their
payments of interest under the plan in excess of dividends paid on the Company's
common stock in any given year. The Company treats these payments as
compensation expense and income to the participants. Compensation expense
relating to interest payments under the plan was $435, $385, and $276 for the
years ended January 2, 1999, January 3, 1998 and December 28, 1996,
respectively.
15. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED
-------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
--------------- --------------- ----------------
<S> <C> <C> <C>
Federal:
Current.............................................. $ (370) $ (3,128) $ 5,799
Deferred............................................. (861) 295 (4,514)
--------------- --------------- ----------------
(1,231) (2,833) 1,285
State:
Current.............................................. 106 (292) 173
Deferred............................................. (66) 101 90
--------------- --------------- ----------------
40 (191) 263
--------------- --------------- ----------------
Provision (benefit) for income taxes...................... $ (1,191) $ (3,024) $ 1,548
=============== =============== ================
Components of provision (benefits) for income taxes:
Continuing operations................................ $ (1,191) $ (3,079) $ (1,815)
Discontinued operations.............................. -- 55 3,686
Extraordinary loss................................... -- -- (323)
--------------- --------------- ----------------
Total............................................ $ (1,191) $ (3,024) $ 1,548
=============== =============== ================
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The significant components of deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
JANUARY 2, JANUARY 3,
1999 1998
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Estimated phase-out costs of steel fabrication operations............... $ 2,427 $ 2,621
Unrealized depreciation - investments................................... 47 358
Alternative minimum tax credits......................................... 4,986 4,264
State tax net operating loss carryforwards.............................. 1,239 945
Other - net............................................................. 135 770
--------------- ---------------
8,834 8,958
Deferred tax liabilities:
Property, plant, and equipment.......................................... (13,032) (14,053)
Inventories............................................................. (3,444) (3,768)
--------------- ---------------
(16,476) (17,821)
Valuation allowance..................................................... (1,239) (945)
--------------- ---------------
Net deferred tax liability.......................................... $ (8,881) $ (9,808)
=============== ===============
</TABLE>
F-23
<PAGE> 26
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
--------------- ---------------
<S> <C> <C>
Components of net deferred tax assets (liability):
Net current deferred tax assets (liability)............................. $ 1,249 $ 406
Net long-term deferred tax liability.................................... (10,130) (10,214)
--------------- ---------------
$ (8,881) $ (9,808)
=============== ===============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Net deferred tax liabilities are classified in the consolidated
financial statements as current or long-term depending upon the classification
of the temporary difference to which they relate. Management believes it is more
likely than not that future taxable income will be sufficient to realize fully
the benefits of deferred tax assets.
The reconciliation of the Company's effective income tax rate to the
federal statutory rate of 34% follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED
------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Federal income taxes at statutory rate.................... $ (612) $ (3,917) $ 960
State income taxes, net of federal tax benefit............ 26 (126) 173
Amortization of goodwill.................................. 219 906 186
Other - net............................................... 95 113 229
Tax rate differential related to
net operating loss carryback......................... (919) -- --
--------------- --------------- ---------------
$ (1,191) $ (3,024) $ 1,548
=============== =============== ===============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
At January 2, 1999 and January 3, 1998, the Company has non-expiring
alternative minimum tax credit carryforwards of approximately $4,986 and 4,264,
respectively, which have been used as a basis for recording tax assets and are
included in the long-term deferred taxes payable account. At January 2, 1999 and
January 3,1998, the Company also has state net operating loss carryforwards of
$30,969 and $23,613, respectively, based on its June 30 tax year. The state net
operating loss carryforwards from the Company's various states of operation
expire from 2003 to 2018. The deferred tax asset arising from these state net
operating loss carryforwards of $1,239 and $945, respectively are not considered
fully realizable and are offset by a valuation allowance.
F-24
<PAGE> 27
16. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - Rent expense under operating leases covering production
equipment and office facilities was approximately $1,218 for the year ended
January 2, 1999, $1,158 for the year ended January 3, 1998, and $1,228 for the
year ended December 28, 1996.
At January 2, 1999, the Company is committed to pay the following
minimum rental payments on non-cancelable operating leases:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDING AMOUNT
- ----------- ----------------
<S> <C>
1999............................................................................................. $ 1,438
2000............................................................................................. 1,136
2001............................................................................................. 944
2002............................................................................................. 856
2003............................................................................................. 737
Thereafter....................................................................................... 2,406
----------------
$ 7,517
================
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
OTHER COMMITMENTS - The Company has employment contracts with certain of its
employees extending through 2001 aggregating approximately $1,505.
As of January 2, 1999, the Company has purchase commitments with
several vendors to buy inventory totaling approximately $39,500.
The Company purchases cotton through approximately ten established
merchants with whom it has long standing relationships. The majority of the
Company's purchases are executed using "on-call" contracts. These on-call
arrangements are used to insure that an adequate supply of cotton is available
for the Company's requirements. Under on-call contracts, the Company agrees to
purchase specific quantities for delivery on specific dates, with pricing to be
determined at a later time. Prices are set according to prevailing prices, as
reported by the New York Cotton Exchange, at the time of the Company's election
to fix specific contracts.
Cotton on-call with a fixed price at January 2, 1999 was valued at $7.4
million, and is scheduled for delivery early in 1999. At January 2, 1999, the
Company had unpriced contracts for deliveries between April 1, 1999 and July 1,
2000. Based on the prevailing price at January 2, 1999, the value of these
commitments are approximately $14 million for deliveries between April and
December of 1999 and approximately $9 million for deliveries between January and
July of 2000. As commodity price aberrations are generally short-term in nature,
and have not historically had a significant long-term impact on operating
performance, financial instruments are not used to hedge commodity price risk.
On September 28, 1998, the Company entered into a leasing program,
under which, the Company is obligated to enter into operating leases for
manufacturing and other equipment for which original cost is expected to
approximate $7,500.
The Company also has capital commitments with terms extending over one
year as of January 2, 1999 with several vendors for the purchase of machinery
and equipment aggregating approximately $810.
GENERAL - The Company is periodically involved in legal proceedings arising out
of the ordinary conduct of its business. Management does not expect that the
resolution of these proceedings will have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
17. SEGMENT AND RELATED INFORMATION
Effective December 15, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information. " The
Company's principal operations include manufacturing and marketing of finished
and unfinished (greige) fabrics plus processing and marketing of textile waste
fibers and fabrics. The Company's operations are organized around manufacturing
processes and its reportable business segments include the Greige Fabrics
Division, the Finished Fabrics Division and the Fiber Products Division. All
remaining operations have been aggregated as "All Other". Segments are evaluated
on the basis of income (loss) on continuing operations before income taxes.
Intersegment transactions are generally recorded at cost.
F-25
<PAGE> 28
Financial and related information for business segments is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Greige Finished Fiber All Reconciling
Year Fabrics Fabrics Products Other Eliminations Consolidated
- --------------------------------------- --------- --------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
AS OF AND FOR THE YEAR ENDED JANUARY 2, 1999
Trade revenues $ 137,443 $ 100,954 $ 34,390 $ 10,937 $ -- $ 283,724
Intersegment revenues 7,221 4,362 1,040 -- (12,623) --
Income (loss) before income taxes 14,296 (3,096) 2,169 (15,168) -- (1,799)
Interest income (19) (5) -- (679) -- (703)
Interest expense 31 75 -- 13,314 -- 13,420
Income tax expense (benefit) 5,404 (1,057) 842 (6,380) -- (1,191)
Equity in income of investees -- -- -- 326 -- 326
Depreciation and amortization 11,391 6,274 1,051 1,179 -- 19,895
Other significant non-cash items:
Restructuring and impairment charges -- 132 36 (75) -- 93
Total assets 105,957 73,525 19,714 339,976 (319,633) 219,539
Expenditures for segment assets 3,946 2,603 1,729 858 -- 9,136
Investment in equity method investee -- -- -- 372 -- 372
AS OF AND FOR THE YEAR ENDED JANUARY 3, 1998
Trade revenues $ 161,939 $ 109,986 $ 52,397 $ 8,215 $ -- $ 332,537
Intersegment revenues 5,348 4,608 3,212 -- (13,168) --
Income (loss) before income taxes 19,859 (7,174) (3,919) (20,467) -- (11,701)
Interest income (10) (18) -- (767) -- (795)
Interest expense 47 69 -- 13,890 -- 14,006
Income tax expense (benefit) 7,428 (2,517) (760) (7,230) -- (3,079)
Depreciation and amortization 11,373 7,594 1,213 1,190 -- 21,370
Other significant non-cash items:
Restructuring and impairment charges -- 3,383 2,492 398 -- 6,273
Total assets 110,981 78,829 16,238 411,257 (382,517) 234,788
Expenditures for segment assets 6,001 3,438 645 279 -- 10,363
AS OF AND FOR THE YEAR ENDED DECEMBER 28, 1996
Trade revenues $ 153,511 $ 106,294 $ 53,495 $ 8,583 $ -- $ 321,883
Intersegment revenues 1,273 3,483 605 -- (5,361) --
Income (loss) before income taxes 13,437 (6,245) 3,320 (16,082) -- (5,570)
Interest income -- (116) (22) (134) -- (272)
Interest expense 612 300 253 10,150 -- 11,315
Income tax expense (benefit) 4,932 (2,429) 1,306 (5,624) -- (1,815)
Depreciation and amortization 9,566 8,761 897 491 -- 19,715
Other significant non-cash items:
Restructuring and impairment charges -- 4,657 86 (1,652) -- 3,091
Extraordinary item (less applicable tax
benefit of $323) loss on early
extinguishment of debt -- 422 105 -- -- 527
Segment assets 105,823 117,044 36,981 328,308 (318,892) 269,264
Expenditures for segment assets 17,069 1,716 2,595 785 (1,638) 20,527
</TABLE>
The Company sells its products to approximately 3,500 customers with
net sales to the largest customer accounting for 5%, 6%, and 5% of total sales
for the years ended January 2, 1999, January 3, 1998 and December 28, 1997,
respectively. The Company sells its products throughout the United States as
well as internationally. The largest portion of domestic sales are for customers
located in the eastern half of the United States, and though generally no more
than 7% of its annual sales are derived from direct international sales, there
is no significant concentration of direct sales into any particular country.
18. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLANS - Johnston has two noncontributory qualified
defined benefits pension plans covering substantially all hourly and salaried
employees. The plan covering salaried employees provides benefit payments based
on years of service and the employees' final average ten years earnings. The
plan covering hourly employees generally provides benefits of stated amounts for
each year of service. Johnston's current policy is to fund retirement plans in
an amount that falls between the minimum contribution required by ERISA and the
maximum tax deductible contribution. Plan assets
F-26
<PAGE> 29
consist primarily of government and agency obligations, corporate bonds, common
stocks, mutual funds, cash equivalents, and unallocated insurance contracts.
Effective July 1, 1995, Johnston adopted a noncontributory,
nonqualified defined benefit plan covering the five senior executives of
Johnston ("SRP") designed to provide supplemental retirement benefits. The
actuarially determined liability for the SRP is immaterial to the consolidated
financial statements taken as a whole.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" supercedes the disclosure requirements in SFAS No. 87,
"Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The Company adopted SFAS No. 132
during the year ended January 2, 1999.
The provisions of SFAS No. 87 require recognition in the consolidated
balance sheet of an additional minimum liability and related intangible asset
for pension plans with accumulated benefits in excess of plan assets. At January
2, 1999 and January 3, 1998, an additional liability of $324 and $954,
respectively, is recorded in the consolidated balance sheets. At December 28,
1996, the liability exceeded the unrecognized prior service cost resulting in a
minimum pension liability, net of taxes, of $478 recorded as a reduction of the
Company's equity.
Net periodic pension cost for the hourly and salaried defined benefit
pension plans included the following components:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED
------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Service cost.............................................. $ 1,671 $ 1,664 $ 1,195
Interest cost............................................. 2,507 2,444 2,218
Expected return on plan assets............................ (2,757) (2,212) (1,815)
--------------- --------------- ---------------
Amortization costs:
Transition (asset)/obligation........................ 298 298 298
Prior service costs.................................. 255 255 124
Actuarial (gain)/loss................................ -- -- 299
--------------- --------------- ---------------
Net amortization................................. 553 553 721
Net periodic pension cost................................. $ 1,974 $ 2,449 $ 2,319
=============== =============== ===============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of the projected benefit obligation
for the hourly and salaried defined benefit pension plans:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED
------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Projected benefit obligation at beginning of year......... $ 36,779 $ 30,302 $ 29,839
Service cost.............................................. 1,671 1,664 1,195
Interest cost............................................. 2,507 2,444 2,218
Actuarial (gain) loss..................................... 1,960 4,344 (1,161)
Benefits paid............................................. (2,762) (1,975) (1,789)
--------------- --------------- ---------------
Projected benefit obligation at end of year............... $ 40,155 $ 36,779 $ 30,302
=============== =============== ===============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
F-27
<PAGE> 30
The following is a reconciliation of plan assets for the hourly and
salaried defined benefit pension plans:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED
------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Fair value of plan assets at beginning of year............ $ 34,076 26,044 21,062
Actual return on plan assets.............................. 4,939 4,249 2,696
Employer contributions.................................... 1,637 5,758 4,075
Benefits paid............................................. (2,762) (1,975) (1,789)
--------------- --------------- ---------------
Fair value of plan assets at end of year.................. $ 37,890 $ 34,076 $ 26,044
=============== =============== ===============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of funded status for the hourly and
salaried defined benefit pension plans:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED
------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Accumulated benefit obligation (ABO)
Vested............................................... $ 31,858 $ 34,286 $ 28,445
Nonvested............................................ 5,772 291 159
--------------- --------------- ---------------
Total accumulated benefit obligation...................... 37,630 34,577 28,604
Projected benefit obligation (PBO)........................ 40,155 36,779 30,302
Market value of plan assets............................... 37,890 34,076 26,044
--------------- --------------- ---------------
Unfunded projected benefit obligation..................... 2,265 2,703 4,258
Unrecognized net transition obligation.................... (1,042) (1,340) (1,638)
Unrecognized prior service costs.......................... (1,402) (1,657) (404)
Unrecognized net gain (loss).............................. (2,942) (2,563) (2,452)
Additional liability...................................... 1,651 1,882 2,796
--------------- --------------- ---------------
Accrued (prepaid) pension cost recognized in the
consolidated balance sheet........................... $ (1,470) $ (975) $ 2,560
=============== =============== ===============
Adjustments to Reflect Minimum Liability
Additional liability...................................... $ 1,651 $ 1,882 $ 2,796
Intangible asset.......................................... 1,651 1,882 2,042
--------------- --------------- ---------------
Charge to equity..................................... $ -- $ -- $ 754
=============== =============== ===============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
F-28
<PAGE> 31
The following are assumptions regarding determination of pension costs:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED
----------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average discount rate for obligations............ 6.80% 7.25% 8.00%
Long-term rate of investment return....................... 8.00% 8.00% 8.00%
Salary increase rate*..................................... 7.50% - 4.00% 7.50% - 4.00% 7.50% - 4.00%
* Higher initial rate, gradually decreasing to lower ultimate rate.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
DEFINED CONTRIBUTION PLANS - The Company has a defined contribution savings plan
that covers substantially all full-time employees who qualify as to age and
length of service. The Company expanded this plan in 1997 and may make
discretionary contributions to the plan. The Company made no contributions for
the years ended January 2, 1999 and January 3, 1998, and contributions of $274
for the year ended December 28, 1996.
19. TRUST AGREEMENTS
During 1991, 1993, and 1997, the Company entered into "rabbi" trust
agreements with officers to transfer assets to trusts in lieu of paying
compensation, bonuses, and consulting fees. These trust assets, which are
classified as trading assets (as defined by SFAS No. 115) and included in "Other
Assets" on the consolidated balance sheets, are recorded at the fair market
value of the underlying assets and short-term investments. The compensation to
the officers is determined in accordance with the employment agreements. Upon
termination of the officer's employment with the Company, the trust assets will
be distributed to the officers. If the Company becomes insolvent at any time
before the assets of the trust are distributed to the officers, the trust assets
may be used to satisfy the claims of the Company's creditors. As of January 2,
1999 and January 3, 1998, trust assets and corresponding liabilities, which are
included in "Other Liabilities" on the consolidated balance sheets, each totaled
$2,054 and $814, respectively.
20. RELATED PARTY TRANSACTIONS
In May 1994, Redlaw Industries, Inc. ("Redlaw"), a stockholder, became
the commissioned sales agent in Canada for sales of textile products
manufactured by the Company. The Company paid Redlaw approximately $282, $295
and $172, related to Redlaw's commissioned sales business for the years ended
January 2, 1999, January 3, 1998 and December 28, 1996, respectively. At January
3, 1998, consigned inventory placed with Redlaw in Canada was $245. As of
November 30, 1998, the Company terminated its commissioned sales agency
arrangement with Redlaw.
F-29
<PAGE> 32
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING SCHEDULES
(in thousands)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
---------- ---------- ------------
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance at beginning of period $ 2,176 $ 1,379 $ 1,772
Additions charged to operations 507 1,764 245
Deductions (1) (1,241) (967) (638)
------- ------- -------
Balance at end of year $ 1,442 $ 2,176 $ 1,379
======= ======= =======
</TABLE>
================================================================================
(1) Amounts written off, net of recoveries.
<PAGE> 1
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 13(b)
QUARTERLY INFORMATION (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
================================================================================
The following summarizes the unaudited quarterly results of operations for the
years ended January 2, 1999 (Fiscal Year 1998) and January 3, 1998 (Fiscal Year
1997).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
FISCAL YEAR 1998 APRIL 4 JULY 4 OCT. 3 JAN. 2
- ---------------- -------- -------- ------- --------
<S> <C> <C> <C> <C>
Net sales $ 79,839 $ 69,063 $69,572 $65,250
Gross margin 9,622 8,554 9,255 11,015
Income (loss) from continuing operations (935) (568) 140 755
-------- -------- ------- -------
Net income (loss) available to common stockholders $ (935) $ (568) $ 140 $ 755
======== ======== ======= =======
Net earnings (loss) per common share-basic (1) $ (.09) $ (.05) $ .01 $ .07
======== ======== ======= =======
Weighted average shares outstanding 10,710 10,404 10,726 10,722
======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
FISCAL YEAR 1997 MARCH 29 JUNE 28 SEPT. 28 JAN. 3
- ---------------- -------- -------- -------- -------
<S> <C> <C> <C> <C>
Net sales $ 86,778 $ 87,724 $78,488 $79,547
Gross margin 11,749 9,068 5,451 10,931
Income (loss) from continuing operations 1,550 (6,635) (3,289) (248)
Income (loss) from discontinued operations (26) 152 -- --
-------- -------- ------- -------
Net income (loss) $ 1,524 $ (6,483) $(3,289) $ (248)
Dividends on preferred stock (41) (41) -- --
-------- -------- ------- -------
Net income (loss) available to common stockholders $ 1,483 $ (6,522) $(3,289) $ (248)
======== ======== ======= =======
Earnings per common share-basic (1):
Income (loss) from continuing operations $ .12 $ (.64) $ (.31) $ (.02)
Discontinued operations .02 .01 .-- .--
-------- -------- ------- -------
Net earnings (loss) per common share $ .14 $ (.63) $ (.31) $ (.02)
======== ======== ======= =======
Weighted average shares outstanding 10,710 10,404 10,726 10,727
======== ======== ======= =======
</TABLE>
(1) Earnings per common share-diluted are not presented as they are either
antidilutive in periods for which a loss is presented or immaterial.
Note: See Notes 2, 3 and 4 of the consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results
of Operations for discussion of certain transactions impacting fiscal
1998 and 1997.
<PAGE> 1
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 21
LIST OF SUBSIDIARIES OF JOHNSTON INDUSTRIES, INC.
================================================================================
1. Johnston Industries Alabama, Inc.
State of Incorporation: Alabama
2. Johnston Industries Composite Reinforcements, Inc.
State of Incorporation: Alabama
3. Greater Washington Investments, Inc.
State of Incorporation: Delaware
- --------------------------------------------------------------------------------
<PAGE> 1
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 23(a)
INDEPENDENT AUDITORS' CONSENTS
================================================================================
The Board of Directors
Johnston Industries, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-86414, 33-38359, 33-44669, 33-50100, 33-73268) on Form S-8 of Johnston
Industries, Inc. of our report dated March 5, 1999, relating to the consolidated
balance sheet of Johnston Industries, Inc. and subsidiaries as of January 2,
1999 and the related consolidated statements of operations, comprehensive
operations, stockholders equity, and cash flows for the year ended January 2,
1999, which report appears in the January 2, 1999, annual report on Form 10-K of
Johnston Industries, Inc.
/s/KPMG LLP
- -------------------------------
KPMG LLP
Atlanta, Georgia
March 29, 1999
================================================================================
<PAGE> 1
JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 23(b)
INDEPENDENT AUDITORS' CONSENT
================================================================================
The Board of Directors
Johnston Industries, Inc.:
We consent to the incorporation by reference in Registration Statements No.
33-86414, No. 33-44669, No. 33-50100, and No. 33-73268 of Johnston Industries,
Inc. (the "Company") on Form S-8 of our report dated March 6, 1998 (March 30,
1998 as to Note 10 and April 1, 1999 as to Note 17) appearing in the Annual
Report on Form 10-K of the Company for the year ended January 2, 1999.
/s/ DELOITTE & TOUCHE LLP
- -------------------------------
DELOITTE & TOUCHE LLP
Atlanta, Georgia
April 1, 1999
================================================================================
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JOHNSTON
INDUSTRIES, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS AS OF JANUARY 2, 1999 AND
FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 1,231,000
<SECURITIES> 0
<RECEIVABLES> 36,210,000
<ALLOWANCES> 1,442,000
<INVENTORY> 58,079,000
<CURRENT-ASSETS> 102,226,000
<PP&E> 239,720,000
<DEPRECIATION> 140,234,000
<TOTAL-ASSETS> 219,539,000
<CURRENT-LIABILITIES> 101,148,000
<BONDS> 128,052,000
0
0
<COMMON> 1,246,000
<OTHER-SE> 47,028,000
<TOTAL-LIABILITY-AND-EQUITY> 219,539,000
<SALES> 283,724,000
<TOTAL-REVENUES> 283,724,000
<CGS> 245,278,000
<TOTAL-COSTS> 245,278,000
<OTHER-EXPENSES> 27,443,000
<LOSS-PROVISION> 507,000
<INTEREST-EXPENSE> 13,420,000
<INCOME-PRETAX> (1,799,000)
<INCOME-TAX> (1,191,000)
<INCOME-CONTINUING> (608,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (608,000)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
