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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-67854
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DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) JUNE 1, 1998
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CMI INDUSTRIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 57-0836097
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1301 GERVAIS STREET, SUITE 920, COLUMBIA, SOUTH CAROLINA 29201
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (803) 771-4434
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NOT APPLICABLE
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(FORMER NAME, FORMER ADDRESS AND FORMAL FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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ITEM 5. OTHER EVENTS.
In a press release on June 1, 1998, CMI Industries, Inc. ("CMI")
announced that it has commenced a tender offer and consent solicitation relating
to the $125 million principal amount 9-1/2% Senior Subordinated Notes due 2003
issued by CMI. CMI also stated that it intends to finance the tender offer
through a private placement of $175 million aggregate principal amount senior
subordinated debt securities which it expects to consummate in early July.
The press release announcing the tender offer and consent solicitation
is incorporated herein by reference.
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SUMMARY
All references to the "Company" or "CMI" refer to CMI Industries, Inc. as
the surviving corporation in the Merger (as defined below) and its subsidiaries.
THE COMPANY
The Company is one of the leading manufacturers and marketers of
lightweight greige (unfinished) fabrics in the United States. In addition, the
Company holds market leading positions in certain segments of the elastic
fabrics and upholstery fabrics markets. The Company believes its vertically
integrated manufacturing capabilities and diverse product offerings provide it
with a key competitive advantage due to the variety of end use markets it is
able to serve.
The Company's core product offerings include greige fabrics, such as
printcloths, broadcloths, twills and other fabrics used in home furnishings,
apparel, and industrial applications; elasticized fabrics used in the production
of intimate apparel, activewear and swimwear; upholstery fabrics used in the
automotive and furniture industries; and consumer products used in the home
textile industry. The Company is a key supplier to leading companies in each
industry it serves. For example, the Company's automotive fabrics are currently
used in 36 vehicle platforms by all three major North American OEM's, as well as
Toyota Motor North America, Inc. ("Toyota"), Mitsubishi Motors America, Inc.
("Mitsubishi"), Nissan North America, Inc. ("Nissan"), American Suzuki
Corporation ("Suzuki"), Isuzu Motors America, Inc. ("Isuzu") and Mazda Motor of
America, Inc. ("Mazda"). By providing a full range of fabrics, the Company has
been able to increase placements with these customers for six of the last seven
years. Other key customers of the Company include Springs Industries, Inc.
("Springs Industries"), Johnson & Johnson, Inc. ("Johnson & Johnson"), Sara Lee
Corporation's ("Sara Lee") Playtex and Bali divisions, V.F. Corporation ("Vanity
Fair"), Steelcase, Inc. ("Steelcase"), Hon Industries, Inc. ("Hon"), J.C. Penney
Company, Inc. ("J.C. Penney") and Sears, Roebuck and Co. ("Sears"). The
Company's large, stable base of customers provides it with a solid platform from
which to pursue additional business.
Management believes the Company operates the most vertically integrated
domestic manufacturing facilities for its primary products and has achieved low
cost positions for many of its core offerings, including domestically produced
100% cotton and cotton/polyester blended lightweight greige fabrics, wide
elasticized fabrics and furniture upholstery used in contract seating. In
addition, the Company is currently the largest domestic manufacturer of
printcloth greige fabrics for sale to third parties, with approximately 15% of
this segment's domestic production capacity. The Company has also made
significant investments in product design and development. As a result, over 20%
of its 1997 sales were derived from new or reengineered products. The Company's
strategic manufacturing position, in conjunction with its design capabilities,
allows CMI to be cost competitive for its primary offerings while providing
customers with specialized value-added products.
The Company operates through three primary divisions: the Greige Fabrics
Division, the Elastic Fabrics Division, and the Chatham Division. For the twelve
months ended April 4, 1998 (the "LTM Period"), the Company had net sales and
EBITDA of $434.5 million and $47.1 million, respectively.
- The Greige Fabrics Division (39% of total sales for the LTM
Period). The Greige Fabrics Division is one of the largest domestic
manufacturers of light to midweight greige fabrics for sale to third
parties. The division's product line includes printcloths,
broadcloths, twills, crepes and other fabrics of 100% cotton, blends
of polyester and cotton, and 100% synthetic yarns. The division sells
its fabrics primarily to integrated manufacturers and also to
converters for use in a wide variety of home furnishings, woven
apparel and industrial products, such as sheets, comforters and
coordinating accessories; men's, women's and career apparel; and
medical and athletic tapes. The Greige Fabrics Division also targets
selected niches in markets where it can provide value-added services,
such as customizing fabrics, packaging and logistical support
services, that effectively differentiate the division from its
competitors. The division's key customers include: Springs Industries,
Thomaston Mills, Inc. ("Thomaston") and Johnson & Johnson.
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- The Elastic Fabrics Division (22% of total sales for the LTM
Period). The Elastic Fabrics Division manufactures and markets both
wide and narrow elasticized fabrics for sale to the apparel market.
The Elastic Fabrics Division's dyed and finished elasticized fabrics
are primarily used in intimate apparel, activewear and industrial and
medical products. The division's vertically integrated manufacturing
operations produce woven and knit fabrics using a variety of spandex,
polyester, rayon, nylon and cotton yarns. Various dyeing and finishing
technologies are utilized which enable the division to achieve
consistent specifications and color matching for these highly-
engineered fabrics. The division's leading customers include: Sara
Lee's Playtex and Bali divisions, Vanity Fair, Maidenform Worldwide,
Inc. ("Maidenform") and The Warnaco Group, Inc. ("Warnaco").
- The Chatham Division (39% of total sales for the LTM Period). The
Chatham Division manufactures fabrics and products for sale to the
furniture upholstery, automotive upholstery and consumer products
markets. Furniture upholstery is supplied for use in office and public
seating, wall panels for open-plan office systems and residential
applications. Customers include contract and residential furniture
manufacturers, such as Hon, Steelcase and LA-Z-BOY Incorporated
("LA-Z-BOY"). Automotive upholstery is supplied for use in automobile
and light truck seating and interior component applications to
domestic automobile manufacturers and to Japanese manufacturers with
domestic production facilities. The Company's automotive upholstery
customers include the Ford Motor Company ("Ford"), General Motors
Corporation ("GM"), the Chrysler Corporation ("Chrysler") and Lear
Corporation ("Lear"). In an effort to expand its product capabilities
and market penetration in the manufacture of automotive upholstery,
CMI has developed strategic alliances to produce woven velour and
circular knit fabrics and to increase its business with the Japanese
auto makers. Consumer products such as blankets, mattress pads and
afghans are marketed under CMI's own Chatham, Beautyrest and Wimbledon
brands and are sold to major retailers including J.C. Penney, Sears
and Linens-N-Things, Inc. ("Linens-N-Things"). CMI entered into an
agreement with Springs Industries in April 1998 to manufacture and
market a line of blankets using Springs Industries' name and
trademarks, such as Springmaid, Wamsutta, and Performance, and expects
to begin selling the division's consumer products under these
trademarks in the fall of 1998.
RECENT HISTORY AND TURNAROUND
In late 1995, the Company made certain changes in senior management,
including the election of Joseph L. Gorga as Chief Executive Officer, after
several years of disappointing financial performance, decreased asset
utilization rates and deteriorating service levels to its customers. The senior
management team initiated a restructuring plan (the "Restructuring") aimed at
improving operating performance by reducing overall costs and realigning certain
resources in order to better serve its customers. Key elements of the
Restructuring include:
- Enhanced Customer Service. CMI redirected its marketing focus to
improve customer service levels and more reliably deliver innovative
products and services. By emphasizing customer satisfaction, CMI
repositioned itself to be a recognized market leader and the preferred
supplier to many of its key customers. CMI placed an increased
emphasis on product development and delivery capabilities through
investments in logistics systems, value-added technologies, design
resources and more professional management. These initiatives have
allowed CMI to reduce its average order lead time from 26 weeks to
three weeks for furniture fabrics in the Chatham Division, diversify
its product offerings and improve its on-time delivery performance for
the past three years. As a result, over 20% of the Company's 1997
sales were derived from new or reengineered products and total sales
have increased from $374.0 million in 1996 to $434.5 million for the
LTM Period.
- Manufacturing Costs Reductions. Management initiated various process
improvement, product reengineering and cost reduction initiatives
designed to improve quality, increase efficiencies and reduce
operating costs. The Greige Fabrics Division closed its least
efficient manufacturing
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facility, the Chatham Division consolidated certain weaving
facilities, and the Company began outsourcing certain products, such
as covered yarns in its Elastic Fabrics Division, which were not cost
effective to produce. CMI invested in new equipment to further reduce
manufacturing costs and redesigned operating schedules to reduce
overtime premiums. CMI also reduced the number of management layers
and encouraged the development of self-directed work teams. The
Company established or refined standard operating procedures for all
manufacturing processes and redesigned numerous products to better
suit the vertical manufacturing capabilities. These programs have
resulted in reduced defect levels, such as a reduction in off-quality
levels for automotive fabrics from over 11% in 1994 to less than 4% in
1997, and lower non-conformance costs in each of the past three years.
Furthermore, CMI has reduced the number of associates by 20%, lowered
overall manufacturing costs, better aligned productive capacity with
market demand, and increased sales per associate from $81,300 in 1995
to $104,000 in 1997.
- Reduced Corporate Overhead. CMI downsized its corporate staff and
facilities and relocated certain support functions back to the
operating divisions. The Restructuring enabled relocated resources in
information services and purchasing to more effectively implement
business improvements and customer service initiatives. As a result of
these changes, CMI reduced its fixed corporate overhead expenses by
approximately $2.3 million from $5.8 million in 1995 to $3.5 million
in 1997.
- Better Working Capital Management. In the Restructuring, CMI focused
considerable effort on reducing past due receivables and excess
inventory levels. As CMI's service levels and capacity imbalances were
corrected, CMI was able to reduce working capital investments and
redirect this capital to more value added projects. As a result of
these efforts, inventory turns increased from 4.6 times in 1995 to 6.2
times in 1997 and working capital turns and overall returns on
invested capital improved significantly in both 1996 and 1997.
Management's turnaround efforts have had a favorable impact on CMI's
competitive position and financial performance. On-time deliveries have improved
to over 95% for all divisions and certain businesses have reduced order lead
times to less than two weeks. In addition to being more diversified and customer
focused, CMI has significantly improved its operating efficiencies while
eliminating over 900 employee positions. The stabilization of demand and pricing
for greige fabrics, as well as the return of raw material prices to historical
levels, have also contributed to the improvements in the Company's operating
margins. As a result, the Company's EBITDA increased from $21.3 million in 1996
to $47.1 million for the LTM Period. As of April 4, 1998, CMI has achieved six
consecutive quarters of year-over-year EBITDA improvement and increased returns
on capital.
BUSINESS STRATEGY
CMI's strategic objective is to improve its competitive position by
capitalizing on its strong customer relationships, vertically integrated
manufacturing capabilities and diverse product offerings. The primary components
of CMI's business strategy are as follows:
- Focus on Customer Service. CMI believes that customer satisfaction is
paramount. CMI has a history of long-standing relationships with
leading companies in each of the markets it serves. These
relationships were developed by being a reliable supplier and
providing innovative products and services. CMI plans to continue to
strengthen these relationships by allocating significant resources and
capital to ensure that its design, manufacturing, delivery and service
capabilities are consistent with providing the highest quality
customer service. CMI's sales effort emphasizes a strategic account
management approach using salaried associates in conjunction with an
after-sale technical support team. CMI believes that anticipating
customer requirements, being first to market and servicing its
products after they are sold are keys to being a preferred supplier
and a market leader. As a result of CMI's focus on strong customer
service, the Company was named wide elastic fabric Supplier of the
Year to Sara Lee in 1997.
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- Increase Market and Product Diversification. CMI believes its breadth
of product offerings, including both spun and filament fabrics in the
Greige Fabrics Division, wide and narrow elastics in the Elastic
Fabrics Division, flat wovens, woven velours and knit fabrics in the
Chatham Division, coupled with its diverse yarn systems and design
capabilities allow it to continually introduce new value-added
products across many market segments. For example, the Chatham
Division has recently expanded its presence in the residential
upholstery and home textile markets by manufacturing a new line of
fabrics and blankets utilizing its internally produced chenille yarns.
By continually introducing new products and services into its already
diverse product portfolio, the Company intends to provide a "one-stop"
purchasing source for many of its customers and further reduce its
exposure to any single market segment.
- Further Improve Manufacturing Execution. CMI monitors its
manufacturing processes to promote operational efficiencies, cost
effective manufacturing and dependable business systems. The Company
expects to become QS9000 certified for certain products in its Chatham
Division by July 1998. The Company will continue to emphasize its
Total Quality Management approach to manufacturing as it works to
further reduce its non-conformance costs, shorten order lead times and
improve on-time delivery performance through the continued
modernization of its facilities and improved operational logistics.
CMI's manufacturing efforts and capital projects will continue to
focus on improving the reliability and flexibility of CMI's production
facilities to meet customer demands.
- Pursue Strategic Acquisitions and Partnerships. CMI intends to pursue
acquisitions and strategic partnerships that will complement its
current product offerings and customer service capabilities. CMI's
joint venture with Mount Vernon Mills, Inc. ("Mount Vernon Mills") to
supply woven velour fabrics to the automotive industry and its recent
agreement with Springs Industries to manufacture and market a line of
blankets using Springs Industries' name and trademarks are two
examples of the type of strategic partnering CMI plans to pursue.
Management will seek out strategic acquisitions and partnerships that
have the potential to add value to CMI's marketing efforts and to
provide enhanced operational efficiencies, increased purchasing power
and other significant cost saving opportunities associated with
combining the efforts of strategically aligned companies.
SUMMARY OF THE TRANSACTIONS
CMI was formed in 1986 by Merrill Lynch Capital Partners, Inc. ("ML Capital
Partners"), a wholly owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
together with certain members of present and former management of the Company.
Affiliates of ML Capital Partners and certain members of management of CMI who
acquired shares of CMI's common stock (the "Company Common Stock") in 1986 and
thereafter and their affiliates currently own 58.7% and 41.3%, respectively, of
the outstanding Company Common Stock. CMI Management, Inc. ("Holdco") and CMI
Acquisitions, Inc. ("CMIA"), a wholly-owned subsidiary of Holdco, were formed by
members of senior management of CMI solely for the purpose of consummating the
Merger and the Transactions (as defined below).
On May 15, 1998, CMI entered into a definitive merger agreement (the
"Merger Agreement"), providing for the acquisition of the outstanding Company
Common Stock other than shares held by Holdco (the "Merger") by CMIA. In the
Merger, each outstanding share of Company Common Stock will be converted into
the right to receive $43.00 in cash, plus 2/45's of a share of Holdco common
stock ("Holdco Common Stock"). The cash and noncash portion of the merger
consideration are collectively referred to herein as the "Merger Consideration."
Each stockholder who is a current employee of the Company (the "Management
Stockholders") and certain other stockholders who are former employees or who
have historical ties to the Company (the "Interested Stockholders") have been
asked to enter into an exchange agreement (the "Exchange Agreement"), pursuant
to which, prior to the Merger, each Management Stockholder and each Interested
Stockholder will exchange (the "Exchange") a pre-determined number of shares of
Company Common
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Stock for an equal number of shares of Holdco Common Stock. In addition,
BancBoston Ventures, Inc. ("BBV") will provide an equity contribution to Holdco
of $9.0 million in exchange for 200,000 shares of Holdco Common Stock (the
"Equity Investment"). Following the Exchange and the Merger, ML Capital Partners
and its affiliates will own approximately 9.4% and the Management Stockholders,
Interested Stockholders and BBV collectively will own 90.6% of the outstanding
Holdco Common Stock, assuming that each CMI stockholder elects to execute the
Exchange Agreement and the transactions contemplated by that agreement occur.
The Company, Holdco and CMIA will use the proceeds of the private placement
in conjunction with borrowings under a new $75.0 million senior secured credit
facility (the "New Credit Facility") and the proceeds from the Equity Investment
to effect the Merger and a recapitalization (the "Recapitalization") under which
substantially all of the outstanding indebtedness of the Company will be
refinanced. The Recapitalization will include the repurchase (or discharge) of
the Company's outstanding $125.0 million principal amount 9 1/2% Senior
Subordinated Notes due 2003 (the "Old Notes"). The consummation of the private
placement is conditioned upon the consummation of the Merger. After giving
effect to the Transactions, CMI, as the surviving corporation in the Merger,
will be a wholly-owned subsidiary of Holdco and will become the obligor of the
Notes. The Merger, the Exchange, the Equity Investment, the Recapitalization and
the private placement are collectively referred to herein as the "Transactions."
The following table sets forth the ownership of the Company Common Stock as
of April 4, 1998 and the ownership of Holdco Common Stock after giving effect to
the Transactions based on the terms and conditions described herein.
<TABLE>
<CAPTION>
CMI HOLDCO
(PRE-TRANSACTIONS) (POST-TRANSACTIONS)
---------------------------- ----------------------------
% TOTAL % TOTAL
NUMBER % (FULLY- NUMBER % (FULLY-
STOCKHOLDER GROUP OF SHARES TOTAL DILUTED) OF SHARES TOTAL DILUTED)
- ----------------- --------- ----- -------- --------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Management and Interested Stockholders(1).... 700,931 41.3% 47.1% 228,582 48.3% 63.9%
MLCP Affiliates.............................. 994,387 58.7 52.9 44,195 9.4 6.6
BBV.......................................... -- -- -- 200,000 42.3 29.5
--------- ----- ----- ------- ----- -----
Total.............................. 1,695,318 100.0% 100.0% 472,777 100.0% 100.0%
========= ===== ===== ======= ===== =====
</TABLE>
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(1) Prior to the Merger, it is anticipated that substantially all of the
Management Stockholders will exchange at least 90% of their shares of
Company Common Stock, for an equal number of shares of Holdco Common Stock
(a Stockholder's "Rollover Equity") pursuant to the Exchange Agreement. Mr.
Joseph L. Gorga, Chairman, Chief Executive Officer and President of the
Company and Mr. James A. Ovenden, Chief Financial Officer, Executive Vice
President and Secretary of the Company have agreed to exchange all of their
shares of Company Common Stock for shares of Holdco Common Stock in the
Exchange. In addition, all members of senior management who hold options to
purchase Company Common Stock have indicated that they will exchange their
options for an option to purchase an equal number of shares of Holdco Common
Stock. The Interested Stockholders have been asked to designate up to 15% of
their shares as Rollover Equity pursuant to the Exchange Agreement.
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THE TRANSACTIONS
CMI was formed in 1986 by ML Capital Partners, Inc., a wholly owned
subsidiary of ML & Co., together with certain members of present and former
management of the Company. Affiliates of ML Capital Partners and certain members
of CMI management who acquired Company Common Stock in 1986 and thereafter and
their affiliates currently own 58.7% and 41.3%, respectively, of the outstanding
Company Common Stock. Holdco and CMIA were formed by members of senior
management of CMI solely for the purpose of consummating the Merger and the
Transactions.
THE MERGER
The Merger Agreement provides that, subject to the terms and conditions
contained therein, at the effective time of the Merger, CMIA will acquire all of
the outstanding shares of CMI (other than those held by Holdco). CMI will be the
surviving corporation in the Merger and will become a wholly-owned subsidiary of
Holdco. In the Merger, each outstanding share of the Company Common Stock will
be converted into the right to receive the Merger Consideration. The aggregate
cash portion of the Merger Consideration will be equal to approximately $65.3
million. Following the consummation of the Transactions, CMI will be the obligor
of the Notes.
EQUITY INVESTMENT
Pursuant to the terms of a stock purchase agreement between Holdco and BBV,
BBV will make a $9.0 million equity investment in Holdco in exchange for 200,000
shares of Holdco Common Stock. Immediately following the closing of the Equity
Investment, Holdco will contribute the net amount of the $9.0 million in
proceeds from the issuance of the Holdco Common Stock to CMIA.
THE EXCHANGE
The Management Stockholders have been asked to continue some or all of
their investment in CMI as Rollover Equity. Prior to the Merger, pursuant to the
Exchange Agreement, substantially all of the Management Stockholders will
exchange at least 90% of their shares of Company Common Stock for an equal
number of shares of Holdco Common Stock. The shares of Company Common Stock held
by the Management Stockholders that are not exchanged for shares of Holdco
Common Stock in the Exchange will be surrendered for the Merger Consideration.
Messrs. Gorga and Ovenden have agreed to exchange all of their shares of Company
Common Stock for shares of Holdco Common Stock. In addition, all members of
senior management who hold options to purchase Company Common Stock have agreed
to exchange their options for an option to purchase an equal number of shares of
Holdco Common Stock.
Also in the Exchange, the Interested Stockholders will exchange a
designated portion of their shares of Company Common Stock for a like number of
shares of Holdco Common Stock. Each of the Interested Stockholders have been
asked to consider designating up to 15% of their shares as Rollover Equity, and
such stockholders' remaining shares that do not constitute Rollover Equity will
be surrendered for the Merger Consideration.
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THE RECAPITALIZATION
As part of the Transactions, CMI, Holdco and CMIA will effect the
Recapitalization in which substantially all of the outstanding indebtedness of
the CMI will be refinanced using the proceeds of the private placement, in
conjunction with the borrowings under the New Credit Facility and the proceeds
of the Equity Investment. As part of the Recapitalization, CMI will terminate
its $65.0 million secured revolving credit facility with The First National Bank
of Boston ("BankBoston"), which serves as agent bank, NationsBank, N.A.
("NationsBank") and The Wachovia Bank of South Carolina, N.A. entered into in
March 1996 and amended in February 1997 (the "Existing Credit Agreement"), and
CMIA will enter into the New Credit Facility with BankBoston and NationsBank. As
proposed, BankBoston and NationsBank will each extend 50% of the New Credit
Facility. In connection with the Recapitalization, the Company expects to pay
off approximately $4.4 million currently outstanding under the Existing Credit
Agreement. Approximately $27.4 million of borrowings under the New Credit
Facility will be used to finance the Transactions. The Company's $4.0 million
unsecured credit facility with The Wachovia Bank of South Carolina, N.A. (the
"Wachovia Credit Facility") will remain in place.
Also as part of the Recapitalization, the Company intends to offer to
repurchase (or discharge) the Old Notes through a tender offer and consent
solicitation. CMI will solicit consents to modify the Indenture governing the
Old Notes. The tender offer and consent solicitation will have the effect of
paying off the Old Notes and removing covenants contained in the indenture that
would otherwise restrict the transactions contemplated by the Merger Agreement.
The consummation of the Merger is conditioned upon the successful consummation
of the Recapitalization.
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USE OF PROCEEDS
The gross proceeds from the private placement, together with the Rollover
Equity, Equity Investment and borrowings under the New Credit Facility will be
used to consummate the Transactions and pay related fees and expenses.
The following table sets forth the sources and uses of funds in connection
with the Transactions:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
CASH SOURCES OF FUNDS:
New Credit Facility(1).................................... $ 27.4
Private Placement......................................... 175.0
Sale of Holdco Common Stock to BBV........................ 9.0
------
Total Cash Sources................................ $211.4
------
NON-CASH SOURCES OF FUNDS:
Exchange of Company Common Stock and Options to Purchase
Company Common Stock for Holdco Common Stock and
Options................................................ $ 12.0
Non-Cash portion of Merger Consideration.................. 3.0
New Options to purchase Holdco Common Stock............... 2.2
------
Total Non-Cash Sources............................ $ 17.2
------
Total Sources of Funds....................... $228.6
======
CASH USES OF FUNDS:
Payment of Merger Consideration........................... $ 65.3
Repurchase of the Old Notes(2)............................ 125.0
Repayment of Existing Credit Agreement.................... 4.4
Payment of Fees, Premiums and Transaction Expenses(3)..... 16.7
------
Total Cash Uses $211.4
------
NON-CASH USES OF FUNDS:
Exchange of Company Common Stock and Options to Purchase
Company Common Stock for Holdco Common Stock and
Options................................................ $ 12.0
Non-Cash portion of Merger Consideration.................. 3.0
Compensation Expense(4)................................... 2.2
------
Total Non-Cash Uses............................... $ 17.2
------
Total Uses of Funds.......................... $228.6
======
</TABLE>
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(1) The Company expects that after giving effect to the Transactions as of April
4, 1998, approximately $39.4 million would have been available for borrowing
under the New Credit Facility.
(2) Assumes the repurchase of all of the Old Notes.
(3) The fees and expenses include: fees paid to the Company's financial, legal
and accounting advisors in connection with the Transactions, a tender
premium and consent fee associated with the tender offer for the Old Notes
and reimbursements to BBV for certain costs associated with the Equity
Investment.
(4) Compensation expense associated with issuance of new options to management.
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CAPITALIZATION
The following table presents the capitalization of CMI as of April 4, 1998
(i) on an actual basis and (ii) on a pro forma basis after giving effect to the
Merger and the Transactions and the application of the net proceeds of the
private placement and the Recapitalization as described under "Use of Proceeds."
<TABLE>
<CAPTION>
APRIL 4, 1998
-----------------------
ACTUAL AS ADJUSTED
------- ------------
(DOLLARS IN MILLIONS
EXCEPT PER SHARE DATA)
<S> <C> <C>
Short-term debt:(1)
Wachovia Credit Facility.................................. $ 4.0 $ 4.0
------ ------
Long-term debt, excluding current portion:(1)
Existing Credit Agreement(2).............................. $ 4.4 $ --
New Credit Facility(2).................................... -- 27.4
Old Notes, net of unamortized discount(3)................. 124.5 --
Private Placement, net of unamortized discount............ -- 175.0
------ ------
Total long-term debt.............................. 128.9 202.4
------ ------
Stockholder's equity:(4)
Common stock, par value $1.00 per share................... 1.7 0.5
Additional paid-in capital................................ 11.4 5.4
Retained earnings......................................... 28.8 (5.6)
------ ------
Total stockholder's equity........................ 41.9 0.3
------ ------
Total capitalization.............................. $174.8 $206.7
====== ======
</TABLE>
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(1) See Note 3 to CMI's audited financial statements at January 3, 1998 for
additional information with respect to debt outstanding.
(2) Excludes standby letters of credit of $1.3 million.
(3) Excludes unamortized debt discount of $0.5 million. Assumes that all of the
Old Notes are tendered in the tender offer. However, there can be no
assurance that all of the Old Notes will be repurchased in the tender offer.
(4) Represents the net adjustment to the Company's stockholders' equity to
record the Transactions using Purchase Accounting in accordance with EITF
88-16 and to reflect the net tax effect of the related extraordinary items
and compensation expenses. See "Unaudited Pro Forma Condensed Consolidated
Financial Information."
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma financial information has been derived by the
application of pro forma adjustments to the Company's historical consolidated
financial statements.
The adjustments give effect to (i) consummation of the Merger, (ii) the
repurchase of the Old Notes and the private placement, (iii) entering into the
New Credit Facility, (iv) the Equity Investment, and (v) the payment of
estimated fees and expenses. The proceeds from the private placement, together
with the issuance of $9.0 million of Holdco Common Stock and amounts available
under the New Credit Facility will be used to repurchase the Old Notes, fund the
Merger Consideration to effect the Merger and pay all related expenses, premiums
and fees.
The Unaudited Pro Forma Condensed Balance Sheet has been prepared as if
such transactions were consummated on April 4, 1998 and each Unaudited Pro Forma
Condensed Statement of Operations has been prepared as if such transactions were
consummated as of December 29, 1996, the first day of the Company's 1997 fiscal
year. The Pro Forma Condensed Financial Information is unaudited and does not
purport to be indicative of the Company's financial position or the results that
would have actually been obtained had such transactions been consummated as of
the assumed dates and for the period presented, nor are they indicative of the
Company's results of operations or financial position for any future period or
date. The pro forma adjustments, as described in the accompanying notes, are
based on available information and upon certain assumptions which management
believes are reasonable. The Unaudited Pro Forma Condensed Consolidated
Financial Information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 3, 1998
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net sales................................................ $422.7 -- $422.7
Cost of Sales............................................ 366.4 $(6.3)(1) 360.1
------ ----- ------
Gross Profit............................................. 56.3 6.3 62.6
Selling, general and administrative expenses............. 32.9 2.2(2) 35.1
------ ----- ------
Operating Income......................................... 23.4 4.1 27.5
------ ----- ------
Interest expense, net.................................... 14.5 5.2(3) 19.7
Other income, net(4)..................................... 3.1 (0.5)(1) 2.6
------ ----- ------
Income before income taxes and extraordinary items....... 12.0 (1.6) 10.4
Income taxes............................................. 4.8 (0.4)(5) 4.4
------ ----- ------
Income before extraordinary items(6)..................... $ 7.2 $(1.2) $ 6.0
====== ===== ======
OTHER DATA:
Capital Expenditures..................................... $ 7.6 -- $ 7.6
Depreciation and amortization(7)(8)...................... 17.3 (5.8)(1) 11.5
EBITDA(9)................................................ 43.8 -- 43.8
Cash interest expense.................................... 13.9 5.2(4) 19.1
EBITDA to cash interest expense.......................... 2.3x
Earnings to fixed charges(10)............................ 1.5x
</TABLE>
12
<PAGE> 13
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 4, 1998
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net sales................................................ $109.0 -- $109.0
Cost of Sales............................................ 92.8 $(1.5)(1) 91.3
------ ----- ------
Gross Profit............................................. 16.2 1.5 17.7
Selling, general and administrative expenses............. 8.8 0.0(2) 8.8
------ ----- ------
Operating Income......................................... 7.4 1.5 8.9
------ ----- ------
Interest expense, net.................................... 3.2 1.3(3) 4.5
Other income, net(4)..................................... 0.4 (0.1)(1) 0.3
------ ----- ------
Income before income taxes and extraordinary items....... 4.6 0.1 4.7
Income taxes............................................. 1.8 0.1(5) 1.9
------ ----- ------
Income before extraordinary items(6)..................... $ 2.8 $ 0.0 $ 2.8
====== ===== ======
OTHER DATA:
Capital Expenditures..................................... $ 2.0 -- $ 2.0
Depreciation and amortization(7)(8)...................... 4.2 (1.4)(1) 2.8
EBITDA(9)................................................ 12.0 -- 12.0
Cash interest expense.................................... 3.1 1.3(4) 4.4
EBITDA to cash interest expense.......................... 2.7x
Earnings to fixed charges(10)............................ 2.0x
</TABLE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED APRIL 4, 1998
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net sales................................................ $434.5 -- $434.5
Cost of Sales............................................ 373.0 $(6.0)(1) 367.0
------ ----- ------
Gross Profit............................................. 61.5 6.0 67.5
Selling, general and administrative expenses............. 33.8 0.0(2) 33.8
------ ----- ------
Operating Income......................................... 27.7 6.0 33.7
------ ----- ------
Interest expense, net.................................... 14.0 5.3(3) 19.3
Other income, net(4)..................................... 2.4 (0.5)(1) 1.9
------ ----- ------
Income before income taxes and extraordinary items....... 16.1 0.2 16.3
Income taxes............................................. 6.4 0.3(5) 6.7
------ ----- ------
Income before extraordinary items(6)..................... $ 9.7 $(0.1) $ 9.6
====== ===== ======
OTHER DATA:
Capital Expenditures..................................... $ 8.2 -- $ 8.2
Depreciation and amortization(7)(8)...................... 17.0 (5.5)(1) 11.5
EBITDA(9)................................................ 47.1 -- 47.1
Cash interest expense.................................... 13.4 5.3(4) 18.7
EBITDA to cash interest expense.......................... 2.5x
Earnings to fixed charges(10)............................ 1.8x
</TABLE>
13
<PAGE> 14
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(1) Reflects incremental depreciation and amortization expense as a result of
the preliminary adjustment to fair market value of the property, plant and
equipment, the revision of estimated useful lives and the excess of cost
over fair market value of the net assets acquired in the Transactions as
follows:
<TABLE>
<CAPTION>
THREE
ESTIMATED MONTHS TWELVE MONTHS
USEFUL YEAR ENDED ENDED ENDED
LIFE JANUARY 3, 1998 APRIL 4, 1998 APRIL 4, 1998
------------ --------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Depreciation adjustment to
reflect fair market value
of property, plant and
equipment................ 3 to 30 yrs. $(6.3) $(1.5) $(6.0)
Amortization of excess of
cost over fair market
value of net assets
acquired (goodwill)...... 40 yrs. $ 0.5 $ 0.1 $ 0.5
</TABLE>
(2) Represents non-cash compensation expense related to the value of the options
to purchase Holdco Common Stock issued to senior management in connection
with the Transactions assuming the Transactions had occurred the first day
of the Company's 1997 fiscal year.
(3) Represents the net adjustment to interest expense as a result of the
borrowings under the debt securities, the New Credit Facility and the
Wachovia Credit Facility calculated as follows:
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS
ENDED ENDED TWELVE MONTHS
JANUARY 3, 1998 APRIL 4, 1998 APRIL 4, 1998
--------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Debt Securities(a)................. $ 16.6 $ 4.1 $ 16.6
Secured and unsecured credit
facilities:
New Credit Facility(b)........... 2.2 0.2 1.8
Wachovia Credit Facility(c)...... 0.3 0.1 0.3
------ ----- ------
Cash interest expense.............. 19.1 4.4 18.7
Amortization of deferred financing
costs(d)......................... 0.6 0.1 0.6
------ ----- ------
Pro forma interest expense......... 19.7 4.5 19.3
Less historical net interest
expense(e)....................... (14.5) (3.2) (14.0)
------ ----- ------
Net adjustment..................... $ 5.2 $ 1.3 $ 5.3
====== ===== ======
</TABLE>
--------------------
<TABLE>
<S> <C>
(a) Represents interest on the $175.0 million private placement
of debt securities using an assumed interest rate of 9.50%.
(b) Represents interest on $27.4 million of the New Credit
Facility which is expected to be drawn at closing using an
assumed interest rate of 7.25% and adjusted to reflect the
seasonal borrowings of the Company since December 28, 1996.
(c) Represents interest on $4.0 million of the Wachovia Credit
Facility which is expected to be left outstanding at closing
using an assumed interest rate of 7.5%.
(d) Represents amortization of estimated deferred financing
costs of $5.5 million which will be amortized over the term
of the related debt (ten years for the debt securities).
(e) Represents the elimination of historical interest expense.
</TABLE>
14
<PAGE> 15
A change of 0.125% in the assumed interest rate would have the following
effect on pro forma interest expense:
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JANUARY 3, 1998 APRIL 4, 1998 APRIL 4, 1998
--------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Debt Securities....................... $0.2 $ -- $0.2
New Credit Facility................... -- -- --
---- ------ ----
$0.2 -- $0.2
==== ====== ====
</TABLE>
(4) Other income, net consists primarily of recurring items related to waste
sales, interest income received on past due trade receivables and payments
from the United Sates Department of Agriculture under the cotton user
program. For the year ended January 3, 1998 and for the twelve months ended
April 4, 1998, gains on the sale of real estate of approximately $0.7
million and $0.6 million, respectively, are also included in other income,
net.
(5) Income taxes are calculated at 40% of income before income taxes,
amortization of goodwill and extraordinary items.
(6) The Company will record costs of $10.5 million (pre tax) related to
premiums, fees and expenses associated with the repurchase of the Old Notes
($7.5 million), writeoff of unamortized deferred debt issuance costs ($2.5
million) and writeoff of debt discount costs ($0.5 million). Approximately
$6.0 million (pre-tax) will be recorded as an extraordinary item and the
balance will be included in the purchase accounting adjustments following
the guidance provided in EITF 88-16.
(7) Depreciation and amortization excludes historical and pro forma amortization
of deferred financing costs.
(8) Depreciation and amortization includes pro forma amortization of the excess
cost over the fair market value of net assets acquired (goodwill) of $0.5
million for the year ended January 3, 1998, $0.1 million for the three
months ended April 4, 1998, and $0.5 million for the twelve months ended
April 4, 1998.
(9) EBITDA represents income before income taxes and extraordinary items plus
interest expense, depreciation, amortization and the non-cash compensation
expense associated with the issuance of options to senior management to
purchase Holdco Common Stock. EBITDA should not be considered as an
alternative measure of net income or cash provided by operating activities
(both as determined in accordance with generally accepted accounting
principles), but is presented to provide additional information relating to
the Company's debt service capability. EBITDA should not be considered in
isolation or as a substitute for other measures of financial performance or
liquidity.
The calculation of pro forma EBITDA is shown below:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JANUARY 3, 1998 APRIL 4, 1998 LTM PERIOD
--------------- ------------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Income before income taxes and extraordinary
items........................................ $10.4 $ 4.7 $16.3
Plus:
Interest expense............................. 19.7 4.5 19.3
Depreciation and amortization................ 11.5 2.8 11.5
Non-cash compensation expense(a)............. 2.2 -- --
----- ----- -----
EBITDA....................................... $43.8 $12.0 $47.1
===== ===== =====
</TABLE>
(a) Compensation expense associated with issuance of new options to senior
management to purchase Holdco Common Stock. See
"Management -- Issuance of CMI Management, Inc. Options."
(10) Cash interest expense excludes noncash amortization of deferred financing
costs of $0.6 million for the year ended January 3, 1998, $0.1 million for
the three months ended April 4, 1998, and $0.6 million for the twelve
months ended April 4, 1998.
(11) For purposes of determining the pro forma ratios of earnings to fixed
charges, earnings are defined as income before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest
expense on all indebtedness, amortization of deferred financing costs and
one third of rental expense, representing that portion deemed to be
attributable to interest.
15
<PAGE> 16
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
APRIL 4, 1998
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................ $ 2.6 $ -- $ 2.6
Accounts receivable, net................................. 54.1 -- 54.1
Inventories.............................................. 61.6 -- 61.6
Other current assets..................................... 1.3 -- 1.3
------ ------- ------
Total current assets............................. 119.6 -- 119.6
Property, plant and equipment, net......................... 101.3 13.9(2) 115.2
Deferred financing costs................................... 2.5 (2.5)(3) 5.5
5.5(4)
Goodwill................................................... 0.3 19.0(5) 19.3
Other assets, net.......................................... 6.3 -- 6.3
------ ------- ------
Total assets..................................... $230.0 $ 35.9 $265.9
====== ======= ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Book overdraft accounts payable and accrued expenses..... $ 39.1 $ -- $ 39.1
Wachovia Credit Facility................................. 4.0 -- 4.0
Income taxes payable..................................... -- -- --
------ ------- ------
Total current liabilities........................ 43.1 -- 43.1
New Credit Facility........................................ 4.4 23.0(6) 27.4
Old Notes.................................................. 124.5 0.5(7) 0.0
(125.0)(8)
Private Placement.......................................... 0.0 175.0(9) 175.0
Deferred income taxes...................................... 2.9 4.0(10) 6.9
Other liabilities.......................................... 13.2 -- 13.2
Total stockholder's equity................................. 41.9 (41.6)(11) 0.3
------ ------- ------
Total liabilities and stockholder's equity....... $230.0 $ 35.9 $265.9
====== ======= ======
</TABLE>
16
<PAGE> 17
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
(1) Sources and uses of cash for the Transaction are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
Sources:
Private placement..................................... $175.0
Borrowings under New Credit Facility.................. 27.4
Sale of Holdco Common Stock to BBV.................... 9.0
------
Total......................................... $211.4
======
Uses:
Old Notes............................................. $125.0
Repayment of Existing Credit Agreement................ 4.4
Payment of Merger Consideration....................... 65.3
Payment of fees, premiums and related expenses........ 16.7
------
Total......................................... $211.4
======
</TABLE>
(2) Reflects a preliminary adjustment to record the fixed assets a fair market
value. The preliminary adjustment is based on management's estimates and is
allocated as follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
Buildings............................................... $12.1
Machinery and equipment................................. 2.6
Land and other.......................................... (0.8)
-----
Total......................................... $13.9
=====
</TABLE>
(3) Reflects the adjustment to write off the unamortized balance of deferred
debt issuance costs related to the Old Notes.
(4) Represents the portion of estimated transaction fees and expenses
attributable to the private placement which will be recorded as deferred
financing costs and amortized over the 10-year life of the debt securities
offered in the private placement.
(5) To record the excess of cost over fair market value of the net assets
acquired (goodwill).
(6) Represents the net borrowings under the New Credit Facility to finance the
Transactions.
(7) Represents the write-off of the unamortized debt discount incurred in
conjunction with the issuance of the Old Notes.
(8) Represents the repayment of the Old Notes as part of the Transactions.
(9) Represents the private placement as part of the Transactions.
(10) To record the deferred tax liability associated with recording the
Transactions, recording the fixed assets at fair market value, and
recording the related extraordinary items and compensation expense.
17
<PAGE> 18
(11) Represents the net adjustment to the Company's stockholder's equity to
record the Transactions using Purchase Accounting in accordance with EITF
88-16 and to reflect the net after tax effect of the related extraordinary
items and compensation expense. A summary of the pro forma stockholder's
equity is as follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
Stock issued to BBV for cash............................ $ 9.0
Net basis of continuing shareholder interests computed
in accordance with EITF 88-16......................... (3.1)
Net effect of various extraordinary items and
compensation expense.................................. (5.6)
-----
Total stockholder's equity.................... $ 0.3
=====
</TABLE>
18
<PAGE> 19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
A number of factors influence operating results for CMI including general
economic conditions, competition, raw material prices and capital expenditures.
Significant factors impacting CMI's operating results over the past several
years are as follows:
History. In 1992, CMI began implementing a strategic plan with the primary
goal of becoming the low-cost domestic provider of greige fabrics while
achieving greater product diversification through acquisitions. Important
elements of this new business strategy included the continued modernization of
CMI's manufacturing facilities and the acquisition of certain strategic
companies in order to reduce CMI's reliance upon sales of greige fabrics.
Chatham Division. In February 1992, CMI acquired the assets of Chatham
Manufacturing Company. In addition to increased product diversification, the
Chatham acquisition provided the Company with access to markets with greater
barriers to entry than the markets of CMI's other businesses. The Chatham
Division manufactures fabrics to be sold to the automotive industry, residential
and contract furniture upholstery industries, as well as consumer products such
as blankets, mattress pads and heated pads. These industry segments are
characterized by sophisticated supplier qualification and quality requirements,
short order lead times, significant capital requirements and other barriers to
entry. Most of the division's products are not sensitive to imports, and in many
instances, provide CMI with export opportunities. Nonetheless, Chatham's
financial performance deteriorated from 1992 through 1995. In 1993 and 1994, the
Chatham Division experienced significant operating disruptions which resulted in
excessive off-quality levels and minimum order lead times of up to 26 weeks for
furniture fabrics. These disruptions negatively impacted operating margins and
the division's ability to service its customers. During 1995, operating margins
in the Chatham Division remained substantially below those of CMI's other
divisions as it worked to improve its product mix, complete the development of
its information systems and correct certain quality and manufacturing
inefficiencies.
Greige Fabrics Division. Continuing with its acquisition strategy, CMI
acquired the Clarkesville Plant in May 1994 which expanded the Company's
products to include greige fabrics of 100% synthetic yarns. Because the fabrics
produced at Clarkesville are less commodity-oriented, they are more capable of
consistently producing higher margins. CMI's Greige Fabrics Division now
manufactures light to midweight greige fabrics, including printcloths,
broadcloths, twills, crepes and other fabrics of 100% cotton, blends of
polyester and cotton and 100% synthetic yarns. The fabrics are sold for use in
home furnishings such as sheetings, curtains and mattress ticking, career
apparel and various industrial applications including medical and athletic tape.
Certain greige fabrics produced by CMI are more commodity oriented, and
therefore, more sensitive to general supply and demand levels and the
corresponding impact on pricing. In 1995 and 1996, there was an oversupply of
greige fabrics which depressed prices and resulted in excess capacity and
increased inventory levels. Also in 1995 and 1996, the division was negatively
impacted by unprecedented increases in raw material costs.
Elastic Fabrics Division. CMI acquired the former United Elastic
Corporation operations in January 1995. The United Elastic Corporation
acquisition allowed CMI to diversify further its product offerings to include
narrow woven elastics and provide its existing customer base with more
value-added products and services. The Elastic Fabrics Division now produces
both wide and narrow elastics and manufactures woven, warp knit and circular
knit fabrics used in intimate apparel, activewear and industrial/medical
markets. The products manufactured in this division are highly engineered and
the quality of the fabrics is critical. United Elastic Corporation was in
bankruptcy when it was purchased by CMI. Despite the strategic opportunities
associated with this acquisition, the negative effects of the bankruptcy on both
customers and manufacturing operations have been difficult to overcome.
Throughout this time period, CMI continued to upgrade its manufacturing
capacity by investing in new equipment capable of producing better quality
fabrics more efficiently. Despite these investments and its
19
<PAGE> 21
achieving greater product diversification through acquisitions, CMI's
performance continued to deteriorate while asset utilization rates and customer
service levels also declined.
Restructuring. The Company's disappointing financial performance in 1994
and 1995 forced CMI to make certain changes in senior management and refocus its
overall business strategy in late 1995. At that time, CMI initiated the
Restructuring to improve operating performance, reduce costs and realign certain
resources in order to better serve its customers. The Restructuring consisted
of: (1) additional changes in the management of CMI; (2) the closing of the
Greige Fabrics Division's least efficient manufacturing facility; (3) the
consolidation of the Chatham Division's weaving operations in Elkin, North
Carolina from three buildings to two buildings; (4) the downsizing of CMI's
corporate offices in Columbia, South Carolina and relocation of certain
resources back to the operating divisions; (5) the write-off and proposed sale
of certain idle and impaired assets; (6) the increased emphasis on customer
service and product development investments, particularly with systems and
design resources; (7) the sale of excess inventories; and (8) other process
improvement initiatives designed to reduce costs, improve customer service
levels, and maximize returns on current investments. As a result of the
Restructuring, CMI recorded a $12.9 million restructuring charge in 1995
relating to severance, retirement, and other nonrecurring charges associated
with facility closures and overhead reductions. Each of the restructuring
initiatives was completed by the end of 1996. In total, CMI now estimates that
over 900 manufacturing and administrative positions out of approximately 5,000
were permanently eliminated.
The Restructuring implemented by new senior management allowed CMI to
downsize its corporate offices, eliminate inefficient capacity and reorganize
its resources to emphasize customer service and product development. These
initiatives have helped position CMI to operate more efficiently and to respond
more quickly and cost effectively to market changes and customer demands. The
initiatives to reduce inventories and to correct capacity levels relative to
market demand, particularly in the Greige Fabrics Division, have resulted in
better internal operating disciplines and a significant reduction in CMI's
overall investment in working capital. Further, the overall improvement in
supply levels relative to demand for greige fabrics positively impacted the
overall market conditions during 1997.
Operating margins improved significantly in the Chatham Division during
1996 and 1997 in response to the business improvement initiatives and strategic
investments in new equipment at its Elkin, North Carolina facility. Although CMI
has been constrained in recent years with respect to its capital expenditures,
CMI intends to continue to invest in new equipment at this facility. In light of
its improved performance in quality, on-time delivery, product development and
order backlog levels, CMI believes that additional investments will allow the
Chatham Division to better realize its earnings potential.
Although the turnaround of CMI's narrow elastic facility has been slower
than that of its other operations, CMI has recently begun to realize the
benefits of changes to this division. As a result of these changes, the Elastics
Fabrics Division reported a 9% increase in narrow elastic woven sales for the
quarter ended April 4, 1998 and CMI believes that additional improvements will
be forthcoming. CMI expects to continue to invest in all three of its divisions
going forward in an effort to meet customer demands and market requirements. The
Company's efforts will continue to focus on improving returns by being
well-positioned to operate a diversified, more value-added product mix and
reducing its dependency on the sale of greige fabrics.
Management's turnaround efforts have had a favorable impact on CMI's
competitive position and financial performance. Despite operating losses in 1995
and 1996, CMI's ability to manage its balance sheet has resulted in a $27.2
million reduction in working capital from 1994 to 1997, while long-term debt has
declined by $29.5 million. From 1996 to 1997, sales increased 13% from $374.0
million to $422.7 million, gross margin increased from 7.6% to 13.3%, and EBITDA
as a percentage of sales increased from 5.7% to 10.3%. As of April 4, 1998, CMI
has now achieved six consecutive quarters of year-over-year EBITDA improvement
and increased returns on capital.
General Economic Conditions. CMI's operating results are susceptible to
fluctuations in the general condition of the United States economy. The ability
of CMI to maintain its operating margins during economic downturns is adversely
affected by the capital intensive nature of its business. The Company's
operating margins may also be negatively impacted by increases in raw material
prices, fluctuations in the
20
<PAGE> 22
commodity-oriented market for greige fabrics and the cyclicality of the
automotive, home furnishing and apparel industries. These factors may occur
despite trends in the general economy of the United States. In 1997, CMI
benefited from its restructuring initiatives and the correction of supply levels
of greige fabrics relative to market demand, as well as a return to more
historical levels of costs for raw materials. Consequently, operating margins
improved to acceptable levels and were more representative of general economic
conditions.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages
that certain income and expense items bear to sales for such periods. All years
refer to CMI's fiscal years.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ---------------------
----------------------- MARCH 29, APRIL 4,
1995 1996 1997 1997 1998
----- ----- ----- --------- --------
<S> <C> <C> <C> <C> <C>
Net sales....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Depreciation.................................... 5.5 5.8 4.0 4.4 3.7
Other cost of sales............................. 84.5 86.6 82.7 84.3 81.4
----- ----- ----- ----- -----
Gross profit.................................. 10.0 7.6 13.3 11.3 14.9
Selling, general and administrative expenses.... 8.0 8.3 7.8 8.1 8.1
Restructuring and other nonrecurring charges.... 4.3 -- -- -- --
----- ----- ----- ----- -----
Operating income (loss)....................... (2.3) (0.7) 5.5 3.2 6.8
Other income (expense)
Interest expense.............................. (4.2) (4.1) (3.4) (3.8) (3.0)
Other, net.................................... 0.3 0.4 0.7 1.1 0.4
----- ----- ----- ----- -----
Income (loss) before income taxes............. (6.2) (4.4) 2.8 0.5 4.2
Income taxes (benefit).......................... (2.3) (1.6) 1.1 0.2 1.6
----- ----- ----- ----- -----
Net income (loss)............................. (3.9)% (2.8)% 1.7% 0.3% 2.6%
===== ===== ===== ===== =====
</TABLE>
Three Months Ended April 4, 1998 Compared with Three Months Ended March 29,
1997
Sales for the three months ended April 4, 1998 increased $11.8 million or
12.1% from $97.2 million to $109 million over the corresponding period of 1997.
Sales of the Greige Fabrics Division decreased $1.2 million or 2.8%, sales of
the Elastic Fabrics Division increased $0.7 million or 2.7%, while sales of the
Chatham Division increased $12.3 million or 39.7%. The decrease in sales for the
Greige Fabrics Division consisted of a $1.3 million decline in sales of 100%
filament fabrics produced at the Company's Clarkesville, Georgia facility. Sales
of blended or 100% cotton greige fabrics were up $0.1 million as a result of a
5.7% increase in average selling prices and a 5.0% decline in volume due to
lower finished goods inventory at January 3, 1998 as compared to December 28,
1996. The increase in sales for the Elastic Fabrics Division was principally
attributable to a $0.7 million, or 9.5%, increase in sales of narrow woven
elasticized fabrics produced at the Company's Stuart, Virginia facility due
primarily to increases in volume. Sales of warp and circular knit elasticized
fabrics produced at the Company's Greensboro, North Carolina facility remained
relatively unchanged. The increase in sales for the Chatham Division included a
$9.8 million increase in automotive upholstery sales which is a result of volume
increases associated with the Company's increased product placements in this
market segment. Sales of furniture upholstery were up $1.0 million due to
increased volume and improving demand for its products, while sales of consumer
products increased $0.3 million. The Chatham Division also reported a $1.2
million increase in yarn sales which reflects the division's better utilization
of capacity.
Operating income for the three months ended April 4, 1998 increased $4.3
million from $3.1 million to an operating profit of $7.4 million. The increase
in profitability is primarily due to the Chatham Division, as increased sales,
improved operating efficiencies and the division's efforts to improve its
product mix have resulted in better margins and increased demand for its
products. Despite lower sales, gross profits in the Greige Fabrics Division
improved due to higher selling prices and lower raw material costs. Gross
profits in the Elastic Fabrics Division were also higher as the division's
efforts to improve the performance of its Stuart facility have resulted in both
higher sales and increased margins. For the three months ended April 4, 1998,
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gross margins were 15.8%, 16.9% and 13.7% for the Greige Fabrics Division,
Elastic Fabrics Division and Chatham Division, respectively as compared to
11.6%, 15.2% and 7.6%, respectively for the three-month period ended March 29,
1997.
Interest expense for the three months ended April 4, 1998 was $3.2 million,
down $0.5 million from the same period in 1997. The decrease reflects lower
average debt balances during the first three months of fiscal 1998 compared to
the corresponding period of fiscal 1997.
Other income, net for the three months ended April 4, 1998 was $0.4
million, down $0.7 million from the same period in 1997. This decrease was due
to the inclusion of income received from certain life insurance policies and
related death benefits in the prior period.
As a result of the above mentioned items, income before income taxes
increased $4.1 million for the three months ended April 4, 1998 over the
corresponding period in 1997, while the provision for income taxes increased
$1.6 million. Net income of $2.8 million for the first three months of fiscal
1998 represents an increase of $2.5 million over the corresponding period of
fiscal 1997.
For the three months ended April 4, 1998, the Company increased its net
borrowings by $6.2 million and used $2.4 million in operations to support
working capital requirements. Additionally, these borrowings were used to
finance $2.0 million of capital expenditures and to reduce its payable-book
overdraft by $0.9 million.
At April 4, 1998, working capital was approximately $77.9 million as
compared to approximately $66.3 million at January 3, 1998. The increase in
working capital can be attributed to the increased sales for the quarter ended
April 4, 1998, and especially to increased sales at the end of the first quarter
as compared to the end of the year when shipments and production are generally
curtailed during the holiday weeks of Christmas and New Year's. Additionally,
working capital at April 4, 1998 included a $3.0 million increase in raw cotton
inventories due to the seasonal nature of these purchases while accrued expenses
were down because the Company paid its scheduled semiannual interest payment on
the Old Notes of $5.9 million on April 1, 1998. Management is not aware of any
present or potential impairments to the Company's liquidity.
At April 4, 1998, long-term debt of approximately $128.9 million
represented 75.5% of total capital, compared to 76.1% at January 3, 1998.
The Company believes that funds from operations during the balance of
fiscal 1998 and amounts available under the credit agreements are adequate to
finance capital expenditures of approximately $20 million during the remainder
of 1998, in addition to meeting working capital requirements and scheduled debt
service payments.
Fiscal Year 1997 Compared to Fiscal Year 1996
CMI's net sales increased $48.7 million or 13.0% from $374.0 million in
1996 to $422.7 million in 1997. Sales of the Greige Fabrics Division increased
$14.2 million or 9.1%, sales of the Elastic Fabrics Division increased $3.7
million or 4.1% while sales of the Chatham Division increased $30.8 million or
24.3%. The increase in sales for the Greige Fabrics Division was primarily
attributable to a more favorable pricing environment as excess supply levels of
lightweight printcloth fabrics relative to market demand were corrected in the
prior year. These factors resulted in increased sales due to a 9.3% increase in
average selling prices for these fabrics without a corresponding change in sales
volume. The increase in sales for the Elastic Fabrics Division was principally
attributable to stronger demand for warp knit fabrics and CMI's decision to
resume shipments of CMI's woven elasticized fabrics to a significant customer
following the resolution of issues which arose in 1996 involving the customer's
creditworthiness. Together, these factors helped to offset a $2.9 million
decrease in sales of narrow woven elasticized fabrics produced at the Stuart
facility. The increase in sales for the Chatham Division consisted primarily of
a $27.3 million increase in automotive upholstery sales as a result of a
substantial increase in shipments attributable to CMI's success in securing new
product placements and increasing market share. Sales of furniture fabrics and
consumer products were relatively unchanged from prior year levels.
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In conjunction with CMI's increased sales, gross profit increased $28.1
million or 99.8% from $28.2 million to $56.3 million, and resulted in a gross
margin increase from 7.6% to 13.3%. In 1997, gross profits as a percentage of
sales were 12.2%, 15.2% and 13.3% for the Greige Fabrics Division, Elastic
Fabrics Division and Chatham Division, respectively, as compared with 0.3%,
12.5% and 12.9%, respectively in 1996. Additionally, CMI's depreciation expense
declined by $5.3 million in 1997 as a majority of the fixed assets acquired when
CMI was formed in 1986 became fully depreciated. The increase in gross profits
was directly attributable to the improved market conditions for greige fabrics,
which resulted in significantly higher selling prices for those products and
allowed CMI to operate its greige manufacturing facilities at full capacity. To
a lesser extent gross profits increased due to decreased costs of raw materials
which returned to more historical levels in 1997. Gross profit in the Elastic
Fabrics Division increased due to higher sales while division-wide gross margins
also improved despite the weak performance of its Stuart Facility. Gross profit
in the Chatham Division was up due to higher sales while gross margins increased
marginally as a result of the continued operating improvements.
Selling, general and administrative expenses increased $1.8 million or 5.8%
from $31.1 million in 1996 to $32.9 million in 1997. The increase in selling,
general and administrative expenses was principally due to the increased sales
and the associated mix of commission based revenues. Additionally, CMI paid
approximately $1.5 million in incentive compensation in 1997 as compared to only
$0.4 million in 1996. CMI continued to realize benefits from its restructuring
and downsizing initiatives from prior years and, consequently, selling, general
and administrative expenses were down as a percentage of sales from 8.3% in 1996
to 7.8% in 1997.
Interest expense decreased $0.9 million or 6.0% from $15.4 million in 1996
to $14.5 million in 1997. This decrease was due to lower debt balances in 1997
which may be attributed to CMI's increased earnings, reduced capital spending
and working capital reduction initiatives.
Income taxes (benefit) as a percent of income (loss) before taxes changed
from 36.4% in 1996 to 40% in 1997.
As a result of the foregoing factors, CMI reported net income of $7.2
million in 1997 as compared to a net loss of $10.7 million in 1996.
Fiscal Year 1996 Compared to Fiscal Year 1995
CMI's net sales decreased $34.6 million or 8.5% from $408.6 million in 1995
to $374.0 million in 1996. Sales of the Greige Fabrics Division decreased $26.1
million or 14.3% and sales of the Elastic Fabrics Division decreased $12.8
million or 12.4% while sales of the Chatham Division increased $4.3 million or
3.5%. The reduction in sales for the Greige Fabrics Division was primarily
attributable to the weak market conditions, which led to an excess supply of
lightweight greige printcloth fabrics and resulted in CMI's permanent closing of
the Lydia Plant in May 1996. These weak market conditions had the effect of
reducing the average selling price for CMI's printcloth fabrics by 8.4% and
caused, together with the closing of the Lydia Plant, a volume decline of 8.6%
in sales for these fabrics. The sales decrease for the Elastic Fabrics was
primarily a result of weak market demand for CMI's woven elasticized fabrics and
CMI's strategic decision to limit shipments to a significant elasticized fabric
customer because of CMI's concerns relating to the creditworthiness of the
customer. The sales increase for the Chatham Division was principally due to an
increase in the number of placements for its fabrics from automotive customers.
In conjunction with CMI's lower sales, gross profit decreased $12.6 million
or 30.8% from $40.7 million to $28.2 million, as the gross margin declined from
10.0% to 7.6%. In 1996, gross profits as a percentage of sales were 0.3%, 12.5%
and 12.9% for the Greige Fabrics Division, the Elastic Fabrics Division and
Chatham Division, respectively, as compared with 7.7%, 14.7% and 8.9%,
respectively, in 1995. The decline in gross profits was primarily attributable
to the weak market conditions for lightweight greige fabrics, resulting in
reduced volumes and lower selling prices. In response to these conditions, CMI
curtailed its operating schedule at certain locations during the first half of
1996 and incurred unabsorbed fixed overhead costs in order to decrease
inventories and production to levels more consistent with market demand.
Unprecedented costs for raw materials also negatively impacted CMI's gross
profits for the Greige Fabrics Division in both 1995 and 1996. Although 1996
earnings for the Chatham Division were improved over 1995 levels, they only
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partially offset the significant reduction in the Greige Fabrics Division's
gross profits and margins and the decline in earnings associated with the
reduction in sales of the Elastic Fabrics Division.
Selling, general and administrative expenses decreased $1.6 million or 4.9%
from $32.7 million in 1995 to $31.1 million in 1996; however as a percentage of
sales, expenses were up 0.3% from 8.0% to 8.3%. The reduction in selling,
general and administrative expenses was related to CMI's downsizing of its
Corporate offices. As a percentage of sales, costs were higher because of an
increase in the mix of commission based sales.
Interest expense decreased $1.7 million or 10.2% from $17.2 million in 1995
to $15.4 million in 1996. This decrease was due to lower debt balances in 1996
and were attributed to CMI's reduced capital spending and inventory reduction
initiatives.
Income taxes (benefit) as a percent of income (loss) before taxes changed
from 37.3% in 1995 to 36.4% in 1996.
As a result of the foregoing factors and the absence of any restructuring
or other nonrecurring charges in 1996, CMI reported a net loss of $10.7 million
in 1996 as compared to a net loss of $15.9 million in 1995.
THE OLD NOTES AND FINANCING AGREEMENTS
In October 1993, CMI consummated an underwritten public offering of the Old
Notes. Immediately upon the issuance of the Old Notes, CMI's then principal
operating subsidiaries were merged with and into CMI. The net proceeds of the
issuance of the Old Notes, together with initial borrowings under the Existing
Credit Agreement and the Wachovia Credit Facility were used to refinance $118.7
million of outstanding debt, comprised of $40.9 million in term loans and $46.7
million in revolving credit loans under then-existing loan agreements with CMI's
subsidiaries, and $31.1 million of 12% Senior Subordinated Debentures due 1999
issued by Clinton Mills, Inc. (the "Clinton Debentures"). In December 1994 the
revolving credit facility was increased to $92 million and the Wachovia Credit
Facility was increased to $8 million. In June 1995, the Wachovia Credit Facility
was reduced to $4 million.
In March 1996, CMI replaced the $92 million unsecured revolving credit
facility with the Existing Credit Agreement and renewed the Wachovia Credit
Facility. CMI and the lenders amended the Existing Credit Agreement in February
1997 to reduce the borrowing limit to $65 million, to contemplate the
realignment of CMI's assets into separate operating entities which were
completed during 1997, to avoid any potential defaults in the covenants of the
Existing Credit Agreement and to extend the maturity of the Existing Credit
Agreement by two years to January 2000. The maximum and average amounts
outstanding during 1997 were $30.6 million and $20.9 million, respectively; at
January 3, 1998, $0.1 million was outstanding and the per annum interest rate
was 8.5%. As part of the Transactions, CMI will replace the Existing Credit
Agreement with the New Credit Facility. The Wachovia Credit Facility will be
retained.
LIQUIDITY AND CAPITAL RESOURCES
The Company will be required to make interest payments with respect to the
New Credit Facility, the Wachovia Credit Facility and the debt securities issued
in the private offering. The Company typically makes capital expenditures
related primarily to the purchase of new equipment and the maintenance and
improvement of manufacturing facilities. The Company spent $2.0 million in
capital expenditures for the three months ended April 4, 1998 as compared to
$1.4 million for the three months ended March 29, 1997. In fiscal 1995, 1996 and
1997, capital expenditures were $8.9 million, $9.3 million and $7.6 million,
respectively. The Company estimates that capital expenditures will be
approximately $20.0 million for the last nine months of 1998 and approximately
$15.0 million in 1999. Working capital (excluding cash, marketable securities
and the current portion of long-term debt) decreased $4.0 million from $70.3
million at December 28, 1996 to $66.3 million at January 3, 1998. The decrease
in working capital resulted from a reduction in CMI's inventory levels.
The Company's principal sources of cash to fund these capital requirements
will be net cash provided by operating activities as well as borrowings, if
needed, under its New Credit Facility. The Company's net cash provided (used) by
operating activities for the three months ended April 4, 1998 totaled ($2.4)
million as compared to $0.5 million for the three months ended March 29, 1997.
In fiscal 1995, 1996 and 1997, the
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Company's net cash provided by operations totaled $30.8 million, $18.8 million,
and $28.9 million, respectively.
Net cash used by investing activities for the three months ended April 4,
1998 was $2.0 million as compared to $1.4 million for the three months ended
March 29, 1997. In fiscal 1995, 1996 and 1997, net cash used by investing
activities totaled $28.9 million, $9.3 million and $7.6 million, respectively.
The decline in investment activities noted above coupled with increased cash
flow from operations enabled CMI to make net repayments of $21.1 million on the
revolving credit facilities in 1997. Net cash provided by financing activities
for the three months ended April 4, 1998 was $5.3 million as compared to $1.0
million for the three months ended March 29, 1997. In fiscal 1995, 1996 and
1997, net cash used in financing activities was $4.8 million, $7.4 million and
$21.1 million, respectively.
After giving effect to the Transactions, the Company will have a
substantial amount of indebtedness. The Company will rely on internally
generated funds and, to the extent necessary, on borrowings under the New Credit
Facility, which will allow for borrowings up to $75.0 million, subject to
certain customary drawing conditions, and the Wachovia Credit Facility to meet
its liquidity needs. In addition, the Company may make selective acquisitions
and would rely on internally generated funds, and to the extent necessary, on
borrowings under the New Credit Facility or from other sources to finance such
acquisitions. The Company's ability to borrow is limited by the New Credit
Facility.
Borrowings under the New Credit Facility will bear interest at a rate per
annum equal to a margin over, at the Company's option, LIBOR or a Base Rate. The
New Credit Facility will be secured by CMI's receivables, inventories and
certain intangibles, and will contain customary covenants and events of default,
including substantial restrictions on the Company's ability to declare dividends
or distributions.
The Company's ability to make scheduled payments of principal of, or to pay
the interest, on, or to refinance, its indebtedness, or to fund planned capital
expenditures will depend on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond its control. Based upon the current level of
operations and revenue growth, management believes that cash flow from
operations and available cash, together with available borrowings under the New
Credit Facility and the Wachovia Credit Facility, will be adequate to meet the
Company's future liquidity needs for at least the next several years. In
addition, there can be no assurance that the Company's business will generate
sufficient cash flow from operations, or that future borrowings will be
available under the New Credit Facility and the Wachovia Credit Facility in an
amount sufficient to (i) enable the Company to service its indebtedness or (ii)
fund its other liquidity needs. If the Company's cash flow, availability under
the New Credit Facility and the Wachovia Credit Facility and other capital
resources are insufficient to fund the Company's debt service obligations, the
Company may be forced to reduce or delay capital expenditures, sell assets,
restructure or refinance its indebtedness, or seek additional equity
contributions. There can be no assurance that any of such measures could be
implemented on satisfactory terms, or, if implemented, would be successful or
would permit the Company to meet its debt service obligations.
ENVIRONMENTAL
Federal and state laws and regulations relating to the discharge of
materials into the environment are continually changing; therefore it is
difficult to gauge the total future impact of such regulations on CMI. In
connection with the acquisition of the Elkin facility, environmental site
evaluations were performed by CMI which concluded that some form of groundwater
and soil remediation will be required and that some asbestos abatement may be
required at the Elkin facility. CMI believes that sufficient amounts are accrued
as of April 4, 1998 for the cost of these expenditures. In the future, CMI may
also construct facilities to control flyash disposal and runoff from a coal pile
at the Elkin facility. CMI may also have remediation obligations with respect to
contamination at two offsite locations. The Company believes that such
obligations are not material. In addition, CMI is pursuing a clean-up of certain
ground water and soil contamination at its Greensboro facility. CMI believes
that the costs associated with this work will not exceed $0.2 million. CMI
further believes that based on all currently available information, the
resolution of all of these known
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environmental matters will not have a material adverse effect on CMI. However,
future events, such as changes in or modified interpretations of existing laws
and regulations or enforcement policies, or further investigation or evaluation
of potential health hazards of certain business activities, may give rise to
additional compliance and other costs that could have a material adverse effect
on CMI.
BACKLOG
At April 4, 1998, CMI had aggregate unfilled orders of $101.0 million, as
compared to $113.0 million at March 29, 1997. As of April 4, 1998, the Greige
Fabrics Division had approximately $63.0 million of unfilled customer orders for
woven fabrics, as compared to $81.0 million at March 29, 1997. The decrease in
the Greige Fabrics Division's order backlog from 1997 to 1998 is indicative of
the market conditions for greige fabrics as certain customers have reduced their
forward order positions to backlog levels more representative of historical
levels. The division expects to fill substantially all of these orders in 1998.
At April 4, 1998, the Elastic Fabrics Division had unfilled orders totaling
$14.0 million, as compared to $16.0 million at March 29, 1997. At April 4, 1998,
the Chatham Division had unfilled orders totaling $24.0 million, as compared to
$16.0 million at March 29, 1997. The increase in the Chatham Division's order
backlog from 1997 to 1998 is indicative of the increase in placements for CMI's
automotive upholstery fabrics. The division expects to fill all of these orders
in 1998. These backlogs consist of orders that are not generally subject to
cancellation prior to shipment, although CMI has in the past accommodated
customer requests for order deferments due to unusual circumstances. Although
order backlog levels were down for the Greige Fabrics Division at April 4, 1998,
as compared to the same time in 1997, CMI believes that current backlog levels
are more representative of historical levels.
IMPACT OF YEAR 2000
Management has initiated a plan to prepare CMI's computer systems and
applications for the year 2000. At January 3, 1998, CMI had made substantial
progress in programming its business systems for year 2000 compliance.
Management estimates that all computer systems and applications will be year
2000 compliant prior to that date. CMI expects to incur primarily internal staff
costs related to enhancements necessary to prepare the systems for the year
2000. Testing and conversion of system applications is expected to cost
approximately $2.0 million over the next two years. This estimate includes the
cost to purchase and install certain software systems or to convert existing
systems which are currently not year 2000 compliant.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NEW STOCKHOLDERS AGREEMENT
In connection with the Transactions, each stockholder of Holdco Common
Stock will be required to execute a stockholders agreement (the "New
Stockholders Agreement") and the Company's existing Stockholders Agreement will
be terminated. Certain significant transactions require the approval of the
Board of Directors (including the approval of at least one director designated
by BBV) and in some instances the approval of not less than 65% of the Holdco
Common Stock then outstanding. The Board of Directors will consist of up to
seven members, two of whom will be designated by BBV as long as BBV owns not
less than 10% of outstanding Holdco Common Stock on a fully-diluted basis.
Subject to certain exceptions, Holdco Stockholders who are active employees of
Holdco and its subsidiaries will be entitled to designate the remaining
directors. The New Stockholders Agreement also provides for demand and piggyback
registration rights, certain restrictions on the transfer of shares of Holdco
Common Stock, rights of first refusal, tag-along and drag-along rights in
connection with certain proposed transfers of Holdco Common Stock. In addition,
the New Stockholders Agreement provides BBV and ML Capital Partners a right to
put the shares owned by them to Holdco, which right will be exercisable for a
period of five years following the fifth anniversary of the consummation of the
Transactions. Holdco also will have the option to call the shares of Holdco
Common Stock owned by ML Capital Partners for a period of 90 days following the
consummation of the Transactions.
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<PAGE> 29
DESCRIPTION OF OTHER INDEBTEDNESS
NEW CREDIT FACILITY
In connection with the Transactions, CMIA will enter into a New Credit
Facility. Upon consummation of the Transactions, CMI will become the borrower
under this facility.
The New Credit Facility provides for a revolving credit facility of up to
$75.0 million, including a letter of credit facility of up to $5.0 million. The
amount available under the New Credit Facility will be governed by a borrowing
base calculated based on percentages of eligible accounts receivable and
eligible inventory, and will be reduced by any outstanding letters of credit
issued under the letter of credit facility. The New Credit Facility will have a
maturity date of five years from the closing date of the Transactions.
Interest Rates and Fees. Interest under the New Credit Facility is payable
at one of two specified rates, as selected by CMI, as follows: (i) the alternate
base rate of the agent bank, plus the applicable margin and (ii) the LIBOR rate,
plus the applicable margin. The applicable margins will be established from time
to time based on a pricing grid. The initial applicable margin will be 0% for
the alternate base rate and 1.5% for the LIBOR rate. CMI pays an upfront fee of
0.25% and a commitment fee of 0.375% per annum on the unused portion of the
revolving credit facility, payable quarterly in arrears. CMI also pays an annual
agency fee of $25,000 to the agent bank. In addition, CMI will pay a fee on the
date any letter of credit is issued under the Credit Agreement and each
anniversary date thereafter in an amount equal to (i) the applicable LIBOR
margin of the stated amount of any standby letter of credit and (ii) the
applicable LIBOR margin minus 0.5% of the stated amount of any documentary
letter of credit, as well as a facing fee equal to 0.125% of the stated amount
of the letter of credit.
Restrictive Covenants. The New Credit Facility contains covenants to be
complied with by CMI and its subsidiaries customary for a secured revolving
credit facility including, among others, covenants restricting the incurrence of
indebtedness, the creation or existence of liens, the declaration or the payment
of dividends, the repurchase or redemption of debt and equity securities of CMI,
certain transactions with related parties, and certain corporate transactions
such as sales and purchases of assets, mergers or consolidations. The New Credit
Facility also contains certain financial covenants relating to tangible net
worth, excess availability, capital expenditures and interest coverage ratios,
as well as certain affirmative covenants relating to compliance with laws,
preservation of corporate existence, maintenance of insurance, payment of taxes,
maintenance of properties, delivery of financial and other information to the
lenders under the New Credit Facility and other matters.
Security. Borrowings under the New Credit Facility are secured by CMI's
and its subsidiaries receivables, inventories and certain intangibles. The New
Credit Facility contains a negative covenant limiting CMI's right to grant
security interests or other liens in its other assets. However, certain
additional senior indebtedness permitted under the New Credit Facility may be
secured by assets of CMI other than inventory or receivables.
Events of Default. The New Credit Facility contains certain events of
default customary for this type of credit facility, including, among others,
payment events of default, covenant defaults, an event of default based on a
change of control of CMI, and a cross-default to other indebtedness of, and
bankruptcy and judgment defaults to, CMI.
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) and (b) Not Applicable.
(c) Exhibits.
99.1 Press Release of CMI Industries, Inc. dated June 1,
1998.
SIGNATURES
Pursuant to the requirements 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.
Date: June 1, 1998 By: /s/ JAMES A. OVENDEN
----------------------------
James A. Ovenden
Executive Vice President and
Chief Financial Officer
29
<PAGE> 1
EXHIBIT 99.1
CMI INDUSTRIES, INC. ANNOUNCES
CASH TENDER OFFER FOR 9-1/2% SENIOR SUBORDINATED NOTES DUE 2003
COLUMBIA, S.C., June 1, 1998 - CMI Industries, Inc. ("CMI") today
announced that it has commenced a cash tender offer and consent solicitation
relating to its $125,000,000 outstanding principal amount of 9-1/2% Senior
Subordinated Notes due October 1, 2003.
The purchase price to be paid for each validly tendered Note will be
based upon a fixed spread of 50.0 basis points over the yield to maturity on the
6% U.S. Treasury Note due September 30, 1998, less a consent payment equal to
$10 per $1,000 principal amount of the Notes. The Company expects that the
purchase price for the Notes will be fixed on June 23, 1998 (or, if the tender
offer is extended, the third business day prior to the expiration date).
In conjunction with the tender offer, consents to certain proposed
amendments to the Indenture governing the Notes are being solicited. Among other
things, these amendments would eliminate substantially all of the restrictive
covenants and would amend certain other provisions contained in the Indenture
for the Notes. Adoption of the proposed amendments requires the consent of
holders of a majority of the outstanding Notes. Holders who tender their Notes
will be required to consent to the proposed amendments.
Holders who tender their Notes prior to the consent deadline will
receive the purchase price referred to above, plus a consent payment of $10 per
$1,000 principal amount of Notes. The consent deadline is Midnight, New York
City time, on the first business day after public announcement by press release
of the later of June 12, 1998 or the date on which CMI receives tenders from
holders of a majority of the outstanding Notes.
The tender offer will expire at 12:00 Midnight, New York City time, on
June 26, 1998, unless terminated or extended.
CMI intends to finance the tender offer and consent solicitation
through a private placement of $175 million aggregate principal amount senior
subordinated debt securities, and CMI expects to consummate the private
placement in early July.
On May 15, 1998 CMI entered into a definitive merger agreement
providing for the acquisition of the outstanding CMI Common Stock on the
effective date of the merger (the "Merger") by CMI Acquisitions, Inc. ("CMI
Acquisitions"). In the Merger, each outstanding share of CMI Common Stock will
be converted into the right to receive cash plus a fractional interest in a
share of CMI Management, Inc. ("CMI Management") Common Stock. After giving
effect to the Merger, CMI shall be the surviving corporation in the Merger and
will be a wholly-owned subsidiary of CMI Management.
<PAGE> 2
NationsBanc Montgomery Securities LLC is acting as the Dealer Manager
for the tender offer and the consent solicitation. The Depositary for the tender
offer is The Chase Manhattan Bank. The tender offer and consent solicitation are
being made pursuant to an Offer to Purchase and Consent Solicitation Statement
and related Consent and Letter of Transmittal, which more fully set forth the
terms of the tender offer and consent solicitation.
Additional information concerning the terms of the tender offer and
consent solicitation may be obtained from NationsBank Montgomery Securities LLC,
Liability Management Group, at 888-292-0070. Copies of the Offer to Purchase and
Consent Solicitation Statement and related documents may be obtained from Beacon
Hill Partners, Inc., the Information Agent, at 90 Broad Street, New York, New
York 10004, at 800-755-5001.
2
