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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO
For the transition period from to
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Commission File Number 33-67854
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 incorporation (I.R.S. Employer
Identification No.)
1301 Gervais Street, Suite 700, Columbia, South Carolina 29201
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(Address of principal executive office) (Zip Code)
Registrant's telephone number including area code: (803) 771-4434
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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No shares of the voting securities of the Registrant are held by nonaffiliates;
the aggregate market value of shares of voting securities held by nonaffiliates
as of March 1, 1998 is zero.
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As of March 15, 1999, there were 1,695,318 shares of $1 Par Value Common Stock
outstanding.
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This Report contains statements which to the extent they are not
recitations of historical fact, may constitute "forward looking statements"
within the meaning of applicable federal securities laws. All forward looking
statements in this Report are intended to be subject to the safe harbor
protection provided by the Private Securities Litigation Reform Act of 1995 and
Section 21E of the Securities Exchange Act of 1934, as amended. For a discussion
identifying some important factors that could cause actual results to vary
materially from those anticipated in the forward looking statements made by the
Company, see "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
PART I
ITEM 1. BUSINESS
THE COMPANY
CMI Industries, Inc. ("CMI" or the "Company") and its subsidiaries
manufacture textile products that serve a variety of markets, including the home
furnishings, woven apparel, elasticized knit apparel, furniture upholstery,
automotive upholstery, consumer products and industrial/medical markets. The
Company operates through three divisions: the Greige Fabrics Division, the
Elastic Fabrics Division and the Chatham Division. The Company had net sales of
$412.8 million in 1998. The Greige Fabrics Division accounted for 36% of 1998
net sales, the Elastic Fabrics Division accounted for 23% of 1998 net sales, and
the Chatham Division accounted for 41% of 1998 net sales.
The Greige Fabrics Division is one of the largest domestic
manufacturers of light to midweight greige (unfinished) fabrics for sale to
third parties. The division's product line includes printcloths, broadcloths,
twills, crepes and other fabrics of 100% cotton and blends of polyester and
combed or carded cotton, and synthetic yarns. The division sells its fabrics
primarily to integrated manufacturers and converters for use in a wide variety
of home furnishings, woven apparel and industrial products. The Greige Fabrics
Division also targets selected niches in markets where value-added services can
differentiate its fabrics from imported fabrics. In addition, this division
works closely with certain manufacturers to customize fabrics, packaging and
services to their specific requirements.
The Elastic Fabrics Division manufactures fabrics and products for sale
to the elasticized apparel fabric markets. The Elastic Fabrics Division is a
leading manufacturer of dyed and finished elasticized fabrics primarily for use
in intimate apparel and foundation garments and also for use in stretch fabric
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 finish and dye
its fabrics to achieve consistent specifications and color matching for its
products.
The Chatham Division manufactures fabrics and products for sale to the
furniture upholstery, automotive upholstery and consumer products markets.
Furniture upholstery is
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supplied for use in residential applications, office and public seating and wall
panels for open-plan office systems. Customers include contract and residential
furniture manufacturers. Furniture upholstery is also sold through an extensive
distributor network. 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.
Consumer products such as blankets, mattress pads and afghans are manufactured
for sale to major retailers.
The Company was formed in 1986 at the direction of 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
or former management for the purpose of acquiring Clinton Mills, Inc., a South
Carolina corporation, a predecessor in interest to the Greige Fabrics Division.
Affiliates of ML Capital Partners and certain members of management of the
Company who acquired shares of the Company's common stock (the "Common Stock")
in 1986 and thereafter and their affiliates (the "Management Investors")
currently own 58.9% and 41.1% respectively, of the outstanding Common Stock.
SALES SUMMARY
The following table presents, for the last three fiscal years, the
dollar sales and the percentages of the Company's sales contributed by each
division.
<TABLE>
<CAPTION>
SALES BY DIVISION
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(Dollars in thousands)
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Greige Fabrics Division $156,793 42% $171,010 41% $147,066 36%
Elastic Fabrics Division 90,266 24% 93,931 22% 95,435 23%
Chatham Division 126,985 34% 157,781 37% 170,290 41%
-------- --- -------- --- -------- ---
Total $374,044 100% $422,722 100% $412,791 100%
======== === ======== === ======== ===
</TABLE>
The following table presents, for the last five fiscal years, the
percentages of the Company's sales to the home furnishings, woven apparel,
furniture upholstery, elasticized fabric, automotive upholstery, consumer
products and industrial/medical/other markets, as estimated by the Company.
<TABLE>
<CAPTION>
PERCENTAGE OF DOLLAR SALES
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1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Home furnishings market 28% 28% 28% 26% 20%
Woven apparel market 15% 11% 11% 11% 10%
Furniture upholstery market 18% 14% 15% 13% 14%
Elasticized fabric market 16% 25% 24% 22% 23%
Automotive upholstery market 11% 8% 11% 16% 19%
Consumer products market 9% 8% 7% 6% 7%
Industrial/medical/other markets 3% 6% 4% 6% 7%
--- --- --- --- ---
Total 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
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GREIGE FABRICS DIVISION
Products. The Greige Fabrics Division manufactures light to midweight
greige (unfinished) fabrics, including printcloths, broadcloths, twills, crepes
and other fabrics of 100% cotton and blends of polyester and combed or carded
cotton, and 100% synthetic yarns. The division can manufacture fabric in a broad
range of styles, which are determined by the fibers used, the number and size of
the yarns and the width of the fabric, but concentrates on a limited number of
styles and blends. The division currently produces fabric in widths ranging from
43 to 135 inches and typically produces between 60 and 100 styles at any one
time. The division's production flexibility enables it to be a cost effective
manufacturer of traditional fabric styles available from a large number of
domestic and foreign producers and gives it the ability to respond to changes in
demand in its markets. The division works closely with major integrated
manufacturers to satisfy their specific requirements.
The fabrics sold by the Greige Fabrics Division are ultimately made
into a variety of home furnishings, woven apparel and industrial products. In
the home furnishings market, fabrics are used in comforters, bedspreads, sheets
and coordinating accessories, as well as curtains and other home furnishing
products. In the woven apparel markets, fabrics are used in a wide range of
items, including women's apparel, men's boxer shorts, trousers, and uniforms and
similar career apparel. Combed blends and 100% cotton fabrics are also used in
bolts of finished cloth sold at retail for home sewing and crafts. The principal
industrial uses for the division's fabrics are medical and athletic tapes.
Manufacturing and Capacity. The Greige Fabrics Division's manufacture
of woven fabrics involves two principal operations: spinning cotton and blends
of cotton and polyester into yarn, and weaving yarn into fabric.
Spinning. The division either spins or purchases the yarn it
uses to produce woven fabrics. Two types of spinning equipment are
used: air-jet spinning equipment, which combines spinning and winding
into one process, and traditional ring spinning equipment.
Approximately 45% of the division's current spinning capacity is
air-jet spinning.
Weaving. The division employs only shuttleless weaving
machines. The division's shuttleless machines are more versatile than
shuttle weaving machines and are capable of weaving multiple fabrics of
different widths simultaneously on the same machine, with some machines
capable of producing fabrics as wide as 147 inches. The shuttleless
machines require a lower labor complement and weave fabric at higher
speeds and with higher quality levels than shuttle machines. The
flexibility of the shuttleless machines permits production to be
shifted among fabric widths to meet changing market requirements and
demand levels.
The division currently operates six manufacturing plants. All of its
plants are equipped with projectile and air-jet shuttleless machines and
supporting equipment including carding, spinning and yarn preparation equipment.
The division plans to make further capital
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expenditures of $5 million during fiscal 1999. These expenditures will include
additional carding and air-jet spinning equipment. Capital expenditures have
been designed to expand production capabilities, reduce production costs and
increase quality.
The division's six plants are currently operating on a 24-hour, six-day
week schedule. CMI tailors its operating schedules to meet market demand, and it
has the ability to adjust these operating schedules as appropriate.
Marketing and Sales. The Greige Fabrics Division's fabrics are sold
primarily through the Company's New York sales office. Fabrics are sold to
integrated manufacturers and converters for use in various home furnishings
products, woven apparel and a variety of industrial applications. None of the
division's customers accounts for more than 10% of Company sales. Fabrics are
typically manufactured to order. The division's sales are generally not
seasonal.
ELASTIC FABRICS DIVISION
Products. The Elastic Fabrics Division manufactures a variety of dyed
and finished elasticized knit and woven fabrics for use in intimate apparel and
foundation garments. It also has a significant presence in the stretch fabric
activewear market, including swimwear fabrics, and produces fabrics for use in
industrial and medical products. The vertically integrated manufacturing
operations produce warp knit, circular knit and woven fabrics using a variety of
spandex, polyester, rayon, nylon, cotton and blends of cotton yarns. The
division dyes and finishes the majority of its elasticized fabrics as well as
lace products manufactured by others.
Manufacturing and Capacity. Manufacturing warp knit, circular knit and
woven fabrics with elastomeric fibers is a more difficult and complicated
process than that required for other fabrics. Customers who purchase elasticized
fabrics typically require that the fabrics meet precise specifications related
to physical characteristics, shades, shrinkage and the like.
Knitting. Several types of warp knitting machines are used.
These machines are versatile, with the capability of knitting fabrics
up to 150 inches in width, in many different styles and at high speeds
and low defect levels. For circular knitting, the Company uses both
single and double knit machines, some of which have mini-jacquard
capability.
Weaving. Several types of looms are used. These looms are
versatile with the capability of weaving high quality narrow elastic
fabric up to twelve inches in width. Certain looms have jacquard
capabilities, and can weave logo designs into the fabric.
Finishing and Dyeing. Various dyeing and finishing
technologies are utilized which allow the division to dye and finish
its fabrics on-site to achieve consistent specifications and color
matching for its products. The processes used depend upon the type and
style of fabrics being produced. The division scours and dyes most of
its fabric
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in either pressurized or non-pressurized dyeing vessels. Fabrics of
regular warp construction are normally steamed in preparation for other
finishing processes. Fabrics are sent through finishing frames that
stretch and set the fabric at a desired width. Computerized color
matching equipment enables the division to meet the stringent
requirements of the markets it serves. For certain fabrics and shades,
it uses dyed yarn for both knitting and weaving.
The division manufactures its wide elasticized knit fabrics at a plant
located in Greensboro, North Carolina, which operates on a 24-hour, five or
six-day week. The division manufactures narrow elasticized woven fabrics in
Stuart, Virginia. This plant operates on a 24-hour, five day week.
Marketing and Sales. The Elastic Fabrics Division sells its elasticized
fabrics through the Company's New York sales office, and marketing professionals
located in Greensboro, North Carolina, Stuart, Virginia, Atlanta and Los
Angeles. These fabrics are manufactured to order and are typically not seasonal.
CHATHAM DIVISION
Products. The Chatham Division manufactures a variety of dyed and
finished fabrics for use in diverse markets.
Furniture Upholstery. The division produces furniture
upholstery for residential applications, office and public seating as
well as wall panels for open office systems. The division's customers
include contract and residential furniture manufacturers. Furniture
upholstery is also sold through an extensive distributor network.
Furniture upholstery fabrics are offered in both wool and a broad range
of manmade fibers and in a variety of constructions, from jacquard and
dobby wovens to knitted and tufted piles. These various fabric
constructions primarily utilize internally produced woolen spun,
filament and novelty type yarns. A wide variety of dyeing methods,
including raw stock, yarn and piece dyeing, are used.
Automotive Upholstery. The division supplies upholstery
fabrics for automobile and light truck seating and interior component
applications as well as for a variety of other transportation uses such
as heavy truck interiors, van conversions and after-market uses.
Primary automotive customers include domestic automobile manufacturers
and Japanese automobile manufacturers with United States manufacturing
facilities. To a limited extent, the division also exports its
automotive fabrics to Japan for overseas production. In an effort to
expand its product capabilities and market penetration, CMI has
developed strategic alliances with Mount Vernon Mills to produce woven
velour fabrics, with AB Borgstena Textile, Ltd. to produce circular
knit fabrics and with Tatsumura Textile Company, Ltd., to help to
increase its business with the Japanese automakers. A wide variety of
upholstery fabrics are produced for the automotive market primarily
from spun and filament polyester. For the automotive upholstery market,
the
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division supplies flat and jacquard wovens, jacquard and dobby woven
velours, jacquard circular knits and double needle bar knits, and
employs stock, yarn, and piece dyeing technologies.
Consumer Products. The division produces blankets, mattress
pads, electric mattress pads, fringed throws, cotton jacquard afghans
and infant bedding for sale to the retail, institutional and health
care markets. Its consumer products are manufactured through either a
loom woven process or a non-woven Fiberwoven(R) process. The Company
markets its consumer products under the brand names: Chatham,
Beautyrest and Wimbledon. In 1998, the Company entered into an
agreement with Springs Industries, Inc. ("Springs Industries") to
manufacture and market a line of blankets using Springs Industries'
names and trademarks, including Springmaid, Wamsutta and Performance.
Manufacturing and Capacity. The division operates a manufacturing
complex in Elkin, North Carolina, containing approximately 1.7 million square
feet in 11 buildings and a plant in Boonville, North Carolina. At the Elkin
complex, manufacturing is vertically integrated from fiber to finished fabric.
The Boonville plant produces yarn from fiber, which is then transferred to the
Elkin facility for weaving. Manufacturing processes include garnetting waste
fiber, extruding nylon and dyeing raw stock, yarn and fabric. The product of
these processes may flow through other processes such as carding, spinning,
weaving, knitting, the nonwoven Fiberwoven(R) process and finishing.
Design Capabilities. The division employs advanced technologies in
computer and design systems which enable fabrics to be designed with reduced
sampling production costs and shortened development time and promote faster
responses to customer inquiries. In the last year, the division added chenille
yarn making equipment in order to enhance its product capabilities. Chenille
yarns have certain characteristics which add texture to fabrics and provide
innovative design opportunities for furniture upholstery, automotive upholstery
and consumer products. The Chatham Division markets its chenille yarns and
fabrics under its own trademark "Sheneele."
Marketing and Sales. Sales and marketing functions are conducted at the
product level. Furniture upholstery is sold by sales personnel in Elkin and High
Point, North Carolina (including a showroom), New York, Chicago, Los Angeles,
and Grand Rapids, Michigan, and sales agents in the Far East, Australia and
South America. Automotive upholstery is sold through sales and marketing offices
in Elkin, North Carolina and Detroit, Michigan. Consumer products are sold and
marketed through offices in Elkin, North Carolina and New York and by sales
associates located throughout the United States. Foreign bedding sales are
handled through agents or distributors in Mexico, Canada, Western Europe,
Australia and the Far East.
RAW MATERIALS
The principal raw materials the Company uses are cotton and man-made
fibers, yarns and woven velour fabrics. In 1998, raw materials accounted for
approximately 56.5% of cost of sales. The Company uses many types of fibers,
both natural (cotton and wool) and man-made
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(polyester, nylon, olefin, rayon and acrylic) as well as yarns including
Lycra(R), a spandex elastomeric yarn produced by DuPont (E.I.) de Nemours &
Company, in the manufacture of its textile products. The Company believes that
availability and future price levels for fibers and yarns will depend primarily
upon supply and demand conditions, crop conditions, general inflation,
government agricultural programs and prices of petroleum-based raw materials.
Additionally, the Company purchases woven velour fabrics for its automotive
upholstery business through a strategic alliance with Mount Vernon Mills.
Although other suppliers of woven velour fabrics are available, and the Company
has manufactured woven velour fabrics in the past, the Company currently sources
all of its woven velour fabric requirements through its alliance with Mount
Vernon Mills.
Generally, the Company has had no difficulty in obtaining raw
materials. The Company's raw materials are available from a large number of
suppliers. The Company maintains a limited supply of cotton in inventory.
Typically, the Company purchases cotton only when firm orders have been obtained
for the goods in which it will be used. However, if management concludes that a
certain grade of cotton may be in short supply or that prices may be
substantially higher in the near term, the Company may deviate from this
procedure and buy additional cotton for inventory or make commitments for cotton
in the future in excess of amounts required to meet future sales orders.
Historically, the Company has not purchased significant amounts of cotton for
inventory. CMI believes it has contracted for cotton at prices that will permit
it to be competitive with other companies in the domestic textile industry when
the cotton purchased for future use is put into production.
The principal man-made fibers and yarns purchased by the Company are
polyester and nylon. The Company maintains a limited supply of man-made fibers
and yarns in inventory. The Company currently purchases man-made fibers for its
Greige Fabrics Division from two suppliers, although other suppliers are
available. The Company also purchases yarns of texturized filament polyester
primarily from a limited number of suppliers for use in its woven and knit
fabrics, although other suppliers are available. Currently, most of the
elastomeric yarn used in the production of elasticized fabrics is Lycra(R).
PATENTS AND TRADEMARKS
The Company has registered a stylized "Clinton," "EFA," "Chatham,"
"Sheneele," and "Restwarmer" as trademarks. CMI markets consumer products in the
Chatham Division under license arrangements with Beautyrest, Wimbledon and
Springs Industries. The Company does not own or use any other patents, licenses
or trademarks that are currently material in the conduct of its business.
BACKLOG
At January 2, 1999, the Company had aggregate unfilled orders of $76
million, as compared to $107 million at January 3, 1998. As of January 2, 1999,
the Greige Fabrics Division had approximately $41 million of unfilled customer
orders for woven fabrics, as compared to $68 million at January 3, 1998. The
decrease in the Greige Fabrics Division's order
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backlog from 1997 to 1998 is indicative of the weaker market conditions for
greige fabrics and the general slowdown of the domestic textile industry. At
January 2, 1999, the Elastic Fabrics Division had unfilled orders totaling $12
million, as compared to $15 million at January 3, 1998. At January 2, 1999, the
Chatham Division had unfilled orders totaling $23 million, as compared to $24
million at January 3, 1998. The divisions expect to fill all of these orders in
1999. These backlogs consist of orders that are not generally subject to
cancellation prior to shipment, although the Company has in the past
accommodated customer requests for order deferments due to unusual
circumstances. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview".
COMPETITION AND INTERNATIONAL TRADE POLICY
The domestic textile industry is highly competitive with no one firm
dominating the United States market. Many companies compete only in limited
segments of the textile market. In recent years, there has been a trend toward
consolidation in the United States textile industry. Textile competition is
based in varying degrees on price, product styling and differentiation, quality
and customer service. The importance of each of these factors depends upon the
needs of particular markets and customers.
The domestic textile industry has been fundamentally affected by
competition from imports. The level of import protection for domestic producers
of textiles has been and will continue to be subject to domestic political and
foreign policy considerations. Under the import tariff and quota framework
developed under the Arrangement Regarding International Trade in Textiles and
commonly known as the Multifiber Arrangement (the "MFA"), most significant
exporters of fabrics were subject to annual quotas. However, the MFA expired on
December 31, 1994, and was replaced by The Uruguay Round Agreement (the "Uruguay
Agreement") on textiles and clothing which contains a schedule for the gradual
phase-out of quotas established pursuant to the MFA over a ten year transition
period. After the transition period, textile and clothing trade will be fully
integrated into the World Trade Organization and subject to the same
restrictions as other sectors. The Uruguay Agreement contains a provision for
reducing tariffs on textiles and clothing products imposed by the United States
by approximately 12% overall, with the reductions phased in over a ten year
period. The reduction in the import protection accorded domestic fabric and
apparel manufacturers could adversely affect the Company.
The Company believes that the North American Free Trade Agreement
("NAFTA") has and will continue to affect competition in the domestic textile
manufacturing market by phasing out substantially all trade restrictions among
Canada, Mexico and the United States while maintaining such restrictions on
products imported from outside North America, subject to the Uruguay Agreement.
While the Company believes that as a result of NAFTA some labor-intensive
apparel production has and will continue to move to Mexico due to Mexico's lower
labor costs, the Company expects to compete for sales of fabric to these apparel
producers in what may become a larger market for the Company's products. To the
extent that U.S. apparel manufacturers move production to Mexico and thus gain a
competitive advantage over Asian producers facing continuing import
restrictions, the Company believes that it could benefit from
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a resulting increase in North American production, as neither Mexico nor Canada
are currently competitive producers of the fabrics used in the manufacture of
apparel.
The impact of import competition varies among the Company's divisions.
The Greige Fabrics 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. The division sells its
fabrics in certain markets where imports are a competitive factor, such as the
women's apparel and the over the counter fabrics for home sewing markets. In
addition, the division's fabrics are used in apparel products which compete with
imported garments. In response to the increasing effect of imports, the division
has engaged in an extensive modernization program which has added flexibility to
its manufacturing process and increased its fabric offerings. This modernization
program has resulted in increases in productivity and lower unit costs, net of
depreciation. In addition, marketing has been redirected in an effort to reduce
its dependence on commodity fabrics and has focused on developing long-term
customer relationships where value added services can differentiate its fabrics
from imports. To implement this strategy, the division has generally endeavored
to decrease its sales to the apparel market and shift more of its sales to home
furnishing markets where competition from imports is less severe. However,
depending on market conditions, the division may from time to time redirect its
sales from home furnishings to apparel to avoid market weakness or to obtain a
benefit from opportunistic selling. The Greige Fabrics Division's principal
competitors include Greenwood Mills and Alice Manufacturing.
The Elastic Fabrics Division and other United States manufacturers of
elasticized fabrics and garments, including intimate apparel, swimwear and
activewear, have not been subject to the same pressure from imports experienced
by many other sportswear apparel manufacturers. Customers place significant
emphasis on product design, component shade-matching and other quality-related
criteria. Customers establish strict specifications that place a premium on
customer service, which places foreign manufacturers at a disadvantage. The
division's principal elasticized fabrics competitors include Liberty Fabrics,
Darlington and Worldtex.
The Chatham Division's furniture upholstery, automotive upholstery and
consumer products compete in domestic markets that, to date, have experienced
little competition from imports. In these markets, product styling and
differentiation, quality and customer service are more significant
considerations as compared to more commodity-oriented markets that are more
susceptible to import competition. Principal competitors include Guilford of
Maine (furniture upholstery), Milliken (furniture and automotive upholstery),
Joan Fabrics (furniture and automotive upholstery), Collins and Aikman
(automotive upholstery) and Pillowtex (consumer products).
EMPLOYEES
On January 2, 1999 the Company had 3,918 employees, none of whom were
covered by a collective bargaining agreement. Of these employees, 3,570 were
employed as hourly associates while 348 were employed as salaried associates.
All of the Company's employees are full-time. The Company believes that its
employee relations are good.
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IMPACT OF YEAR 2000
The Company presently expects to spend approximately $1.0 million
during 1999 to replace or modify its computer information systems to ensure the
proper processing of transactions relating to Year 2000 and beyond. Included in
this amount are expenditures to implement certain new or improved systems which
not only achieve Year 2000 compliance, but significantly improve and expand
operational capabilities of certain of the Company's computer systems. The
Company has inventoried all critical financial, human resource, operational and
manufacturing systems and has developed detailed plans for the necessary system
modifications or replacements. As of the date of this filing, the Company
believes it has completed approximately 80% of the new system installations or
existing system modifications, and expects to complete the balance of these
system changes in fiscal 1999. Testing and certification of all business
critical systems is expected to be substantially concluded by September 1999.
Additionally, the Company is communicating with its suppliers, vendors
including machinery manufacturers, and customers to determine the status of
their Year 2000 initiatives and appropriate contingency plans are being
developed to address identified risks in these areas.
Executive management regularly reviews the status of its Year 2000
efforts and based on analyses of its own systems and discussions with and
surveys of its key vendors and customers, management currently believes that
Company information and manufacturing systems affected by Year 2000 issues have
been or will be timely identified and that its implementation plans will render
all material systems Year 2000 compliant on a timely basis; however, should
other entities upon whose systems the Company relies fail to properly address
Year 2000 compliance issues, or should key resources required to achieve the
initiatives described herein become unavailable or prove to be unreliable, the
Company's effectiveness in achieving Year 2000 compliance could be delayed,
which could have a material adverse effect on the Company's results of
operations. The Company believes its most likely worse case scenario is that
disruption of its distribution system would occur, through product delays from
suppliers or delayed orders from customers, which could result in the reduction
or suspension of the Company's operations. Based upon the efforts already
completed, the Company does not believe a formal contingency plan will be
required. Individual locations will develop informal contingency plans in the
event that they do not expect to be fully Year 2000 compliant within the current
time estimates.
ENVIRONMENTAL, HEALTH AND SAFETY, AND OTHER REGULATORY MATTERS
The Company's operations are subject to federal, state and local laws
and regulations relating to the environment, health and safety, and other
regulatory matters. Certain of the Company's operations may from time to time
involve the use of substances that are classified as toxic or hazardous
substances within the meaning of these laws and regulations. Environmental
operating permits are, or may be required, for certain of the Company's
operations and such permits are subject to modification, renewal and revocation.
The Company monitors and reviews its operations, procedures and policies for
compliance with these laws and regulations. Despite these compliance efforts,
risk of environmental liability is inherent in the operation of the Company's
businesses, as it is with other companies engaged in similar businesses, and
there can be no assurance that environmental liabilities will not have a
material adverse effect on the Company in the future.
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Certain of the Company's products, including its electric mattress
pads, are sold directly to consumers, and the Company is subject from time to
time to product liability claims, as well as inquiries by the Consumer Products
Safety Commission. In the opinion of the Company, the resolution of these
matters, individually or in the aggregate, will not have a materially adverse
effect upon the financial position or results of operations of the Company.
The Company has identified certain groundwater and soil contamination
which will require remediation and asbestos which may require abatement at its
Elkin facility. The Company has accrued for the costs it expects to incur in
connection with this remediation and abatement. See "Item 7--Management
Discussion and Analysis of Financial Condition and Results of
Operations--Environmental" and Notes 7 and 8 to Financial Statements.
The Company is working under the directions of the North Carolina
Department of Environment, Health and Natural Resources and from Guilford County
Environmental Health to cleanup groundwater at its Greensboro facility resulting
from previously removed leaking underground storage tanks. The Company estimates
that remaining costs associated with the cleanup will be less than $100,000.
Partial reimbursement has been approved from the North Carolina Underground
Storage Tank Trust Fund.
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ITEM 2. PROPERTIES
The following table sets forth certain information relating to the
Company's principal facilities as of January 2, 1999. All of these facilities
are owned by the Company, except for the New York sales office, the Columbia
executive office, and the Elkin distribution center. The Company's New York
sales office is leased for a term expiring in 2005. The Columbia executive
office and the Elkin distribution center are each leased for a term expiring in
2000. The Company believes all of its facilities are in good repair and are in
suitable condition for the purposes for which they are used.
<TABLE>
<CAPTION>
LOCATION SQ. FOOTAGE USE
-------- ----------- ---
<S> <C> <C>
GREIGE FABRICS DIVISION
- -----------------------
Vance No. 1...................................263,000 Manufacturing (191,000 sq. ft.)
Clinton, SC Warehouse and Office (72,000 sq. ft.)
Vance No. 2...................................544,900 Manufacturing (303,900 sq. ft.)
Clinton, SC Warehouse and Office (241,000 sq. ft.)
Lydia .......................................472,100 Warehouse and Office (472,100 sq. ft.)
Clinton, SC
Bailey .......................................277,200 Manufacturing (224,100 sq. ft.)
Clinton, SC Warehouse and Office (53,100 sq. ft.)
Office-Clinton, SC.............................37,700 Office
Geneva No. 1..................................151,500 Manufacturing (128,300 sq. ft.)
Geneva, AL Warehouse and Office (23,200 sq. ft.)
Geneva No. 2..................................258,200 Manufacturing (211,900 sq. ft.)
Geneva, AL Warehouse and Office (46,300 sq. ft.)
Office-Geneva, AL...............................7,500 Office
Clarkesville, GA..............................268,800 Manufacturing (170,100 sq. ft.)
Warehouse and Office (98,700 sq. ft.)
ELASTIC FABRICS DIVISION
- ------------------------
Greensboro, NC................................175,300 Manufacturing (138,800 sq. ft.)
Warehouse and Office (36,500 sq. ft.)
Stuart, VA....................................415,340 Manufacturing (328,900 sq. ft.)
Warehouse and Office (86,440 sq. ft.)
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
LOCATION SQ. FOOTAGE USE
-------- ----------- ---
<S> <C> <C>
CHATHAM DIVISION
- ----------------
Elkin, NC..................................1,697,600 Manufacturing (1,270,500 sq. ft.)
Warehouse and Office (427,100 sq. ft.)
Elkin, NC....................................170,720 Distribution Center
Boonville, NC................................128,500 Manufacturing (99,200 sq. ft.)
Warehouse and Office (29,300 sq. ft.)
OTHER
- -----
CMI Sales Office
New York, NY..................................16,332 Office
CMI Executive Office
Columbia, SC...................................9,330 Office
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation
incidental to its business operations, as well as product liability litigation.
In the opinion of the Company's management, none of the litigation in which it
is currently involved is material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal 1998.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
None of the issued shares of the Common Stock is publicly held and
there is no established published trading market for the Common Stock.
During the two fiscal years ended January 2, 1999, the Company did not
pay any dividends. The Company's ability to pay dividends was subject to
limitations in its bank credit agreement and in the indenture pursuant to which
its $125 million principal amount 9-1/2% Senior Subordinated Notes due 2003 were
issued (the "Indenture"). Capitalized terms used in this Item 5 that are not
defined in this Report have the same meaning as set forth in the Indenture.
The Indenture prohibits the Company from paying cash dividends or
making other Restricted Payments if an Event of Default exists under the
Indenture or the Company cannot incur additional Indebtedness (other than
Permitted Indebtedness) because of an inadequate Fixed Charge Coverage Ratio.
The Indenture limits the aggregate amount of cash dividends and other Restricted
Payments that may be made subsequent to October 28, 1993 to an amount no greater
than the sum of (i) 50% of the Company's Consolidated Adjusted Net Income
accrued on a cumulative basis since October 1, 1993 (less 100% of any loss) plus
(ii) the aggregate net proceeds received by the Company after October 28, 1993
from certain issues or sales of the Company's capital stock and from capital
contributions. Notwithstanding the foregoing, so long as an Event of Default
does not exist, the Indenture permits the Company to (i) repurchase its capital
stock from Management Investors under certain circumstances in an aggregate
amount of up to $2.0 million per year, with the right to carry forward into the
immediately following year the aggregate amount of the unused portion, and (ii)
pay cash dividends and make other Restricted Payments in an aggregate amount not
to exceed $10.0 million.
Under a $65 million secured revolving credit facility from The First
National Bank of Boston, which serves as the agent bank, NationsBank, N.A. and
The Wachovia Bank of South Carolina, N.A. entered into in March 1996 and amended
in February 1997 (the "Credit Agreement"), the Company is permitted to pay
dividends of up to $3 million in any fiscal year. At January 2, 1999, under the
terms of the Indenture the Company could acquire capital stock in an amount of
$4.0 million from Management Investors and could pay cash dividends or make
other Restricted Payments in an aggregate amount of $11.5 million. However, the
limitation on restricted payments contained in the Credit Agreement as then in
effect was more restrictive than the limitation contained in the Indenture, so
that at January 2, 1999 the Company was able to only pay dividends or make
restricted payments of up to $3 million.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial
information for the Company for fiscal years 1994 through 1998, which has been
derived from the audited financial statements of the Company for such periods.
The information contained in the following table reflects the results of
operations of the Clarkesville plant from May 9, 1994, and the former United
Elastic Corporation operations from January 3, 1995, the respective dates of
acquisition. The selected financial data should be read in conjunction with
"Item 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the audited financial statements of the Company, together
with the related notes and independent accountant's report. The Company's
consolidated balance sheet as of January 3, 1998 and January 2, 1999, and
financial statements for each of the fiscal years in the three-year period ended
January 2, 1999, and the independent accountant's report thereon, are included
elsewhere in this Report. See "Index to Financial Statements."
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
STATEMENT OF INCOME DATA (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $ 390,067 $ 408,636 $ 374,044 $ 422,722 $ 412,791
Depreciation 19,879 22,660 21,968 16,702 16,387
Other cost of sales 323,564 345,265 323,920 349,596 345,829
--------- --------- --------- --------- ---------
Gross profit 46,624 40,711 28,156 56,424 50,575
Selling, general and administrative expense 31,433 32,704 31,097 32,914 33,586
Restructuring and other nonrecurring charges (1) -- 17,682 -- -- 304
--------- --------- --------- --------- ---------
Operating income (loss) 15,191 (9,675) (2,941) 23,510 16,685
Other income (expense)
Interest expense (14,430) (17,174) (15,425) (14,499) (12,759)
Other income (expense), net 1,397 1,406 1,588 2,975 1,013
--------- --------- --------- --------- ---------
Total other income (expense) (13,033) (15,768) (13,837) (11,524) (11,746)
--------- --------- --------- --------- ---------
Income (loss) before income taxes 2,158 (25,443) (16,778) 11,986 4,939
Income taxes (benefit) 789 (9,500) (6,115) 4,800 1,900
--------- --------- --------- --------- ---------
Net income (loss) $ 1,369 $ (15,943) $ (10,663) $ 7,186 $ 3,039
========= ========= ========= ========= =========
Ratio of earnings to fixed charges (2) 1.15x (0.48)x (0.09)x 1.83x 1.39x
BALANCE SHEET DATA (AT END OF YEAR)
Current assets $ 137,582 $ 123,281 $ 112,623 $ 104,349 $ 116,424
Property, plant and equipment, net 135,800 125,774 112,545 103,592 97,018
Other assets 8,567 8,053 8,366 8,599 9,724
Total assets 281,949 257,108 233,534 216,540 223,166
Current liabilities 43,443 42,739 44,117 38,541 39,794
Long-term debt, less current portion 153,962 154,245 143,749 124,528 124,536
Other liabilities and deferred items 22,773 17,616 13,823 14,427 16,753
Stockholders' equity 61,771 42,508 31,845 39,044 42,083
EBITDA (3) $ 36,790 $ 14,361 $ 21,293 $ 43,749 $ 34,633
Depreciation and amortization (4) 20,294 22,670 22,646 17,264 16,935
Capital expenditures 28,390 8,850 9,288 8,292 10,322
Ratio of EBITDA to interest expense (5) 2.67x 1.03x 1.43x 3.15x 2.83x
Ratio of total debt (at end of year) to EBITDA 4.25x 10.80x 6.94x 2.90x 3.60x
</TABLE>
- --------------------
16
<PAGE> 17
(1) Represents $4,782 of executive severance charges related to the
retirement of Mr. G. T. Williams, the Company's former President and
Chief Executive Officer and $12,900 of charges related to the Company's
restructuring plan, both recorded in 1995. Also reflects the write-off
of transaction costs associated with the terminated merger agreement
with CMI Management, Inc. in 1998 of $1,649 and a credit of $1,345 in
1998 related to the previously reported restructuring and severance
charges. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
(2) For purposes of computing this ratio, earnings consist of income before
income taxes and extraordinary items, plus fixed charges. Fixed charges
consist of interest expense on debt, amortization of deferred debt cost
and debt discount cost and the estimated interest component of rent
expense.
(3) Represents income before interest, income taxes, extraordinary items,
depreciation and amortization. The Company has included information
concerning EBITDA as a measure of the Company's ability to service its
debt. EBITDA should not be considered as an alternative to, or more
meaningful than, operating income or cash flow as an indicator of the
Company's operating performance. See the Statements of Cash Flows
included in the Financial Statements.
(4) Excludes amortization of deferred debt cost and debt discount cost.
(5) Interest expense excludes amortization of deferred debt cost and debt
discount cost.
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
A number of factors influence the operating results for the Company
including general economic conditions, competition, raw material prices and
capital expenditures. Significant factors impacting the Company's operating
results over the past several years are as follows:
History. In 1992, the Company 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 the Company's manufacturing
facilities and the acquisition of certain strategic companies in order
to reduce the Company'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, the Company 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
18
<PAGE> 19
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.
Elastics Fabrics Division. CMI acquired the former United
Elastic Corporation operations in January 1995. The United Elastic
Corporation acquisitions allowed the Company to further diversify 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, the Company continued to upgrade
its manufacturing capacity by investing in new equipment capable of
producing better quality fabrics more efficiently. Despite these
investments and its 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 a plan ("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 the Company;
(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 the Company'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, the Company 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, the Company now estimates that
over 900 manufacturing and administrative positions out of
approximately 5,000 were permanently eliminated.
19
<PAGE> 20
The Restructuring 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 the Company 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. Although supply levels relative to demand for greige
fabrics positively impacted the overall market conditions during 1997,
market conditions for greige fabrics deteriorated in 1998. Increased
imports of lower priced Asian fabrics, excess inventories at key
vertical home furnishing customers and a stronger U.S. dollar all have
combined to weaken demand, place downward pressure on selling prices
and create an oversupply situation in the marketplace similar to that
of 1995 and 1996.
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. In light of its improved performance in
quality, on-time delivery, product development and order backlog
levels, the Chatham Division increased it investments in 1998 in new
equipment, new product offerings, new business certifications and new
Year 2000 compliant business systems. Although these investments have
been disruptive to operations in 1998 and have resulted in lower
operating margins despite record sales levels, CMI believes that these
investments were critical in order for the Chatham Division to continue
as a key supplier in its markets.
Although the turnaround of CMI's narrow elastic facility had
been slower than that of its other operations, CMI has realized
significant operating improvements at this facility in 1998.
Consequently, operating margins in the Elastics Division improved for
the second consecutive year and CMI believes that additional
improvements are possible as the Company continues to realize
efficiencies from offering both wide and narrow elasticized fabrics.
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.
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 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
20
<PAGE> 21
a return to more historical levels of costs for raw material. In 1998,
the Company continued to benefit from favorable conditions for raw
materials but was negatively impacted by weakening market conditions
for greige fabrics. Market conditions have remained difficult for
greige fabrics in the first quarter of 1999 and consequently, operating
margins are expected to deteriorate despite favorable 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 the Company's fiscal years.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Net sales............................................... 100.0% 100.0% 100.0%
Depreciation............................................ 5.8 4.0 4.0
Other cost of sales..................................... 86.6 82.7 83.8
----- ----- -----
Gross profit............................................ 7.6 13.3 12.2
Selling, general and administrative expenses............ 8.3 7.8 8.1
Restructuring and other nonrecurring charges............ -- -- 0.1
----- ----- -----
Operating income (loss)................................. (0.7) 5.5 4.0
Other income (expense)
Interest expense..................................... (4.1) (3.4) (3.1)
Other, net............................................ 0.4 0.7 0.3
----- ----- -----
Income (loss) before income taxes ...................... (4.4) 2.8 1.2
Income taxes (benefit).................................. (1.6) 1.1 0.5
----- ----- -----
Net income (loss) ...................................... (2.8)% 1.7% 0.7%
===== ===== =====
</TABLE>
Fiscal Year 1998 Compared to Fiscal Year 1997
The Company's net sales decreased $9.9 million or 2.3% from $422.7
million in 1997 to $412.8 million in 1998. Sales of the Greige Fabrics Division
decreased $23.9 million or 14.0%, sales of the Elastic Fabrics Division
increased $1.5 million or 1.6% while sales of the Chatham Division increased
$12.5 million or 7.9%. The decrease in sales for the Greige Fabrics Division was
primarily attributable to increased imports of lower priced Asian fabrics,
excess inventories at key home furnishing customers, and a stronger U.S. dollar
which all combined to severely weaken the domestic greige fabrics market. These
factors resulted in a 1.0% decrease in average selling prices for lightweight
printcloth greige fabrics and a corresponding decrease in sales volume of 11.4%.
The increase in sales for the Elastic Fabrics Division was principally
attributable to stronger demand for wide warp knit elasticized fabrics. Sales of
narrow woven elasticized fabrics rose slightly in 1998, but market conditions
for narrow elastics remain soft and sales are still below historical levels. The
increase in sales for the Chatham Division consisted primarily of a $12.8
million increase in automotive upholstery sales due to the Company's success in
securing new product placements and increasing market share. Sales of furniture
fabrics and consumer products remained relatively unchanged from prior year
levels. Sales in
21
<PAGE> 22
1998 were also negatively impacted because of the loss of production and sales
associated with 1998 being a 52-week year as compared to 1997, which was a
53-week year.
In conjunction with the Company's decreased sales, gross profit
decreased $5.8 million from $56.4 million in 1997 to $50.6 million in 1998,
which resulted in a gross margin decline from 13.3% to 12.2%. The decrease in
gross profits was directly attributable to the deteriorating market conditions
for greige fabrics which resulted in lower selling prices and forced the Company
to curtail its greige operations below capacity. Gross profit in the Elastic
Fabrics Division increased due to higher sales while gross margins also improved
as a result of better product mix and improved efficiencies at the division's
Stuart facility. Gross profit in the Chatham Division decreased despite higher
sales as gross margins were negatively affected by manufacturing inefficiencies
associated with numerous capital investment projects, charges associated with
attaining its QS9000 certification on July 2, 1998 and startup costs associated
with developing its new residential upholstery and chenille yarn product
offerings. Gross profit in 1998 was also negatively impacted because of the loss
of production and sales associated with 1998 being a 52-week year as compared to
1997 which was a 53-week year.
Selling, general and administrative expenses increased $0.7 million or
2.0% from $32.9 million in 1997 to $33.6 million in 1998. The increase in
selling, general and administrative expenses was primarily due to the increased
costs associated with the Company's efforts to become year 2000 compliant and an
increase in commission or royalty based revenues at the Company's Chatham
Division. Additionally, the Company paid approximately $0.9 million in incentive
compensation in 1998 as compared to $1.5 million in 1997. The Company continued
to realize benefits from its restructuring and downsizing initiatives from prior
years, but due to lower sales levels, selling, general and administrative
expenses were up from 7.8% of sales in 1997 to 8.1% of sales in 1998.
In 1998, the Company wroteoff transaction costs associated with the
terminated merger agreement with CMI Management, Inc. of $1,649 and reported a
credit of $1,345 related to the previously reported restructuring and severance
charges. The Company did not have any related items in 1997.
Interest expense decreased $1.7 million or 12.0% from $14.5 million in
1997 to $12.8 million in 1998. This decrease was due to lower debt balances in
1998 which resulted from the Company's continued earnings and continued efforts
to monitor capital spending and working capital levels.
Income taxes (benefit) as a percent of income (loss) before taxes
changed from 40% in 1997 to 38.5% in 1998.
As a result of the foregoing factors, the Company reported net income
of $3.0 million in 1998 as compared to a net income of $7.2 million in 1997.
22
<PAGE> 23
Fiscal Year 1997 Compared to Fiscal Year 1996
The Company'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 the restructuring initiatives implemented by the Company in 1995
and 1996 to reduce inventory and capacity levels relative to market demand and
the related improvement in market conditions for greige fabrics in 1997. These
factors resulted in increased sales due to a 9.3% increase in average selling
prices 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 the Company's decision to resume shipments to a
significant customer following the resolution of issues which arose in 1996
involving the customer's creditworthiness. Together, these factors helped to
offset the continued weakness in sales of narrow woven elasticized fabrics. The
increase in sales for the Chatham Division consisted primarily of a $27.3
million increase in automotive upholstery sales due to the Company's success in
securing new product placements and increasing market share. Sales of furniture
fabrics and consumer products have remained relatively unchanged from prior year
levels. Sales in 1997 were also favorably impacted compared to 1996 due to an
additional week of sales and production as 1997 was a 53-week year.
In conjunction with the Company'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%. Additionally, the
Company's depreciation expense declined by $5.3 million in 1997 as a majority of
the fixed assets acquired when the Company was formed in 1986 became fully
depreciated. The increase in gross profits was directly attributable to improved
market conditions for greige fabrics which resulted in significantly higher
selling prices and allowed the Company to operate its greige manufacturing
facilities at full capacity. Gross profit in the Elastic Fabrics Division
increased due to higher sales while gross margins also improved despite the weak
performance of its Stuart facility. Gross profit in the Chatham Division
increased 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, the Company paid approximately $1.5 million in incentive
compensation in 1997 as compared to only $0.4 million in 1996. The Company
continued to realize benefits from its restructuring and downsizing initiatives
from prior years and, consequently, selling, general and administrative expenses
were down from 8.3% of sales in 1996 to 7.8% of sales 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
23
<PAGE> 24
to the Company's increased earnings, reduced capital spending and working
capital reduction initiatives.
Income taxes (benefit) as a percent of income (loss) before taxes
changed from 37% in 1996 to 40% in 1997.
As a result of the foregoing factors, the Company reported net income
of $7.2 million in 1997 as compared to a net loss of $10.7 million in 1996.
THE NOTES AND FINANCING AGREEMENTS
In October 1993, the Company consummated an underwritten public
offering (the "Offering") of $125 million principal amount of 9-1/2% Senior
Subordinated Notes due 2003 (the "Notes"). Immediately upon the issuance of the
Notes, the Company's then principal operating subsidiaries were merged with and
into the Company. The net proceeds of the Offering, together with initial
borrowings under a new $70 million revolving credit facility from The First
National Bank of Boston, which served as the agent bank (the "Agent Bank"),
NationsBank, N.A. and The Wachovia Bank of South Carolina, N.A. and a $5 million
uncommitted line of credit from The Wachovia Bank of South Carolina, N.A., 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 the Company'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 line of credit was increased to $8 million. In June
1995, the Wachovia line of credit was reduced to $4 million.
In March 1996, the Company replaced the $92 million unsecured revolving
credit facility with the Credit Agreement and renewed the Wachovia line of
credit at $4 million (the "Wachovia Credit Facility" and, together with the
Credit Agreement constitute the "Bank Credit Facilities"). The Company and the
lenders amended the Credit Agreement in February 1997 to reduce the borrowing
limit to $65 million, to contemplate the realignment of the Company's assets
into separate operating entities, which were completed during 1997, and to
extend the maturity of the Credit Agreement by two years to January 2000.
The Credit Agreement provides for a revolving credit facility of up to
$65.0 million, including a letter of credit facility of up to $5.0 million. The
borrowings under the Credit Agreement are secured by certain inventories, all
receivables and certain intangibles. The amount available under the revolving
credit facility is limited to a percentage of the collateral pledged by the
Company, as evidenced by a monthly borrowing base certificate to be delivered by
the Company, and is reduced by any outstanding letters of credit issued under
the letter of credit facility. The maximum and average amounts outstanding
during 1998 were $4.4 million and $0.6 million, respectively; at January 2,
1999, no amounts were outstanding.
Interest Rates and Fees. Interest under the Credit Agreement is
payable at one of two specified rates, as selected by the Company, as follows:
(i) the rate announced as the base rate of
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<PAGE> 25
the Agent Bank and (ii) a Eurodollar rate plus 1.5%. The Company pays a
commitment fee of 0.375% per annum on the unused portion of the revolving credit
facility, payable quarterly in arrears. The Company also pays a quarterly agency
fee of $12,500 to the Agent Bank. In addition, the Company 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) 1.0% of the stated amount
of any standby letter of credit and (ii) 0.375% of the stated amount of any
documentary letter of credit.
Restrictive Covenants. The Credit Agreement contains covenants
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 the Company, certain transactions
with related parties, and certain corporate transactions such as sales and
purchases of assets, mergers or consolidations. Under the Credit Agreement, the
Company may incur additional senior indebtedness in an aggregate principal
amount of up to $18.0 million, which amount includes borrowings under the
Wachovia Credit Facility, without obtaining the consent of the lenders. Up to
$10.0 million of such additional senior indebtedness may be secured by purchase
money liens. The Credit Agreement also contains 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 Credit Agreement and other
matters.
The Company is required to maintain certain financial ratios,
including a minimum tangible net worth of $33.6 million in fiscal 1998, with
minimum increases each year thereafter by 50% of the consolidated net income of
the Company and certain of its subsidiaries for the previous fiscal year. The
Company is required to maintain a minimum interest coverage ratio (EBITDA to
interest) of not less than 1.5 to 1 for any four consecutive quarters. The
Company must also maintain a fixed charge coverage ratio of 1.0 to 1, meaning
that (i) consolidated EBITDA less cash used to pay for taxes and capital
expenditures must exceed (ii) all interest plus principal due on long term
indebtedness of the Company and its consolidated subsidiaries for any four
consecutive fiscal quarters. As of January 2, 1999, the Company was in
compliance with all of the covenants under the Credit Agreement.
Security. Borrowings under the Credit Agreement are secured by the
Company's receivables, certain inventories and certain intangibles. The Credit
Agreement contains a negative covenant limiting the Company's right to grant
security interests or other liens in its other assets. However, up to $10.0
million of any additional senior indebtedness permitted under the Credit
Agreement, excluding borrowings under the Wachovia Credit Facility, may be
secured by assets of the Company other than inventory or receivables.
Events of Default. The Credit Agreement 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 the Company, and a cross-default to other indebtedness of,
and bankruptcy and judgment defaults to, the Company.
25
<PAGE> 26
Wachovia Credit Facility
Under the Wachovia Credit Facility, loan amounts, interest rates and
maturities are offered by the bank in its discretion and are accepted by the
Company at the time of borrowing, subject to the execution of a note and
supporting loan documentation satisfactory to the bank. Borrowings under the
Wachovia Credit Facility constitute additional senior indebtedness under the
Credit Agreement and are unsecured. The maximum and average amounts outstanding
during 1998 were $4.0 million and $1.7 million respectively; at January 2, 1999,
no amounts were outstanding.
LIQUIDITY AND CAPITAL RESOURCES
In 1998, net cash provided by operations decreased $13.4 million from
$28.2 million in 1997 to $14.8 million in 1998, primarily as a result of
decreased earnings in 1998 as compared to 1997 and an increase in other current
assets consisting of equipment deposits and prepaid employee benefit costs.
Net cash used in investing activities increased $2.7 million from $7.6
million in 1997 to $10.3 million in 1998 as a result of increased spending on
capital improvement projects.
Net cash used in financing activities decreased $18.8 million from 1997
to 1998. The increase in investment activities noted above coupled with less
cash flow from operations enabled the Company to make net repayments of $2.3
million on its revolving credit facilities in 1998 and increase its cash
position by $2.2 million.
Working capital (excluding cash, marketable securities and the current
portion of long-term debt) increased $6.4 million from $66.3 million at January
3, 1998 to $72.7 million at January 2, 1999. The increase in working capital
resulted from an increase in the Company's other current assets and receivables.
The Company's primary ongoing cash requirements will be to meet its
debt service requirements, invest in capital expenditures and position the
Company to respond to better business conditions. The Company currently intends
to make capital expenditures of approximately $21.1 million during 1999, of
which a portion may be financed with operating lease facilities. The Company's
ability to make scheduled payments 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,
regulatory and other factors that are beyond its control. Based upon the current
level of operations, management believes that cash flow from operations and
available cash, together with availability under the Bank Credit Facilities,
will be adequate to meet the Company's future liquidity needs, meet its debt
service requirements and fund capital expenditures. 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 Bank Credit Facilities in
amounts sufficient to enable the Company to service its indebtedness or to fund
its other liquidity needs.
26
<PAGE> 27
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 the Company.
In connection with the acquisition of the Elkin facility, environmental site
evaluations were performed by the Company 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. The Company believes that
sufficient amounts are accrued as of January 2, 1999 for the cost of these
expenditures. The Company may also have remediation obligations with respect to
a previously removed leaking underground storage tank. See "Item 1--Business --
Environmental, Health and Safety, and Other Regulatory Matters." The Company
believes that based on all currently available information, the resolution of
environmental matters will not have a material adverse effect on the Company.
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 the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk. The Company has exposure to interest rate changes
primarily relating to interest rate changes under its Bank Credit Facilities.
See "Item 7. Management's Discussion and Analysis of Financial condition and
Results of Operations--The Notes and Financing Agreements." The Company's Bank
Credit Facilities bear interest at rates which vary with changes in (i) the
London Interbank Offered Rate (LIBOR) or (ii) a rate of interest announced
publicly by The First National Bank of Boston. Although the Company is not
presently a party to any contracts in which it speculates on the direction of
interest rates, the Company has in the past and may, in the future, enter into
contracts which have the effect of speculating on the direction of interest
rates. As of January 2, 1999, the Company had no outstanding debt balances which
bore interest at variable rates. The Company believes that the effect, if any,
of reasonably possible near-term changes in interest rates on the Company's
consolidated financial position, results of operations or cash flows would not
be material.
Commodity price risk. A portion of the Company's raw material is cotton
which is subject to price volatility caused by weather, production problems,
delivery difficulties and other factors which are outside the control of the
Company. The Company believes that at certain times, changes in cotton pricing
may not be adjusted for by changes in its product pricing and therefore could
have a significant effect on the Company. Consequently, the Company purchases
futures contracts to hedge against fluctuations in the price of raw material
cotton. Increases or decreases in the market price of cotton may affect the fair
value of cotton commodity futures contracts. As of January 2, 1999, the Company
had contracted for 30,698 bales of cotton through commodity futures contracts. A
10% decline in the market price of cotton would have a negative impact of
approximately $1.1 million on the fair value of the Company's outstanding
futures contracts.
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<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements filed as a part of this Annual Report on Form
10-K are listed in the Index to Consolidated Financial Statements and Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
28
<PAGE> 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
current executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Joseph L. Gorga 46 Director; Chairman, President and Chief Executive
Officer
James A. Ovenden 36 Director; Chief Financial Officer, Executive Vice
President and Secretary
Joshua T. Hamilton 47 Executive Vice President and President, Greige
Fabrics Division
James F. Robbins 45 Executive Vice President and President, Elastic
Fabrics Division
W. James Raleigh 71 Director
Rupinder S. Sidhu 42 Director
Stephen M. McLean 41 Director
Michael H. deHavenon 58 Director
</TABLE>
- ----------------------
Each member of the Board of Directors holds office until the next
annual meeting of the stockholders and until his successor is elected and
qualified. Officers are appointed by the Board of Directors and serve at the
discretion of the Board.
Joseph L. Gorga was named Chairman of the Board of Directors, President
and Chief Executive Officer and appointed as a director of the Company in
November 1995. Prior to 1995, Mr. Gorga joined a predecessor of the Elastic
Fabrics Division as its President in 1991.
James A. Ovenden joined the Company in 1987 as Assistant Treasurer and
became Treasurer in 1988. He was appointed to the newly-created office of Chief
Financial Officer in 1993 and was elected Executive Vice President and Assistant
Secretary in 1993. He became a director of the Company in 1990 and has served as
Secretary since 1995.
Joshua T. Hamilton, Executive Vice President of the Company and
President of the Greige Fabrics Division, joined a predecessor of the Greige
Fabrics Division in 1983 and served as Vice President of Operations from 1989
until becoming President in 1992.
James F. Robbins joined the Company in 1992 as Executive Vice President
for Marketing, Elastic Fabrics. In 1996, he was elected Executive Vice President
and President in charge of the Elastic Fabrics Division.
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<PAGE> 30
W. James Raleigh was elected as a director of the Company on April 2,
1996. Mr. Raleigh previously served as President of the Greige Division's sales
organization until his retirement in September 1995.
Rupinder S. Sidhu has served as a director of the Company since 1986.
Mr. Sidhu is the President of Merion Capital Management LLC, a private
investment company, a position he has held since 1994. He was also a Special
Limited partner of Stonington Partners, Inc., a private investment firm, from
1993 through 1994. He has been a member of the Board of Directors of ML Capital
Partners, a private investment firm affiliated with ML & Co., since 1987. From
1993 to July 1994, he was a Partner of ML Capital Partners and a Senior Vice
President of MLCP from 1987 to 1994. Mr. Sidhu was also a Managing Director of
the Investment Banking Division of ML & Co. from 1989 to 1994, a Director of the
Investment Banking Division of Merrill Lynch, Pierce, Fenner & Smith
Incorporated from 1989 to 1994. Mr. Sidhu is currently a director of Gemini
Industries, Inc. and Paymentech Inc.
Stephen M. McLean has served as a director of the Company since 1992.
Mr. McLean is a Partner and a Director of Stonington Partners, Inc., a private
investment firm, a position that he has held since 1993 and is a Partner and a
Director of Stonington Partners, Inc. II. He has also been a member of the Board
of Directors of ML Capital Partners, a private investment firm affiliated with
Merrill Lynch & Co., Inc. since 1987. Mr. McLean was a partner of ML Capital
Partners from 1993 to July 1994. Mr. McLean was also a Managing Director of the
Investment Banking Division of Merrill Lynch, Pierce, Fenner & Smith,
Incorporated, from 1987 to 1994. Mr. McLean is a director of Dictaphone
Corporation, Merisel, Inc., Packard BioScience Company, Pathmark Stores, Inc.
and Supermarkets General Holding Corporation.
Michael H. deHavenon was first elected as a director of the Company in
1986 and served until 1994 when he did not stand for reelection. Mr. deHavenon
was appointed to the Board on October 24, 1995. Since January 1997, Mr.
deHavenon has been President of Kulen Capital Corp., a firm engaged primarily in
making private investments. Prior thereto, Mr. deHavenon served as President of
Merrill Lynch Capital Corporation and its predecessor, a wholly-owned subsidiary
of ML & Co., which structured and managed leveraged private investments.
30
<PAGE> 31
ITEM 11. EXECUTIVE COMPENSATION
Compensation Summary. The following table shows, for the last three
fiscal years of the Company, annual compensation paid by the Company to Joseph
L. Gorga, the President and Chief Executive Officer and the three other
executive officers of the Company serving at the end of the 1998 fiscal year
(collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
Summary Compensation Table(1)
Long Term
Compensation
Annual Compensation Awards
----------------------------------------------- ------------
Other Annual Securities All Other
Salary Bonus Compensation Underlying Compensation
Name and Principal Position Year ($) ($)(2) ($)(3) Options (#) ($)
- --------------------------- ---- ------ ------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Joseph L. Gorga 1998 395,000 175,000 20,800 -- --
President and Chief 1997 354,737 325,000 20,550 -- --
Executive Officer 1996 325,000 185,000 15,400 40,000 --
James A. Ovenden 1998 250,000 100,000 15,000 -- --
Executive Vice President 1997 242,770 150,000 14,750 -- --
and Chief Financial Officer 1996 225,000 75,000 10,740 15,000 --
Joshua T. Hamilton 1998 220,000 30,000 13,200 -- --
President, Greige Fabrics 1997 208,987 75,000 12,660 -- --
1996 200,000 -- 11,600 -- --
James F. Robbins 1998 232,000 100,000 13,920 -- --
President, Elastic Fabrics 1997 220,000 80,000 13,200 10,000 --
1996 200,000 20,000 11,400 -- --
</TABLE>
- ---------------------------
(1) The Company does not maintain a "long-term incentive plan," as that
term is defined by applicable rules of the Securities and Exchange
Commission (the "Commission"), and has not made any awards of
restricted stock or stock appreciation rights.
(2) Bonus amounts for Messrs. Gorga, Ovenden, Hamilton and Robbins
represent amounts paid under the Company's Incentive Compensation
Program, which provides for discretionary awards and for cash bonuses
in years in which returns and earnings before interest, taxes and
depreciation exceed predetermined levels. Bonuses for Messrs. Gorga and
Ovenden are based on the performance of the Company and bonuses for Mr.
Hamilton and Mr. Robbins are based on the performance of the Greige
Fabrics Division and the Company's Elastic Fabrics Division,
respectively. See "--Employment and Severance Agreements."
(3) Represents the Company's contribution on behalf of the Named Executive
Officer to the Company's 401(k) Plan for Associates of CMI Industries,
Inc. and the Company's 401(n) Deferred Compensation Plan.
31
<PAGE> 32
Stock Option Exercises. The following table sets forth information with
respect to unexercised stock options held by the Named Executive Officers as of
January 2, 1999. None of the Named Executive Officers exercised any options
during the Company's 1998 fiscal year.
<TABLE>
<CAPTION>
Aggregated Fiscal Year End Option Values
----------------------------------------
Number of Unexercised Value of Unexercised
Options at Fiscal Year End In-the-Money Options at
(#) Fiscal Year End ($)(1)
Name Exercisable/Unexercisable Exercisable/Unexercisable
---------------- ------------------------- -------------------------
<S> <C> <C>
Joseph L. Gorga 75,000/0 $0/$0
James A. Ovenden 45,000/0 $0/$0
Joshua T. Hamilton -- --
James F. Robbins 10,000/0 $0/$0
</TABLE>
- --------------------
(1) Calculated based on the difference between the estimated value of the
Common Stock underlying the options at January 2, 1999 and the exercise
price. Because the Common Stock is privately held and not listed on any
securities exchange, the fair market value of the Common Stock is not
readily ascertainable. Management's estimate of the value of the Common
Stock underlying the options includes a discount to reflect the lack of
a public market for the Common Stock and the restrictions applicable to
the Common Stock held by Management Investors pursuant to the terms of
the Management Subscription Agreements and the Restated Stockholders
Agreement. See "--Management Subscription Agreements" and "Item 12.
Security Ownership of Certain Beneficial Owners and Management."
Awards Under Long-Term Incentive Plans. The Company does not maintain a
"long-term incentive plan" as that term is defined by applicable rules of the
Commission.
The 401(k) Plan. Effective January 1, 1995, the Company established The
401(k) Plan for Associates of CMI Industries, Inc., which covers substantially
all of the Company's employees. Under the 401(k) plan, the Company matches 50%
of employee contributions, not to exceed 2% of pay, for all eligible and
participating employees. Messrs. Gorga, Ovenden, Hamilton and Robbins
participate in the 401(k) plan.
The 401(n) Plan. Effective January 1, 1995, the Company established The
401(n) Deferred Compensation Plan for CMI Industries, Inc., which covers a
select group of highly compensated associates. The 401(n) Plan is a
non-qualified plan established to provide retirement benefits for CMI's
executives whose retirement benefits were limited due to the freezing of the
accrued benefits under the Company's defined benefit retirement plans, and the
restrictions on benefits in the 401(k) Plan. The Board in its discretion may
authorize a supplemental match for select executives. Messrs. Gorga, Ovenden,
Hamilton and Robbins participate in the 401(n) Deferred Compensation Plan.
Defined Benefit Retirement Plans. Effective December 31, 1994, the
Company merged its two defined benefit plans, the Chatham Manufacturing, Inc.
Pension Plan and the Clinton Retirement Income Program and curtailed future
benefits.
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<PAGE> 33
Clinton Retirement Income Program. In 1991, the Company's former
Clinton Mills subsidiary combined its Pension Plan for salaried employees, its
Retirement Plan for hourly employees and its frozen Profit Sharing Plan to form
the Clinton Retirement Income Program ("CRIP"). The CRIP is a noncontributory
plan providing retirement benefits to all salaried and hourly employees who meet
certain age and service requirements. Retirement benefits to salaried employees
generally equal the greater of (i) 1 1/2% of the average total cash compensation
for the five highest consecutive years before retirement, multiplied by the
number of years of service as a salaried employee and reduced by 50% of the
employee's primary Social Security benefit payable at normal retirement date and
(ii) 1% of the aggregate of the participant's total cash compensation for all
years of service as a salaried employee after December 31, 1980. Benefits can be
paid under the CRIP through one of several annuity options selected by the
participant, including joint and survivor annuity options.
The following table sets forth estimated annual benefits payable upon
retirement in the Company's last fiscal year to CRIP participants at normal
retirement age in the compensation and service classifications specified.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
YEARS OF SERVICE
REMUNERATION 15 20 25 30 35
------------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$125,000 $ 20,541 $ 29,916 $ 39,291 $ 48,666 $ 58,041
150,000 26,166 37,416 48,666 59,916 71,166
175,000 31,791 44,916 58,041 71,166 84,291
200,000 37,416 52,416 67,416 82,416 97,416
225,000 43,041 59,916 76,791 93,666 110,541
250,000 48,666 67,416 86,166 104,916 118,800
300,000 59,916 82,416 104,916 118,800 118,800
400,000 82,416 112,416 118,800 118,800 118,800
450,000 93,666 120,000 120,000 120,000 120,000
500,000 104,916 120,000 120,000 120,000 120,000
550,000 116,166 120,000 120,000 120,000 120,000
600,000 120,000 120,000 120,000 120,000 120,000
650,000 120,000 120,000 120,000 120,000 120,000
700,000 120,000 120,000 120,000 120,000 120,000
750,000 120,000 120,000 120,000 120,000 120,000
</TABLE>
Beginning in 1994, recognizable pay in tax qualified plans was limited
to $150,000 per year. Because of the grandfather treatment of prior accruals in
the CRIP, the above table recognizes accrued benefits on compensation in excess
of $150,000. The credited years of service for each of the Named Executive
Officers who participate in the CRIP are: Joseph L. Gorga, 4 years; James A.
Ovenden, 8 years; Joshua T. Hamilton, 12 years; and James F. Robbins, 3 years.
Chatham Pension Plan. On February 14, 1992, the Company's former
Chatham subsidiary became the sponsor of a pension plan that was originally
established in 1969 by Chatham's predecessor. The plan is a noncontributory plan
and covers all Chatham employees as of the first day of the first plan year
after the employee's date of employment. Participants accrue
33
<PAGE> 34
benefits as of January 1 of each year of eighty-five hundredths of one percent
(.0085) of total compensation for each plan year plus sixty-five hundredths of
one percent (.0065) of compensation which is in excess of $12,200. The plan is a
career average plan and has provision for accredited service prior to January 1,
1989. Benefits can be paid under the Chatham Pension Plan through one of several
annuity options. A lump-sum payment option is also offered with spousal consent.
The following table sets forth estimates of annual benefits payable upon
retirement in the Company's last fiscal year at normal retirement age in the
compensation and service classifications specified. The assumptions used
indicate the remuneration as career average compensation.
The following table sets forth estimated annual benefits payable upon
retirement in the Company's last fiscal year to plan participants at normal
retirement age in the compensation and service classifications specified.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
YEARS OF SERVICE
REMUNERATION 15 20 25 30 35
- ------------ -- -- -- -- --
<C> <C> <C> <C> <C> <C>
$125,000 $ 26,935 $ 35,914 $ 44,892 $ 53,871 $ 62,849
150,000 32,560 43,414 54,267 65,121 75,974
175,000 38,185 50,914 63,642 76,371 89,099
200,000 43,810 58,414 73,017 87,621 102,224
225,000 49,435 65,914 82,392 98,871 115,349
235,840 51,875 69,166 86,458 103,749 118,800
</TABLE>
The above table limits remuneration to $235,840 since the Chatham
Pension Plan has no participants with grandfathered compensation in excess of
the 1993 maximum recognizable compensation limit for tax qualified plans. None
of the Named Executive Officers participate in the Chatham Pension Plan.
Compensation Committee Interlocks and Insider Participation. During the
1998 fiscal year, the Compensation Committee of the Company's Board of Directors
was composed of Messrs. Rupinder S. Sidhu, Stephen H. McLean, Michael H.
deHavenon and Joseph L. Gorga. Mr. Gorga is the President and Chief Executive
Officer of the Company. Messrs. Sidhu, McLean and deHavenon are not, and have
not been at any time, either officers or employees of the Company. Messrs. Sidhu
and McLean are affiliated with ML Capital Partners or ML & Co. ML Capital
Partners, through various affiliates, beneficially owns 58.7% of the outstanding
shares of Common Stock.
COMPENSATION OF DIRECTORS
The Company pays $2,000 per quarter and $1,000 per meeting to its
outside directors (Messrs. deHavenon and Raleigh) for serving as a Director.
34
<PAGE> 35
EMPLOYMENT AND SEVERANCE AGREEMENTS
Mr. Gorga. Effective January 1, 1996, the Company and Mr. Gorga
entered into an amended and restated employment agreement providing for the
employment of Mr. Gorga as the President and Chief Executive Officer of the
Company. The agreement had a term of two years, subject to annual renewals
unless either party objected. In September 1997, the parties agreed to an
amendment to the amended and restated employment agreement whereby the term of
the agreement was extended for another two year period. Under the amendment, Mr.
Gorga is entitled to an annual salary of $395,000, subject to increase by the
Board's Compensation Committee. He is entitled to participate in Company benefit
plans, including the Incentive Compensation Plan; so long as the current
Incentive Compensation Plan is in effect, the maximum amount payable under the
plan to Mr. Gorga would be the greater of 75% of his base salary or the amount
specified in the plan.
In the event Mr. Gorga is terminated without cause during the term of
the agreement or within six months after its expiration, the agreement provides
for the payment to him of the greater of the base salary which would accrue over
the remaining term of the agreement or one year's base salary, together with
continued health and life insurance benefits during the period in which the
payments are made. If Mr. Gorga is terminated or resigns under specified
circumstances following a change of control (as defined) that occurs during the
term of the agreement or within six months after its expiration, Mr. Gorga will
be entitled to two years' base salary from the termination or resignation and
continued health and life insurance coverage for two years. In addition, with
respect to certain change of control situations, the bonus payable to Mr. Gorga
under any incentive compensation plan then in effect, rather than being
calculated on a pro rata basis as of the termination date, would be double the
maximum amount to which Mr. Gorga otherwise would be entitled for the entire
year, regardless of the actual performance of the Company. In the event of a
change of control, Mr. Gorga may also be entitled to receive special
compensation (as defined) based upon the transaction value realized by the
Company. Under certain circumstances with respect to change of control, the
severance and special compensation amounts payable, including funding for the
continued benefits, would be payable contemporaneously with the occurrence of
the change of control. Payments that result in the imposition of an excise tax
penalty under section 4999 of the Internal Revenue Code of 1986, as amended,
would result in a reimbursement payment so that Mr. Gorga's after tax situation
is not affected by the additional tax. The agreement also contains certain
agreements of Mr. Gorga relating to noncompetition with the Company.
Mr. Ovenden. Effective January 1, 1996, the Company and Mr. Ovenden
entered into an amended and restated employment agreement providing for the
employment of Mr. Ovenden as the Executive Vice President and Chief Financial
Officer of the Company. The agreement had a term of two years, subject to annual
renewals unless either party objected. In September 1997, the parties agreed to
an amendment to the amended and restated employment agreement whereby the term
of the agreement was extended for another two year period. Under the amendment,
Mr. Ovenden is entitled to an annual salary of $250,000, subject to increase by
the Board's compensation committee. He is entitled to participate in Company
benefit plans, including the Incentive Compensation Plan; so long as the current
Incentive Compensation Plan is in effect,
35
<PAGE> 36
the maximum amount payable under the plan to Mr. Ovenden would be the greater of
50% of his base salary or the amount specified in the plan.
In the event Mr. Ovenden is terminated without cause during the term
of the agreement or within six months after its expiration, the agreement
provides for the payment to him of the greater of the base salary which would
accrue over the remaining term of the agreement or one year's base salary,
together with continued health and life insurance benefits during the period in
which the payments are made. If Mr. Ovenden is terminated or resigns under
specified circumstances following a change of control (as defined) that occurs
during the term of the agreement or within six months after its expiration, Mr.
Ovenden will be entitled to two years' base salary from the termination or
resignation and continued health and life insurance coverage for two years. In
addition, with respect to certain change of control situations, the bonus
payable to Mr. Ovenden under any incentive compensation plan then in effect,
rather than being calculated on a pro rata basis as of the termination date,
would be double the maximum amount to which Mr. Ovenden otherwise would be
entitled for the entire year, regardless of the actual performance of the
Company. In the event of a change of control, Mr. Ovenden may also be entitled
to receive special compensation (as defined) based upon the transaction value
realized by the Company. Under certain circumstances with respect to change of
control, the severance and special compensation amounts payable, including
funding for the continued benefits, would be payable contemporaneously with the
occurrence of the change of control. Payments that result in the imposition of
an excise tax penalty under section 4999 of the Internal Revenue Code of 1986,
as amended, would result in a reimbursement payment so that Mr. Ovenden's after
tax situation is not affected by the additional tax. The agreement also contains
certain agreements of Mr. Ovenden relating to noncompetition with the Company.
Mr. G. Thaddeus Williams. Until his retirement from the Company in
August 1995, Mr. Williams was employed as President and Chief Executive Officer
of the Company pursuant to an employment agreement effective as of January 1,
1991, which was amended as of July 1, 1993. Pursuant to the terms of a severance
and consulting agreement (the "Consulting Agreement") entered into upon Mr.
Williams' retirement, the rights and obligations of Mr. Williams and the Company
under the employment agreement have been terminated, except as expressly
provided by the Consulting Agreement.
Pursuant to the Consulting Agreement, Mr. Williams received severance
payments at the annual rate of $275,000 until August 1997. Following the
expiration of the severance payment period, Mr. Williams will provide consulting
services to the Board of Directors and to the Chief Executive Officer of the
Company for a period of up to three years and shall receive an annual consulting
fee of $175,000. During the term of the severance payment period and the
consulting period, Mr. Williams has agreed that he will not compete or interfere
with any business conducted by the Company or its affiliates. Mr. Williams and
his dependents are also entitled to continued participation in the Company's
group medical insurance plan and the Company will pay the required premiums
until Mr. Williams attains age 62.
36
<PAGE> 37
MANAGEMENT SUBSCRIPTION AGREEMENTS
Pursuant to a management subscription agreement (the "Management
Subscription Agreement"), certain of the Company's officers and employees,
including Mr. Hamilton, acquired shares of Common Stock in December 1986. Mr.
Ovenden, who acquired shares of Common Stock in 1987, is subject to a
subscription agreement substantially identical to the Management Subscription
Agreement, and is a Management Investor. The Management Subscription Agreement
and Mr. Ovenden's separate subscription agreement grant the Company an option to
purchase and each of the Management Investors an option under certain
circumstances to sell at fair market value the shares of Common Stock owned by
such Management Investor in the event of his death, incapacity or termination of
employment.
Under the Consulting Agreement with Mr. Williams, Mr. Williams waived
his rights under the Management Subscription Agreement to require the Company to
purchase his shares upon his retirement. The Consulting Agreement grants Mr.
Williams the option to sell all or a portion of the shares of Common Stock
directly owned by him to the Company in the event of an initial public offering
of Common Stock, at the same price as shares of Common Stock are being offered
to the public.
37
<PAGE> 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the
beneficial ownership of shares of Common Stock as of January 2, 1999 of all
stockholders known by the Company to be the beneficial owners of more than five
percent of its outstanding Common Stock, of each director of the Company, each
Named Executive Officer named in the Summary Compensation Table, and of all
directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLYOWNED
------------------------
NUMBER PERCENT
OF SHARES OF TOTAL
--------- --------
<S> <C> <C>
Merrill Lynch Capital Partners, Inc.(1)(2).............. 994,387 58.7%
767 Fifth Avenue
48th Floor
New York, NY 10153
Steve F. Warren(3)..................................... 120,000 7.1%
2 Baywater Lane
Greensboro, NC 27408
G. Thaddeus Williams.................................... 97,000 5.7%
333 Spring Lake Road
Columbia, SC 29206
Joseph L. Gorga(4)..................................... 80,000 4.5%
W. James Raleigh(5)..................................... 60,000 3.5%
James A. Ovenden(6).................................... 55,000 3.2%
Joshua T. Hamilton(7).................................. 16,000 *
James F. Robbins (8).................................... 10,000 *
Michael H. deHavenon.................................... 4,081 *
Rupinder S. Sidhu...................................... -- --
Stephen M. McLean...................................... -- --
M. S. Bailey and Son Bankers, as Trustee............... 126,698 7.5%
211 North Broad Street
Clinton, SC 29325
All directors and executive officers as a group
(8 persons)(4)(5)(6)(7)(8)........................... 221,748 12.2%
</TABLE>
*Less than 1%
(1) Ten limited partnerships, each of which is an affiliate of ML Capital
Partners and Merrill Lynch, are record owners of 894,986 of the
presently outstanding shares: Merrill Lynch Capital Appreciation
Partnership No. VII, L.P., Merrill Lynch Capital Appreciation
Partnership No. B-XVI, L.P., ML Offshore LBO Partnership No. VII, ML
Offshore LBO Partnership No. B-XVI, ML Employees LBO Partnership No. I,
L.P., ML Capital Partners Associates L.P. No. II, Merrill Lynch Kecalp
L.P. 1986, Merrill Lynch Kecalp L.P. 1989, Merrill Lynch Kecalp L.P.
1991, and Merchant Banking L.P. No. 1. Merrill
38
<PAGE> 39
Lynch LBO Partners No. II, L.P. ("LBO Partners II") is the general
partner of Merrill Lynch Capital Appreciation Partnership No. VII, L.P.
and the investment general partner of ML Offshore LBO Partnership No.
VII. Merrill Lynch LBO Partners No. B-III ("LBO Partners III") is the
general partner of Merrill Lynch Capital Appreciation Partnership No.
B-XVI, L.P. and ML Offshore LBO Partnership No. B-XVI. ML Capital
Partners is in turn the general partner of LBO Partners II and LBO
Partners III. ML Employees LBO Managers, Inc., a wholly-owned
subsidiary of ML Capital Partners, is the managing general partner of
ML Employees LBO Partnership No. 1, L.P. ML Capital Partners is the
general partner of ML Capital Partners Associates L.P. No. II. Kecalp,
Inc., an indirect wholly-owned subsidiary of ML&Co., is the general
partner of Merrill Lynch Kecalp L.P. 1986, Merrill Lynch Kecalp L.P.
1989 and Merrill Lynch Kecalp L.P. 1991. Merrill Lynch MBP, Inc., an
indirect wholly-owned subsidiary of ML&Co., is the general partner of
Merchant Banking L.P. No. 1. The remaining 99,401 outstanding shares
deemed beneficially owned by ML Capital Partners are owned of record by
ML IBK Positions, Inc., an indirect wholly-owned subsidiary of ML&Co.
and an affiliate of ML Capital Partners and Merrill Lynch.
(2) Rupinder S. Sidhu and Stephen M. McLean, directors of the Company, are
members of the Board of Directors of ML Capital Partners. By virtue of
their status as directors of ML Capital Partners, Messrs. Sidhu and
McLean may be deemed under the rules of the Commission to be beneficial
owners of 856,165 shares of Common Stock owned of record by limited
partnerships that are wholly owned by ML Capital Partners. Messrs.
Sidhu and McLean disclaim beneficial ownership of these shares of
Common Stock.
(3) Amounts for Mr. Warren include 60,000 shares of Common Stock held by a
limited partnership in which Mr. Warren is a general partner.
(4) Amounts for Mr. Gorga include 75,000 shares issuable upon exercise of
presently exercisable options to acquire Common Stock.
(5) Amounts for Mr. Raleigh do not include 60,000 shares of Common Stock
held by a trust for the benefit of Mr. Raleigh's children, as to which
Mr. Raleigh disclaims beneficial ownership.
(6) Amounts for Mr. Ovenden include 45,000 shares issuable upon exercise of
presently exercisable options to acquire Common Stock.
(7) Amounts for Mr. Hamilton do not include 4,000 shares of Common Stock
held by a trust for the benefit of Mr. Hamilton's children, as to which
Mr. Hamilton disclaims beneficial ownership.
(8) Amounts for Mr. Robbins represent shares issuable upon exercise of
presently exercisable options to acquire common stock.
39
<PAGE> 40
RESTATED STOCKHOLDERS AGREEMENT
In connection with the original issuance of Common Stock to the ML
Capital Partners affiliates, certain of the Management Investors and others upon
the organization of the Company in 1986, all stockholders entered into a
stockholders agreement with the Company, which was amended and restated in its
entirety in February 1992 (the "Restated Stockholders Agreement"). The Restated
Stockholders Agreement provides that the ML Capital Partners affiliates are
entitled to designate four of the Company's seven directors and the Management
Investors are entitled to designate three of the Company's directors. The Board
of Directors is currently comprised of six members, three of whom (Messrs.
Sidhu, McLean and deHavenon) have been designated by ML Capital Partners.
Certain significant transactions between the Company and unrelated parties
require the approval of the Board of Directors and the holders of more than
two-thirds of the outstanding shares of Common Stock. Since the ML Capital
Partners affiliates have the right to elect the majority of the Board of
Directors, the approval of the directors elected by the ML Capital Partners
affiliates and Management Investors holding approximately 8% of the outstanding
Common Stock (in addition to the ML Capital Partners affiliated stockholders)
will be required to approve significant transactions. The Restated Stockholders
Agreement also provides for certain restrictions on the transfer of shares of
Common Stock by the current stockholders and rights of first refusal in
connection with certain proposed transfers of Common Stock. Pursuant to the
Consulting Agreement, Mr. Williams' shares of Common Stock will not be subject
to these transfer restrictions if the ML Capital Partners affiliated
stockholders sell their shares of Common Stock to an unaffiliated person or
distribute their shares of Common Stock to their respective partners or
investors.
Under the Restated Stockholders Agreement, all the stockholders of the
Company have certain registration rights with respect to their Common Stock.
These rights include demand and "piggyback" registration rights. The Company is
obligated to register shares of Common Stock under the demand registration
rights if holders of more than two-thirds of the outstanding shares request
registration. The registration rights extend until February 14, 2002 or
terminate sooner upon (i) the merger or consolidation of the Company with an
unaffiliated corporation in which the Management Investors and affiliates of ML
Capital Partners own less than 65% of the surviving or resulting corporation or
(ii) the sale of substantially all the assets of the Company to an unaffiliated
person. The remaining provisions of the Restated Stockholders Agreement would
terminate under the foregoing circumstances or sooner in the event of (i) a
public offering of Common Stock at the conclusion of which at least 30% of the
outstanding shares shall have been sold to the public or (ii) the sale of 60% or
more of the shares of Common Stock owned by either the Management Investors as a
group or the ML Capital Partners affiliates as a group (as fully diluted by
shares to be issued upon exercise of options).
40
<PAGE> 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Purchase of Common Stock. Pursuant to the terms of the Consulting
Agreement with Mr. Williams and the Management Subscription Agreement, the
Company in August 1995, purchased 83,000 shares of Common Stock owned by certain
trusts for the benefit of Mr. Williams' descendants (the "Trusts") at a price of
$40 per share or a total of $3.3 million.
In October 1997, Mr. Gorga, a director and the President and Chief
Executive Officer of the Company, purchased 5,000 shares of Common Stock for a
purchase price of $27.50. Mr. Gorga delivered a non-recourse promissory note to
the Company in payment of 90% of the purchase price for these shares of Common
Stock and paid the balance in cash. Mr. Gorga's note bears interest at a per
annum rate of 6.55% and is payable in ten years. Mr. Gorga pledged the purchased
shares as security for payment of his promissory note.
Market Making Activities. In October 1993, ML & Co. underwrote a
public offering of the Notes. The Company used the proceeds of the Offering,
together with initial borrowings under a credit agreement, to refinance the
indebtedness outstanding under certain subsidiary loan agreements and to call
the Clinton Debentures for redemption. ML & Co. received an underwriting
discount of $3,046,875 in connection with the Offering. The Company has agreed,
if required by ML & Co., to maintain the effectiveness of the registration
statement pursuant to which the Notes were registered with the Commission to
enable ML & Co. to make a market in the Notes. The Company also agreed to
indemnify ML & Co. against certain liabilities, including liabilities under the
federal securities laws. For a discussion of the relationship between each of ML
& Co. and its affiliates and the Company, see "Item 12--Security Ownership of
Certain Beneficial Owners and Management."
Registration Rights. All current stockholders of the Company have
certain registration rights with respect to their Common Stock. See "Item
12--Security Ownership of Certain Beneficial Owners and Management."
41
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
1. The financial statements filed as a part of this Report are
listed in the attached index to consolidated financial
statements and schedules.
2. The financial statement schedules filed as a part of this
Report are listed in the attached index to consolidated
financial statements and schedules.
3. Exhibits
<TABLE>
<S> <C>
3.1 -- Certificate of Incorporation of CMI Industries, Inc.,
as amended (1)
3.2 -- Bylaws of CMI Industries, Inc. (1)
4.1 -- Indenture dated as of October 28, 1993 between CMI
Industries, Inc. and Chemical Bank, Trustee
(including the form of Note) (2)
4.2 -- Letter dated September 24, 1993 from the South
Carolina National Bank to CMI Industries, Inc. (1)
4.3 -- Form of ISDA Master Agreement dated as of January
14, 1994 between the First National Bank of Boston
and CMI Industries, Inc., including memorandum of
Swap Transaction dated January 14, 1994 (3)
4.4 -- Interest Rate Collar Transaction letter agreement
dated February 5, 1996 between the First National
Bank of Boston and CMI Industries, Inc. (7)
4.5 -- Credit Agreement dated as of March 19, 1996 among CMI
Industries, Inc., The First National Bank of Boston,
individually and as Agents, NationsBank of North
Carolina, N.A., and the Wachovia Bank of South
Carolina, N.A. (7)
4.6 -- Waiver Letter dated October 11, 1996, among CMI
Industries, Inc., and The First National Bank of
Boston, As Agent, NationsBank of North Carolina, and
Wachovia Bank of South Carolina, as Lenders. (8)
4.7 -- Amendment No. 1 and Consent and Waiver dated as of
February 28, 1997 to Loan and Security Agreement
dated as of March 19, 1996 among CMI Industries,
Inc., The First National Bank of Boston, as Agent and
Lender, NationsBank, N.A. and The Wachovia Bank of
South Carolina, N.A., as Lenders (9)
</TABLE>
42
<PAGE> 43
<TABLE>
<S> <C>
4.8 -- Tender offer to Purchase for Cash Any and All
Outstanding 9-1/2% Senior Subordinated Notes Due 2003
issued by CMI Industries, Inc. and Solicitation of
Consents to Amendments of the Indenture.
(11)
4.9 -- First Supplemental Indenture of CMI Industries, Inc.
9-1/2% Senior Subordinated Notes Due 2003 dated as of
June 17, 1998, Supplementing the Indenture of October
28, 1993. (11)
4.10 -- Termination of Tender Offer and Consent
Solicitation relating to the $125 million Principal
Amount 9-1/2% Senior Subordinated Notes due 2003
issued by CMI Industries, Inc. (12)
10.1 -- Management Subscription Agreement dated as of
December 23, 1986 among CMI Industries, Inc. and the
persons listed on Schedule I thereto (1)
10.2 -- Subscription Agreement dated as of June 1, 1987
between CMI Industries, Inc. and James A. Ovenden (1)
10.3 -- Subscription Agreement dated as of November 9, 1988
between CMI Industries, Inc. and Michael H. deHavenon
(1)
10.4 -- Amendment No. 1 to Management Subscription Agreement
dated as of April 14, 1989 among CMI Industries, Inc.
and the persons listed on Schedule 1 thereto (1)
10.5 -- Amendment No. 1 to Subscription Agreement dated as of
April 14, 1989 between CMI Industries, Inc. and James
A. Ovenden (1)
10.6 -- Description of CMI Industries, Inc. Incentive
Compensation Program (1)*
10.7 -- CMI Holdings, Inc. 1989 (now known as CMI Industries,
Inc.) Non-Qualified Stock Option Plan (1)*
10.8 -- CMI Industries, Inc. 1992 Non-Qualified Stock Option
Plan dated February 14, 1992 (1)*
10.9 -- Option Agreement dated January 14, 1991 between CMI
Industries, Inc. and Joseph L. Gorga.(1)*
10.10 -- Amended and Restated Stockholders Agreement dated
February 14, 1992 among CMI Industries, Inc. and its
Stockholders.(1)
</TABLE>
43
<PAGE> 44
<TABLE>
<S> <C>
10.11 -- Amended and Restated Employment Agreement dated as of
January 1, 1991 between Clinton Mills, Inc. and G.
Thaddeus Williams as amended effective as of July 1,
1993 by Amendment No. 1 to Amended and Restated
Employment Agreement dated August 24, 1993 between
Clinton Mills, Inc. and G. Thaddeus Williams.(1)*
10.12-- Amendment No. 1 to Amended and Restated Stockholders
Agreement dated March 31, 1994 (4)
10.13-- CMI Industries, Inc. 1994 Non-Qualified Stock Option
Plan (4)
10.14-- Option Agreement between CMI Industries, Inc. and
Joseph L. Gorga dated January 2, 1994 pursuant to the
CMI Industries, Inc. 1992 Stock Option Plan (5)*
10.15 -- Option Agreement between CMI Industries, Inc. and
Joseph L. Gorga dated January 2, 1994 pursuant to the
CMI Industries, Inc. 1994 Stock Option Plan (5)*
10.16-- Severance and Consulting Agreement dated August 23,
1995, by and between CMI Industries, Inc. and G.
Thaddeus Williams (6)
10.17-- Option Agreement between CMI Industries, Inc. and
Joseph L. Gorga dated January 23, 1995, pursuant to
the CMI Industries, Inc. 1994 Stock Option Plan (7)*
10.18-- Amended and Restated Employment Agreement dated
January 1, 1996 between CMI Industries, Inc. and
Joseph L. Gorga (7)*
10.19-- Amended and Restated Employment Agreement dated
January 1, 1996, between CMI Industries, Inc. and
James A. Ovenden (7)*
10.20-- Amendment No. 1 to Option Agreement between CMI
Industries, Inc. and Joseph L. Gorga dated January
31, 1996 (7)*
10.21-- Option Agreement between CMI Industries, Inc. and
Joseph L. Gorga dated January 31, 1996, pursuant to
the CMI Industries, Inc. 1992 Stock Option Plan (7)*
10.22-- Option Agreement between CMI Industries, Inc. and
Joseph L. Gorga dated January 31, 1996, pursuant to
the CMI Industries, Inc. 1994 Stock Option Plan (7)*
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C>
10.23-- Option Agreement between CMI Industries, Inc. and
James A. Ovenden dated January 31, 1996, pursuant to
the CMI Industries, Inc. 1994 Stock Option Plan (7)*
10.24-- Option Agreement between CMI Industries, Inc. and
James F. Robbins dated January 31, 1997, pursuant to
the CMI Industries, Inc. 1992 Stock Option Plan (9)*
10.25 -- Amendment No. 1 to Amended and Restated Employment
Agreement between CMI Industries, Inc., and Joseph L.
Gorga dated September 30, 1997 (10)*
10.26 -- Amendment No. 1 to Amended and Restated Employment
Agreement between CMI Industries, Inc., and James A.
Ovenden dated September 30, 1997 (10)*
10.27 -- Agreement Regarding Restriction of Shares of CMI
Industries, Inc. Common Stock between CMI Industries,
Inc. and Joseph L. Gorga dated October 21, 1997 (10)*
10.28 -- Merger Agreement by and among CMI Management, Inc.,
CMI Acquisitions, Inc. and CMI Industries, Inc. dated
as of May 15, 1998. (11)
10.29 -- Dealer Manager Agreement Between NationsBanc
Montgomery Securities LLC and CMI Industries, Inc.
dated May 29, 1998. (11)
10.30 -- Letter dated February 25, 1999 from CMI Management,
Inc. terminating the Merger Agreement by and among
CMI Management, Inc., CMI Acquisitions, inc., and CMI
Industries, Inc. (filed with this Report)
10.31-- Letter dated February 25, 1999 from CMI
Industries, Inc. terminating the dealer manager
engagement letter with NationsBanc Montgomery
Securities, LLC dated March 31, 1998. (filed with
this Report)
12 -- Computation of Ratio of Earnings to Fixed Charges
(filed with this Report)
21 -- Subsidiaries of CMI Industries, Inc. (filed with this
Report)
23.1 -- Consent on Financial Statement Schedules of Arthur
Andersen & Co. (filed with this Report)
27.1 -- Financial Data Schedule (for SEC use only) (filed
with this Report)
</TABLE>
- ----------------------
45
<PAGE> 46
(1) Filed as an exhibit to the Registration Statement on Form S-1
(Commission File No. 33-67854) filed by CMI Industries, Inc.
with respect to its $125,000,000 principal amount 9-1/2%
Senior Subordinated Notes due 2003 and declared effective
October 22, 1993.
(2) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q on December 6, 1993 and incorporated herein by this
reference.
(3) Filed as an exhibit to the Company's Annual Report on Form
10-K on March 29, 1994 and incorporated herein by this
reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q on May 16, 1994 and incorporated herein by this
reference.
(5) Filed as an exhibit to the Company's Annual Report on Form
10-K on March 31, 1995 and incorporated herein by this
reference.
(6) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q on November 14, 1995 and incorporated herein by this
reference.
(7) Filed as an exhibit to the Company's Annual Report on Form
10-K on March 29, 1996 and incorporated herein by this
reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q on November 12, 1996 and incorporated herein by this
reference.
(9) Filed as an exhibit to the Company's Annual Report on Form
10-K on March 27, 1997 and incorporated herein by this
reference.
(10) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q on November 18, 1997 and incorporated herein by this
reference.
(11) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q on August 7, 1998 and incorporated herein by this
reference.
(12) Filed as an exhibit to the Company's Report on Form 8-K on
August 10, 1998 and incorporated herein by this reference.
* Identifies a management contract or compensatory plan or
arrangement required to be filed pursuant to Item 14(c) of
Form 10-K.
(b) The Company did not file any Current Reports on Form 8-K during the
last quarter of the Company's 1998 fiscal year.
46
<PAGE> 47
SUPPLEMENTAL INFORMATION
The Company has not provided its security holders with an annual report
covering the Company's last fiscal year, or a proxy statement, a form of proxy
or other proxy soliciting material. After the filing of this Annual Report on
Form 10-K, the Company will send to the holders of its 9 1/2% Senior
Subordinated Notes an annual report containing audited financial statements of
the Company, together with an opinion thereon expressed by the Company's
independent auditors. The Company will furnish to the Securities and Exchange
Commission four copies of such annual report when it is sent to such holders.
47
<PAGE> 48
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CMI INDUSTRIES, INC.
Date: March 29, 1999 /s/ JOSEPH L. GORGA
--------------------------------
Joseph L. Gorga, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ JOSEPH L. GORGA President, Chief Executive March 29, 1998
- ------------------------- Officer, and Director
Joseph L. Gorga
/s/ JAMES A OVENDEN Principal Financial and March 29, 1999
- ------------------------- Accounting Officer, and Director
James A. Ovenden
/s/ W. JAMES RALEIGH Director March 29, 1999
- -------------------------
W. James Raleigh
/s/ RUPINDER S. SIDHU Director March 29, 1999
- -------------------------
Rupinder S. Sidhu
/s/ STEPHEN M. MCLEAN Director March 29, 1999
- -------------------------
Stephen M. McLean
/s/ MICHAEL H. DEHAVENON Director March 29, 1999
- -------------------------
Michael H. deHavenon
</TABLE>
48
<PAGE> 49
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
CMI INDUSTRIES, INC. AND SUBSIDIARIES
Financial Statements:
<TABLE>
<S> <C>
Report of Independent Public Accountants ............................................ 50
Consolidated Balance Sheets as of December 28, 1996 and January 3, 1998 ............. 51
Consolidated Statements of Operations for the years ended December 30, 1995,
December 28, 1996, and January 3, 1998 .................................... 52
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 30, 1995, December 28, 1996 and January 3, 1998 ............ 53
Consolidated Statements of Cash Flows for the years ended December 30, 1995,
December 28, 1996 and January 3, 1998 ..................................... 54
Notes to the Consolidated Financial Statements ...................................... 55
Schedules:
Schedule V - Property, Plant and Equipment for the years ended December 30, 1995,
December 28, 1996 and January 3, 1998 ..................................... 68
Schedule VI - Accumulated Depreciation and Amortization of Property, Plant and
Equipment for the years ended December 30, 1995, December 28, 1996
and January 3, 1998 ....................................................... 69
Schedule VIII - Valuation and Qualifying Accounts for the years ended
December 30, 1995, December 28, 1996 and January 3, 1998 .................. 70
</TABLE>
49
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of
CMI Industries, Inc.:
We have audited the accompanying consolidated balance sheets of CMI Industries,
Inc. (a Delaware corporation) and subsidiaries as of January 2, 1999 and January
3, 1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CMI Industries, Inc. and
subsidiaries as of January 2, 1999 and January 3, 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
January 2, 1999, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Columbia, South Carolina
March 12, 1999.
50
<PAGE> 51
CMI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1998 AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,729 $ 3,911
Receivables, net 47,762 50,884
Inventories, net 53,927 54,198
Other current assets 931 7,431
-------- --------
Total current assets 104,349 116,424
Property, plant and equipment, net 103,592 97,018
Intangible and other assets, net 8,599 9,724
-------- --------
$216,540 $223,166
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Book overdraft $ 6,023 $ 12,247
Current portion of long-term debt 2,204 --
Accounts payable 15,685 13,914
Accrued expenses, including restructuring charges 14,488 13,633
Income taxes payable 141 --
-------- --------
Total current liabilities 38,541 39,794
Long-term debt 124,528 124,536
Deferred income taxes 1,245 4,506
Other liabilities 13,182 12,247
-------- --------
138,955 141,289
Commitments and contingencies
Stockholders' Equity:
Common stock of $1 par value per share; 2,100,000 shares
authorized, 1,695,318 shares issued and outstanding 1,695 1,695
Paid-in capital 11,358 11,358
Retained earnings 25,991 29,030
-------- --------
Total stockholders' equity 39,044 42,083
-------- --------
$216,540 $223,166
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
51
<PAGE> 52
CMI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE YEARS ENDED DECEMBER 28, 1996,
JANUARY 3, 1998 AND JANUARY 2, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 374,044 $ 422,722 $ 412,791
Cost of sales 345,888 366,298 362,216
--------- --------- ---------
Gross profit 28,156 56,424 50,575
Selling, general and administrative expenses 31,097 32,914 33,586
Writeoff of merger costs -- -- 1,649
Credits to restructuring and severance charges -- -- (1,345)
--------- --------- ---------
Operating income (loss) (2,941) 23,510 16,685
--------- --------- ---------
Other income (expenses):
Interest expense (15,425) (14,499) (12,759)
Other, net 1,588 2,975 1,013
--------- --------- ---------
Total other expenses, net (13,837) (11,524) (11,746)
Income (loss) before income taxes (16,778) 11,986 4,939
Income tax provision (benefit) (6,115) 4,800 1,900
--------- --------- ---------
Net income (loss) $ (10,663) $ 7,186 $ 3,039
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
52
<PAGE> 53
CMI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998 AND JANUARY 2, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of December 30, 1995 1,690 $1,690 $11,350 $ 29,468 $ 42,508
Net loss -- -- -- (10,663) (10,663)
----- ------ ------- -------- --------
Balance as of December 28, 1996 1,690 $1,690 $11,350 $ 18,805 $ 31,845
Sale of common stock 5 5 8 -- 13
Net income -- -- -- 7,186 7,186
----- ------ ------- -------- --------
Balance as of January 3, 1998 1,695 $1,695 $11,358 $ 25,991 $ 39,044
Net income -- -- -- 3,039 3,039
----- ------ ------- -------- --------
Balance as of January 2, 1999 1,695 $1,695 $11,358 $ 29,030 $ 42,083
===== ====== ======= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
53
<PAGE> 54
CMI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 28, 1996,
JANUARY 3, 1998 AND JANUARY 2, 1999
(in thousands)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(10,663) $ 7,186 $ 3,039
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 23,226 17,868 17,447
(Gain) loss on disposal of equipment (109) (678) --
Changes in assets and liabilities:
Receivables 3,175 (253) (3,122)
Inventories 8,908 4,216 (271)
Other current assets 3,731 657 (6,500)
Intangible and other assets (817) (758) (1,579)
Book overdraft (1,726) (5,477) 6,224
Accounts payable 2,057 157 (1,771)
Accrued expenses, including restructuring charges (2,100) 1,399 (855)
Income taxes payable -- 141 (141)
Deferred income taxes (6,491) 4,384 3,261
Other liabilities (441) (641) (935)
-------- -------- --------
Net cash provided by operating activities 18,750 28,201 14,797
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (9,288) (7,614) (10,322)
-------- -------- --------
Net cash used in investing activities (9,288) (7,614) (10,322)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on revolving credit facilities (7,445) (21,115) (2,293)
Sale of common stock to management -- 13 --
-------- -------- --------
Net cash used in financing activities (7,445) (21,102) (2,293)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,017 (515) 2,182
Cash and cash equivalents, beginning of period 227 2,244 1,729
-------- -------- --------
Cash and cash equivalents, end of period $ 2,244 $ 1,729 $ 3,911
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 15,211 $ 14,035 $ 12,233
======== ======== ========
Income taxes $ -- $ -- $ 2,068
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
54
<PAGE> 55
CMI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998 AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
1. DESCRIPTION OF COMPANY
CMI Industries, Inc. ("CMI," a Delaware corporation and subsequently referred to
as the "Company") is a diversified manufacturer of textile products serving a
variety of markets. On October 28, 1993, the Company merged its two primary
operating subsidiaries, Clinton Mills, Inc. and Chatham Manufacturing, Inc.
("Chatham"), with and into the Company upon the closing of the Offering (see
note 3). The Company currently operates through three divisions: the Greige
Fabrics Division, the Elastic Fabrics Division and the Chatham Division.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries. The Company uses a 52-53 week fiscal year. There were
53 weeks in the Company's accompanying statements of operations for the year
ended January 3, 1998, and 52 weeks for the years ended December 28, 1996 and
December 30, 1995. All significant intercompany balances and transactions have
been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company includes cash, demand deposits and highly liquid investments with
maturities of less than three months in cash and cash equivalents in its
consolidated financial statements. The book overdraft consists of outstanding
checks that had not been presented to a bank for payment.
55
<PAGE> 56
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and include the costs of raw materials, direct labor and manufacturing
overhead.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are stated at cost. Depreciation of
property, plant and equipment is calculated for financial reporting purposes
using the straight-line method over the estimated useful lives of the assets.
For income tax purposes, depreciation is calculated principally by accelerated
methods. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings 20 years
Land improvements 20 years
Machinery and equipment 3-10 years
</TABLE>
LONG-LIVED ASSETS
During fiscal year 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The statement
requires impairment losses to be recorded on long-lived assets used in
operations when indicators are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. The
effect of adoption did not have a material impact on the Company's results of
operation.
INTANGIBLE AND OTHER ASSETS
Capitalized debt issuance costs are amortized over the remaining terms of the
respective debt using the straight-line method.
REVENUE RECOGNITION
The Company recognizes revenue when goods are shipped or when ownership is
assumed by the customers.
LINE OF BUSINESS AND CREDIT RISK
The Company's line of business is the manufacturing and selling of fabrics and
other textile products for the home furnishings, apparel, furniture upholstery,
transportation upholstery, bedding and industrial markets. Export sales are
insignificant. Substantially all of the Company's accounts receivable are due
from companies in the above markets located throughout the United States. The
Company generally does not require collateral for its accounts receivable.
56
<PAGE> 57
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company performs ongoing credit evaluations of its customers' financial
condition and carries credit insurance on a majority of its outstanding trade
receivables. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information, including the amount of credit insurance on
specific accounts.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes," which requires deferred income taxes to be
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
PRIOR-YEAR RECLASSIFICATIONS
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform with the 1998 presentation.
OTHER
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"
and No. 131, "Disclosures About Segments of an Enterprise and Related
information," both of which the Company adopted in its 1998 fiscal year. The
Company is required to report comprehensive income, which is the total of net
income and certain other nonowner changes in shareholders' equity. The
implementation of the statement did not have a material impact on the Company's
financial position or results of operations. The Company does not presently have
any items affected by this statement. SFAS No. 131, among other things,
establishes standards for reporting financial information about operating
segments, defined as components of an enterprise about which separate financial
information is available to the chief operating decision maker for purposes of
assessing performance and allocating resources.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management has not yet
evaluated the effects of this change on its operations. The Company will adopt
SFAS No. 133 as required in its interim financial statements for the first
quarter of 2000.
3. LONG-TERM DEBT
In October 1993, the Company completed a public offering ("the Offering") of
$125,000 in aggregate principal amount of 9 1/2% Senior Subordinated Notes
("Notes") due October 1, 2003. The Offering was completed through an underwriter
which is affiliated with the Company's principal shareholders. The Notes are
general unsecured obligations of the Company and are due October 1, 2003. The
Notes' interest is payable semiannually, and are redeemable at the option of the
Company at any time after October 1, 1998. Redemption prices commence at
104-3/4% of the principal amount, declining annually to 100% of the principal
amount in October 2000, plus accrued interest. The recorded balance of $124,536
at January 2, 1999, is presented net of $464 of unamortized bond issue discount
that is being amortized over the period to maturity.
57
<PAGE> 58
3. LONG-TERM DEBT (CONTINUED)
The latest information available indicates the fair value of the Company's Notes
was $118,750 at January 2, 1999. The fair value presented herein is not
necessarily indicative of the amounts that the Company would realize in a
current market exchange.
The Company had credit agreements at January 2, 1999 which provided a secured
revolving credit facility of $65,000, including a letter of credit facility of
up to $5,000, and a Wachovia Bank of South Carolina credit facility, which
provided an unsecured, uncommitted line of credit of $4,000. The borrowings
under the secured revolving credit facility are secured by all inventories, all
receivables, and certain intangibles. The secured revolving credit facility
matures on January 15, 2000.
Long-term debt at January 3, 1998 and January 2, 1999 consisted of:
<TABLE>
<CAPTION>
1997 1998
--------- --------
<S> <C> <C>
Borrowings under credit agreements:
Secured revolving credit facility $ 88 $ --
Unsecured Wachovia Bank credit facility 2,204 --
Senior subordinated notes, net 124,440 124,536
--------- --------
126,732 124,536
Less current portion (2,204) --
--------- --------
Long-term debt $ 124,528 $124,536
========= ========
</TABLE>
The secured revolving credit facility requires a commitment fee of 3/8 of 1% per
annum on all unused amounts and as of January 2, 1999, the Company could have
borrowed an additional $48,982 under the facility. Interest on the secured
revolving credit facility is based on a floating prime rate or an eurodollar
rate plus 1 1/2%. The Wachovia Bank of South Carolina facility is unsecured,
requires no commitment fee and may be terminated by the bank with 100 days
notice. Interest on the Wachovia Bank of South Carolina facility accrues at an
amount based on the daily Federal Funds rate.
The credit agreements and indenture contain various restrictive covenants and
conditions requiring, among other things, minimum levels of net worth, certain
interest coverage ratios, prohibitions against certain borrowings and advances,
and a negative covenant limiting the Company's right to grant security interests
or other liens on its assets. In addition, the credit agreements and the
indenture pursuant to which the Notes were issued contain restrictions on the
Company's ability to pay cash dividends or purchase its capital stock. Under the
most restrictive covenant, as of January 2, 1999, the Company was authorized to
pay up to $3,000 in cash dividends or capital stock repurchases. At January 2,
1999, the Company was in compliance with all covenants under all credit
agreements.
58
<PAGE> 59
3. LONG-TERM DEBT (CONTINUED)
As part of the Company's workers' compensation insurance agreements in South
Carolina, Alabama, Georgia and Virginia, the Company has obtained letters of
credit for $750, $200, $250 and $75, respectively. The letters of credit expire
on February 10, 1998, June 30, 1998, January 11, 1998 and April 10, 1998,
respectively. At January 3, 1998, the Company owed no amount under these letters
of credit.
4. INCOME TAXES
Components of income tax expense (benefit) for the years ended December 28,
1996, January 3, 1998 and January 2, 1999, consisted of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -----
1996:
<S> <C> <C> <C>
Current $ -- $ -- $ --
Deferred (5,705) (410) (6,115)
------- ------- -------
$(5,705) $ (410) $(6,115)
======= ======= =======
1997:
Current $ 141 $ -- $ 141
Deferred 3,934 725 4,659
------- ------- -------
$ 4,075 $ 725 $ 4,800
======= ======= =======
1998:
Current $ -- $ -- $ --
Deferred 1,679 221 1,900
------- ------- -------
$ 1,679 $ 221 $ 1,900
======= ======= =======
</TABLE>
Alternative minimum taxes that have been paid as of January 2, 1999 and are
available indefinitely as carryforward credits for future federal income taxes
aggregated approximately $7,523. Such carryforward credits have been considered
in the determination of the net deferred income tax liability at January 2,
1999.
Total income tax expense (benefit) differed from the amounts computed by
applying the U.S. federal income tax rate of 34 percent in 1996, 1997 and 1998
to income (loss) before income taxes as a result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $(5,705) $4,075 $1,679
Increase in income taxes resulting from:
State income taxes, net of federal income tax benefit (554) 396 163
Other, net 144 329 58
------- ------ ------
Total income tax expense (benefit) $(6,115) $4,800 $1,900
======= ====== ======
</TABLE>
59
<PAGE> 60
4. INCOME TAXES (CONTINUED)
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to the net deferred income tax
liability at January 3, 1998, and January 2, 1999 relate to the following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Plant & equipment, principally due to difference in depreciation
methods $ 16,709 $ 15,231
Benefit of net operating loss for tax purposes (6,307) (169)
Alternative minimum tax credits (5,403) (7,523)
Accrued expenses not currently deductible and other, net (3,754) (3,033)
-------- --------
Net deferred income tax liability $ 1,245 $ 4,506
======== ========
</TABLE>
5. BENEFIT PLANS
Effective December 31, 1994, the Company curtailed future benefits and merged
its two defined benefit plans, the Clinton Retirement Income Program (the
"CRIP") and the Pension Plan of Chatham Manufacturing, Inc. into the CRIP, which
covers substantially all of its associates who qualify as to age and service. In
general, the pension benefits are based on either years of service and
percentages of the average of the five highest years of compensation or total
compensation earned through December 31, 1994. The Company's funding policy is
to contribute the amounts recommended by its independent actuary, which are
determined after considering the funding status of the Company's plans, ERISA
guidelines and tax deductibility. The curtailment of these plans did not reduce
either plan assets or vested benefits of the participants.
The following table sets forth the funded status of the plans and amounts
recognized in the accompanying consolidated balance sheets at December 28, 1996,
January 3, 1998, and January 2, 1999:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Change in benefit obligation
Benefit obligation at end of prior fiscal year $ 37,277 $ 33,044 $ 35,823
Interest cost 2,650 2,394 2,416
Net actuarial (gain)/loss (1,415) 6,381 2,083
Benefits paid (5,468) (5,996) (4,116)
-------- -------- --------
Benefit obligation at end of year $ 33,044 $ 35,823 $ 36,206
======== ======== ========
Change in plan assets
Fair value of assets at end of prior fiscal year $ 37,304 $ 38,155 $ 40,325
Actual return on plan assets 6,318 8,166 4,181
Benefits paid (5,467) (5,996) (4,116)
-------- -------- --------
Fair value of assets at end of year $ 38,155 $ 40,325 $ 40,390
-------- -------- --------
Funded status $ 5,111 $ 4,502 $ 4,184
Unrecognized net actuarial (gain)/loss (3,807) (2,352) (1,045)
-------- -------- --------
Prepaid pension cost $ 1,304 $ 2,150 $ 3,139
======== ======== ========
</TABLE>
60
<PAGE> 61
5. BENEFIT PLANS (CONTINUED)
Net pension expense (income) consists of the following components:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ -- $ -- $ --
Interest cost on projected benefit obligation 2,650 2,394 2,416
Actual return on plan assets (6,318) (8,166) (4,181)
Net amortization 3,037 4,926 776
------- ------- -------
Net pension expense (income) $ (631) $ (846) $ (989)
======= ======= =======
</TABLE>
The assumptions used in determining the actuarial present value of benefit
obligations and the net periodic pension costs are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Expected long-term return on assets - both plans 9.0% 9.0% 9.0%
Weighted average discount rate 7.75% 7.25% 6.75%
</TABLE>
The plans' assets include marketable equity securities, guaranteed interest
contracts, and corporate and government debt securities.
The Company had a contributory Profit Sharing and Retirement Savings Plan for
the employees of Chatham. The Plan provided for contributions to the Plan by the
Company as designated by the Board of Directors and voluntary contributions by
the employees from 1% to 10% of their compensation. Effective January 1, 1995,
this plan was amended and restated, converting it into The 401(k) Plan for
Associates of CMI Industries, Inc., which covers substantially all of the
Company's associates. Under the 401(k) Plan, the Company matches 50% of employee
contributions, not to exceed 2% of pay, for all eligible and participating
associates. Additionally, the Company can make additional contributions at the
discretion of the Board of Directors. The Company's matching contributions
totaled $1,105 for 1996, $1,156 for 1997, and $1,167 for 1998.
The Company is substantially self-insured for employee health and workers'
compensation benefits. Provision for claims under these self-insured programs is
recorded based upon actuarially determined estimates of the aggregate liability
for claims incurred. The Company has accrued $3,320 and $3,350 for payments
under these plans at January 3, 1998 and January 2, 1999, respectively.
61
<PAGE> 62
5. BENEFIT PLANS (CONTINUED)
In connection with the acquisition of Chatham, the Company assumed obligations
under a Supplemental Executive Retirement Plan ("SERP"), which is a
non-qualified plan that provides certain current and former Chatham officers
defined pension benefits in excess of limits imposed by federal tax law. At
January 3, 1998, and January 2, 1999, the accrued SERP liability was $3,360 and
$3,320, respectively, which equals the projected benefit obligation and is
included in other liabilities in the accompanying balance sheets. The expense
was $291, $246 and $263 for the periods ended December 28, 1996, January 3,
1998, and January 2, 1999, respectively. An irrevocable trust has been
established to hold certain assets of the Company (life insurance contracts with
a net cash value of $1,604 at January 2, 1999) as a reserve for the discharge of
liabilities under the plan.
The 1989 CMI Industries, Inc. Non-Qualified Stock Option Plan provided for the
grant of up to 35,000 shares of common stock for $25 per share. All of the
options granted under this plan are fully vested. In 1992, Chatham's Board of
Directors adopted the Chatham Manufacturing, Inc. 1992 Non-Qualified Stock
Option Plan which provided for the grant of up to 140,000 shares of Chatham
common stock. Options for 9,000 shares vest upon the attainment of levels of
earnings as defined in the agreement or at the end of 10 years, whichever occurs
first, while 60,000 shares vested immediately, 26,000 shares were vested in
1993, and 8,000 shares were vested in 1994. Options to purchase Chatham common
stock were converted to options to purchase the Company's stock. In 1996, the
Company granted the remaining 37,000 shares from the 1992 Plan and vested the
recipients' interest in these shares immediately. In 1994, the Company adopted
the 1994 CMI Industries, Inc. Stock Option Plan which provided for the grant of
up to 50,000 shares of the Company's stock. Options for 2,000 shares were
granted and vested immediately in 1994 pursuant to the 1994 Plan. In 1995,
options for 30,000 shares were granted pursuant to the 1994 Plan, with vesting
upon the attainment of certain earnings levels as defined in the agreement or at
the end of ten years, whichever comes first. In 1996, the Company granted the
remaining 18,000 shares from the 1994 Plan and vested the recipients' interest
in these shares immediately. As of January 2, 1999, options to acquire 180,000
shares of the Company's common stock were outstanding. Exercise prices of the
options range from $25 to $45 per share. Management has determined that no
compensation expense should be recorded based on these options. Since the
inception of these plans, no options have been exercised. The Company accounts
for stock option plans under APB Opinion No. 25, under which no compensation
cost has been recognized. Had compensation cost for these plans been determined
in accordance with FASB Statement No. 123, there would not have been a material
impact on the Company's net income.
62
<PAGE> 63
6. RECEIVABLES, INVENTORIES, PROPERTY, PLANT AND EQUIPMENT, AND INTANGIBLE AND
OTHER ASSETS
Receivables, inventories, other current assets, property, plant and equipment,
and intangible and other assets at January 3, 1998 and January 2, 1999 consisted
of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Receivables:
Trade $ 48,240 $ 47,756
Income tax receivable -- 3,311
Other 722 1,017
--------- ---------
48,962 52,084
Less allowance for doubtful accounts (1,200) (1,200)
--------- ---------
$ 47,762 $ 50,884
========= =========
Inventories:
Raw materials $ 11,474 $ 9,754
Work-in-progress 19,312 19,386
Finished goods 18,729 20,716
Supplies 4,412 4,342
--------- ---------
$ 53,927 $ 54,198
========= =========
Other current assets:
Prepaid employee benefit costs 772 4,669
Deposits for equipment purchases -- 2,422
Other 159 340
--------- ---------
$ 931 $ 7,431
========= =========
Property, plant and equipment:
Land and land improvements $ 3,332 $ 3,326
Buildings and leasehold improvements 38,725 40,049
Machinery and equipment 202,199 207,923
Construction in progress 3,500 4,967
--------- ---------
247,756 256,265
Less accumulated depreciation and amortization (144,164) (159,247)
--------- ---------
$ 103,592 $ 97,018
========= =========
Intangible and other assets:
Debt issuance costs $ 2,365 $ 1,951
Cash value of life insurance, net of policy loans of $3,665
at January 3, 1998 and $4,177 at January 2, 1999 1,695 1,755
Prepaid pension cost 2,150 3,139
Other 2,389 2,879
--------- ---------
$ 8,599 $ 9,724
========= =========
</TABLE>
63
<PAGE> 64
7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities at January 3, 1998, and January 2, 1999
consist of the following:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Accrued interest $ 3,139 $ 3,142
Accrued compensation 2,937 1,608
Environmental cleanup accrual 251 408
Reserve for self insurance 3,320 3,350
Accrued restructuring charges 905 118
Other 3,936 5,007
------- -------
Total accrued expenses $14,488 $13,633
======= =======
Accrued SERP, deferred compensation and other $ 8,101 $ 8,592
Accrued severance liability 1,998 813
Environmental cleanup accrual 3,083 2,842
------- -------
Total noncurrent other liabilities $13,182 $12,247
======= =======
</TABLE>
8. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
The Company leases certain office facilities and equipment under various
operating leases expiring at various dates through 2005. Future minimum lease
payments under noncancelable operating leases are as follows at January 2, 1999:
<TABLE>
<S> <C>
1999 $ 4,196
2000 3,466
2001 3,188
2002 2,290
2003 1,080
Thereafter 788
-------
Total minimum lease payments $15,008
=======
</TABLE>
Rental expense was $1,581 for 1996, $2,152 for 1997, and $3,003 for 1998. The
majority of these leases require the Company to pay taxes, maintenance,
insurance, and certain other operating expenses applicable to the leased
property.
Environmental site evaluations have been performed which concluded that some
form of groundwater and soil remediation will be required by the Company. The
Company has initiated various remediation projects and continues to monitor
these projects on an ongoing basis. Additionally, the Company may be required to
perform asbestos abatement. The Company believes that sufficient amounts are
accrued as of January 2, 1999 for the cost of these expenditures.
64
<PAGE> 65
8. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
The Company is involved in various legal proceedings arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's financial
condition or results of operations.
As of January 2, 1999 the Company was committed to future capital expenditures
of $9,565.
The Company purchases significant amounts of cotton, one of its primary raw
materials, through commodity contracts. At January 2, 1999, all fixed contracts
were at prices which approximated or were below current market prices, or were
purchased to hedge firm sales orders from customers in which the Company
believes it has maintained margins at, or above, recent levels. The Company's
financial results are impacted by the variability of cotton and other raw
material prices.
Under the stockholders agreement, all of the stockholders of the Company have
certain registration rights with respect to their common stock. These rights
include demand and "piggyback" registration rights. The Company is obligated to
register shares of common stock under the demand registration rights if holders
of more than two-thirds of the outstanding shares request registration. The
registration rights extend until February 14, 2002 or terminate sooner upon (i)
the merger or consolidation of the Company with an unaffiliated corporation in
which the management investors and affiliates of Merrill Lynch Capital Partners,
Inc. own less than 65% of the surviving or resulting corporation or (ii) the
sale of substantially all the assets of the company to an unaffiliated person.
The remaining provisions of the stockholders agreement would terminate under the
foregoing circumstances or sooner in the event of (i) a public offering of
common stock at the conclusion of which at least 30% of the outstanding shares
shall have been sold to the public or (ii) the sale of 60% or more of the shares
of common stock owned by either the management investors as a group or the
Merrill Lynch Capital Partners, Inc. affiliates as a group (as fully diluted by
shares to be issued upon exercise of options). Under the management subscription
agreement, the Company has an option to purchase, and each of the management
investors have an option under certain circumstances to sell, at fair market
value the shares of common stock owned by such management investor in the event
of his death, incapacity or termination of employment.
9. RESTRUCTURING CHARGES AND ACCRUED SEVERANCE LIABILITY
In December 1995, the Company approved a plan to pursue restructuring
initiatives in all divisions. These initiatives were completed by December 1996.
In the Greige Fabrics Division, the Company closed one of its manufacturing
facilities and disposed of idle equipment and inventories. In the Finished
Fabrics Division, the Company consolidated certain operations and disposed of
idle equipment and inventories. The Company also downsized its corporate
operations. The restructuring charges also consist of costs for the severance
and retirement of approximately 700 associates, including the termination of
consulting contracts, insurance,
65
<PAGE> 66
vacation, and related expenses. Related to this decision, the Company reported a
$12,900 charge to earnings in 1995.
In August 1995, the former President and Chief Executive Officer retired from
the Company. In connection with the retirement, the Company reported a severance
charge in the Company's 1995 statement of operations of $4,782 which included
certain retirement benefits, salary, life insurance, consulting fees and other
items.
In connection with the restructuring and severance charges reported in 1995, the
Company made certain estimates concerning the net realizable value of disposing
of certain assets and the amount required to ultimately fund certain benefits.
In 1998, the Company recognized that its losses or expenses associated with
these estimates were overstated and consequently has reported a credit to the
restructuring and severance charges of $1,345 in the accompanying 1998 statement
of operations. As of January 2, 1999, the Company has reported $118 of
restructuring related accruals and $813 of severance liabilities to the former
President and Chief Executive Officer which the Company expects to fund from
operations or amounts available under the Credit Agreement.
10. WRITE-OFF OF MERGER COSTS
During 1998, the Company evaluated various alternative changes to its capital
structure, including a possible merger in which the Company entered into a
merger agreement with an acquisition company formed by senior management. As
part of the proposed transaction, the Company would have been recapitalized
whereby all of the outstanding indebtedness would have been refinanced using
borrowings under a new credit facility, the proceeds of anticipated equity
financing and the proceeds of satisfactory debt financing. The parties
ultimately terminated the merger agreement because of unsatisfactory market
conditions for obtaining the financing. As part of evaluating various
possibilities to changing its capital structure and negotiating the merger
agreement, the Company incurred legal, accounting and professional advisory fees
amounting to $1,649 which the Company has written off and reported as a charge
to earnings in 1998.
11. SEGMENT INFORMATION
The Company manages its businesses through three operating divisions: the Greige
Fabrics Division, the Elastic Fabrics Division, and the Chatham Division. The
Greige Fabrics Division produces greige woven fabrics, such as printcloths,
broadcloths, twills and other fabrics used in home furnishings, apparel and
industrial applications. The Elastic Fabrics division produces woven and knitted
elasticized fabrics used in the manufacturing of intimate apparel, activewear
and swimwear. The Chatham Division produces upholstery fabrics used in the
automotive and furniture industries; and consumer products used in the home
textile industry. Information about the Company's three segments and the items
necessary to reconcile this information to the Company's consolidated results
are as follows:
66
<PAGE> 67
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales
Greige $ 156,793 $ 171,010 $ 147,066
Chatham 126,985 157,781 170,290
Elastics 90,266 93,931 95,435
--------- --------- ---------
Total $ 374,044 $ 422,722 $ 412,791
========= ========= =========
Operating income (loss) before nonrecurring items
Greige $ (5,809) $ 14,384 $ 9,629
Chatham 3,119 5,211 1,946
Elastics 5,984 8,415 9,646
Corporate (6,235) (4,500) (4,232)
--------- --------- ---------
Total (2,941) 23,510 16,989
Nonrecurring items -- -- 304
Interest expense 15,425 14,499 12,759
Other expense (income), net (1,588) (2,975) (1,013)
--------- --------- ---------
Income before income taxes $ (16,778) $ 11,986 $ 4,939
========= ========= =========
Operating margin before nonrecurring items
Greige (3.70) 8.41 6.55
Chatham 2.46 3.30 1.14
Elastics 6.63 8.96 10.11
--------- --------- ---------
Total (0.79%) 5.56% 4.12%
========= ========= =========
Identifiable assets
Greige $ 92,020 $ 82,955 $ 77,383
Chatham 78,314 78,750 80,433
Elastics 46,916 42,090 42,394
Corporate 16,284 12,745 22,956
--------- --------- ---------
Total $ 233,534 $ 216,540 $ 223,166
========= ========= =========
Depreciation and amortization
Greige $ 13,485 $ 9,246 $ 8,811
Chatham 4,720 4,519 4,846
Elastics 3,762 3,104 2,920
Corporate 1,259 999 870
--------- --------- ---------
Total $ 23,226 $ 17,868 $ 17,447
========= ========= =========
Capital expenditures
Greige $ 2,815 $ 2,208 $ 5,983
Chatham 3,514 3,128 5,089
Elastics 2,431 3,139 (714)
Corporate 528 (861) (36)
--------- --------- ---------
Total $ 9,288 $ 7,614 $ 10,322
========= ========= =========
</TABLE>
67
<PAGE> 68
CMI INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
For the Three Years Ended December 28, 1996, January 3, 1998 and January 2, 1999
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Additions at Other End of
of Period Cost(1) Retirements Changes Period
--------- ------- ----------- ------- ------
<S> <C> <C> <C> <C> <C>
1996
Land and land improvements $ 3,813 $ -- $ (308) $ 16 $ 3,521
Buildings 37,925 -- (1,592) 758 37,091
Machinery and equipment 203,648 -- (12,980) 9,143 199,811
Leasehold improvements 1,530 -- (582) -- 948
Construction in progress 1,346 9,848 -- (9,917) 1,277
-------- -------- -------- --------- --------
$248,262 $ 9,848 $(15,462) $ -- $242,648
======== ======== ======== ========= ========
1997
Land and land improvements $ 3,521 $ 48 $ (237) $ -- $ 3,332
Buildings 37,091 -- -- 267 37,358
Machinery and equipment 199,811 -- (3,043) 5,431 202,199
Leasehold improvements 948 -- -- 419 1,367
Construction in progress 1,277 8,340 -- (6,117) 3,500
-------- -------- -------- --------- --------
$242,648 $ 8,388 $ (3,280) $ -- $247,756
======== ======== ======== ========= ========
1998
Land and land improvements $ 3,332 $ -- $ (9) $ 3 $ 3,326
Buildings 37,358 -- -- 1,100 38,458
Machinery and equipment 202,199 -- (2,692) 8,416 207,923
Leasehold improvements 1,367 -- -- 224 1,591
Construction in progress 3,500 11,210 -- (9,743) 4,967
-------- -------- -------- --------- --------
$247,756 $ 11,210 $ (2,701) $ -- $256,265
======== ======== ======== ========= ========
</TABLE>
68
<PAGE> 69
CMI INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
For the Three Years Ended December 28, 1996, January 3, 1998, and January 2,
1999
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Additions at Other End of
of Period Cost(1) Retirements Changes(2) Period
--------- ------- ----------- ---------- ------
<S> <C> <C> <C> <C> <C>
1996
Land and land improvements $ 204 $ 5 $ -- $ (193) $ 16
Buildings 11,749 1,880 (684) (768) 12,177
Machinery and equipment 109,798 20,714 (11,434) (1,474) 117,604
Leasehold improvements 737 216 (236) (411) 306
-------- -------- -------- --------- --------
$122,488 $ 22,815 $(12,354) $ (2,846) $130,103
======== ======== ======== ========= ========
1997
Land and land improvements $ 16 $ 5 $ (3) $ -- $ 18
Buildings 12,177 1,893 (25) 14,044
Machinery and equipment 117,604 15,611 (1,574) (2,009) 129,632
Leasehold improvements 306 164 -- -- 470
-------- -------- -------- --------- --------
$130,103 $ 17,672 $ (1,577) $ (2,034) $144,164
======== ======== ======== ========= ========
1998
Land and land improvements $ 18 $ 5 $ -- $ -- $ 23
Buildings 14,044 1,895 -- -- 15,939
Machinery and equipment 129,632 14,765 (1,696) -- 142,701
Leasehold improvements 470 231 -- (117) 584
-------- -------- -------- --------- --------
$144,164 $ 16,896 $ (1,696) $ (117) $159,247
======== ======== ======== ========= ========
</TABLE>
(1) Depreciation is provided for financial reporting purposes on the
straight-line method over the following estimated useful lives for the periods
indicated.
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Buildings 20 years 20 years 20 years
Land improvements 20 years 20 years 20 years
Machinery and equipment 3-10 years 3-10 years 3-10 years
</TABLE>
(2) The Company has recorded the 1995 nonrecurring write-off of property, plant
and equipment in other changes to accumulated depreciation and amortization.
69
<PAGE> 70
CMI INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998
AND JANUARY 2, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Additions End of
Description of Period at Cost Deductions Period
--------- ------- ---------- ------
<S> <C> <C> <C> <C>
Year ended December 28, 1996:
Allowance for doubtful accounts $1,729 $760 $ (489) $2,000
====== ==== ======= ======
Year ended January 3, 1998:
Allowance for doubtful accounts $2,000 $528 $(1,328) $1,200
====== ==== ======= ======
Year ended January 2, 1999:
Allowance for doubtful accounts $1,200 $916 $ (916) $1,200
====== ==== ======= ======
</TABLE>
70
<PAGE> 71
Report of Independent Public Accountants
To The Board of Directors of
CMI Industries, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of CMI Industries, Inc. and subsidiaries included in this
annual report and have issued our report thereon dated March 12, 1999. Our audit
was made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedules listed in the index are the responsibility of
the Company's management and are presented for the purposes of complying with
the Securities and Exchange Commission's rules and are not a required part of
the basic financial statements. These schedules have been subjected to the
auditing procedures applied in our audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Columbia, South Carolina
March 12, 1999.
71
<PAGE> 72
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
10.30 Letter dated February 25, 1999 from CMI Management, Inc.
terminating the Merger Agreement by and among CMI Management,
Inc., CMI Acquisitions, Inc., and CMI Industries, Inc.
10.31 Letter dated February 25, 1999 from CMI Industries, Inc.
terminating the dealer manager engagement letter with
NationsBanc Montgomery Securities, LLC dated March 31, 1998.
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of CMI Industries, Inc.
23.1 Consent and Report on Financial Statement Schedules of
Arthur Andersen LLP
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
72
<PAGE> 1
EXHIBIT 10.30
CMI MANAGEMENT, INC.
February 25, 1999
CMI Industries, Inc.
CMI Acquisitions, Inc.
1301 Gervais Street, Suite 700
Columbia, SC 29201
Attn: Chief Financial Officer
Re: Termination of Merger Agreement
Ladies and Gentlemen:
The Board of Directors of CMI Management, Inc. has approved the
termination of the Merger Agreement by and between CMI Industries, Inc., CMI
Management, Inc., and CMI Acquisitions, Inc. dated as of May 15, 1998. Pursuant
to Section 7.1(d) of the Merger Agreement, CMI Management, Inc. hereby
terminates the Merger Agreement and such agreement shall be of no further force
or effect as of the date hereof except as set forth therein.
Sincerely
/s/JOSEPH L. GORGA
Joseph L. Gorga
Chief Executive Officer
73
<PAGE> 1
EXHIBIT 10.31
February 25, 1999
Mr. Gary Wolfe
Managing Director
NationsBanc Montgomery Securities, LLC
100 North Tryon Street
Charlotte, NC 28255
Dear Mr. Wolfe
The Board of Directors of CMI Management, Inc. has approved the
termination of the Merger Agreement entered into as of May 15, 1998 by and
between CMI Management, Inc., CMI Acquisitions, Inc. and CMI Industries, Inc. As
a result, CMI Industries, Inc. hereby terminates the engagement letter with
NationsBanc Montgomery Securities, LLC dated March 31, 1998 relating to such
transaction.
Sincerely
/S/ J. A. OVENDEN
J. A. Ovenden
Chief Financial Officer
74
<PAGE> 1
EXHIBIT 12
RATIO OF EARNINGS TO FIXED CHARGES*
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- ------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Income before income taxes
and extraordinary items $ 2,158 $(25,443) $(16,778) $11,986 4,939
Fixed charges:
Interest expense 13,895 16,599 14,843 13,893 12,249
Amortization of debt expense 535 575 582 606 510
Interest component of rent expense 148 -- -- -- --
------- -------- -------- ------- -----
Total fixed charges $14,578 $ 17,174 $ 15,425 $14,499 $12,759
======= ======== ======== ======= =======
Income before income taxes, extraordinary
items and fixed charges $16,736 $ (8,269) $ (1,353) $26,485 $17,698
======= ======== ======== ======= =======
Ratio of earnings to fixed charges 1.15x (0.48)x (0.09)x 1.83x 1.39x
======= ======== ======== ======= =======
</TABLE>
*For purposes of calculation of earnings to fixed charges, earnings consist of
income before income taxes and extraordinary items, plus fixed charges. Fixed
charges consist of interest on all indebtedness, amortization of debt expenses
and the estimated interest component of rent expense.
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF REGISTRANT
Chatham Fabrics LLC
Elastic Fabrics of America LLC
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion
of our report dated March 12, 1999 by reference in this Form 10-K. It should be
noted that we have not audited any financial statements of the Company
subsequent to January 2, 1999 or performed any audit procedures subsequent to
the date of our report.
/s/ARTHUR ANDERSEN LLP
Columbia, South Carolina,
March 30, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF CMI INDUSTRIES INC. FOR THE TWELVE MONTH PERIOD ENDED JANUARY 2,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> JAN-02-1999
<CASH> 3,911
<SECURITIES> 0
<RECEIVABLES> 52,084
<ALLOWANCES> 1,200
<INVENTORY> 54,198
<CURRENT-ASSETS> 116,242
<PP&E> 256,265
<DEPRECIATION> 159,247
<TOTAL-ASSETS> 223,166
<CURRENT-LIABILITIES> 39,794
<BONDS> 124,536
0
0
<COMMON> 1,695
<OTHER-SE> 40,388
<TOTAL-LIABILITY-AND-EQUITY> 223,166
<SALES> 412,791
<TOTAL-REVENUES> 413,804
<CGS> 362,216
<TOTAL-COSTS> 396,106
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,759
<INCOME-PRETAX> 4,939
<INCOME-TAX> 1,900
<INCOME-CONTINUING> 3,039
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,039
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.79
</TABLE>
