UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period for __________________ to
________________
Commission file number 0-21340
MARTIN COLOR-FI, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 57-0879569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
306 Main Street
Edgefield, South Carolina 29824
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (803) 637-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
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 Rule
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 to Part III of this Form 10-K or any amendments to
this Form 10-K. ( )
Aggregate market value of the voting stock held by nonaffiliates of the
registrant, computed on the basis of $4.375 per share (the closing price of such
stock on February 28, 1998 on The Nasdaq Stock Market): $12,537,718 For purposes
of the foregoing calculation only, all directors and executive officers of the
registrant have been deemed affiliates.
The number of shares of the registrant's Common Stock outstanding as of
March 30, 1998 was 6,730,284.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders (the "Proxy Statement")(to be filed with the Securities and
Exchange Commission on or before April 30, 1998) are incorporated by reference
in Part III hereof.
Exhibit Index on sequentially numbered page 44
<PAGE>
MARTIN COLOR-FI, INC.
Cross Reference Sheet
Page No.
Part I -
Item 1. Business.....................................................3
Item 2. Properties...................................................7
Item 3. Legal Proceedings............................................8
Item 4. Submission of Matters to a Vote of Security Holders..........8
Part II -
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters..........................................9
Item 6. Selected Financial Data......................................9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................11
Item 8. Financial Statements and Supplementary Data.................16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................43
Part III -
Item 10. Directors and Executive Officers of the Registrant..........43
Item 11. Executive Compensation............................. .......43
Item 12. Security Ownership of Certain Beneficial
Owners and Management.......................................43
Item 13. Certain Relationships and Related Transactions..............43
Part IV -
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................... ............................44
Signatures....................................................................49
Exhibit Index.................................................................44
2
<PAGE>
PART I
This Annual Report on Form 10-K contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements should be read with the cautionary statements and important factors
included in this Form 10-K. (See Item 7. - Management's Discussion and Analysis
of Financial Condition and Results of Operations, Safe Harbor for
Forward-Looking Statements.) Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified, without
limitation, by the use of the word "anticipates," "estimates," "expects,"
"intends," "plans," "predicts," "projects," and similar expressions. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, date
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished.
Item 1. Business
General
Martin Color-Fi, Inc. is a South Carolina corporation incorporated in 1988.
The principal business of Martin Color-Fi, Inc. (which, together with its
subsidiaries, is herein referred to as the "Company") is the production of
polyester fiber and pellets from recycled plastic materials (primarily
polyethylene terephthalate, or "PET"), such as beverage bottles, polyester fiber
waste, film waste and off-class packaging resin. The Company uses these waste
materials to produce polyester fibers of varying sizes (or "deniers") and
pelletized plastics for a wide range of markets. Examples of end use markets for
the Company's fiber products include automotive fabrics, carpet, apparel, home
furnishings, industrial materials and construction reinforcement materials. A
significant portion of the Company's pellet production is used internally for
manufacturing fiber, and the Company sells the balance into the plastics
industry.
Products and Markets
The following table presents the combined net sales (in thousands) and
percentage of net sales by business of the Company for the periods indicated.
For purposes of this data, intercompany transactions have been eliminated.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------- ---------------------
Net % of Net % of Net % of
Sales Total Sales Total Sales Total
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Fibers and Recycling Division ............... $ 62,648 52.0% $ 69,873 61.1% $ 82,101 70.2%
Carpet Division ............................. 40,348 33.5% 30,871 27.0% 22,262 19.0%
Yarn Division ............................... 11,582 9.6% 8,959 7.8% 8,412 7.2%
Pigments and Additives ...................... 5,924 4.9% 4,713 4.1% 4,195 3.6%
-------- ----- -------- ----- -------- -----
$120,502 100% $114,416 100% $116,970 100%
======== ===== ======== ===== ======== =====
</TABLE>
Fibers and Recycling Division
During 1997, the principal products of the Company were fibers which are
marketed to a broad spectrum
3
<PAGE>
of fiber related markets. The Company focuses its marketing efforts on the
development of market niches where its ability to manufacture products to
customer specifications regarding color, cut length, denier, texture, finish and
lot size are its key competitive advantages. The Company currently has
production capacity of approximately 148 million pounds of fiber annually and
approximately 125 million pounds of pellets annually. In the fourth quarter of
1995, the Company refocused on the core business of this division, the
production and sale of fibers, and began de-emphasizing the external plastics
sales and trading and contract processing areas of this division.
Fibers
The Company produces polyester fibers in deniers from 1.5 to 1000 in
various cut lengths for use in numerous end markets, including automotive
fabrics, floor coverings, home furnishings, industrial, construction
reinforcement and apparel. The Company also produces a small quantity of nylon
and polypropylene fiber. The following chart sets forth the approximate
percentages of the Company's total shipments of fiber products in pounds with
respect to its primary markets for the past eight quarters and illustrates the
Company's market diversification and ability to shift production as necessary to
quickly respond to changing market conditions and demands.
<TABLE>
<CAPTION>
Percentage of Pounds of Fiber Shipped
--------------------------------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
End Markets 1997 1997 1997 1997 1996 1996 1996 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Automotive Fabrics 21% 23% 22% 25% 20% 20% 19% 25%
Floor Coverings 10% 10% 5% 6% 7% 8% 7% 5%
Home Furnishings & Domestic:
Fiberfill (slick) 17% 12% 18% 12% 19% 15% 14% 16%
Fiberfill (high loft) 19% 20% 14% 15% 17% 17% 18% 17%
Other 4% 8% 10% 12% 11% 12% 9% 8%
Industrial 24% 21% 24% 22% 22% 20% 28% 23%
Construction Reinforcement 2% 4% 6% 5% 3% 5% 4% 4%
Apparel 3% 2% 1% 3% 1% 3% 1% 2%
----- ----- ----- ----- ----- ----- ----- -----
100% 100% 100% 100% 100% 100% 100% 100%
</TABLE>
Plastics
The Company produces pellets for internal use and for sale to manufacturers
of plastic products such as non-food containers, strapping, oil containers,
plastic trays, laundry powder scoops, paint roller trays and for sale to other
fiber producers. A significant portion of its pellet production is utilized
internally as a raw material for the Company's fiber manufacturing. During the
latter part of 1995, the Company exited the market for sale of pellets to
customers because of unfavorable market conditions including higher cost and
reduced availability of raw materials, and the resulting lower gross profit
margins. The Company is continuing to evaluate this area of the business and has
not reached a final decision about whether, or the extent to which, it will
continue to operate in this area of the business. The revenue and net income in
1997 related to this area was not material. Operations do, however, continue on
a very limited basis.
Trading and Contract Processing
The Company engages in the trading of synthetic fibers and plastics. The
Company utilizes the
4
<PAGE>
contacts developed through marketing its products and purchasing its raw
materials as an introduction to sources and customers for products it does not
produce. These products are distributed through the Company's sales channels.
During the latter part of 1995, the Company significantly reduced this area of
the business due to lower profit margins and now is limited to the sale of waste
by-products from its fiber operation. The Company is continuing to evaluate this
area of the business and has not reached a final decision about whether, or the
extent to which, it will continue to operate in this area of the business. The
revenue and net income in 1997 related to this area was not material.
The Company also provides processing services on a contract basis to
selected customers to maximize utilization of its production capacity. The
Company receives raw materials from these customers on a consignment basis and,
for a fee, converts them to finished products which meet the customer's
specifications. During 1995, the Company exited these markets due to the
expiration of all existing contracts. The Company is continuing to evaluate this
area of the business and has not reached a final decision about whether, or the
extent to which, it will continue to operate in this area of the business.
Operations do, however, continue on a very limited basis. The revenue and net
income in 1997 related to this area was not material.
Carpet Division
Through its wholly owned subsidiary, Buchanan Industries, Inc., the Company
manufactures specialty carpets under the Forum Contract Carpet name for
hospitality, restaurant, health care and corporate markets. Under the Condor
name the Company manufactures carpets for the manufactured housing, recreational
vehicle and automotive industries. The Division produces approximately 10
million square yards of carpet annually.
Yarn Division
Through its wholly owned subsidiary, Palmetto Spinning Corporation, the
Company processes spun yarns, continuous filament twisted and heat set yarns,
and space dyed yarns for use in a variety of applications such as residential,
commercial and automotive carpets, craft, rug, bath rug and industrial markets.
The Yarn Division produces both single and plied heat set yarns. The Company
processes nylon, polyester, polypropylene, olefin acrylic and rayon fibers, both
natural and predyed, in a wide variety of carpet deniers. The Division has the
production capacity to produce approximately 13 million pounds of spun and
filament yarns annually.
Pigments and Additives Division
Through its wholly owned subsidiary, Custom Colorants, Inc., the Company
produces pigments and additives used in the manufacture of fiber and plastic
pellets. The Company markets these products to fiber extrusion companies for
various applications and also utilizes these products internally for its
production of fiber and pellets.
Marketing, Customer Dependency and Seasonality
The Company markets its products through a direct sales force which is
assigned to the areas of either textile fibers, plastics, construction
reinforcement, carpet sales, pigments and additives or yarn. The Company also
utilizes sales agents in international markets for fiber and pigment sales and
certain domestic markets for carpet sales. The sales representative in each area
of sales is then assigned a geographic area of responsibility. The Company has a
diverse customer base and does not experience seasonality in sales volume.
5
<PAGE>
Raw Materials
Fibers and Recycling Division
The Company uses plastic waste products such as post-consumer polyester
beverage bottles, post-industrial fiber waste, film producer waste and off-class
packaging resins as its primary raw materials to manufacture textile staple
fiber and plastic pellets. In recent years, the cost of plastic waste products
used by the Company has been less than the cost of using petrochemical
feedstocks. The Company's raw material costs compare favorably to comparable raw
material costs of producers that use virgin petrochemical feedstocks, but there
can be no assurance that the cost of the Company's raw materials will remain
lower than the cost of petrochemical feedstocks in the future. Beginning in the
latter part of 1995 and through the first quarter of 1998, the Company has
focused on post- industrial fiber waste, film producer waste and off-class
packaging resins as its primary raw material sources and has reduced its
reliance on post-consumer PET beverage bottles as a raw material source because
industrial fiber waste, film producer waste and off-class packaging resins are
currently less expensive than post-consumer PET beverage bottles. The Company
changes the mix of raw materials used based on a number of factors which include
cost, availability and end-products to be produced.
The Company generally maintains raw material inventories of at least 35 to
52 million pounds, which is adequate for approximately three to four months of
production. Beginning in the latter part of 1995 and through the first quarter
of 1998, the supply of raw material returned to normal levels from the lower
levels experienced during a significant portion of 1995.
Other Divisions
The Company's Yarn Division primarily uses polyester staple fiber and nylon
fiber supplied internally from the Fibers and Recycling Division. Other fibers
used are supplied by third party suppliers. The Carpet Division primarily uses
yarn from the Yarn Division and from third party suppliers. The Pigments and
Additives Division purchases raw material from third party suppliers also. The
Company has not experienced and does not foresee a problem with availability of
raw material from third party suppliers.
Competition
The Company faces competition both from other recyclers of waste plastics
as well as major producers of synthetic fibers from petrochemical feedstocks.
Four virgin domestic polyester fiber producers manufacture approximately ninety
(90%) percent of the industry output. Many of the Company's competitors have
greater financial resources than the Company.
The demand for synthetic fibers and related products tends to vary with
general economic conditions in the United States and the level of foreign
imports. An increase in foreign imports can result in generally lower sales
prices and more intense competition among major fiber producers, particularly
for commodity products. For example, the Company's average sales price per pound
for all of its fiber products ranged from a low of $0.6301 in 1991 to a high of
$0.826 in 1995.
The Company competes on the basis of price, quality, and its ability to
produce custom orders of solution-dyed fibers on relatively short notice.
Although the Company has increased its sales of higher value solution-dyed
fibers, it also has increased its overall production capacity. As a result, the
Company continues to sell a majority of its production as commodity products,
such as dry or slippery fiberfill, which are subject to greater price
competition.
The yarn, carpet and pigment and additive markets have historically
displayed price and volume cyclicality. The markets are subject to changes in
consumer preferences and spending and retail sales patterns, which are driven by
general economic conditions. Consequently, a downturn in the domestic economy
could adversely affect the
6
<PAGE>
Company's business.
Research and Development
The Company does not have significant expenditures in research and
development activities.
Foreign Activities
The Company exports to international markets, primarily Europe, South
America and Canada, through its Fibers and Recycling Division and Pigments and
Additives Division. See Note 11 to the Consolidated Financial Statements for
additional information relating to the Company's foreign activities.
Trademarks and Patents
Although the Company has several trademarks and patents, none is considered
by the Company to be material to the Company's business at the present time.
Employees
As of December 31, 1997, the Company employed approximately 1012 persons,
of whom approximately 217 employees were in management, sales and administration
and the balance of whom were involved in the manufacturing process. None of the
Company's employees are covered by a collective bargaining agreement. The
Company believes it has a good relationship with its employees.
Environmental Compliance
Except to the extent described below, the Company believes its facilities
are in compliance in all material respects with all laws and regulations
pertaining to environmental protection. The nature of the Company's present
operations is such that it does not expect expenditures for environmental
compliance to be material.
In December, 1993, the Company's wholly owned subsidiary, Star Fibers
Corp., acquired a plant site in Edgefield, South Carolina (the "Star Facility"),
under which certain groundwater contamination exists. All evidence indicates
that the contamination resulted from contamination on an adjacent property. In
connection with the acquisition of the Star Facility, the Company was
indemnified from liability with respect to the pre-existing contamination by a
party believed by the Company to be financially responsible, and believes that
it will have no material liability as a result of any contamination at the Star
Facility.
Item 2. Properties
The location and general description of the principal properties owned or
leased (the majority of which are leased on a month to month basis) by the
Company as of December 31, 1997 are set forth in the table below:
<TABLE>
<CAPTION>
Location Principal Function Square Footage Ownership
- -------- ------------------ -------------- ---------
<S> <C> <C> <C>
Edgefield, South Carolina Corporate/Sales 7,500 Leased
Edgefield, South Carolina Fiber Manufacturing, Recycling 200,000 Owned
Operations and Warehousing
Edgefield, South Carolina Warehousing 70,400 Leased
7
<PAGE>
Trenton, South Carolina Fiber Manufacturing, Recycling 407,350 Owned
Operations and Warehousing
Sumter, South Carolina Fiber Manufacturing, Recycling 405,000 Owned
Operations and Warehousing
Sumter, South Carolina Warehousing 248,700 Leased
Dalton, Georgia Pigments and Additives 35,000 Leased
Manufacturing and Warehousing
Pensacola, Florida Pigments and Additives 9,500 Leased
Manufacturing and Warehousing
Elkhart, Indiana Carpet Warehousing and
Distribution Center 32,000 Owned
Dalton, Georgia Carpet Manufacturing and
Warehousing 187,000 Owned
Dalton, Georgia Carpet Warehousing 103,000 Leased
Laurens, South Carolina Yarn Manufacturing and
Warehousing 123,670 Owned
</TABLE>
The Company considers the facilities suitable and adequate for its
operations.
- ----------------------------------
Item 3. Legal Proceedings
In March 1995, litigation was commenced by a shareholder of the Company
against the Company and James F. Martin, Chairman and Chief Executive Officer of
the Company, in the United States District Court for the District of South
Carolina, Greenville Division. In the litigation, the plaintiff alleged, among
other things, that the Company failed to prepare its financial statements in
accordance with generally accepted accounting principles and issued false and
misleading business and financial information to the investing public which
misstated the Company's financial condition, earnings and prospects, in
violation of the Federal securities laws and common law. The plaintiff sought to
have the action certified as a class action on behalf of non-insider
shareholders who purchased the common stock of the Company from April 21, 1993
through February 28, 1995. A definitive written settlement agreement was reached
with the class plaintiff under which the Company's settlement liability was
fixed at $2,000,000. By order dated March 12, 1997, the United States District
Court certified the class in the matter, appointed the class plaintiffs' counsel
as settlement administrator and gave preliminary approval to the settlement. The
settlement was funded by the Company on March 20, 1997. In exchange for a
written release, the Company's insurance carrier provided $850,000 of this
amount. Final settlement of the matter was approved by the Court on September
10, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
None.
8
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock is traded on The Nasdaq Stock Market (National
Market) under the symbol MRCF. The following table sets forth high and low bid
information for the Common Stock on The Nasdaq Stock Market for the fiscal
periods indicated. Such over-the counter market quotations reflect interdealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
No dividends have been declared nor does the Company anticipate declaring
any dividends in the near future. Certain covenants under the Company's loan
agreements restrict its ability to pay dividends. See Note 6 to the Company's
Consolidated Financial Statements.
As of March 30, 1998, the Company had approximately 1400 stockholders based
on the number of holders of record and an estimate of the number of individual
participants represented by security position listings.
1997
----------------------
High Low
----------------------
First Quarter 8 3/4 6 5/8
Second Quarter 8 1/4 7 1/8
Third Quarter 8 1/2 7 1/4
Fourth Quarter 8 5/8 4 1/2
For the Year 8 3/4 4 1/2
1996
----------------------
High Low
----------------------
First Quarter 5 1/4 3 1/4
Second Quarter 6 4 3/4
Third Quarter 6 3/8 4 5/8
Fourth Quarter 8 1/4 5 3/4
For the Year 8 1/4 3 1/4
Item 6. Selected Financial Data
The following table sets forth selected income statement, pro forma, and
balance sheet data of the Company. The selected income statement and balance
sheet data for each of the five years in the period ended
9
<PAGE>
December 31, 1997 are derived from the financial statements of the Company. The
audited financial statements for the three most recent years appear elsewhere
herein. The pro forma information is unaudited and reflects the effect of the
income tax provision that would have been made for year ended December 31, 1993
if the Company's income had been taxable to the Company rather than directly to
its shareholders during a portion of the year. The data presented below should
be read in conjunction with the audited financial statements, including the
related notes thereto, included elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- --------
(In thousands, except per share data)
Statements of Income Data:
<S> <C> <C> <C> <C> <C>
Net sales ........................................... $ 120,502 $ 114,416 $ 116,970 $ 102,493 $ 73,971
Cost of sales .................................... 100,590 91,453 95,265 89,229 63,051
--------- --------- --------- --------- --------
Gross profit ........................................ 19,912 22,963 21,705 13,264 10,920
Selling, general and administrative
expenses ....................................... 14,733 12,026 12,611 9,624 5,153
--------- --------- --------- --------- --------
Operating income .................................... 5,179 10,937 9,094 3,640 5,767
Interest expense, net ............................ (4,334) (4,335) (4,658) (3,366) (2,055)
Other income ..................................... 464 234 244 141 121
--------- --------- --------- --------- --------
Income before income taxes .......................... 1,309 6,836 4,680 415 3,833
Provision for income taxes .......................... 281 2,402 1,724 204 2,183
--------- --------- --------- --------- --------
Income before extraordinary item .................... 1,028 4,434 2,956 211 1,650
Extraordinary item: Extinguishment of debt
(less applicable income tax benefit of $68) ..... - - - (117) -
--------- --------- --------- --------- --------
Net income .......................................... $ 1,028 $ 4,434 $ 2,956 $ 94 $ 1,650
========= ========= ========= ========= ========
Income before extraordinary item
per share (5) .................................... $ 0.15 $ 0.67 $ 0.44 $ 0.03 $ 0.28
========= ========= ========= ========= ========
Net income per share (5) ............................ $ 0.15 $ 0.67 $ 0.44 $ 0.01 $ 0.28
========= ========= ========= ========= ========
Net income per share -
assuming dilution (5) ............................ $ 0.15 $ 0.65 $ 0.44 $ 0.01 $ 0.28
========= ========= ========= ========= ========
Pro forma net income data:
Net income before income taxes and
extraordinary item, as reported .................. $ 1,309 $ 6,836 $ 4,680 $ 415 $ 3,833
Pro forma income tax provision (1) .................. 281 2,402 1,724 204 1,403
--------- --------- --------- --------- --------
Pro forma income before
extraordinary item ............................... 1,028 4,434 2,956 211 2,430
Pro forma extraordinary item, net of
income tax benefit ............................... - - - (117) -
--------- --------- --------- --------- --------
Pro forma net income (1) ............................ $ 1,028 $ 4,434 $ 2,956 $ 94 $ 2,430
========= ========= ========= ========= ========
Pro forma income before extraordinary
item per share ................................... $ 0.15 $ 0.67 $ 0.44 $ 0.03 $ 0.41
========= ========= ========= ========= ========
Pro forma net income per share (1)(2)(5) ............ $ 0.15 $ 0.67 $ 0.44 $ 0.01 $ 0.41
========= ========= ========= ========= ========
Weighted average shares outstanding (4) ............. 6,705 6,660 6,657 6,590 $ 5,985
========= ========= ========= ========= ========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
(In thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital ............................... $ 38,424 $ 30,479 $ 27,969 $ 10,910 $ 11,126
Property, plant and equipment, net ............ 42,772 42,873 40,214 39,294 27,055
Total assets .................................. 115,847 102,616 94,966 93,678 71,491
Total short-term debt(3) ...................... 9,149 6,725 4,472 24,577 24,604
Total long-term debt(3) ....................... 51,065 44,429 45,168 30,315 16,624
Shareholders' equity .......................... 31,432 30,173 25,632 22,656 21,008
</TABLE>
- --------------------
(1) For the period from January 1, 1993 until April 21, 1993, the Company was
an S Corporation for federal and state income tax purposes and,
accordingly, was not subject to corporate income taxes. The pro forma
information has been computed as if the Company were subject to corporate
income taxes for all periods presented, based on the tax laws in effect
during the respective periods.
(2) Supplemental earnings per share for 1993, assuming the initial public
offering (which was effected April 21, 1993) was consummated on January 1,
1993, would be $0.41 per share.
(3) Includes notes payable to shareholders for period ending 1993.
(4) On March 2, 1993, the Company effected a 6.01083-for-1 stock split of its
outstanding common shares. Accordingly, the weighted average shares
outstanding have been restated to reflect the stock split.
(5) Per share amounts in prior years have been restated to conform with FASB
No. 128 "Earnings per Share".
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Safe Harbor for Forward-Looking Statements
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended. The Company cautions readers that forward looking
statements, including without limitation, those relating to the Company's future
business prospects, revenues, working capital, liquidity, capital needs,
interest costs, and income, are subject to certain risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward looking statements, due to several important factors herein identified,
among others, and other risks and factors identified from time to time in the
Company's reports filed with the Securities and Exchange Commission.
11
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Results of Operations
Net Sales. Net sales increased 5.3% to $120.5 million in the year ended
December 31, 1997, from $114.4 million in the year ended December 31, 1996. This
net sales increase is primarily related to an increase in net sales of the
Pigment, Yarn and Carpet Divisions, after intercompany eliminations, to $57.9
million in the year ended December 31, 1997, from $44.5 million in the year
ended December 31, 1996. The increase resulted primarily from an increased
volume of sales in the Carpet Division.
Net sales in the Fibers Division decreased by $7.2 million due to a
decrease in PET fiber sales. PET fiber sales decreased due to a decrease in the
average PET fiber sales price per pound to $0.675 in the year ended December 31,
1997, from $0.766 in the year ended December 31, 1996. The decrease was,
however, partially offset by an increase in shipments to 94.8 million pounds in
the year ended December 31, 1997, from 92.9 million pounds in the year ended
December 31, 1996.
Gross Profit. Gross profit decreased 13.3% to $19.9 million in the year
ended December 31, 1997, as compared to $23.0 million in the year ended December
31, 1996. As a percentage of net sales, gross profit decreased to 16.5% in 1997
compared to 20.1% in 1996. The decrease in the gross profit percentage relates
directly to the decreases in gross profit percentage in the Fibers and Carpet
Divisions offset by slight increases in the Pigment and Yarn Divisions. The
Carpet Division incurred a significant decrease in gross profit percentage due
to unfavorable manufacturing variances and the discounted sale of excess
inventory.
Selling, General and Administrative. Selling, general and administrative
expenses ("SG&A") were $14.7 million, or 12.2% of net sales in the year ended
December 31, 1997, as compared to $12.0 million, or 10.5% of net sales in the
year ended December 31, 1996. The increase in selling, general and
administrative expenses is due primarily to the increase in net sales discussed
above primarily related to the Carpet Division. The increase in SG&A expenses as
a percentage of net sales is due to the sales growth of the Carpet Division
which incurs higher selling, general and administrative expenses for its revenue
than the other divisions.
Interest Expense. Interest expense was $4.3 million for the years ended
December 31, 1997 and December 31, 1996. For the year ended December 31, 1997,
the increase in the average outstanding debt balance compared to the year ended
December 31, 1996 was offset by a decrease in the weighted average interest rate
and a higher interest capitalization.
Income Tax Provision. The income tax expense for the year ended December
31, 1997, was $281 thousand compared to $2.4 million for the year ended December
31, 1996. The change is directly due to the decrease in pretax income and a
decrease in the effective income tax rate.
Net Income and Net Income Per Share. Net income decreased to $1.0 million
or $0.15 per share for the year ended December 31, 1997, compared to $4.4
million or $0.67 per share for the year ended December 31, 1996. The decrease
related directly to decreases in gross profit and gross profit percentage and an
increase in selling, general and administrative expenses.
Financial Condition
Current assets increased to $66.3 million at December 31, 1997 from $53.3
million at December 31, 1996. The increase was primarily related to an increase
in accounts receivable by $3.2 million, and an increase in inventories by $9.8
million. The change in accounts receivable resulted directly from higher fourth
quarter sales
12
<PAGE>
in 1997 of $31.4 million versus $27.7 million in the fourth quarter of 1996. The
increase in inventories was primarily related to an increase in inventories at
the Carpet Division due directly to the growth in sales volume during the year
which required a larger inventory.
The decrease in other assets is due directly to an amount which was
reimbursed via an insurance contract for the stop loss portion related to the
Company's health insurance plan. The Company is self insured up to a certain
amount and has an insurance policy for amounts greater than a stated amount.
Current liabilities increased by $5.0 million primarily due to an increase
in the current portion of debt by $2.4 million and an increase in accounts
payable and accrued expenses by $2.6 million.
The increase in accounts payable and accrued expenses was primarily related
to the increase in inventories and the timing of purchases and cash
disbursements. The increase in debt relates directly to the growth in accounts
receivable and inventory discussed above.
Outlook
Demand for polyester fibers is expected to remain relatively stable for
1998. The large declines in worldwide selling prices of polyester fiber
throughout 1996 and 1997 are expected to stabilize for 1998. The strong demand
for the Company's carpet production that has been experienced over the last
three years is expected to decrease in 1998. The Company has based its plans for
1998 on these expectations. These matters are, however, beyond the Company's
control and could vary substantially from the Company's expectations.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Results of Operations
Net Sales. Net sales decreased 2.2% to $114.4 million in the year ended
December 31, 1996, from $117.0 million in the year ended December 31, 1995. Net
sales in the Fibers Division decreased to $69.9 million in 1996 from $82.1
million in 1995. Net sales from PET fiber before intercompany eliminations
decreased $3.9 million due primarily to a decrease in the average PET fiber
sales price per pound to $0.766 in 1996 from $0.826 in 1995 offset by an
increase in shipments to 92.9 million pounds in 1996 from 90.9 million in 1995.
Net sales from shipments of nylon fiber, pellets, trading materials, PET
plastics, and chemical polymer sales decreased to $1.6 million in 1996 from $8.7
million in 1995 which was directly related to a decrease in shipments for all of
the areas. The decrease in shipments is a result of management's decision to
temporarily exit these markets due to market conditions. Operations do, however,
continue in the Fibers Division on a very limited basis.
Net sales of the Pigment, Yarn and Carpet Divisions, after intercompany
eliminations, increased to $44.5 million in 1996 from $34.9 million in 1995. The
increase relates primarily to increased sales of the Carpet Division due to
volume growth.
Gross Profit. Gross profit increased 6.0% to $23.0 million in 1996 as
compared to $21.7 million in 1995. As a percentage of net sales, gross profit
increased to 20.1% in 1996 compared to 18.6% in 1995. The increase in the gross
profit percentage relates directly to the increases in gross profit percentage
in the Fibers, Pigment, and Yarn Divisions offset by a slight decrease in the
gross profit percentage in the Carpet Division.
Selling, General and Administrative. Selling, general and administrative
expenses ("SG&A") were $12.0 million, or 10.5% of net sales in 1996 compared to
$12.6 million, or 10.8% of net sales in 1995. The decrease
13
<PAGE>
is a result of an accrual of $1.2 million in 1995 which is the amount estimated
to be paid for the settlement of a lawsuit which was not present in 1996.
Excluding the settlement accrual in 1995, the SG&A expenses as a percent of net
sales would have been 9.8%. The increase as a percent of net sales excluding the
settlement accrual in 1995 was due to the fact that the Carpet Division is a
distribution company and has higher selling, general and administrative expenses
as a percent of its net sales than the rest of the Company and this division's
sales grew by $8.6 million in 1996 compared to 1995.
Interest Expense. Interest expense decreased to $4.3 million in 1996 from
$4.7 million in 1995, due primarily to a decrease in the weighted average
interest rate during the year ended December 31, 1996, compared to the year
ended December 31, 1995.
Income Tax Provision. Income tax expense for 1996 increased to $2.4 million
compared to $1.7 million for 1995. The increase is primarily due to the increase
in pretax income.
Net Income and Net Income Per Share. Net income increased to $4.4 million
or $0.67 per share in 1996 compared to a net income of $3.0 million or $0.44 per
share in 1995. The increase related directly to the increase in gross profit and
gross profit percentage and decreases in selling, general and administrative
expenses and interest expense.
Liquidity and Capital Resources
The Company used cash in operations of $4.3 million for the year ended
December 31, 1997, compared to cash generated from operations of $5.7 million
for the year ended December 31, 1996. The increase in cash used in operations
was primarily the result of increases in net operating assets and liabilities,
primarily an increase in inventories and accounts receivable, partially offset
by an increase in accounts payable and accrued expenses.
Net cash used in investing activities amounted to $4.9 million in the year
ended December 31, 1997, compared to $7.1 million in the year ended December 31,
1996. The Company decreased its investment in property, plant, and equipment
during the year ended December 31, 1997, by $2.6 million compared to the year
ended December 31, 1996.
Net cash provided by financing activities amounted to $9.2 million for the
year ended December 31, 1997, compared to $1.6 million for the year ended
December 31, 1996. The change occurred primarily due to the increase in net cash
used in operating activities discussed above.
The Company's loan agreements with financial institutions contain a number
of restrictive covenants. See Note 6 of Notes to Financial Statements. At
December 31, 1997, the Company was in violation of certain loan covenants under
a debt agreement with NationsBank. The Bank, in a letter dated March 4, 1998,
agreed to waive those violations.
In March of 1997, the Company entered into a $5 million capital expenditure
term loan to fund $2 million of 1996 capital expenditures, which were previously
funded under the revolving line of credit agreement, and $3 million of 1997
capital expenditures.
On March 4, 1998, the Company amended its revolving line of credit
agreement to increase its borrowings from $30 million, or an agreed upon
borrowing base to $32.5 million, or an agreed upon borrowing base until June 2,
1998.
The Company believes that the financial resources available to it under its
revolving line of credit and other internally generated funds will be sufficient
to adequately meet its foreseeable working capital and capital
14
<PAGE>
expenditures requirements. The internally generated funds will primarily be
generated from a reduction in inventories.
Year 2000
The Company has made an initial assessment of certain computer systems'
compatibility with the "Year 2000" issue and has determined that it will need to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the Year 2000 and beyond. The Company
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 issue will not pose significant operational
problems for its computer systems. The Company will utilize both internal and
external resources to reprogram, or replace, and test the software for the Year
2000 modifications. Management does not currently expect the total costs of the
Year 2000 conversion project to be material to the financial condition of the
Company taken as a whole. The costs of the project and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
anticipated. Specific factors that might cause material differences include, but
are not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes and similar
uncertainties.
15
<PAGE>
Item 8. Financial Statements and Supplementary Data
Martin Color-Fi, Inc.
Consolidated Financial Statements
List of Financial Statements
Report of Independent Auditors.............................................17
Audited Consolidated Financial Statements
Consolidated Balance Sheets............................................18
Consolidated Statements of Income......................................20
Consolidated Statements of Shareholders' Equity........................21
Consolidated Statements of Cash Flows..................................22
Notes to Consolidated Financial Statements.............................25
16
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Martin Color-Fi, Inc.
We have audited the accompanying consolidated balance sheets of Martin Color-Fi,
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Martin
Color-Fi, Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations, and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Greenville, South Carolina
February 13, 1998,
except for the last paragraph of Footnote 6,
as to which the date is March 4, 1998
17
<PAGE>
Martin Color-Fi, Inc.
Consolidated Balance Sheets
(In Thousands, except Share Related Data)
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- --------
Assets
Current assets:
<S> <C> <C>
Cash ...................................................... $ 259 $ 272
Accounts receivable, less allowance of $200
in 1997 and $150 in 1996 ................................ 15,789 12,622
Inventories (Note 4) ...................................... 48,430 38,678
Prepaid expenses .......................................... 1,179 881
Income tax receivable ..................................... 611 -
Other assets .............................................. - 856
-------- --------
Total current assets ........................................ 66,268 53,309
Property, plant and equipment, net (Note 5) ................. 42,772 42,873
Goodwill (net of accumulated amortization of $732
and $500 for 1997 and 1996, respectively) ................. 5,446 5,091
Other assets ................................................ 1,361 1,343
-------- --------
Total assets ................................................ $115,847 $102,616
======== ========
</TABLE>
18
<PAGE>
Martin Color-Fi, Inc.
Consolidated Balance Sheets (continued)
(In Thousands, except Share Related Data)
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- --------
Liabilities and shareholders' equity
Current liabilities:
<S> <C> <C>
Accounts payable and accrued expenses ......................... $ 18,695 $ 16,105
Current portion of debt (Note 6) .............................. 9,149 6,725
-------- --------
Total current liabilities ....................................... 27,844 22,830
Deferred income taxes (Note 9) .................................. 5,506 5,184
Long-term portion of debt (Note 6) .............................. 51,065 44,429
Shareholders' equity:
Common stock, no par value:
Authorized shares - 50,000,000 in 1997 and 1996
Issued and outstanding shares - 6,730,284 and
6,681,479 in 1997 and 1996, respectively .................. 832 832
Additional paid-in capital .................................... 20,092 19,861
Retained earnings ............................................. 10,508 9,480
-------- --------
Total shareholders' equity ...................................... 31,432 30,173
-------- --------
Total liabilities and shareholders' equity ...................... $115,847 $102,616
======== ========
</TABLE>
See accompanying notes.
19
<PAGE>
Martin Color-Fi, Inc.
Consolidated Statements of Income
(In Thousands, except Share Related Data)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ............................................... $ 120,502 $ 114,416 $ 116,970
Cost of sales ........................................... 100,590 91,453 95,265
----------- ----------- -----------
Gross profit ............................................ 19,912 22,963 21,705
Selling, general and administrative expenses ............ 14,733 12,026 12,611
----------- ----------- -----------
Operating income ........................................ 5,179 10,937 9,094
Interest expense ........................................ (4,334) (4,335) (4,658)
Other income ............................................ 464 234 244
----------- ----------- -----------
Income before income taxes .............................. 1,309 6,836 4,680
Provision for income taxes (Notes 2 and 9) .............. 281 2,402 1,724
----------- ----------- -----------
Net income .............................................. $ 1,028 $ 4,434 $ 2,956
=========== =========== ===========
Net income per share .................................... $ 0.15 $ 0.67 $ 0.44
=========== =========== ===========
Net income per share - assuming dilution ................ $ 0.15 $ 0.65 $ 0.44
=========== =========== ===========
Weighted average shares outstanding (Note 2) ............ 6,705,464 6,660,356 6,657,483
=========== =========== ===========
</TABLE>
See accompanying notes.
20
<PAGE>
Martin Color-Fi, Inc.
Consolidated Statements of Shareholders' Equity
(In Thousands, except Share Related Data)
<TABLE>
<CAPTION>
Notes
Additional Receivable
Common Stock Paid-In Retained from
Shares Amount Capital Earnings Shareholders Total
--------- --------- --------- --------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ................... 6,657,483 $ 832 $ 19,754 $ 2,090 ($20) $22,656
Net reduction in notes receivable from
shareholders ............................... - - - - 20 20
1995 net income .............................. - - - 2,956 - 2,956
--------- --------- --------- --------- ---- -------
Balance at December 31, 1995 ................... 6,657,483 832 19,754 5,046 0 25,632
Exercise of stock options .................... 23,996 - 107 - - 107
1996 net income .............................. - - - 4,434 - 4,434
--------- --------- --------- --------- ---- -------
Balance at December 31, 1996 ................... 6,681,479 832 19,861 9,480 0 30,173
Exercise of stock options .................... 48,805 - 231 - - 231
1997 net income .............................. - - - 1,028 - 1,028
--------- --------- --------- --------- ---- -------
Balance at December 31, 1997 ................... 6,730,284 $ 832 $ 20,092 $ 10,508 $ 0 $ 31,432
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
21
<PAGE>
Martin Color-Fi, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
-------- -------- --------
Operating activities
<S> <C> <C> <C>
Net income ............................................................. $ 1,028 $ 4,434 $ 2,956
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ...................................... 4,535 4,222 3,951
Provision for doubtful accounts .................................... 113 71 38
Deferred income taxes .............................................. 322 1,123 929
Loss on sale of equipment .......................................... 34 27 85
Changes in operating assets and liabilities:
Accounts receivable .............................................. (3,280) (2,290) 3,633
Income tax receivable ............................................ (611) 51 913
Inventories ...................................................... (9,752) (1,756) (4,489)
Other assets ..................................................... 976 (417) 461
Prepaid expenses ................................................. (298) (229) (178)
Accounts payable and accrued expenses ............................ 2,590 506 2,830
-------- -------- --------
Net cash (used in) provided by operating activities .................... (4,343) 5,742 11,129
Investing activities
Purchases of property, plant and equipment ............................. (4,031) (6,653) (4,809)
Purchase of assets from Dye Pigments and
Custom Colorants, Inc. and Custom Polymer
Additives and Colors, Inc. ........................................... (575) (575) (600)
Deposits on purchase of equipment ...................................... (239) (139) (678)
Net proceeds from sale of equipment .................................... 38 206 210
Other .................................................................. (66) 94 (281)
-------- -------- --------
Net cash used in investing activities .................................. (4,873) (7,067) (6,158)
</TABLE>
22
<PAGE>
Martin Color-Fi, Inc.
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
-------- -------- --------
Financing activities
<S> <C> <C> <C>
Borrowings under line of credit ........................................ $ 40,654 $ 40,407 $ 42,409
Payments on line of credit ............................................. (30,697) (37,734) (46,085)
Additional loan costs .................................................. (88) (36) (38)
Proceeds from issuance of long-term debt ............................... 5,133 3,000 3,000
Principal payments on long-term debt ................................... (6,030) (4,159) (4,576)
Proceeds from net shareholder debt ..................................... - - 20
Proceeds from issuance of common stock ................................. 231 107 -
-------- -------- --------
Net cash provided by (used in) financing activities .................... 9,203 1,585 (5,270)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ................... (13) 260 (299)
Cash at beginning of year .............................................. 272 12 311
-------- -------- --------
Cash at end of year .................................................... $ 259 $ 272 $ 12
======== ======== ========
Supplemental disclosures of cash flow
information
Cash paid during the year for interest (net of
amounts capitalized) ................................................. $ 4,284 $ 4,347 $ 4,697
Income taxes paid ...................................................... 607 1,203 874
</TABLE>
23
<PAGE>
Martin Color-Fi, Inc.
Consolidated Statements of Cash Flows (continued)
(In Thousands)
Supplemental Schedule of Noncash Investing and Financing Activities
In 1997, 1996, and 1995, the Company recorded additional goodwill, other assets,
and liabilities totaling approximately $575 in 1997 and 1996, and $600 in 1995
related to contingent consideration determined in those years for the
acquisition of the assets of Dye Pigments and Custom Colorants, Inc. and Custom
Polymer Additives and Colors, Inc. which occurred during 1993.
See accompanying notes.
24
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
December 31, 1997
1. Nature of Business
Martin Color-Fi, Inc. (the "Company") is a recycler of reclaimed plastics. The
Company uses these waste materials to produce polyester and other synthetic
fibers and pellets for a wide range of markets throughout various geographic
regions, including the automotive and furniture industries. In addition, through
its wholly owned subsidiaries, the Company manufactures synthetic yarn and
tufted carpet. The Company insures part of its accounts receivable, performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains an allowance for doubtful accounts at a level
which management believes is sufficient to cover probable credit losses.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
Inventories
Inventories are stated at the lower of cost, determined by the specific
identification method, or market using the aggregate method.
25
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements
(In Thousands Except Share Data)
2. Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. For financial reporting
purposes, depreciation is computed by the straight-line method over the
estimated useful lives of the assets. For income tax purposes, depreciation is
computed principally by an accelerated method using recovery periods allowed by
the Internal Revenue Code.
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
Intangible Assets
Costs in excess of identified net assets acquired in business combinations are
amortized by the straight-line method over 25 years. The carrying value of
goodwill is reviewed at each balance sheet date to determine if it may be
impaired. If this review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value of the goodwill is
reduced by the estimated shortfall of discounted cash flows.
Loan costs are amortized over the life of the related loan. Amortization of
these costs was approximately $89, $60, and $46 for the years ended December 31,
1997, 1996, and 1995, respectively.
Revenue Recognition
Sales are generally recorded when products are shipped to customers. Provision
for normal sales allowances are made at the time of sale and classified as sales
reductions.
Advertising Costs
The Company expenses all advertising costs as incurred in accordance with the
provisions of SOP 93-7 "Reporting on Advertising Costs". Advertising costs were
$474, $271, and $281 for 1997, 1996, and 1995, respectively.
26
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands Except Share Data)
2. Summary of Significant Accounting Policies (continued)
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
per Share". Statement 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the Statement 128 requirements.
Stock Options
The Company accounts for stock options under Accounting Principles Board Opinion
25, "Accounting for Stock Issued to Employees." (See Note 10.)
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
New Accounting Standards
The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting
Comprehensive Income," which is effective for financial statements for fiscal
years ending after December 31, 1997. This standard establishes standards for
the reporting and display of comprehensive income which is defined under SFAS
No. 130 as "the change in equity (net assets) during a period from transactions
and other events and circumstances from nonowner sources." The Company plans to
implement SFAS No. 130 during the first quarter of fiscal year 1998 and, based
on current circumstances, does not believe the effect of adoption will be
material.
The Financial Accounting Standards Board has also issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" which is
effective for years beginning after December 15, 1997. SFAS 131 establishes
standards for the way that business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company will
adopt the new requirements retroactively in 1998. Management anticipates that
the adoption of this statement may affect the disclosure of segment information.
27
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands Except Share Data)
3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------- ---------- ----------
Numerator:
<S> <C> <C> <C>
Numerator for earnings per share ..................................... $ 1,028 $ 4,434 $ 2,956
Effect of dilutive securities:
Subordinated 5% convertible note payable ........................... - 105 100
Subordinated 6% convertible note payable ........................... - - 7
---------- ---------- ----------
Numerator for earnings per share
assuming dilution - after assumed conversions ...................... $ 1,028 $ 4,539 $ 3,063
Denominator:
Denominator for earnings per share -
weighted-average shares ............................................ 6,705,464 6,660,356 6,657,483
Effect of dilutive securities:
Employee stock options ............................................. 29,014 18,465 -
Subordinated 5% convertible note payable ........................... - 286,364 286,364
Subordinated 6% convertible note payable ........................... - - 18,004
---------- ---------- ----------
Dilutive potential common shares ..................................... 29,014 304,829 304,368
Denominator for earnings per share
assuming dilution - adjusted weighted-average
shares and assumed conversions ................................... 6,734,478 6,965,185 6,961,851
========== ========== ==========
Earnings per share ................................................... $ 0.15 $ 0.67 $ 0.44
========== ========== ==========
Earnings per share - assuming dilution ............................... $ 0.15 $ 0.65 $ 0.44
========== ========== ==========
</TABLE>
28
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands Except Share Data)
3. Earnings Per Share (continued)
Debt of $2,100 at December 31, 1997, ($3,150 at December 31, 1996) convertible
into common stock at $11 per share was outstanding during 1997, but was not
included in the computation of earnings per share assuming dilution because
adding after-tax interest to the numerator resulted in an effect which was
antidilutive.
4. Inventories
Inventories consist of the following:
December 31,
1997 1996
-------- --------
Raw materials ................................. $28,868 $25,963
Finished goods ................................ 19,562 12,715
------- -------
$48,430 $38,678
======= =======
5. Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31,
1997 1996
-------- --------
Land and buildings ............................ $ 14,354 $ 13,794
Machinery and equipment ....................... 45,891 38,714
Furniture and fixtures ........................ 4,389 3,523
Machinery and equipment under construction .... 658 5,359
-------- --------
65,292 61,390
Accumulated depreciation ...................... (22,520) (18,517)
-------- --------
Net property, plant and equipment ............. $ 42,772 $ 42,873
======== ========
29
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands Except Share Data)
5. Property, Plant and Equipment (continued)
Depreciation expense of approximately $4,049, $3,761, and $3,594 was recorded
for the years ended December 31, 1997, 1996, and 1995, respectively.
Interest of approximately $338, $234, and $55 was capitalized on qualifying
assets for the years ended December 31, 1997, 1996, and 1995, respectively.
At December 31, 1997, the Company had commitments to spend approximately $199 to
purchase other machinery and equipment.
6. Debt
The Company's revolving line of credit agreement with a bank provides for
borrowings not to exceed the lesser of $30,000 or an agreed upon borrowing base.
The borrowing base is calculated based on accounts receivable and inventory
balances. The line of credit bears interest at the lower of prime or an adjusted
LIBOR rate based on the Company's "leverage ratio", as defined in the revolving
line of credit agreement, adjusted monthly. At December 31, 1997, the interest
rate was adjusted LIBOR plus 240 basis points, or 8.26%. This agreement was
amended effective September 30, 1997, which extended the maturity date to June
2, 1999. A single principal payment is due at maturity, with interest payable
monthly. At December 31, 1997, the balance outstanding was $29,900. The Company
anticipates making payments on the loan in 1998 based on a borrowing base
formula; therefore $3,000 of the amount outstanding at December 31, 1997, is
classified as a current liability. The unused line of credit available is $100
at December 31, 1997. At December 31, 1997, under the revolving line of credit
agreement, the Company has available letters of credit in the aggregate
principal amount up to $100. There were no amounts outstanding under letters of
credit at December 31, 1997.
The Company also has term loan agreements, amended effective September 30, 1997,
with a bank which provides for borrowings up to $41,310. The term loans bear
interest at the lower of prime plus 1/8% or an adjusted LIBOR rate based on the
Company's "leverage ratio", as defined in the term loan credit agreements,
adjusted monthly. At December 31, 1997, the interest rate was adjusted LIBOR
plus 265 basis points, or 8.51%. The terms of the loans include monthly
principal payments of approximately $401 plus interest. The loans also require a
principal payment each year equal to 25% of the previous years' net income if
the debt to tangible net worth is greater than 1.75 to 1. The loans mature on
June 2, 1999.
The agreements with the bank contain several restrictive covenants requiring,
among other matters, a minimum debt service ratio, a maximum ratio of
indebtedness to net worth, and restrictions on the payment of dividends.
The loans are collateralized by all Company assets.
30
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands Except Share Data)
6. Debt (continued)
The following is a summary of debt:
<TABLE>
<CAPTION>
December 31,
1997 1996
------- -------
<S> <C> <C>
Term loan with a bank .................................................................... $23,178 $27,868
Term loan with a bank .................................................................... 4,866 -
Revolving line of credit with a bank ..................................................... 29,900 19,943
Subordinated convertible note payable to the former owners of Palmetto Spinning
Corporation. The note provides for quarterly interest payments at 5% and
annual principal payments of $1,050 beginning on June 13, 1997, with the
note maturing on June 13, 1999 ......................................................... 2,100 3,150
Note payable to former shareholder in monthly installments of $3, which includes
principal plus interest at 8%, due
June 2003 .............................................................................. 170 193
------- -------
60,214 51,154
Less current portion ..................................................................... 9,149 6,725
------- -------
$51,065 $44,429
======= =======
</TABLE>
On March 4, 1998, the debt agreements with the bank discussed above were amended
effective September 30, 1997. The amendments provided for changes in the
borrowing base formula and increased the borrowings under the revolving line of
credit not to exceed $32,500 or an agreed upon borrowing base until June 2,
1998. At December 31, 1997, the Company was in violation of certain loan
covenants under the debt agreements. The bank, in a letter dated March 4, 1998,
agreed to waive these violations.
31
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands Except Share Data)
6. Debt (continued)
Maturities of debt after December 31, 1997, are as follows:
1998 $ 9,149
1999 50,948
2000 30
2001 33
2002 35
Thereafter 19
-------
$60,214
=======
7. Profit Sharing Plan
The Company's defined contribution profit-sharing plan covers all eligible
employees of the Company. The plan provides for voluntary contributions at the
election of the employee. The Company's contribution is one-half or seventy-five
percent of the employees' contribution up to a maximum matching contribution of
two and one-half percent or three and three-fourths percent of the employee's
salary. The Company's matching contribution percentage is determined based on
the investment vehicle selected by the employee. Additionally, the Company's
Board of Directors can authorize a discretionary contribution to the plan. This
discretionary amount was $25, $25, and $75 for the years ended December 31,
1997, 1996, and 1995, respectively. For the years ended December 31, 1997, 1996,
and 1995, the Company made total contributions (including the discretionary
amount) to the plan of $290, $295, and $350, respectively.
8. Leases
On February 1, 1995, the Company entered into a lease agreement for a new
Corporate Office facility from an entity controlled by the Chairman and Chief
Executive Officer of the Company. The term of the lease is for 12 years and
requires monthly payments of approximately $4. Rent expense for the Corporate
Office in 1997, 1996, and 1995 was $50, $50, and $46, respectively.
The majority of the Company's remaining leases for its facilities and equipment
are with unrelated parties under monthly operating leases. The Company has the
option to purchase one of its warehouse facilities for $2,100 upon giving notice
within 60 days of the end of the lease term. Total rent expense for all
operating leases was $1,997, $1,508, and $1,558 for the years ended December 31,
1997, 1996, and 1995, respectively.
32
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands Except Share Data)
8. Leases (continued)
Future minimum rental payments under noncancelable operating leases as of
December 31, 1997, are as follows:
1998 $ 979
1999 659
2000 544
2001 332
2002 95
Thereafter 255
------
$2,864
======
33
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands Except Share Data)
9. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
------ ------
Deferred tax liabilities:
<S> <C> <C>
Tax over book depreciation ....................................................... $7,201 $6,984
Other ............................................................................ 675 531
------ ------
Total deferred tax liabilities ..................................................... 7,876 7,515
Deferred tax assets:
Tax inventory value over book .................................................... 186 218
Allowance for doubtful accounts and accruals ..................................... 207 532
Alternative minimum tax credits .................................................. 937 941
Net operating loss carryforwards ................................................. 925 640
Job tax credits .................................................................. 115 -
------ ------
Total deferred tax assets .......................................................... $2,370 $2,331
------ ------
Net deferred tax liabilities over tax assets ....................................... $5,506 $5,184
====== ======
</TABLE>
At December 31, 1997, the Company has federal net operating loss carryforwards
of $2,064 and state net operating loss carryforwards of $4,224 which expire from
2001 to 2011.
34
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands Except Share Data)
9. Income Taxes (continued)
The Company's effective income tax rate differs from the U.S. statutory rate as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Tax expense at U.S.
statutory rate ....................... $ 445 34 $ 2,324 34 $ 1,591 34
State income taxes,
net of Federal benefit ............... 25 2 78 1 91 2
Change in effective state
income tax rate,
including net operating
losses and credits ................... (189) (15) - - - -
Other .................................. - - - - 42 1
------- ---- ------- --- ------- ----
$ 281 21 $ 2,402 35 $ 1,724 37
======= ==== ======= === ======= ====
</TABLE>
The following information reflects the components of the provision for income
taxes in 1997, 1996, and 1995:
Year Ended December 31,
1997 1996 1995
----- ------ ------
Income tax provision:
Current:
Federal ................ $ (47) $1,201 $ 753
State .................. 6 78 42
Deferred ................. 322 1,123 929
----- ------ ------
$ 281 $2,402 $1,724
===== ====== ======
35
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands Except Share Data)
10. Shareholders' Equity
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock- Based Compensation," requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company has three stock option plans for the purpose of providing incentives
for retaining qualified and competent employees or for rewarding employees for
past performance. The 1993 and 1994 Incentive Stock Option and Stock
Appreciation Rights Plans (the "Qualified Plans") permit the grant of options to
purchase an aggregate of up to 600,000 shares of common stock of the Company.
The Qualified Plans also provide for the granting of up to 600,000 stock
appreciation rights ("SARs") in tandem with stock options. Under the Qualified
Plans, incentive stock options (Incentive Stock Options qualify for special tax
treatment under Section 422 of the Internal Revenue Code of 1986, as amended),
non-qualified options or SARs may be issued at the discretion of the Stock
Option Committee of the Board of Directors. The 1993 Non-Qualified Stock Option
Plan (the "Non-Qualified Plan") permits the grant of stock options to purchase
an aggregate of up to 16,000 shares of common stock of the Company (Stock
options issued under the Non-Qualified Plan do not qualify for favorable tax
treatment under Section 422 of the Internal Revenue Code of 1986). No stock
appreciation rights have been granted under either plan as of December 31, 1997.
Participants under these plans include employees, executive officers, key
employees and former employees of the Company. The per share exercise price of
each stock option issued under the Qualified Plan is not less than the fair
market value of the stock on the date of the grant, or in case of a shareholder
owning more than 10% of the outstanding stock of the Company, the price is not
less than 110% of such fair market value on the date of grant. The exercise
price of each stock option issued under the Non-Qualified Plan is not required
to be at the fair market value of the stock on the date of grant. Options
granted under the 1993 Qualified Plan have five-year terms and options granted
under the 1994 Qualified Plan have ten-year terms. All options vest one-third at
the end of six months, eighteen months, and thirty months of continued
employment.
36
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands Except Share Data)
10. Shareholders' Equity (continued)
The following table summarizes stock option transactions during 1997, 1996, and
1995.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
at beginning of
period ........................... 295,501 $ 7.12 244,500 $ 9.10 235,000 $ 11.38
Granted ............................ 224,000 $ 6.88 163,500 $ 4.25 84,000 $ 4.63
Canceled ........................... (65,176) $ 7.95 (88,503) $ 8.57 (74,500) $ 11.23
Exercised .......................... (48,805) $ 4.72 (23,996) $ 4.47 - -
------- ------ ------- ------ ------- -------
Options outstanding
at end of period ................. 405,520 $ 7.14 295,501 $ 7.12 244,500 $ 9.10
------- ------ ------- ------ ------- -------
Options exercisable
at end of period ................. 240,793 $ 7.52 184,789 $ 8.50 159,640 $ 10.16
------- ------ ------- ------ ------- -------
Options available
for grant at end
of period ........................ 137,679 296,503 371,500
------- ------- -------
Weighted average fair
value of options
granted during the year ........ $ 2.55 $ 2.72 $ 2.97
------ -------- -------
</TABLE>
37
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands Except Share Data)
10. Shareholders' Equity (continued)
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994, under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1996, and 1995, respectively; risk-free interest rates of 6.5%, 5.75%, and
5.75%; no dividend yield; volatility factors of the expected market price of the
Company's common stock of 0.42, 0.43, and 0.43; and a weighted-average expected
life of the option of 3 years, 7 years, and 7 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1997 1996 1995
------- --------- ---------
<S> <C> <C> <C>
Pro forma net income ............................................... $ 761 $ 4,280 $ 2,910
Pro forma earnings per share ....................................... $ 0.11 $ 0.64 $ 0.44
Pro forma earnings per share, assuming dilution .................... $ 0.11 $ 0.61 $ 0.42
</TABLE>
Exercised prices for options outstanding at December 31, 1997, ranged from
$4.25-$13.00. The weighted-average remaining contractual life of those options
is 4.7 years.
38
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands Except Share Data)
10. Shareholder's Equity (continued)
Shareholders' Agreement
The Company entered into a shareholders' agreement upon the effective date of
its initial public offering in 1993. All shares of the Corporation's stock owned
by the shareholders prior to and upon the effective date of the offering are
considered restricted shares. The transfer, pledge or sale of the shares is
subject to the terms of the agreement. The Company has the right of first
refusal to purchase the shares. If the Company does not exercise the option to
purchase the offered shares then the shareholder who desires to sell can sell
the shares as permitted by law.
11. Geographic Sales Information
The Company's net sales by major geographic areas in 1997, 1996, and 1995 are as
follows:
1997 1996 1995
--------- -------- ---------
Domestic ............ $114,750 $105,876 $103,484
Foreign ............. 5,752 8,540 13,486
-------- -------- --------
$120,502 $114,416 $116,970
======== ======== ========
12. Fair Values of Financial Instruments
The fair values of the Company's financial instruments at December 31, 1997,
approximate the carrying values, except for the subordinated convertible note
payable due to former owners of Palmetto Spinning Corporation at a fixed rate of
interest of 5% (see Note 6). The fair value of this obligation is estimated to
be $2,037 based on a discounted cash flow analysis using the Company's current
borrowing rates for other borrowing arrangements tied to the market. The effect
on the market value of this obligation of the convertible feature of this
obligation was not practicable to determine.
39
<PAGE>
Martin Color-Fi, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands Except Share Data)
13. Litigation
On March 16, 1995, the Company was served with a lawsuit by a shareholder
alleging violations of Federal securities laws and related state laws and
seeking an unspecified amount of damages. The shareholder requested to have the
case certified as a class action on behalf of other non-insider shareholders.
A definitive written settlement agreement was reached with the class plaintiff
under which the Company's settlement liability was fixed at $2,000. By order
dated March 12, 1997, the United States District Court certified the class in
the matter, appointed the class plaintiffs' counsel as settlement administrator
and gave preliminary approval to the settlement. The settlement was funded by
the Company on March 20, 1997. In exchange for a written release, the Company's
insurance carrier provided $850 of the settlement amount. Final settlement of
the matter was approved by the court on September 10, 1997.
40
<PAGE>
Schedule II
MARTIN COLOR-FI, INC.
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
====================================================================================================================================
Balance Additions
at Charged to Charged to Balance
Beginning Costs and Other at End
Classification of Period Expenses Accounts Deductions of Period
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts .......................................... $150 $113 - ($ 63) (1) $ 200
==== ==== ===== ===== =====
Year ended December 31, 1996
Allowance for doubtful
accounts .......................................... $150 $ 71 - ($ 71) (1) $ 150
==== ==== ===== ===== =====
Year ended December 31, 1995
Allowance for doubtful
accounts .......................................... $200 $ 55 - ($ 105) (1) $ 150
==== ==== ===== ===== =====
</TABLE>
- ----------------------------
(1) Uncollectible accounts written off, net of recoveries.
41
<PAGE>
Summary of Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
March 30 June 29 September 28 December 31 TOTAL
----------------------------------------------------------------------------------
(In thousands, except per share data)
1997
<S> <C> <C> <C> <C> <C>
Net sales ....................... $ 27,176 $ 32,349 $ 29,532 $ 31,445 $ 120,502
Gross profit .................... 5,801 6,349 5,539 2,223 19,912
Operating profit (loss) ......... 2,532 2,938 1,542 (1,833) 5,179
Net income (loss) ............... 1,200 1,311 471 (1,954) 1,028
Net income (loss) per share
Basic ........................ 0.18 0.20 0.07 (0.29) 0.15*
Assuming Dilution ............ 0.18 0.19 0.07 (0.29) 0.15
</TABLE>
* The sum of quarterly net income (loss) per share-information is different from
annual net income per share-information due to rounding.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------
March 31 June 30 September 29 December 31 TOTAL
-----------------------------------------------------------------------------
(In thousands, except per share data)
1996
<S> <C> <C> <C> <C> <C>
Net sales ...................... $ 25,623 $ 29,582 $ 31,521 $ 27,690 $ 114,416
Gross profit ................... 3,703 5,367 7,589 6,304 22,963
Operating profit (loss) ........ 941 2,536 4,193 3,267 10,937
Net income (loss) .............. (75) 932 2,005 1,572 4,434
Net income (loss) per share
Basic ....................... (0.01) 0.14 0.30 0.24 0.67
Assuming Dilution ........... (0.01) 0.14 0.29 0.23 0.65
</TABLE>
The Company made a year-end adjustment in 1997 resulting from a change in an
estimate that was material to the results of the fourth quarter. The physical
inventory adjustment in excess of amounts provided, after applicable income tax
reductions, reduced net income by approximately $834. These adjustments reduced
fourth quarter net income per share by $0.12.
42
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the captions "Election of Directors"
and "Executive Officers and other Key Employees" in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1998 and the
information regarding compliance within Section 16(a) of the Security Exchange
Act of 1934 under "Section 16(a) Beneficial Ownership Reporting Compliance" in
the 1998 Proxy Statement are hereby incorporated by reference herein.
Item 11. Executive Compensation
The information contained under the captions "Executive Compensation
and Other Information" and "Stock Option Plan" (page 7 through 11) in the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission on or before April 30, 1998 is
hereby incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission on or before April 30, 1998 is hereby incorporated by
reference herein.
Item 13. Certain Relationships and Related Transactions
The information contained under the caption "Compensation and Stock
Option Committee Interlocks and Insider Participation" and "Certain
Relationships and Transactions" in the Company's Proxy Statement for the 1998
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or before April 30, 1998 is hereby incorporated by reference
herein.
43
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Exhibit Number Description
(a) 1. Financial Statements
Consolidated statements of income for the years ended
December 31, 1997, 1996 and 1995
Consolidated balance sheets at December 31, 1997 and 1996
Consolidated statements of shareholders equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated statements of cash flows for the years ended
December 31, 1997, 1996 and 1995
Notes to consolidated financial statements
Consolidated schedules for the years ended December 31, 1997,
1996 and 1995:
II - Valuation and qualifying accounts
2. Financial Statement Schedule
The financial statement schedule listed above to financial
statements is filed as part of this annual report.
3. Exhibits
3.1 Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's S-1
Registration Statement filed March 4, 1993, as amended,
Registration No. 33-59124
44
<PAGE>
("the S-1 Registration Statement")).
3.2 First Amendment to Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.2 of the S-1
Registration Statement).
3.3 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.3 of the S-1 Registration Statement).
3.4 First Amendment to Amended and Restated Bylaws of the Company
(incorporated by reference to Exhibit 4.5 to the 1994 second
quarter 10-Q).
10.1 Loan and Security Agreement dated July 14, 1994 between the
Company and NationsBank of South Carolina, N.A. (incorporated
by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the period ended October 2, 1994 (the "1994 third
quarter 10-Q")).
10.2 Revolving Loan and Promissory Note dated July 14, 1994 between
the Company and NationsBank of South Carolina, N.A.
(incorporated by reference to Exhibit 10.2 of the 1994 third
quarter 10-Q).
10.3 Term Loan and Promissory Note dated July 14, 1994 between the
Company and NationsBank of South Carolina, N.A. (incorporated
by reference to Exhibit 10.3 of the 1994 third quarter 10-Q).
10.4 First Amendment to Loan Documents and Agreement dated as of
February 15, 1995 between the Company and its subsidiaries and
NationsBank, National Association (Carolinas), as successor to
NationsBank of South Carolina, N.A. (incorporated by reference
to Exhibit 10.4 of the 1994 third quarter 10-Q).
10.11 Lease for corporate offices (now the sales offices),
Edgefield, South Carolina, dated November 20, 1992 between the
Company and James F. Martin (incorporated by reference to
Exhibit Number 10.13 of the S-1 Registration Statement).
10.14 Amended lease for corporate offices (now the sales offices),
Edgefield, South Carolina dated March 1, 1994 between the
Company and James F. Martin (incorporated by reference to
Exhibit 10.21 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 (the "1993 10-K")).
10.15 1993 Incentive Stock Option and Stock Appreciation Rights Plan
(incorporated by reference to Exhibit 4.1 of the Registration
Statement on Form S-8, Registration No. 333-15019).
10.16 Noncompetition Agreements between Registrant and U. Benjamin
Tanner, Samuel C. Stevens, Jr., Russell T. Lyon, Heyward C.
Addy, Henry M. Poston and James F. Martin (incorporated by
reference to Exhibit 10.21 of the S-1 Registration Statement).
45
<PAGE>
10.17 Form of Shareholder Tax Indemnity Agreement (incorporated by
reference Exhibit Number 10.22 of the S-1 Registration
Statement).
10.18 1993 Non-Qualified Stock Option Plan of the Company
(incorporated by reference to Exhibit 4.1 of the Registration
Statement on Form S-8, Registration No. 333-15017).
10.19 Amended Corporate Buy-Sell Agreement dated January 31, 1994
(incorporated by reference to Exhibit 10.16 of the Company's
1993 10-K).
10.20 Employee 401(k) Profit Sharing Plan dated January 1, 1994
(incorporated by reference to Exhibit 10.17 of the 1993 10-K).
10.21 Employment Agreement dated July 14, 1994, between G. Robert
Buchanan and Buchanan Industries, Inc. (South Carolina)
(incorporated by reference to Exhibit 10.20 to the 1994 second
quarter 10-Q).
10.22 Employment Agreement dated July 13, 1994 between W. Fred
Davis, Jr. and Martin Color-Fi, Inc. (incorporated by
reference to Exhibit 10.19 to the 1994 second quarter 10-Q).
10.24 Lease for corporate office, Edgefield, South Carolina, dated
February 1, 1995, between the Company and Edgefield
Properties, Inc. (incorporated by reference to Exhibit 10.24
to the Company's Report on Form 10-Q for the period ended
April 2, 1995).
10.26 Amended and Restated Loan and Security Agreement dated August
9, 1995 between the Company and NationsBank of South Carolina,
N.A. (incorporated by reference to Exhibit 10.26 to the
Company's Report on Form 10-Q for the period ended July 2,
1995 (the "1995 second quarter 10-Q")).
10.27 Amended and Restated Revolving Credit Promissory Note dated
August 9, 1995 between the Company and NationsBank of South
Carolina, N.A. (incorporated by reference to Exhibit 10.27 to
the 1995 second quarter 10-Q).
10.28 Amended and Restated Term Loan Promissory Note dated August 9,
1995, between the Company and NationsBank of South Carolina,
N.A. (incorporated by reference to Exhibit 10.28 to the 1995
second quarter 10-Q).
10.29 1994 Incentive Stock Option and Stock Appreciation Rights Plan
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-8, Registration No. 333-15029).
10.30 Amendment to Employment Agreement dated July 14, 1994, between
G. Robert Buchanan and Buchanan Industries, Inc. (South
Carolina), dated December 14, 1995 (incorporated by reference
to Exhibit 10.30 to the Company's Annual Report on Form 10-K
for the year ended
46
<PAGE>
December 31, 1995 (the "1995 10-K")).
10.31 Letter Agreement, dated October 25, 1996, Modifying Amended
and Restated Loan and Security Agreement, dated August 9,
1995, with NationsBank, N.A. (incorporated by reference to
Exhibit 10 to the Company's Report on Form 10-Q for the period
ended September 29, 1996).
10.32 Second Amended and Restated Loan and Security Agreement dated
December 16, 1996 between the Company and NationsBank, N.A.
(incorporated by reference to Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996 (the "1996 10-K")).
10.33 Second Amended and Restated Revolving Credit Promissory Note
dated December 16, 1996 between the Company and NationsBank,
N.A. (incorporated by reference to Exhibit 10.33 of the
Company's 1996 10-K).
10.34 Second Amended and Restated Term Loan Promissory Note dated
December 16, 1996 between the Company and NationsBank, N.A.
(incorporated by reference to Exhibit 10.34 of the Company's
1996 10-K).
10.35 Letter Agreement, dated February 18, 1997, Modifying Second
Amended and Restated Loan and Security Agreement, dated
December 16, 1996, with NationsBank, N.A. (incorporated by
reference to Exhibit 10.35 of the Company's 1996 10-K).
10.36 Third Amended and Restated Loan and Security Agreement, dated
March 27, 1997 between the Company and NationsBank,
N.A.(incorporated by reference to Exhibit 10.36 of the
Company's 1996 10-K).
10.37 1997 Term Loan Promissory Note, dated March 27, 1997 between
the Company and NationsBank, N.A.(incorporated by reference to
Exhibit 10.37 of the Company's 1996 10-K).
10.38 Letter Agreement, dated May 2, 1997, Modifying Third Amended
and Restated Loan and Security Agreement, dated March 27,
1997, with NationsBank, N.A. (incorporated by reference to
Exhibit 10.38 to the Company's Report on Form 10-Q for the
period ended March 30, 1997).
10.39 Letter Agreement, dated June 2, 1997, Modifying Third Amended
and Restated Loan and Security Agreement, dated March 27,
1997, with NationsBank, N.A. (incorporated by reference to
Exhibit 10.39 to the Company's Report on form 10-Q for the
period ended June 29, 1997 (the "1997 second quarter 10-Q")).
10.40 Letter Agreement, dated August 6, 1997, Modifying Third
Amended and Restated Loan and Security Agreement, dated March
27, 1997, with NationsBank, N.A. (incorporated by reference to
Exhibit 10.40 to the 1997 second quarter 10-Q).
10.41 Fourth Amended and Restated Loan and Security Agreement, dated
September 30, 1997, between the Company and NationsBank,
N.A.(incorporated by reference to Exhibit 10.41 to the
Company's Report on form 10-Q for the period ended
September 28, 1997 (the "1997 third quarter 10-Q")).
47
<PAGE>
10.42 Third Amended and Restated Revolving Credit Promissory Note
dated September 30, 1997, between the Company and NationsBank,
N.A.(incorporated by reference to Exhibit 10.42 to the 1997
third quarter 10-Q).
10.43 Letter Agreement, dated October 1, 1997, Modifying Fourth
Amended and Restated Loan and Security Agreement, dated
September 30, 1997, with NationsBank, N.A. (incorporated by
reference to Exhibit 10.43 to the 1997 third quarter 10-Q).
10.44 Letter Agreement, dated January 20, 1998, Modifying Fourth
Amended and Restated Loan and Security Agreement, dated
September 30, 1997, with NationsBank, N.A.
10.45 1998 Amendment to the Fourth Amended and Restated Loan
Agreement and Other Documents dated March 4, 1998 between the
Company and NationsBank, N.A.
10.46 1998 Overline Promissory Note, dated March 4, 1998 between the
Company and NationsBank, N.A.
21.1 Subsidiaries of Registrant (incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 24, 1998.
MARTIN COLOR-FI, INC.
\s\ James F. Martin
By: _________________________________________
JAMES F. MARTIN, Chief Executive Officer
\s\ Bret J. Harris
By: _________________________________________
BRET J. HARRIS, Chief Financial 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 in the capacities indicated on March 24, 1998.
Signatures Title
s/James F. Martin
______________________________ Chairman of the Board, President &
James F. Martin Chief Executive Officer
s/Gregory W. Anderson
______________________________ Corporate Counsel, Secretary &
Gregory W. Anderson Director
s/Bret J. Harris
______________________________ Chief Financial Officer, Treasurer &
Bret J. Harris Director
______________________________ Director
W. Fred Davis, Jr.
______________________________ Director
James C. Hite
______________________________ Director
Jack J. Jackson
s/George L. Rainsford
______________________________ Director
George L. Rainsford
s/Bettis C. Rainsford
______________________________ Director
Bettis C. Rainsford
______________________________ Director
Jerry E. Trapnell
* Principal Financial and Accounting Officer
49
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit Number Description Page Numbers
<S> <C> <C>
3.1 Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of the Company's S-1 Registration Statement
filed March 4, 1993, as amended, Registration No. 33-59124
("the S-1 Registration Statement")). *
3.2 First Amendment to Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 of the S-1 Registration Statement). *
3.3 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.3 of the S-1 Registration Statement). *
3.4 First Amendment to Amended and Restated Bylaws of the Company
(incorporated by reference to Exhibit 4.5 to the 1994 second
quarter 10-Q). *
10.1 Loan and security Agreement dated July 14, 1994 between the
Company and NationsBank of South Carolina, N.A. (incorporated
by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the period ended October 2, 1994 (the "1994 third
quarter 10-Q")). *
10.2 Revolving Loan and Promissory Note dated July 14, 1994 between the
Company and NationsBank of South Carolina, N.A. (incorporated by
reference to Exhibit 10.2 of the 1994 third quarter 10-Q). *
10.3 Term Loan and Promissory Note dated July 14, 1994 between the Company
and NationsBank of South Carolina, N.A. (incorporated by reference
to Exhibit 10.3 of the 1994 third quarter 10-Q). *
10.4 First Amendment to Loan Documents and Agreement dated as of
February 15, 1995 between the Company and its subsidiaries and
NationsBank, National Association (Carolinas), as successor to
NationsBank of South Carolina, N.A. (incorporated by reference
to Exhibit 10.4 of the 1994 third quarter 10-Q). *
10.11 Lease for corporate offices (now the sales offices), Edgefield,
South Carolina, dated November 20, 1992 between the Company and
James F. Martin (incorporated by reference to Exhibit Number 10.13
of the S-1 Registration Statement). *
10.14 Amended lease for corporate offices (now the sales offices),
Edgefield, South Carolina dated March 1, 1994 between the
Company and James F. Martin (incorporated by reference to
Exhibit 10.21 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1993
(the "1993 10-K")). *
50
<PAGE>
10.15 1993 Incentive Stock Option and Stock Appreciation Rights Plan
(incorporated by reference to Exhibit 4.1 of the Registration
Statement on Form S-8, Registration No. 333-15019). *
10.16 Noncompetition Agreements between Registrant and U. Benjamin
Tanner, Samuel C. Stevens, Jr., Russell T. Lyon, Heyward C.
Addy, Henry M. Poston and James F. Martin (incorporated by
reference to Exhibit 10.21 of the S-1 Registration Statement). *
10.17 Form of Shareholder Tax Indemnity Agreement (incorporated by
reference Exhibit Number 10.22 of the S-1 Registration Statement). *
10.18 1993 Non-Qualified Stock Option Plan of the Company (incorporated
by reference to Exhibit 4.1 of the Registration Statement on Form S-8,
Registration No. 333-15017). *
10.19 Amended Corporate Buy-Sell Agreement dated January 31, 1994
(incorporated by reference to Exhibit 10.16 of the Company's
1993 10-K). *
10.20 Employee 401(k) Profit Sharing Plan dated January 1, 1994
(incorporated by reference to Exhibit 10.17 of the 1993 10-K). *
10.21 Employment Agreement dated July 14, 1994, between G. Robert
Buchanan and Buchanan Industries, Inc. (South Carolina) (incorporated
by reference to Exhibit 10.20 to the 1994 second quarter 10-Q). *
10.22 Employment Agreement dated July 13, 1994 between W. Fred Davis, Jr.
and Martin Color-Fi, Inc. (incorporated by reference to Exhibit
10.19 to the 1994 second quarter 10-Q). *
10.24 Lease for corporate office, Edgefield, South Carolina, dated
February 1, 1995, between the Company and Edgefield Properties, Inc.
(incorporated by reference to Exhibit 10.24 to the Company's Report
on Form 10-Q for the period ended April 2, 1995). *
10.26 Amended and Restated Loan and Security Agreement dated August
9, 1995 between the Company and NationsBank of South Carolina,
N.A. (incorporated by reference to Exhibit 10.26 to the
Company's Report on Form 10-Q for the period ended July 2,
1995 (the "1995 second quarter 10-Q")). *
10.27 Amended and Restated Revolving Credit Promissory Note dated
August 9, 1995 between the Company and NationsBank of South Carolina,
N.A. (incorporated by reference to Exhibit 10.27 to the 1995 second
quarter 10-Q). *
10.28 Amended and Restated Term Loan Promissory Note dated August 9,
1995, between the Company and NationsBank of South Carolina,
N.A.
51
<PAGE>
(incorporated by reference to Exhibit 10.28 to the 1995 second
quarter 10-Q). *
10.29 1994 Incentive Stock Option and Stock Appreciation Rights Plan
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-8, Registration No. 333-15029.) *
10.30 Amendment to Employment Agreement dated July 14, 1994, between
G. Robert Buchanan and Buchanan Industries, Inc. (South Carolina),
dated December 14, 1995 (incorporated by reference to Exhibit 10.30
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 10-K")). *
10.31 Letter Agreement, dated October 25, 1996, Modifying Amended
and Restated Loan and Security Agreement, dated August 9,
1995, with NationsBank, N.A. (incorporated by reference to
Exhibit 10 to the Company's Report on Form 10-Q for the period
ended September 29, 1996). *
10.32 Second Amended and Restated Loan and Security Agreement dated
December 16, 1996 between the Company and NationsBank, N.A.
(incorporated by reference to Exhibit 10.32 to the Company's
annual Report on Form 10-K for the year ended December 31,
1996 (the "1996 10-K")). *
10.33 Second Amended and Restated Revolving Credit Promissory Note
dated December 16, 1996 between the Company and NationsBank, N.A.
(incorporated by reference to Exhibit 10.33 of the Company's 1996 10-K). *
10.34 Second Amended and Restated Term Loan Promissory Note dated
December 16, 1996 between the Company and NationsBank, N.A.
(incorporated by reference to Exhibit 10.34 of the Company's 1996 10-K). *
10.35 Letter Agreement, dated February 18, 1997, Modifying Second Amended
and Restated Loan and Security Agreement, dated December 16, 1996,
with NationsBank, N.A.(incorporated by reference to Exhibit 10.35
of the Company's 1996 10-K). *
10.36 Third Amended and Restated Loan and Security Agreement, dated
March 27, 1997 between the Company and NationsBank, N.A.(incorporated
by reference to Exhibit 10.36 of the Company's 1996 10-K). *
10.37 1997 Term Loan Promissory Note, dated March 27, 1997 between the
Company and NationsBank, N.A.(incorporated by reference to Exhibit 10.37
of the Company's 1996 10-K). *
10.38 Letter Agreement, dated May 2, 1997, Modifying Third Amended
and Restated Loan and Security Agreement, dated March 27,
1997, with NationsBank, N.A. (incorporated by reference to
Exhibit 10.38 to the Company's Report on Form 10-Q for the
period ended March 30, 1997) *
10.39 Letter Agreement, dated June 2, 1997, Modifying Third Amended and
52
<PAGE>
Restated Loan and Security Agreement, dated March 27, 1997, with
NationsBank, N.A. (incorporated by reference to Exhibit 10.39 to
the Company's Report on Form 10-Q for the period ended June 29, 1997
(the "1997 second quarter 10-Q")). *
10.40 Letter Agreement, dated August 6, 1997, Modifying Third Amended and
Restated Loan and Security Agreement, dated March 27, 1997, with
NationsBank, N.A. (incorporated by reference to Exhibit 10.40 to
the 1997 second quarter 10-Q). *
10.41 Fourth Amended and Restated Loan and Security Agreement, dated September
30, 1997, between the Company and NationsBank, N.A.(incorporated by reference
to Exhibit 10.41 to the Company's Report on form 10-Q for the period ended
September 28, 1997 (the "1997 third quarter 10-Q")). *
10.42 Third Amended and Restated Revolving Credit Promissory Note dated
September 30, 1997, between the Company and NationsBank, N.A.(incorporated
by reference to Exhibit 10.42 to the 1997 third quarter 10-Q). *
10.43 Letter Agreement, dated October 1, 1997, Modifying Fourth Amended and
Restated Loan and Security Agreement, dated September 30, 1997, with
NationsBank, N.A.(incorporated by reference to Exhibit 10.43 to the 1997
third quarter 10-Q). *
10.44 Letter Agreement, dated January 20, 1998, Modifying Fourth Amended and
Restated Loan and Security Agreement, dated September 30, 1997, with
NationsBank, N.A. Attached
10.45 1998 Amendment to the Fourth Amended and Restated Loan
Agreement and Other Documents dated March 4, 1998 between the
Company and NationsBank, N.A. Attached
10.46 1998 Overline Promissory Note, dated March 4, 1998 between the Company and
NationsBank, N.A. Attached
21.1 Subsidiaries of Registrant (incorporated by reference to Exhibit 21.1
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994). *
23.1 Consent of Ernst & Young LLP Attached
27 Financial Data Schedule Attached
(b) Reports on Form 8-K
None.
</TABLE>
* Incorporated by reference
53
January 20, 1998
Mr. Bret J. Harris
Chief Financial Officer
Martin Color-Fi, Inc.
Star Fibers Corp.
Buchanan Industries, Inc.
P.O. Box 469
Edgefield, SC 29824
Re: Modification of Revolving Credit Loan having a current maximum
principal availability of up to $30,000,000 extended by
NationsBank, N.A.
Dear Bret:
This letter shall serve as a written modification to that certain
Fourth Amended and Restated Loan and Security Agreement dated to be effective as
of September 30, 1997 (as amended or modified the "Loan Agreement") by and
between Martin Color-Fi, Inc., (for itself and as successor by merger to Custom
Colorants, Inc. and Palmetto Spinning Corporation) Star Fibers Corp., and
Buchanan Industries, Inc. (collectively, the "Borrowers") and NationsBank, N.A.
("NationsBank").
The Loan Agreement is amended by deleting the words "fifty-five percent
(55%) of the total principal outstanding under the Revolving Credit Loan"
appearing on line 13 of Section 2.5 entitled Margin Requirements under the
Revolving Credit Loan and substituting in lieu thereof the following:
(i) except as provided in (ii), fifty-five percent (55%) of the total
principal outstanding under the Revolving Credit Loan; and (ii) during
the period of time commencing on January 9, 1998 and ending on April
15, 1998, sixty percent (60%) of the total principal outstanding under
the Revolving Credit Loan.
The intent of the modification described in this letter is to provide Borrowers
a period of time commencing on January 9, 1998 and ending on April 15, 1998
during which the inventory "cap" will be raised from 55% of the total principal
outstanding under the Revolving Credit Loan to 60% of the total principal
outstanding under the Revolving Credit Loan. On and after April 16, 1998, the
maximum principal advanced and outstanding under the Revolving Credit Loan
against Eligible Inventory shall not exceed, at any time, fifty-five percent
(55%) of the total principal outstanding under the Revolving Credit Loan.
<PAGE>
Mr. Bret J. Harris
January 20, 1998
Page 2
All capitalized terms not otherwise defined in this letter shall have
the meaning ascribed to such term in the Loan Agreement. All other terms and
conditions of the Loan Agreement and any other document executed in connection
with the Revolving Credit Loan (collectively, the "Loan Documents") shall remain
in full force and effect. Except as specifically set forth below, Borrowers
represent and warrant that, as of the date of this letter; (i) all
representations contained in the Loan Agreement or the Loan Documents are true
and accurate; (ii) all covenants contained in the Loan Agreement and the Loan
Documents have been and remain satisfied; and (iii) no Event of Default exists
or no condition exists which with the giving of notice or the passage of time,
or both, would constitute an Event of Default under Loan Agreement or the Loan
Documents. NationsBank acknowledges that Borrowers have informed NationsBank
that Borrowers may have violated the covenant contained in Section 7.1(aa) of
the Loan Agreement. The execution of this letter by NationsBank shall not be
deemed to be a waiver by NationsBank of any rights it may have under the Loan
Agreement, the other Loan Documents or otherwise in connection with a violation
of the covenant contained in Section 7.1(aa), and NationsBank specifically
reserves all such rights.
Please have all parties execute the original of this letter to indicate
the Borrowers' agreement to be bound by the terms and conditions of this letter
and return the original fully- executed letter to me as soon as possible. This
letter agreement will be binding on all parties upon our receipt of the original
fully-executed and dated letter.
This letter supersedes and replaces our letter to you dated January 12,
1998.
Kindest regards,
NationsBank, N.A.
Greg A. Lapointe
Senior Vice President
<PAGE>
Mr. Bret J. Harris
January 20, 1998
Page 3
Agreed to on this 20th day of January, 1998.
BORROWERS:
MARTIN COLOR-FI, INC.
By: Bret J. Harris
Its: Chief Financial Officer
STAR FIBERS CORP.
By: Bret J. Harris
Its: Chief Financial Officer
BUCHANAN INDUSTRIES, INC.
By: Bret J. Harris
Its: Chief Financial Officer
1998 AMENDMENT TO THE FOURTH AMENDED AND RESTATED
LOAN AGREEMENT AND OTHER DOCUMENTS
THIS 1998 AMENDMENT TO THE FOURTH AMENDED AND RESTATED LOAN AGREEMENT
AND OTHER DOCUMENTS ("1998 Amendment") is made as of this 4th day of March, 1998
between MARTIN COLOR-FI, INC., a South Carolina corporation ("MCF"), STAR FIBERS
CORP., a South Carolina special purpose corporation ("Star Fibers") and BUCHANAN
INDUSTRIES, INC., a South Carolina corporation ("BI") (MCF, Star Fibers and BI
are individually or collectively, as the context requires, referred to as
"Borrower" or "Borrowers") and NATIONSBANK, N.A. ("Bank").
Factual Background
A. Bank has extended to Borrowers various loans and credit facilities
(collectively, the "Loans") pursuant to the terms of that certain Fourth Amended
and Restated Loan and Security Agreement (as amended, modified or restated, the
"Loan Agreement") between Borrower and the Bank dated as of September 30, 1997.
The Loans are secured inter alia by a perfected first priority lien on all real
and personal property of the Borrowers pursuant to various mortgages, deeds to
secure debt, assignments and security agreements (collectively, the "Security
Documents").
B. Bank, at Borrowers' request, has agreed to extend to Borrowers an
overline (the "Overline") to the Revolving Credit Loan (as such term is defined
in the Loan Agreement). The Overline shall be in the maximum principal amount of
$2,500,000 and shall be evidenced by an Overline Promissory Note (as amended or
modified, the "Overline Note") dated of even date, executed and delivered by
Borrower to Bank.
C. Borrowers and Bank now desire to execute this 1998 Amendment to
modify and amend the provisions of the Loan Agreement and the Security Documents
in the manner hereinafter set forth, with the specific understanding and
agreement that, except as herein modified and amended, the terms and provisions
of the Loan Agreement, the Security Documents and all documents related thereto
shall remain unchanged and continue in full force and effect as therein written.
D. All capitalized terms used, but not defined, in this 1998 Amendment
shall have the meaning ascribed to such term in the Loan Agreement.
NOW, THEREFORE, in consideration of the foregoing, to induce the Bank
to extend the Overline, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto do
hereby agree as follows:
1. All terms, conditions and provisions of the Factual Background are
incorporated in, and shall be a part of, the agreement between Borrowers and
Bank.
2. The Borrowers specifically agree that the Overline shall be subject
to and governed by the Loan Agreement.
3. The Loan Agreement is hereby amended as follows:
(i) By including the following provision at the end of the definition
of the term "Collateral Certificate" appearing in Section 1.1:
; provided, during the period of time in which the Overline is
available to Borrowers, the term "Collateral Certificate" shall
also include the Overline Collateral Certificate, in the form
established by Bank, as may be amended from time to time;
1
<PAGE>
(ii) By deleting the definition of the term "Loan" or "Loans"
appearing in Section 1.1 and substituting in lieu thereof the
following:
"Loan" or "Loans" shall mean the individual or collective
reference, as the context requires, to the Revolving Credit, the
Overline, the Term Loan and the 1997 Term Loan.
(iii)By including the following provision at the end of the definition
of the term "Monthly Borrowing Base Certificate" appearing in
Section 1.1:
; provided, during the period of time in which the Overline is
available to Borrowers, the term "Monthly Borrowing Base
Certificate" shall also include the Overline Monthly Borrowing
Base Certificate, in the form established by Bank, as may be
amended from time to time;
(iv) By deleting the definition of the term "Notes" appearing in
Section 1.1 and substituting in lieu thereof the following:
"Note" or "Notes" shall mean the individual or collective
reference, as the context requires, to the Revolving Credit Note,
the Overline Note, the Term Note, the 1997 Term Note and any
other notes as may be outstanding from time to time, under this
Agreement, which are properly executed, completed and delivered
to Bank, as the same may be amended from time to time and all
other notes delivered in substitution, addition or exchange for
any thereof.
(v) By inserting the following definitions in Section 1.1 after the
term "Obligations":
"Overline" shall mean the Overline to the Revolving Credit Loan
in the maximum principal amount of up to $2,500,000 pursuant to
the terms of and as more particularly set forth in Article 2A of
this Agreement.
"Overline Documents" shall mean and refer to, collectively, all
those certain documents and instruments executed in connection
with the Overline, including this Agreement, the Overline Note,
the Mortgages, the Security Agreements, the Assignment of Leases,
the Assignment of Contracts, the Financing Statements and any
other documents executed in connection with the Overline as such
documents and instruments may be amended, substituted or renewed
from time to time.
"Overline Note" shall mean and refer to that certain Overline
Promissory Note in the original principal amount of up to
$2,500,000 dated as of March 4, 1998 executed and delivered by
Borrowers to Bank, as the same may be amended, renewed or
substituted from time to time.
(vi) By deleting in its entirety the remainder of the portion of
Section 2.5 commencing with the words "provided, however" and
substituting in lieu thereof the following:
provided, however, that the aggregate principal amount
outstanding under the Revolving Credit Loan and the Overline
supported by Borrowers' and any Approved Subsidiaries' Eligible
Inventory shall not exceed, at any one time (i) except as
provided in (ii) below, 55% of the total principal amount
outstanding under the Revolving Credit Loan; and (ii) during the
period of time commencing on December 31, 1997 and ending on June
2, 1998, sixty percent (60%) of the total principal outstanding
under the Revolving Credit Loan and the Overline. The
availability under the Revolving Credit Loan and the Overline for
each week shall be determined by the then-current Collateral
Certificate delivered in accordance with Section 7.1(k) of this
Agreement.
2
<PAGE>
(vii) By inserting the following after Article 2:
2A. OVERLINE.
2.1.A. General Terms. During the period of time commencing on
March 4, 1998 and ending on June 2, 1998 and subject to the terms
of this Agreement, Bank will lend, on a revolving credit basis,
to Borrowers and Borrowers will borrow from Bank such sums as
Borrowers may from time to time request but which will not exceed
an aggregate principal amount outstanding at any one time, equal
to the lesser of (a) the amount available to be outstanding in
accordance with the margin requirements stated in Section 2.4.A.
hereof, or (b) Two Million Five Hundred Thousand and No/100
Dollars ($2,500,000). The proceeds of the Overline shall be used
for the same purposes as the proceeds of the Revolving Credit
Loan, and the proceeds of the Overline will be made available to
Borrowers only during such time that no availability exists under
the Revolving Credit Loan. Borrower will be required to make
repayments of principal outstanding under the Overline
immediately and as and when necessary to comply with the margin
requirements stated in Section 2.4.A., or upon demand by Bank in
connection with an acceleration of the Overline, or immediately
upon the termination of Article 2A of this Agreement in
accordance with Section 2.6.A. of this Agreement.
2.2.A. Disbursements of the Overline. Disbursements of principal
under the Overline may be made on any Business Day, provided
that, in addition to all other terms of this Agreement: (A)
Borrowers shall have delivered to Bank oral or written notice in
form and content acceptable to Bank no later than 11:00 a.m.
(Columbia, South Carolina time) on the proposed funding date,
which notice shall specify the proposed funding day, the amount
requested and contain other information required by Bank; (B)
Borrowers and any Approved Subsidiary shall have delivered to
Bank an executed, properly completed then current Monthly
Borrowing Base Certificate and Collateral Certificate with
respect to the Overline, with the then current Collateral
Certificate with respect to the Overline governing the
availability under the Overline for the period of time until
receipt by Bank of the next Collateral Certificate with respect
to the Overline; (C) no Event of Default or Default Condition has
occurred; and (d) no availability under the Revolving Credit Loan
exists. Each delivery of an executed and properly completed
Monthly Borrowing Base Certificate and Collateral Certificate
with respect to the Overline shall constitute a representation by
the Borrowers and any Approved Subsidiary that, as of the date of
such Monthly Borrowing Base Certificate or Collateral with
respect to the Overline (1) all material representations and
warranties made by the Borrowers and any Approved Subsidiary in
this Agreement are true and correct, unless otherwise disclosed
to Bank in writing and approved by Bank, (2) Borrowers or any
Approved Subsidiary have not failed to observe any of its
undertakings hereunder, (3) no Event of Default has occurred, and
(4) no fact, condition, or event has occurred or exists that,
with the giving of notice or the passage of time or both, could
become an Event of Default. Bank will credit the proceeds of all
disbursements under the Overline to the Collateral Account. Bank
shall not incur any liability to the Borrowers (x) for acting
upon any telephonic notice or other oral notice for a requested
disbursement that Bank believes in good faith was given by the
Controller, the Chief Financial Officer or another officer deemed
acceptable to Bank in its sole discretion, or (y) for otherwise
acting good faith in disbursing proceeds under the Overline.
2.3.A. Overline Note. The obligation to repay the Overline is
evidenced by the Overline Note.
2.4.A. Margin Requirement Under Overline. In addition to the
limitations set forth in Section 2.1.A. of this Agreement, the
aggregate principal amount outstanding at any one
3
<PAGE>
time under the Overline as determined by the most recent
Collateral Certificate may not exceed the difference of:
(X) the sum of (i) ninety percent (90%) of the face amount
of Borrowers' and any Approved Subsidiary's Eligible
Accounts Receivable which are subject to factoring
agreements with NationsBanc Commercial Corporation and are
acceptable to Bank; plus (ii) eighty percent (80%) of the
face value of Borrowers' and any Approved Subsidiary's
Eligible Accounts Receivable which are not subject to
factoring agreements with NationsBanc Commercial Corporation
that are acceptable to Bank; plus (iii) fifty percent (50%)
of the value of Borrowers' and any Approved Subsidiary's
Eligible Inventory (provided, however, that the aggregate
principal amount outstanding under the Revolving Credit Loan
and the Overline supported by Borrowers' and any Approved
Subsidiary's Eligible Inventory shall not exceed, at any one
time sixty percent (60%) of the total principal outstanding
under the Revolving Credit Loan and the Overline), minus
(Y) principal outstanding under the Revolving Credit Loan.
2.5.A. Fees. In consideration of NationsBank extending the
Overline, Borrowers shall pay a commitment fee equal to $10,000,
which fee shall be due and payable upon the delivery of the
Overline Note. Additionally, Borrower further shall pay an "user
fee" under the Overline to be assessed and due and payable on
June 2, 1998, which fee will equal one-eighth of one percent
(0.125%) per annum of the average unused portion of the Overline
calculated on a daily basis.
2.6.A. Termination. This Agreement as it relates to the Overline
shall be terminated (a) by Bank or notice to Borrowers at any
time in connection with the acceleration pursuant to Section 9.2
hereof; or (b) have not sooner demanded, on June 2, 1998. The
termination of this Agreement as it relates to the Overline shall
in no way effect or impair any right of Bank arising prior
thereto or by reason thereof, nor shall any such termination
relieve Borrowers of any Obligations under the Overline until all
Obligations under the Overline are fully paid and performed, nor
shall any such termination effect any right or remedy of Bank
arising from any other Obligation. All agreements, warranties and
representations of Borrowers shall survive termination.
2.7.A. Additional Provisions. All other terms, conditions,
representations, warranties and covenants contained in Article 2
and elsewhere in the Loan Agreement, to the extent not in
consistent to the express provisions of this Article 2A., shall
apply to the Overline.
(viii) By deleting Section 7.1(aa) in its entirety and substituting in
lieu thereof the following:
(aa) Borrowers, on a consolidated basis, must maintain a Funded
Debt Ratio of less than or equal to (i) 4.00 to 1.00 for the
twelve (12) month period ending on December 31, 1998; and (ii)
3.00 to 1.00 for each twelve (12) month period ending on the
closing date of each of Borrowers' fiscal quarters commencing
with the first fiscal quarter of fiscal year 1999.
4. The Overline shall be secured by a perfected security interest in or
lien on any and all of Borrowers' real and personal property pursuant to the
Security Documents; the Borrowers hereby grant to Bank such security interests
and liens; and the Security Documents are amended as necessary to grant such
security interests in favor of Bank.
4
<PAGE>
5. Except as otherwise modified herein, the Security Documents shall
continue to secure the obligations of the Borrowers or other parties as
described therein with the same force and effect as when originally executed. It
is intended that this 1998 Amendment will not disturb the existing priority of
the liens granted pursuant to the Security Documents.
6. Except as provided herein, the Loan Agreement, the Security
Documents and the other Loan Documents shall remain unchanged and in full force
and effect.
7. All agreements of Borrower contained herein shall survive the
execution and delivery of this 1998 Amendment, and all representations,
warranties and covenants contain in the Loan Agreement and the Loan Documents
are true, accurate, satisfied and/or not breached as of the date of this 1998
Amendment.
8. This 1998 Amendment shall be governed by and construed in accordance
with the laws of the State of South Carolina.
9. Borrowers represent and warrant that they are represented by legal
counsel of their choice, are fully aware of the terms contained in this 1998
Amendment and the Overline Note and have voluntarily and without coercion or
duress of any kind entered into this 1998 Amendment, the Overline Note and any
documents executed in connection with this 1998 Amendment.
10. Borrowers acknowledge and agree that (A) they have (i)
independently reviewed and approved each and every provision of this 1998
Amendment, the Overline Note and any and all other documents and items as it or
its counsel have deemed appropriate, (ii) entered into this 1998 Amendment and
executed this 1998 Amendment and the other closing documents, including the
Overline Note, with the advice of its legal counsel, and (iii) not relied in any
way on any representation, warranty, statement of fact or opinion,
understanding, disclosure or nondisclosure of the Bank, and have not been
induced by the Bank in any way, except for the consideration recited herein, in
entering into this 1998 Amendment and executing this 1998 Amendment and the
other closing documents contemplated hereby, including the Overline Note, and
(B) the Bank has not made any warranties or representations of any kind in
connection with this transaction except as specifically set forth herein or in
the documents executed in conjunction with this 1998 Amendment.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
1998 Amendment as of the date first above written.
[SIGNATURES OMITTED]
5
MCF's Taxpayer
Identification No.
57-0879569
OVERLINE PROMISSORY NOTE
$2,500,000.00
March 4, 1998
Columbia, South Carolina
FOR VALUE RECEIVED, MARTIN COLOR-FI, INC., a South Carolina corporation
("MCF"), STAR FIBERS CORP., a South Carolina special purpose corporation ("Star
Fibers") and BUCHANAN INDUSTRIES, INC., a South Carolina corporation ("BI")
(MCF, Star Fibers and BI are individually or collectively, as the context
requires, referred to as "Borrower" or "Borrowers"), jointly and severally
promise to pay to the order of NATIONSBANK, N.A., a national banking association
("Bank") at its offices in Columbia, South Carolina (or at such other place or
places as the Bank may designate) the principal sum of up to TWO MILLION FIVE
HUNDRED THOUSAND AND NO/100 DOLLARS ($2,500,000.00) under the terms and
conditions of this Overline Promissory Note (the "Note") and in accordance with
that certain Fourth Amended and Restated Loan and Security Agreement by and
between Borrowers and Bank dated as of September 30, 1997 (as further amended or
modified, the "Loan Agreement"). This Note is secured by perfected, first
priority liens on all of Borrowers' assets pursuant inter alia to various (i)
Security Agreements dated as of July 14, 1994 and August 9, 1995 (collectively
as amended or modified, the "Security Agreements") (ii) Mortgages, Deeds to
Secure Debts, Security Deeds and other instruments dated as of July 14, 1994 and
August 9, 1995 (collectively, as amended or modified, the "Mortgage
Instruments"); and (iii) other agreements by and between Borrowers and Bank. All
of the terms, conditions and covenants of the Loan Agreement, the Security
Agreements and the Mortgage Instruments are expressly made a part of this Note
by reference in the same manner and with the same effect as if set forth herein
at length and any holder of this Note is entitled to the benefits of and
remedies provided in the Loan Agreement, the Security Agreements, the Mortgage
Instruments and other agreements by and between the Borrowers and the Bank. The
Bank shall advance funds under the Overline evidenced by this Note to the
Borrowers pursuant to the terms of the Loan Agreement. Any Event of Default
under the Loan Agreement is an Event of Default under the terms of this Note.
Definitions. As used herein:
"Leverage Ratio" shall mean the ratio that (total liabilities minus
Subordinated Indebtedness) BEARS TO (Tangible Net Worth plus
Subordinated Indebtedness), as such are computed in accordance with
GAAP.
"Prime Rate" shall mean the fluctuating rate of interest established by
Bank from time to time, at its discretion, whether or not such rate
shall be otherwise published. The Prime Rate is established by Bank as
an index or base rate and may or may not at any time be the best or
lowest rate charged by Bank on any loan.
---------------------------------------------------------------------------
THIS DOCUMENT IS SUBJECT TO THE FEDERAL ARBITRATION ACT AND THE SOUTH
CAROLINA ARBITRATION ACT SECTION 15-48-10, ET. SEQ. CODE OF LAWS OF SOUTH
CAROLINA 1976 AS AMENDED
---------------------------------------------------------------------------
<PAGE>
All other capitalized terms not otherwise defined in this Note shall have the
meaning ascribed to such term in the Loan Agreement.
Interest. Interest on the principal outstanding evidenced by this Note
shall accrue, during each Interest Period, at the lesser of the Prime Rate minus
one-eighth of one-percent (0.125%) or the following, as calculated and
established on each Determination Date:
(i) During the period of time that the Leverage Ratio is
greater than 2.50 to 1.00 but less than 3.00 to 1.00,
at a rate per annum equal to Adjusted LIBOR plus two
hundred twenty-five (225) basis points; and
(ii) During the period of time that the Leverage Ratio is
less than or equal to 2.50 to 1.00, at a rate per
annum equal to Adjusted LIBOR plus two hundred (200)
basis points.
Provided, however, during the period of time (x) prior to
Borrowers entering a Swap Agreement in an amount acceptable to
Bank; or (y) after the Swap Agreement in an amount acceptable
to Bank has been terminated or modified, interest on the
outstanding principal evidenced by this Note shall accrue,
during each Interest Period, at the lesser of the Prime Rate
or the following, as calculated and established on each
Determination Date:
(i) During such time that the Leverage Ratio is greater
than 2.50 to 1.0 but less than 3.00 to 1.00, at a
rate per annum equal to Adjusted LIBOR plus two
hundred forty (240) basis points; and
(ii) During the period of time that the Leverage Ratio is
less than or equal to 2.50 to 1.00, at a rate per
annum equal to Adjusted LIBOR plus two hundred
fifteen (215) basis points.
Interest shall be calculated on the basis of a 360 day year and actual number of
days elapsed during each Interest Period. The most recent financial information
delivered to, and reviewed by, Bank in accordance with subsection 7.1(i) or
7.1(j) of the Loan Agreement will govern the calculation of the Leverage Ratio
on each Determination Date for purposes of establishing the interest rate for
each Interest Period. The interest rate shall be fixed during each Interest
Period and shall be adjusted on each successive Determination Date.
Repayment of Principal and Payment of Interest. Principal shall be paid
in a single payment on June 2, 1998 and interest on the outstanding principal
shall be paid monthly commencing on March 12, 1998 and continuing thereafter on
the twelfth (12th) day of each successive month, with a final payment of all
accrued but unpaid interest due and payable at the time of payment of principal.
Additionally, Borrowers must repay outstanding principal in amounts and under
the terms and conditions as set forth in the Loan Agreement.
Acceleration. If payment of all sums due hereunder is accelerated under
the terms of the Loan Agreement or if payment is not made in full at maturity of
this Note, the then outstanding principal and all accrued but unpaid interest
shall bear interest at the rate provided for hereunder plus four percent (4%)
per annum until such principal and interest have been paid in full;
2
<PAGE>
provided, however, that in no event shall this or any other provision herein
permit the collection of any interest which would be usurious under the law
governing this transaction, and if any such interest is collected, the amount
above the maximum rate permitted by law shall be deemed to be a principal
payment hereunder.
Prepayment. Borrowers may prepay the Overline in whole or part at any
time without penalty or premium.
Late Charges. In the event any payment of interest or principal is
delinquent more than fifteen (15) days, Borrowers will pay to Bank a late charge
of four percent (4%) of the amount of the overdue payment. This provision for
late charges shall not be deemed to extend the time for payment or be a "grace
period" or "cure period" that gives the Borrowers a right to cure a Default
Condition, except as provided in the Loan Agreement. Imposition of late charges
is not contingent upon the giving of any notice or lapse of any cure period
provided for in the Loan Agreement.
Application of Payments. All sums received by the Bank for application
to the Overline may be applied by the Bank to late charges, expenses, costs,
interest, principal and other amounts owing to the Bank in connection with any
of the Loans in the order selected by the Bank in its sole discretion.
Expenses. In the event this Note is not paid when due at any stated or
accelerated maturity, Borrowers jointly and severally will pay, in addition to
principal and interest, all costs of collection, including reasonable attorneys'
fees.
Governing Law. This Note shall be governed by, and construed in
accordance with, the laws of the State of South Carolina.
Non-waiver. The failure at any time of Bank to exercise any of its
options or any other rights hereunder shall not constitute a wavier thereof, nor
shall it be a bar to the exercise of any of its options or rights at a later
date. All rights and remedies of Bank shall be cumulative and may be pursued
singly, successively or together, at the option of Bank. The acceptance by Bank
of any partial payment shall not constitute a waiver of any Event of Default or
of any of Bank's rights under this Note or the other Loan Documents. No waiver
of any of its rights hereunder, and no modification or amendment of this Note,
shall be deemed to be made by Bank unless the same shall be in writing, duly
signed on behalf of Bank; and each such waiver, if any, shall apply only with
respect to the specific instance involved, and shall in no way impair the rights
of Bank or the obligations of the Borrower to Bank in any other respect at any
other time.
Partial Invalidity. The unenforceability or invalidity of any provision
of this Note shall not affect the enforceability or the validity of any other
provision herein and the invalidity or unenforceability of any provision of this
Note or of the Loan Documents to any person or circumstance shall not affect the
enforceability or validity of such provision as it may apply to other persons or
circumstances.
Jurisdiction and Venue. In any litigation in connection with or to
enforce this Note or any endorsement or guaranty of this Note or any Loan
Documents, Borrowers, irrevocably consent to and confer personal jurisdiction on
the courts of Richland County, State of South
3
<PAGE>
Carolina or the United States courts located within the State of South Carolina,
and expressly waive any objections as to venue in any such courts, and agree
that service of process may be made on Borrowers by mailing a copy of the
summons and complaint by registered or certified mail, return receipt requested,
to their respective addresses. Nothing contained herein shall, however, prevent
Bank from bringing any action or exercising any rights within any other state or
jurisdiction or from obtaining personal jurisdiction by any other means
available by applicable law.
ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS
NOTE OR ANY RELATED NOTES OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR
ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN
ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE
APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION
OR COMMERCIAL DISPUTES OR JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC.
(J.A.M.S.) AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY
INCONSISTENCE, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION
AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THE NOTE MAY
BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL
ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS NOTE APPLIES IN ANY COURT
HAVING JURISDICTION OVER SUCH ACTION.
(A) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF
COLUMBIA, SOUTH CAROLINA AT THE TIME OF THIS NOTE'S EXECUTION AND ADMINISTERED
BY J.A.M.S. WHO WILL APPOINT AN ARBITRATION; IF J.A.M.S. IS UNABLE OR LEGALLY
PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION
ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90
DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A
SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR AN
ADDITIONAL 60 DAYS.
(B) RESERVATION OF RIGHTS. NOTHING IN THIS NOTE SHALL BE DEEMED TO (I)
LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR
REPOSE AND ANY WAIVERS CONTAINED IN THIS NOTE; OR (II) BE A WAIVER BY THE BANK
OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. ss.91 OR ANY SUBSTANTIALLY
EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO
EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO
FORECLOSURE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN
FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE
PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS NOTE. NEITHER
THE EXERCISE OR SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN
ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL
4
<PAGE>
CONSTITUTE A WAIVER OF THE RIGHT TO ANY PARTY, INCLUDING THE CLAIMANT IN SUCH
ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT
TO SUCH REMEDIES.
Bind Effect. This note shall be binding upon and inure to the benefit
of Borrowers and Bank and their respective successor, assigns, heirs and
personal representatives, provided, however, that no obligations of the
Borrowers hereunder can be assigned without prior written consent of Bank.
NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE AND
ANY OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, Borrowers have caused this Note to be duly executed
under seal as of the day and year first above written.
[SIGNATURES OMITTED]
5
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-15019) pertaining to the 1993 Incentive Stock Option and Stock
Appreciation Rights Plan, (Form S-8 No. 33- 15029) pertaining to the 1994
Incentive Stock Option Plan and Stock Appreciation Rights Plan, (Form S-8 No.
33-15017) pertaining to the 1993 Non-qualified Stock Option Plan and (Form S-8
No. 33-92808) pertaining to the 401(k) Profit Sharing Plan and Trust of Martin
Color-Fi, Inc. of our report dated February 13, 1998, (except for the last
paragraph of Note 6, as to which the date is March 4, 1998) with respect to the
consolidated financial statements and schedule of Martin Color-Fi, Inc. included
in this Annual Report (Form 10-K) for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
Greenville, South Carolina
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet at December 31, 1997, and the Condensed
Consolidated Statement of Operations for the Year Ended December 31, 1997, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-START> JAN-01-1997
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 259
<SECURITIES> 0
<RECEIVABLES> 15,789
<ALLOWANCES> 200
<INVENTORY> 48,430
<CURRENT-ASSETS> 66,268
<PP&E> 42,772
<DEPRECIATION> 22,520
<TOTAL-ASSETS> 115,847
<CURRENT-LIABILITIES> 27,844
<BONDS> 51,065
0
0
<COMMON> 832
<OTHER-SE> 30,600
<TOTAL-LIABILITY-AND-EQUITY> 115,847
<SALES> 120,502
<TOTAL-REVENUES> 120,502
<CGS> 100,590
<TOTAL-COSTS> 115,323
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 113
<INTEREST-EXPENSE> 4,334
<INCOME-PRETAX> 1,309
<INCOME-TAX> 281
<INCOME-CONTINUING> 1,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,028
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
