ITEM 1. BUSINESS
WestPoint Stevens Inc., a Delaware corporation organized in 1987 (the "Company"), is engaged directly and indirectly through its subsidiaries in the manufacture, marketing and distribution of products in two industry segments: bed and bath home fashions products ("Home Fashions") and knitted fabrics for the apparel industry.
See "Reorganization," "Recent Developments," and "Item 8. Financial Statements and Supplementary Data" included elsewhere herein for information regarding certain matters concerning the bankruptcy reorganization of the Company (the "Reorganization") consummated on September 16, 1992 under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"), the Company's recapitalization consummated in May 1993 (the "Recapitalization"), the Company's refinancings consummated in December 1993 (the "Refinancing") and November 1994 which resulted in the Company's present secured credit facility (the "Senior Credit Facility"), the public offering of trade receivables participation certificates by the Company's receivables subsidiary in May 1994 under a trade receivables program (the "Trade Receivables Program"), and the adoption by the Company of a second stock repurchase program in May 1995, which was expanded in November 1995, and further expanded in August 1996.
GENERAL
The Company manufactures and markets Home Fashions products for distribution to chain and department stores, mass merchants and specialty stores. Home Fashions products are manufactured and distributed under owned trademarks and pursuant to various licensing agreements. See "- Home Fashions - Trademarks and Licenses."
The Company's wholly-owned subsidiary, Alamac Knits Fabrics, Inc. ("Alamac"), produces knitted fabrics supplied primarily to manufacturers of men's, women's and children's apparel.
HOME FASHIONS
The Company is the largest producer in the domestic bed and bath towel market. The Company's management estimates that it has the largest market share (approximately 36%) in the domestic sheet and pillowcase market and the second largest market share (approximately 35%) in the domestic bath towel market. Such estimates are calculated by the Company based on United States government data (source: United States Census Bureau Current Industrial Report dated January 14, 1997), publicly available information about the Company's competitors and information in trade publications. In addition, according to such United States government data, each of these markets had over $1 billion in annual sales during each of the past five years. Home Fashions accounted for approximately 87% of the Company's consolidated net sales for the fiscal year ended December 31, 1996.
See Note 10 "Segment and Major Customer Information" in the Notes to Consolidated Financial Statements of the Company elsewhere herein for a summary of certain operating information for the Home Fashions segment. For a discussion of the Company's overall financial condition, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
PRODUCTS
The Company manufactures and markets a broad range of bed and bath products, including decorative sheets and towels, designer sheets and accessories, sheets and towels for institutions, blankets, private label sheets and towels, bedskirts, bedspreads, comforters, duvet covers, drapes, valances, throw pillows, shower curtains and table covers. Such products are made from a variety of fabrics, such as chambray, twill, sateen, flannel, linen, cotton and cotton blends and are available in a wide assortment of colors and patterns. The Company has positioned itself as a single-source supplier to retailers of bed and bath products, offering a broad assortment of products across multiple price points. Such product and price point breadth allows the Company to provide a comprehensive product offering for each major distribution channel.
TRADEMARKS AND LICENSES
The Company's products are marketed under well-known and firmly established trademarks, brand names and private labels. The Company uses trademarks, trade names and private labels as merchandising tools to assist its customers in coordinating their product offerings and differentiating their products from those of their competitors. Home Fashions' trademarks include ATELIER MARTEX(R), MARTEX(R), UTICA(R), STEVENS(TM), LADY PEPPERELL(R) and VELLUX(R). In addition, certain Home Fashions' products are manufactured and sold pursuant to licensing agreements under designer names that include, among others, Ralph Lauren, Sanderson, Larry Laslo, Julie Ingleman and Halston.
A portion of the Company's sales are derived from licensed designer brands. The license agreements for the Company's designer brands generally are for a term of two or three years; some of the licenses are automatically renewable for additional periods, provided that certain sales thresholds set forth in the license agreements are met. No single license has accounted for more than 9% of the Company's total sales volume during any of the last five fiscal years. Although the Company has no reason to believe that it will lose any of its licenses, the loss of a significant license could have an adverse effect upon the Company's business, which could be material. The following are the expiration dates for the licensing agreements discussed above: Ralph Lauren, December 31, 1997; Sanderson, March 31, 1998; Larry Laslo, March 31, 1998; Julie Ingleman, December 31, 1997; and Halston, December 31, 1998.
MARKETING
The Company is committed to developing and maintaining integral relationships with its customers through "Strategic Partnering," a program designed to improve customers' operating results by leveraging the Company's merchandising, manufacturing and inventory management skills. Strategic Partnering includes Electronic Data Interchange ("EDI") direct electronic entry systems, "Quick Response" and "Vendor Managed Inventory" customer delivery programs and point-of-sale processing. The Company incorporates Strategic Partnering into its planning, manufacturing and shipping systems, in order to enable it to efficiently and economically anticipate and respond to customers' inventory requirements. As a result, the Company is better able to plan and forecast its own production and inventory requirements. Sales of the Company's Home Fashions products in the United States are conducted by business units consisting of marketing, merchandising, management information systems, finance and sales staff members under the supervision of an account executive. Business units are linked by a centralized manufacturing logistics and planning group and designer and administration groups. Each business unit focuses on one of the following channels of distribution: mass merchants; department and specialty stores; custom brands; Ralph Lauren; health and hospitality institutions; international and other. This organization allows the Company to tailor its services and resources to the different requirements of each channel of distribution and customer.
The Company works closely with its major customers to assist them in merchandising and promoting its products to the consumer. In addition, the Company periodically meets with its customers in an effort to maximize product exposure and sales and to jointly develop merchandise assortments and plan promotional events specifically tailored to the customer. The Company provides merchandising assistance with store layouts, fixture designs, advertising and point-of-sale displays. The Company also provides its customers with suggested customized advertising materials designed to increase its product sales.
Approximately 90% of the Home Fashions' sales are made to retail establishments in the United States, including chain and department stores, mass merchants, and specialty bed and bath stores. Finished products are distributed to retailers directly from the Company's plants. Distribution to hospitals and other healthcare establishments accounts for most of the remaining portion of the Home Fashions' sales. Certain institutional products also are sold directly and through distributors to major hotel and motel chains, and to laundry supply businesses. In addition to domestic sales, the Company distributes its Home Fashions products for eventual sale to certain foreign markets, principally Canada, Mexico, the United Kingdom, continental Europe, the Middle East and the Far East. International operations accounted for less than 5% of the total revenues of Home Fashions in 1996. In January 1997, the Company purchased P.J. Flower & Co. Limited ("Flower") through a recently formed English subsidiary. Flower is an English
company that manufactures, markets and distributes home fashions products in Europe and had approximately $20 million in annual sales for 1996. The Company intends to continue its efforts to increase its foreign sales.
In addition, certain products of the Company are sold through WestPoint Stevens Stores Inc., a wholly-owned subsidiary of the Company ("WestPoint Stores"). WestPoint Stores currently consists of 36 geographically dispersed, value-priced outlets, some of which are located in factory outlet shopping centers. The products sold in WestPoint Stores are first quality (including overstocks), seconds, discontinued items and other products.
INVENTORY MANAGEMENT, ELECTRONIC COMMUNICATION AND DELIVERY
The Company uses EDI, Quick Response and Vendor Managed Inventory replenishment programs, point-of-sale data and the latest available technology in retail warehouse and shelf space management to minimize inventory and maximize floor stock turnover for its customers. The Company's EDI system allows customers to place orders, and allows the Company to fill, track and bill orders, all by computer. This system enables the Company to ship products on a Quick Response basis so that customers can maintain lower inventories and react rapidly to changes in product demand. In addition, the Company is using Vendor Managed Inventory and dedicating certain manufacturing facilities to servicing key strategic customers. The Company anticipates that these programs will result in lower transportation expense and reduced distribution complexities for its customers. Through the use of the Nielsen Spaceman III space analysis program, the Company supports its customers' efforts to improve operating results through efficient inventory and shelf space management. The Company's objective is to provide its customers with 100% delivery reliability in terms of order quantities and delivery schedules. The Company believes that the use of in-house transportation has enabled the Company to maintain a high level of on-time delivery.
CUSTOMERS
The Company is pursuing strategic relationships with large, high volume merchandisers. An important component of the Company's strategy is to increase its share of shelf and floor space by strengthening its partnership with its customers. The Company is working closely with retailers and is sharing information and business practices with them to improve service and achieve higher profitability for both the retailer and the Company.
The Company's Home Fashions products are sold to chain stores, including, among others, J.C. Penney Company, Inc. ("J.C. Penney"), and Sears Roebuck & Co., Inc. ("Sears"); mass merchants such as Wal-Mart Stores, Inc. ("Wal-Mart"), Kmart Corporation ("Kmart") and Target Stores (a division of Dayton Hudson Corporation); and department and specialty stores, including Federated Department Stores and Mervyn's (also a division of Dayton Hudson Corporation). The above named customers, which are the Company's six largest customers, accounted for approximately 54% of the net sales of Home Fashions and 47% of the net sales of the Company during the fiscal year ended December 31, 1996. Sales to the Dayton Hudson Corporation and to J.C. Penney each represented approximately 11% of the net sales of the Company in 1996. Each of such customers has purchased goods from the Company in each of the last 10 years. Although the Company has no reason to believe that it will lose the business of any of its largest customers, a loss of any of the largest accounts (or a material portion of any thereof) would have an adverse effect upon the Company's business, which could be material.
ALAMAC
Alamac manufactures and sells knitted fabrics primarily to manufacturers of men's, women's and children's apparel. Based on United States government data (source: United States Census Bureau Current Industrial Report dated September 3, 1996), publicly available information about Alamac's competitors and information in trade publications, management believes that Alamac supplies approximately 11% of the knitted fabric in the markets it serves. Alamac accounted for approximately 13% of the Company's net sales for the fiscal year ended December 31, 1996.
See Note 10 "Segment and Major Customer Information" in the Notes to Consolidated Financial Statements of the Company elsewhere herein for a summary of certain operating information for Alamac. For a discussion of the
Company's overall financial condition, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
PRODUCTS
Alamac's knitted fabrics are available in a full range of colors, pattern layouts and weight/width options and are produced in 50/50 poly-cotton, 100% cotton and cotton-rich blends. Primary fabrications are jersey, interlock, fleece, double knit and rib. Alamac's current product mix is comprised of piece-dyed solids and yarn-dyed fancies. These products are sold under the Alamac name to branded and private label manufacturers. Alamac markets highly-styled, customized seasonal knit lines. Support services include seasonal color and fabric direction, conceptual fashion lines, computerized design capability, rapid sample production, customized delivery schedules, EDI and customer service programs. Alamac has recently begun to pursue Vendor Managed Inventory opportunities.
Alamac develops exclusively designed knitted lines to meet the fashion needs of both apparel manufacturers and retailers. Alamac receives additional fashion input from its customers who work closely with Alamac throughout the styling process in developing new fabrics which address the customers' needs in terms of design, fiber content, texture, weight and price. Alamac manufactures its products pursuant to each customer's specifications. As a result, risks associated with maintaining high levels of inventory are reduced at Alamac. Alamac's product strategy has been to emphasize high quality and fashion-oriented customized seasonal knitted fabric lines. Alamac pioneered the use of CAD/CAM (computer aided design/computer aided manufacturing) design technologies which have reduced product development time and expense and have enabled Alamac to deliver fabric samples in as little as two weeks.
PATENTS AND TRADEMARKS
The Company and its subsidiaries own other United States trademarks used in Alamac's operations, including ALAMAC(R) and ALASET(TM). In addition, Alamac produces a full range of SANITECH(TM) knit fabrics with an antimicrobial treatment.
MARKETING
Alamac currently sells to branded and private label manufacturers including Health-Tex, Inc., Osh-Kosh B'Gosh, Inc., and Garan, Inc. Alamac currently sells 35% of its fabrics to the childrenswear manufacturers, 31% to the womenswear manufacturers, and 34% to the menswear manufacturers. In addition, Alamac is focusing its efforts to increase sales in speciality markets such as manufacturers of employee uniforms and golf apparel and on the higher-margin specialty retailer segment, including manufacturers of coordinated sportswear. In light of this strategic shift, Alamac has increased its capabilities to manufacture 100% cotton knits. Alamac has established and maintained credibility with its customers through Strategic Partnering relationships that employ EDI, Quick Response and point-of-sale data.
Alamac's sales force, headquartered in New York City with regional offices in Atlanta, Dallas and Los Angeles, sells to and services approximately 250 accounts primarily throughout the United States market and, to a lesser degree, the Caribbean basin, Mexico and Europe. The sales force is organized by specific product lines (childrenswear, womenswear and menswear), with a manager and sales team responsible for accounts within each product line. In addition, two separate sales teams cover the retail/chain market and the international market. The sales force works closely with Alamac's merchandising department to ensure market exposure and follow-up of ongoing product styling. Costing, order delivery schedules, product forecasting and specific customer needs also are addressed by the sales teams.
Alamac distributes its knitted fabrics from a centralized distribution center located in Lumberton, North Carolina. Alamac believes that the use of Company transportation has enabled it to maintain a high level of on-time delivery of fabrics. Alamac also exports knitted fabrics to the Caribbean basin, Mexico and Europe.
CUSTOMERS
No single customer of Alamac represented 10% or more of the net sales of the Company for the fiscal year ended December 31, 1996. Although Alamac's management has no reason to believe that it will lose the business of any of its largest customers, a loss of any of Alamac's largest accounts (or a material portion of any thereof) could have a significant effect on Alamac's business. Management does not believe, however, that any such loss would have an adverse effect on the Company's business taken as a whole.
Alamac also supports a close working relationship with major retailers to provide fabric, fashion and color direction, quality standard specifications and customer service programs where required. Retail chains and catalog houses that also are important to Alamac's distribution are: Wal-Mart; J.C. Penney; KMart; Mervyn's; Target Stores; Lands' End, Inc.; Sears; and L.L. Bean, Inc.
MANUFACTURING
The Company currently uses the latest manufacturing and distribution equipment and technologies in its mills. Management therefore believes that the Company is one of the most efficient manufacturers in the home fashions industry. Over the past five years, the Company has spent approximately $453 million to modernize its manufacturing and distribution systems and has spent approximately $100 million of that amount during 1996. The capital expenditures have been used to, among other things, replace shuttle looms with faster, more efficient projectile and air jet looms, replace ring spinning with open-end and air jet spinning, purchase new high speed multicolor printing equipment, and further automate the Company's cut and sew operations. Air jet and projectile looms produce at higher speeds than shuttle looms, yielding fewer defects, requiring less maintenance and providing cleaner and safer working environments. Using air jet technology, compressed air propels the filling yarn at high speeds, with robotics handling fabric cutting and tucking. The Company's new open-end spinning machines use computerized monitors and sensors which track and analyze the work, streamline information gathering and detect defects immediately to improve yarn quality. The Company intends to invest $125 million in capital improvements in the aggregate in 1997 which includes the continued conversion of the Company's older projectile looms to higher speed air jet looms, construction and installation of dyeing and finishing plant and equipment, and automated fabricating equipment and distribution management systems which will further eliminate labor-intensive and costly manufacturing steps and improve distribution efficiency. These capital programs have resulted, and are expected to continue to result, in improved product quality, increased efficiency and capacity, lower costs and quicker response time to customer orders. The Company utilizes 21 manufacturing facilities, all of which are owned by the Company and located primarily in the Southeastern United States and with the acquisition of P.J. Flower & Co. Limited, leases one manufacturing facility in England. See "Item 2.
ITEM 2. PROPERTIES
GENERAL
The Company's properties are owned or leased directly and indirectly through its subsidiaries. Management believes that the Company's facilities and equipment are in good condition and sufficient for current operations.
The Company owns office space in West Point, Georgia and Lanett and Valley, Alabama, and leases various additional office space, including approximately 332,000 square feet in New York City, of which approximately 169,000 square feet is subleased to other tenants. The Company also owns or leases various administrative, storage and office space.
The Company also owns a chemical plant containing approximately 39,000 square feet of floor space from which Grifftex Chemicals operates.
HOME FASHIONS
The Company owns 21 Home Fashions manufacturing facilities located in Alabama, Florida, Georgia, Maine, North Carolina, South Carolina and Virginia which contain in the aggregate approximately 8,565,000 square feet of floor space.
The Company also owns 8 distribution centers and warehouses for Home Fashions operations which contain approximately 2,499,000 square feet of floor space. In addition, the Company leases 5 Home Fashions distribution outlets and warehouses containing approximately 323,000 square feet of floor space.
WestPoint Stores owns 2 retail stores and leases its 34 other retail stores, all of which are dispersed throughout the United States.
In addition, the Company, through its subsidiary Flower, leases a manufacturing facility containing approximately 21,000 square feet, a warehouse containing approximately 56,000 square feet and office space containing approximately 10,000 square feet in England. Also, Flower's U.S. subsidiary leases a warehouse containing approximately 12,500 square feet in New Jersey.
ALAMAC
Alamac owns 5 manufacturing facilities. These facilities are located in North Carolina and South Carolina and contain in the aggregate approximately 1,769,000 square feet of floor space. Alamac also leases approximately 36,000 square feet of warehouse space.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On July 12, 1995, the United States District Court, Eastern District of North Carolina, granted final approval of the settlement of a class action lawsuit against J.P. Stevens & Co., Inc. ("Stevens"). The action involved claims of racial discrimination in hiring, promotion and placement dating to the late 1960's. West Point-Pepperell, Inc., predecessor to the Company, assumed liability for this litigation upon its acquisition of Stevens. The settlement requires payment of $20 million to the class, payable in three equal installments, plus certain other fees and costs. The final payment was made on January 2, 1997.
The Company is subject to various federal, state and local environmental laws and regulations governing, among other things, the discharge, storage, handling and disposal of a variety of hazardous and non-hazardous substances and wastes used in or resulting from its operations and potential remediation obligations thereunder. Certain of the Company's facilities (including certain facilities no longer owned or utilized by the Company) have been cited or are being investigated with respect to alleged violations of such laws and regulations. The Company believes that it has adequately provided in its financial statements for any expenses and liabilities that may result from such matters. The Company also is insured with respect to certain of such matters. The Company's operations are governed by laws and regulations relating to employee safety and health which, among other things, establish exposure limitations for cotton dust, formaldehyde, asbestos and noise, and regulate chemical and ergonomic hazards in the workplace. Although the Company does not expect that compliance with any of such laws and regulations will adversely affect the Company's
operations, there can be no assurance such regulatory requirements will not become more stringent in the future or that the Company will not incur significant costs in the future to comply with such requirements.
The Company and its subsidiaries are involved in various other legal proceedings, both as plaintiff and as defendant, which are normal to their business.
It is the opinion of management that the aforementioned actions and claims, if determined adversely to the Company, will not have a material adverse effect on the financial condition or operations of the Company taken as a whole.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1996, no matters were submitted by the Company to a vote of its stockholders.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is listed on the National Association of Securities Dealers Automated Quotation System - National Market System ("NASDAQ") under the symbol WPSN. Such listing became effective on August 2, 1993. Prior thereto, the Company's Common Stock was not listed or admitted to unlisted trading privileges on a national securities exchange or included for quotation through an inter-dealer quotation system of a registered national securities association, and there was a limited trading market for the Common Stock.
High (ask) and low (bid) quotations, as reported, each quarterly period within the two most recent fiscal years were:
The Company has not declared any cash dividends on its Common Stock during the past two fiscal years. Under its existing credit facility the Company is permitted to pay dividends from excess cash flow as defined in the credit facility. The Company does not expect to pay dividends to its stockholders in the near future.
As of February 3, 1997, there were approximately 13,628 holders of the Company's Common Stock. Of that total, approximately 177 were stockholders of record and approximately 13,451 held their stock in nominee name.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below for 1996, 1995 and 1994 were derived from the Audited Consolidated Financial Statements of the Company and its subsidiaries for the years ended December 31, 1996, 1995 and 1994 (the "Consolidated Financial Statements"), and should be read in conjunction therewith, including the notes thereto and the other financial information included elsewhere herein. Information for periods subsequent to September 30, 1992 was prepared under the principles of "Fresh Start" reporting and is not comparable to the information for prior periods. Accordingly, a bold vertical line has been used to separate such information. The statement of operations data reflect the discontinuance of all operations other than Home Fashions and the Alamac Knits Subsidiary. The balance sheet data prior to September 30, 1992 have not been reclassified for management's decision in October 1992 to reinstate the Alamac Knits Subsidiary as a continuing operation.
See footnotes on following page.
(1)The results for the year ended December 31, 1993 include restructuring expense of $200 million ($117.8 million after minority interest and income taxes). The charge related to (a) the closing and consolidation of certain facilities; (b) the write-off of certain equipment; and (C) severance, outplacement and other costs associated with plant closures and overhead reductions.
(2)Upon the consummation of a "prepackaged" plan of reorganization, the Company established a new basis of accounting ("Fresh Start"). In Fresh Start reporting, the Company's assets and liabilities were evaluated and stated at their fair values as of September 30, 1992. The resulting adjustments to the Company's consolidated assets and liabilities, primarily reflecting reorganization expenses of approximately $612.5 million and an extraordinary gain on debt discharge of approximately $1,142 million, increased the Company's stockholders' equity by approximately $1,800 million. The total reorganization value of the Company was based on management's estimate of the fair value of the Company's debt and Common Stock. These estimates resulted in management's estimated reorganization value of approximately $1 billion, of which the Excess Reorganization Value was $637.5 million.
(3)Operating earnings (loss) for the year ended December 31, 1995 includes amortization of excess reorganization value of $177.7 million, for the year ended December 31, 1994 includes amortization of excess reorganization value of $236.9 million, for the year ended December 31, 1993 includes restructuring expense of $200 million, amortization of excess reorganization value of $221.6 million and, for the three months ended December 31, 1992 includes amortization of excess reorganization value of $31.9 million.
(4)Per share amounts for periods prior to October 1, 1992, have not been presented because they are not meaningful due to the implementation of "Fresh Start" reporting.
(5)Working capital (deficiency) for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 includes the current portion of bank indebtedness and other long-term debt of $24.0 million, $73.0 million, $48.0 million, $18.0, and $998.1 million, respectively.
(6)Excludes amortization of excess reorganization value.
(7)Such amounts are presented to facilitate comparisons between periods since there were no charges in the 1996 period for amortization of excess reorganization value, goodwill amortization or restructuring expense.
(8)Operating margin before amortization of excess reorganization value, goodwill amortization and restructuring expense represents operating earnings before amortization of excess reorganization value, goodwill amortization and restructuring expense as a percentage of net sales for the periods presented.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The table below sets forth net sales, gross earnings, operating earnings (loss), interest expense and net income (loss) of the Company for the years ended December 31, 1996, 1995, and 1994 (in millions of dollars and as percentages of net sales).
RESULTS OF OPERATIONS--CONTINUED
1996 COMPARED WITH 1995
NET SALES. Net sales for the year ended December 31, 1996 increased $73.9 million, or 4.5%, to $1,723.8 million compared with net sales of $1,649.9 million for the year ended December 31, 1995. Home Fashions net sales of $1,501.8 million were $83.6 million, or 5.9%, higher than net sales for the same period of 1995, and resulted primarily from higher unit volume in the 1996 period compared with the 1995 period. Alamac Knits Subsidiary net sales of $222 million were $9.7 million, or 4.2%, lower than net sales for the same period of 1995, and resulted primarily from lower unit volume in the 1996 period compared with the 1995 period.
GROSS EARNINGS/MARGINS. Gross earnings for the year ended December 31, 1996 of $397.9 million increased $13.9 million, or 3.6%, compared with $384 million for the same period of 1995 and reflect gross margins of 23.1% in the 1996 period compared with 23.3% in the 1995 period. Gross earnings increased in 1996 primarily as a result of the increase in Home Fashions unit volume and decreases in operating costs of our Alamac Knits Subsidiary, both offset somewhat by a wage increase effective the beginning of the second quarter, higher raw material costs, and production challenges due to high customer demand and capacity constraints in the last half of 1996. The Company is expanding its sheet and towel facilities in order to meet the increased customer demand.
OPERATING EARNINGS/MARGINS. Selling, general and administrative expenses increased by $1 million, or 0.5%, for the year ended December 31, 1996, compared with the same period of 1995, and as a percentage of net sales represent 11.7% in 1996 and 12.2% in 1995. The increase in expenses for 1996 was due primarily to higher warehousing/shipping and advertising expenses, offset somewhat by lower selling and trade receivables program expenses along with lower administrative expenses.
Operating earnings were $195.6 million for the year ended December 31, 1996 compared with operating earnings of $5 million for the same period of 1995 which includes the amortization of excess reorganization value of $177.7 million. Operating earnings increased as a result of the increase in gross earnings offset somewhat by the increase in selling, general and administrative expenses, and the complete amortization of excess reorganization value in 1995 as discussed herein.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1996 of $102.4 million increased $1.1 million compared with interest expense for the year ended December 31, 1995. The increase is due primarily to higher average debt levels in the 1996 period compared with the corresponding 1995 average debt levels offset somewhat by lower interest rates on the Company's variable rate bank debt.
OTHER EXPENSE-NET. Other expense-net for the year ended December 31, 1996 decreased $0.3 million compared with the same period in 1995. Included in other expense-net for the years ended December 31, 1996 and 1995 are the amortization of deferred financing fees of $3.9 million in each period less certain miscellaneous income items.
INCOME TAX EXPENSE. The Company's effective tax rate differed from the federal statutory rate primarily due to state income taxes, nondeductible items and the effects of amortization of excess reorganization value in 1995.
NET INCOME. Net income for the year ended December 31, 1996 was $57.7 million, or $1.81 per share. In the year ended December 31, 1995, the net loss was $129.8 million, or $3.97 per share, including amortization of excess reorganization value of $177.7 million, or $5.43 per share. Excess reorganization value was completely amortized in 1995.
Per share amounts are based on 31.8 million and 32.7 million average shares outstanding for the 1996 and 1995 periods, respectively. The decrease in the average shares outstanding was primarily the result of the purchase by the Company of shares under the stock repurchase programs.
OPERATING EARNINGS BEFORE CERTAIN CHARGES. Operating earnings for the year ended December 31, 1996 were $195.6 million, or 11.3% of sales, and increased $12.9 million, or 7.1%, compared with operating earnings (before the amortization of excess reorganization value) of $182.7 million, or 11.1% of sales, for the same period of 1995. The increase resulted from the increase in gross earnings offset somewhat by the increase in selling, general and administrative expenses discussed above. Home Fashions operating earnings for 1996 of $188.5 million increased $9.8 million, or 5.5% compared with the same period of 1995 and reflect operating margins of 12.6% in both 1996 and 1995. Alamac Knits operating earnings for 1996 of $7.1 million increased $3.1 million compared with the same period of 1995 and reflect operating margins of 3.2% in 1996 and 1.7% in 1995.
RESULTS OF OPERATIONS--CONTINUED
1995 COMPARED WITH 1994
NET SALES. Net sales for the year ended December 31, 1995 increased $53.1 million, or 3.3%, to $1,649.9 million compared with net sales of $1,596.8 million for the year ended December 31, 1994. Home Fashions net sales of $1,418.2 million were $71.3 million, or 5.3%, higher than net sales for the same period of 1994, and resulted primarily from better pricing and higher unit volume in the 1995 period compared with the 1994 period. Alamac Knits Subsidiary net sales of $231.7 million were $18.2 million, or 7.3%, lower than net sales for the same period of 1994, and resulted primarily from lower unit volume in the 1995 period compared with the 1994 period.
GROSS EARNINGS/MARGINS. Gross earnings for the year ended December 31, 1995 of $384 million increased $16 million, or 4.3%, compared with $368 million for the same period of 1994 and reflect gross margins of 23.3% in 1995 compared with 23% in 1994. Gross earnings and margins increased in 1995 compared with 1994 despite substantially higher raw material costs, a 4% wage increase effective the beginning of 1995, and reduced plant operating schedules at our Alamac Knits Subsidiary (reflecting the retail weakness for apparel fabrics) in 1995 compared with 1994. The increase in gross margins reflects the substantial cost reductions implemented through a $300 million modernization program that was completed in 1995 and price increases in 1995 to offset the continuing rise in raw material costs.
OPERATING EARNINGS/MARGINS. Selling, general and administrative expenses increased by $4.4 million, or 2.3%, for the year ended December 31, 1995, compared with the same period of 1994, and as a percentage of net sales represent 12.2% in 1995 and 12.3% in 1994. The increase in expenses for 1995 was due primarily to the higher sales volume (including shipping/warehousing costs and costs related to the Trade Receivables Program) and a 4% wage increase effective the beginning of 1995.
The amortization of excess reorganization value, which was completely amortized as of September 30, 1995, was $177.7 million in 1995, compared with $236.9 million in 1994.
The Company's operating earnings (loss) were $5 million for the year ended December 31, 1995 and ($65.8) million for the same period of 1994, as a result of the above.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1995 of $101.3 million decreased $0.8 million compared with interest expense for the year ended December 31, 1994. The decrease is due primarily to lower average debt levels in the 1995 period compared with the corresponding 1994 average debt levels and lower interest rates on the Company's variable rate bank debt.
OTHER EXPENSE-NET. Other expense-net decreased $9.9 million for the year ended December 31, 1995 compared with the same period in 1994. Included in other expense-net for the years ended December 31, 1995 and 1994 are the amortization and write-off of deferred financing fees of $3.9 million and $13.6 million, respectively.
INCOME TAX EXPENSE. The Company's effective tax rate differed from the federal statutory rate primarily due to the effects of amortization of excess reorganization value, nondeductible items and state income taxes.
NET INCOME. The net loss for the year ended December 31, 1995 was $129.8 million, or $3.97 per share, including amortization of excess reorganization value of $177.7 million, or $5.43 per share. In the corresponding period of 1994, the net loss was $203.4 million, or $6.02 per share, including amortization of excess reorganization value of $236.9 million, or $7.01 per share, the write-off of deferred financing fees of $5.4 million (net of applicable taxes), or $.16 per share, related to the bank agreement that was refinanced in the fourth quarter of 1994. Excess reorganization value (a non-cash charge against earnings) was being amortized on a straight-line basis and was completely amortized as of September 30, 1995.
Per share amounts are based on 32.7 million and 33.8 million average shares outstanding for the 1995 and 1994 periods, respectively. The decrease in the average shares outstanding was primarily the result of the purchase by the Company of shares under the stock repurchase programs.
RESULTS OF OPERATIONS--CONTINUED
1995 COMPARED WITH 1994--CONTINUED
OPERATING EARNINGS BEFORE CERTAIN CHARGES. Operating earnings before amortization of excess reorganization value for the year ended December 31, 1995 were $182.7 million and increased $11.6 million, or 6.7%, compared with operating earnings before amortization of excess reorganization value of $171.1 million for the same period of 1994, primarily as a result of the increase in gross earnings offset somewhat by the increase in selling, general and administrative expenses discussed above. Home Fashions operating earnings of $178.7 million increased $21.9 million, or 14% compared with the same period of 1994 and reflect operating margins of 12.6% in 1995 and 11.6% in 1994. Alamac Knits operating earnings of $4 million decreased $10.3 million compared with the same period of 1994 and reflect operating margins of 1.7% in 1995 and 5.7% in 1994. The increase in Home Fashions operating earnings more than offset the decrease in Alamac Knits operating earnings.
EFFECTS OF INFLATION
The Company believes that the relatively moderate rate of inflation over the past few years has not had a significant impact on its sales or profitability.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are expected to be cash from its operations and funds available under the Senior Credit Facility. At February 5, 1997, the maximum commitment under the Senior Credit Facility was approximately $350 million and the Company had unused borrowing availability under the Senior Credit Facility totaling approximately $190 million. The Senior Credit Facility contains covenants which, among other things, limit indebtedness and require the maintenance of certain financial ratios and minimum net worth as defined.
The Company's principal uses of cash for the next several years will be operating expenses, capital expenditures and debt service requirements related primarily to interest payments. The Company spent approximately $100 million in 1996 on capital expenditures and intends to invest an additional $125 million in 1997.
During 1996 the Company purchased approximately 1.3 million shares under the various stock repurchase programs, at an average price of $23.59 per share. In August 1996 the Board of Directors approved the purchase of up to one million additional shares of the Company's common stock, subject to the Company's debt limitations, which brings the total shares that have been approved for purchase to five million shares. At December 31, 1996, approximately 1.6 million shares remained to be purchased.
Cash contributions in 1997 to the Company's pension plans are estimated to total approximately $12.1 million, compared with actual contributions in 1996 of $21.3 million, including the effect of the changes in the actuarial assumptions relating to the Company's pension plans (see Note 3 "Employee Benefit Plans - Pension Plans" in the Notes to Consolidated Financial Statements included elsewhere herein).
The Company, through a "bankruptcy remote" receivables subsidiary, has a Trade Receivables Program which provides for the sale of accounts receivable, on a revolving basis. At December 31, 1996 and 1995, $133 million and $121 million, respectively, had been sold under this program and the sale is reflected as a reduction of accounts receivable in the Company's Consolidated Balance Sheets. The cost of the Trade Receivables Program in 1997 is estimated to total approximately $8 million, compared with $7.4 million in 1996, and will be charged to selling, general and administrative expenses.
Debt service requirements for interest payments in 1997 are estimated to total approximately $103 million (excluding amounts related to the Trade Receivables Program) compared with payments of $102.6 million in 1996. There are no debt service requirements in 1997 related to required principal amortization.
Management believes that cash from the Company's operations and borrowings under its credit agreements will provide the funding necessary to meet the Company's anticipated requirements for capital expenditures and operating expenses and to enable it to meet its anticipated debt service requirements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements for the years ended December 31, 1996, 1995 and 1994
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS WESTPOINT STEVENS INC.
We have audited the accompanying consolidated balance sheets of WestPoint Stevens Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the index at Item 14 (a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of WestPoint Stevens Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/Ernst & Young LLP
Columbus, Georgia February 5, 1997
WESTPOINT STEVENS INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying notes.
WESTPOINT STEVENS INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying notes.
WESTPOINT STEVENS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes.
WESTPOINT STEVENS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
See accompanying notes.
WESTPOINT STEVENS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes
WESTPOINT STEVENS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BUSINESS. WestPoint Stevens Inc. (the "Company") is a manufacturer and marketer of bed and bath products, including sheets, pillowcases, comforters, blankets, bedspreads, towels and related products and is also a leading domestic manufacturer of knitted apparel fabrics. The Company conducts its operations in two principal industry segments: bed and bath products and knitted fabrics for the apparel industry.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements of the Company include the accounts of the Company and all of its subsidiaries. All material intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and trade accounts receivable.
The Company maintains cash and cash equivalents and certain other financial instruments with various financial institutions. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in the Company's investment strategy.
Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of entities comprising the Company's customer base. However, as of December 31, 1996, substantially all of the Company's receivables were from companies in the retail industry.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Short-term investments (consisting primarily of commercial paper and certificates of deposit) totaling approximately $14 million and $8 million are included in cash and cash equivalents at December 31, 1996 and 1995, respectively. These investments are carried at cost, which approximates market value.
INVENTORIES. Inventory costs include material, labor and factory overhead. Inventories are stated at the lower of cost or market (net realizable value). At December 31, 1996 and 1995, approximately 85% and 88%, respectively, of the Company's inventories are valued at the lower of cost or market using the "dollar value" last-in, first-out ("LIFO") method. The remainder of the inventories (approximately $44.1 million and $37.3 million at December 31, 1996 and 1995, respectively) are valued at the lower of cost (substantially first-in, first-out method) or market.
Inventories consist of the following (in thousands of dollars):
PROPERTY, PLANT AND EQUIPMENT. As a result of the adoption of Fresh Start reporting, as of September 30, 1992, property, plant and equipment were adjusted to their estimated fair values and historical accumulated depreciation was eliminated. Additions since September 30, 1992 are stated at cost.
WESTPOINT STEVENS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES--CONTINUED
PROPERTY, PLANT AND EQUIPMENT (CONTINUED). Depreciation is computed over estimated useful lives using the straight-line method for financial reporting purposes and accelerated methods for income tax reporting. Depreciation expense was approximately $77.0 million, $80.4 million, and $86.2 million in the years ended December 31, 1996, 1995 and 1994, respectively.
Estimated useful lives for property and equipment are as follows:
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCATED TO IDENTIFIABLE ASSETS ("Excess Reorganization Value"). In September 1992, the Company completed a "prepackaged" plan of reorganization (the "Plan") and in accordance with SOP 90-7 the Company established a new basis of accounting ("Fresh Start"). In Fresh Start reporting, the Company's assets and liabilities were adjusted to their fair values as of September 30, 1992. The excess of the reorganization value over the value of identifiable assets, $637.5 million, was reported as Excess Reorganization Value at September 30, 1992. Excess Reorganization Value has been amortized on a straight-line basis over three years and was fully amortized by September 1995.
HEDGING TRANSACTIONS. The Company engages in hedging activities within the normal course of its business. Management has been authorized to manage exposure to price fluctuations relevant to the purchase of cotton through the use of a variety of derivative nonfinancial instruments. Derivative nonfinancial instruments require or permit settlement by the delivery of commodities and include exchange traded commodity futures contracts and options. Gains and losses on these hedges, which were not material at December 31, 1996 and 1995, are deferred and subsequently recognized in income as cost of goods sold in the same period as the hedged item. The Company does not hold or issue derivative instruments for trading purposes.
INCOME TAXES. The Company accounts for income taxes under FAS 109, Accounting for Income Taxes. Under FAS 109, deferred income taxes are provided at the enacted marginal rates on the differences between the financial statement and income tax bases of assets and liabilities.
PENSION PLANS. The Company has a number of defined benefit pension plans covering essentially all employees who are not covered by certain collective bargaining agreements. The benefits are based on years of service and compensation. The Company's practice is to fund amounts which are required by the Employee Retirement Income Security Act of 1974.
The Company also sponsors an employee savings plan covering certain employees. Participants in this plan elect to make contributions as either a percent of earnings or a basic contribution. For the periods prior to December 31, 1994, there were no contributions by the Company for this plan. The Company amended the plan to provide for Company contributions beginning in 1995 (see Note 3 "Employee Benefit Plans - Retirement Savings Plan").
OTHER EMPLOYEE BENEFITS. The Company accounts for post-retirement and post-employment benefits in accordance with FAS 106, Employer's Accounting for Post Retirement Benefits Other Than Pensions and FAS 112, Employer's Accounting for Postemployment Benefits.
STOCK BASED COMPENSATION. The Company grants stock options for a fixed number of shares in accordance with certain of its benefit plans. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants if the exercise price is equal to or more than the fair value of the shares at the date of grant.
FAIR VALUE DISCLOSURES. Cash and cash equivalents: The carrying amounts reported in the balance sheets for cash and cash equivalents approximates its fair value.
WESTPOINT STEVENS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES--CONTINUED
Accounts receivable and accounts payable: The carrying amounts reported in the balance sheets for accounts receivable and accounts payable approximate their fair value.
Long-term and short-term debt: The fair value of the Company's outstanding debt is estimated based on the quoted market prices for the same issues or on the current rates offered to the Company for debt of similar issues. The fair value of the $1,099 million and $1,148 million of outstanding debt at December 31, 1996 and 1995 was approximately $1,127 million and $1,142 million, respectively.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement 121 in the first quarter of 1996, and the effect of adoption was not material.
NET INCOME (LOSS) PER COMMON SHARE. The computation of net income (loss) per common share is based on the weighted average number of common and common equivalent shares (stock options) outstanding each period.
2. INDEBTEDNESS AND FINANCIAL ARRANGEMENTS
Indebtedness is as follows (in thousands of dollars):
The Company's Senior Credit Facility with certain lenders (collectively, the "Banks") consists of a $349.6 million revolving credit facility ("Revolver") due May 23, 2001. The Company has included $50 million of Revolver in long-term debt at December 31, 1996 because the Company intends that at least that amount would remain outstanding during 1997.
At the option of the Company, interest under the Senior Credit Facility will be payable either at the prime rate or at LIBOR plus 1.25%. Upon the Company achieving certain ratios of EBITDA (as defined) to cash interest expense, interest rates can be reduced up to 0.5%. The Company pays a commitment fee in an amount equal to 0.375% of the unused portion of each Bank's commitment under the Revolver. The loans under the Senior Credit Facility are secured by the pledge of all the stock of the Company's material subsidiaries and a first priority lien on substantially all of the assets of the Company, other than the Company's accounts receivable.
WESTPOINT STEVENS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INDEBTEDNESS AND FINANCIAL ARRANGEMENTS--CONTINUED
A subsidiary of the Company has a credit facility with the Banks that provides $25 million of revolving credit loans. Borrowings under this facility reduce the amounts available under the Senior Credit Facility. No amounts were outstanding under this facility at December 31, 1996.
The 8-3/4% Senior Notes due 2001 (the "Notes") are general unsecured obligations of the Company and rank senior in right of payment to the 9-3/8% Senior Subordinated Debentures due 2005 (the "Debentures") and pari passu in right of payment with all indebtedness of the Company under the Senior Credit Facility and all other existing or future Senior Indebtedness of the Company. The Debentures are general unsecured obligations of the Company and subordinate in right of payment to the Notes and all other existing and future Senior Indebtedness of the Company, including indebtedness under the Senior Credit Facility, pari passu with any future senior subordinated indebtedness and senior to any future subordinated indebtedness of the Company.
The Notes bear interest at the rate of 8-3/4% per annum, payable semi-annually on June 15 and December 15 of each year. The Notes are redeemable, in whole or in part at any time on or after December 15, 1998, at the option of the Company, at the redemption prices, as defined, together with accrued and unpaid interest to the date of redemption. The Debentures bear interest at the rate of 9-3/8% per annum, payable semi-annually on June 15 and December 15 of each year. The Debentures are redeemable, in whole or in part at any time on or after December 15, 1998, at the option of the Company, at the redemption prices, as defined, together with accrued and unpaid interest to the date of the redemption.
In addition, in the event of a Change of Control (as defined), the Company will be obligated to make an offer to redeem a holder's Notes or Debentures at a redemption price of 101% of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption. The Company may also redeem each of the Notes or Debentures upon a Change of Control at a redemption price equal to the greater of 101% of the principal amount thereof, together with accrued interest thereon to the date of redemption or 100% of the principal amount thereof, plus a Make-Whole Premium (as defined).
The Company's credit agreements contain a number of customary covenants including, among others, restrictions on the incurrence of indebtedness, transactions with affiliates, and certain asset dispositions. Certain provisions require the Company to maintain certain financial ratios, such as a minimum current ratio, and a minimum interest coverage ratio. A minimum consolidated net worth, as defined, is also mandated. At December 31, 1996, the Company could make restricted payments aggregating approximately $5.7 million.
The Company, through a "bankruptcy remote" receivables subsidiary ("Receivables Subsidiary"), has a trade receivables program ("Trade Receivables Program") which provides for the sale of accounts receivable, on a revolving basis. At December 31, 1996 and 1995, $133 million and $121 million, respectively had been sold under this program and the sale is reflected as a reduction of accounts receivable in the accompanying Consolidated Balance Sheets. The Trade Receivables Program was financed through the issuance of (a) $115 million of Floating Rate Class A Trade Receivables Participation Certificates ("Class A Certificates"); (b) $18 million of Floating Rate Class B Trade Receivables Participation Certificates ("Class B Certificates"); and (c) $27 million of Investor Revolving Certificates. The Class A Certificates and Class B Certificates bear interest at LIBOR plus .27% and LIBOR plus .57%, respectively, and the Investor Revolving Certificates bear interest at LIBOR plus .375%. The expected final payment date of amounts outstanding under the Trade Receivables Program is May 18, 1999, but earlier termination could occur upon the occurrence of certain defined events. The cost of the Trade Receivables Program is charged to selling and administrative expense.
The Trade Receivables Program requires the Company and Receivables Subsidiary to perform certain servicing obligations with respect to the existing and future trade receivables sold by the Company. The Company is not subject to any financial covenants under the Trade Receivables Program, but the documentation for the Trade Receivables Program provides for early termination of the Trade Receivables Program and early payment of the securities issued thereunder upon certain events, which include the incurrence of losses or delinquencies on the receivables in excess of certain levels or the bankruptcy or insolvency of the Company.
WESTPOINT STEVENS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INDEBTEDNESS AND FINANCIAL ARRANGEMENTS--CONTINUED
Excluding amounts related to the Revolver, maturities of long-term debt for 1998, 1999 and 2000 are $3.75 million per year and $403.75 million in 2001.
In connection with the refinancing of its Senior Credit Facility on November 23, 1994, the Company wrote-off deferred financing fees of $8.9 million ($5.4 million after income taxes).
3. EMPLOYEE BENEFIT PLANS
PENSION PLANS
Pension expense related to the Company's defined benefit plans, is comprised of the following (in thousands of dollars):
WESTPOINT STEVENS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. EMPLOYEE BENEFIT PLANS
PENSION PLANS--CONTINUED
The following table sets forth the funded status of the Company's pension plans and amounts recognized in the accompanying Consolidated Balance Sheets at December 31, 1996 and 1995 (in thousands of dollars):
At December 31, 1996, the Company changed the discount rate to 8.25% from 7.25% which decreased the projected benefit obligation by approximately $38.5 million. At December 31, 1995, the Company changed the discount rate to 7.25% from 8.5% which increased the projected benefit obligation by approximately $43.5 million.
The provisions of Financial Accounting Standards Board Statement No. 87 Employee Accounting for Pensions (SFAS No. 87) require recognition in the balance sheet of an additional minimum liability for pension plans with accumulated benefits in excess of plan assets. At December 31, 1996 and 1995, minimum pension liability adjustments of $10.2 million ($6.4 million after related income taxes) and $52.0 million ($32.0 million after related income taxes), respectively, are included in the accompanying Consolidated Balance Sheets.
Plan assets are primarily invested in United States Government and corporate debt securities, equity securities and fixed income insurance contracts. At December 31, 1996 and 1995, the Company's pension plans held Notes and Debentures of the Company with a market value of $17.0 million and $13.2 million, respectively.
WESTPOINT STEVENS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. EMPLOYEE BENEFIT PLANS--CONTINUED
RETIREMENT SAVINGS PLAN
The Company amended its Retirement Savings Value Plan (the "401K Plan") effective January 1, 1995, to provide that the Company will match 50 percent of employee's before-tax contributions up to two percent of the employee's compensation. Company contributions may be made either in cash or in shares of Common Stock of the Company. During both 1996 and 1995, the Company charged $2.4 million to expense in connection with the 401K Plan.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to sponsoring defined benefit pension plans, the Company sponsors various defined benefit post-retirement plans that provide health care and life insurance benefits to certain current and future retirees. All such post-retirement benefit plans are unfunded. The following table presents the status of post-retirement plans (in thousands of dollars):
Net periodic post-retirement benefit plans expense includes the following components (in thousands of dollars):
As of December 31, 1996, the actuarial assumptions include a discount rate of 8.25% and a medical care trend rate of 8.7% for 1997, grading down to 6% by 2000. These trend rates reflect the Company's prior experience and management's expectation of future rates. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated post-retirement benefit plans obligations as of December 31, 1996 by approximately $0.5 million, and the aggregate service and interest cost components of net periodic post-retirement benefit cost for the year ended December 31, 1996 by an immaterial amount.
The Company continues to evaluate post-retirement plan redesign options that may reduce the ongoing annual expense of post-retirement benefits cost covered by FAS 106 and FAS 112.
4. OTHER EXPENSE--NET
Included in "Other expense-net" in the accompanying Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994, are the amortization and write-off of deferred financing fees of $3.9 million, $3.9 million and $13.6 million, respectively.
WESTPOINT STEVENS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES
The Company accounts for income taxes under FAS 109. Under FAS 109, deferred income taxes are provided at the enacted marginal rates on the difference between the financial statement and income tax bases of assets and liabilities. Deferred income tax provisions or benefits are based on the change in the deferred tax assets and liabilities from period to period.
The total provision (benefit) for income taxes consisted of the following (in thousands of dollars):
Income tax expense from operations differs from the statutory federal income tax rate of 35% for the following reasons (in thousands of dollars):
Components of the net deferred income tax liability are as follows (in thousands of dollars):
WESTPOINT STEVENS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES--CONTINUED
At December 31, 1996, the Company has estimated operating loss carryforwards ("NOLs") expiring in 2004-2009 of approximately $443 million available to reduce future federal taxable income. Due to the ownership change which occurred September 16, 1992 in connection with a reorganization, the utilization of NOLs generated prior to this date will be significantly limited.
During prior years, the Internal Revenue Service (the "Service") issued Revenue Agent's Reports to Cluett, Peabody & Co., Inc., J. P. Stevens & Co., Inc., and West Point - Pepperell, Inc. asserting income tax deficiencies and additions to tax totaling approximately $89 million related to tax years 1979 and 1982 through 1989. This amount did not include interest which accrues from the dates the taxes were due until the dates of the payments. During 1995, the Company reached agreements with the Service concerning all of the Revenue Agent's Reports. As a result, the Company made payments in December, 1995, totaling approximately $33 million, which includes interest of approximately $19 million that was tax deductible. This liability had been accrued in previous periods and, accordingly, no additional income tax expense has been recognized in 1995 related to the agreements.
6. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company has granted stock options in accordance with (a) the 1993 Management Stock Option Plan (the "1993 Stock Option Plan") and, (b) the 1994 Non-Employee Directors Stock Option Plan (the "1994 Directors Stock Option Plan") and also has granted certain other stock options which were contractual options not granted pursuant to any plan. The 1993 Stock Option Plan covers approximately 1.9 million shares of Common Stock (approximately 700,000 shares of which are subject to further shareholder approval at the Company's May 14, 1997 Annual Meeting of Stockholders) and the 1994 Directors Stock Option Plan covers 150,000 shares of Common Stock. Key employees are granted options under the 1993 Stock Option Plan at terms (purchase price, expiration date and vesting schedule) established by a committee of the Board of Directors. Options granted either in accordance with contractual arrangements or pursuant to the 1993 Stock Option Plan have been at a price which is approximately equal to fair market value on the date of grant. Non-employee directors are granted options under the 1994 Directors Stock Option Plan at a price which is approximately equal to fair market value on the date of grant and such options are exercisable on the date of grant for a period of ten years. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.2% and 7%; no dividend yield; volatility factors of the expected market price of the Company's common stock of .29 and .29; and a weighted-average expected life of the option of 8 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
WESTPOINT STEVENS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY--CONTINUED
STOCK OPTIONS--CONTINUED
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Pro forma stock based compensation costs resulted in 1996 pro forma net income of $57.2 million (or pro forma net income per share of $1.80) and 1995 pro forma net loss of $130.2 million (or pro forma net loss per share of $3.98).
Changes in outstanding options were as follows:
At December 31, 1996, options for 883,600 shares were exercisable.
STOCK BONUS PLAN
During 1995, the Company's Board of Directors approved the WestPoint Stevens Inc. 1995 Key Employee Stock Bonus Plan (the "Stock Bonus Plan") covering 500,000 shares of the Company's Common Stock. Under the Stock Bonus Plan, the Company may grant bonus awards of shares of Common Stock to key employees based on the Company's achievement of targeted earnings levels during the Company's fiscal year. For 1996 and 1995, respectively, bonus awards were deemed earned by fifty-three and thirty-nine employees covering an aggregate of 321,732 and 338,468 shares of Common Stock. The Stock Bonus Plan provides for vesting of the bonus awards of 20 percent in the year of award and 20 percent in each of the next four years if the employee continues employment with the Company. The Company charged $3.4 million and $1.4 million to expense in 1996 and 1995, respectively, in connection with the Stock Bonus Plan.
7. LEASE COMMITMENTS
The Company's operating leases, including sublease arrangements with divested operations, consist of land, sales offices, manufacturing equipment, warehouses and data processing equipment with expiration dates at various times during the next thirteen years. Some of the operating leases stipulate that the Company can (a) purchase the properties at their then fair market values or (b) renew the leases at their then fair rental values. Some of the Company's leases, principally sales office space and manufacturing equipment, are sublet to others under leases expiring over the next four years.
WESTPOINT STEVENS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LEASE COMMITMENTS--CONTINUED
The following is a schedule, by year, of future minimum lease payments as of December 31, 1996 under operating leases, including sublease arrangements, that have initial or remaining noncancellable lease terms in excess of one year (in thousands of dollars):
The following schedule shows the composition of total rental expense for all operating leases, except those with terms of one month or less that were not renewed (in thousands of dollars):
8. LITIGATION AND CONTINGENT LIABILITIES
The Company is subject to various federal, state and local environmental laws and regulations governing, among other things, the discharge, storage, handling and disposal of a variety of hazardous and non-hazardous substances and wastes used in or resulting from its operations and potential remediation obligations thereunder. Certain of the Company's facilities (including certain facilities no longer owned or utilized by the Company) have been cited or are being investigated with respect to alleged violations of such laws and regulations. The Company is cooperating fully with relevant parties and authorities in all such matters. The Company believes that it has adequately provided in its financial statements for any expenses and liabilities that may result from such matters. The Company also is insured with respect to certain of such matters. The Company's operations are governed by laws and regulations relating to employee safety and health which, among other things, establish exposure limitations for cotton dust, formaldehyde, asbestos and noise, and regulate chemical and ergonomic hazards in the workplace. Although the Company does not expect that compliance with any of such laws and regulations will adversely affect the Company's operations, there can be no assurance such regulatory requirements will not become more stringent in the future or that the Company will not incur significant costs in the future to comply with such requirements.
The Company and its subsidiaries are involved in various other legal proceedings, both as plaintiff and as defendant, which are normal to its business. It is the opinion of management that the aforementioned actions and claims, if determined adversely to the Company, will not have a material adverse effect on the financial condition or operations of the Company taken as a whole.
WESTPOINT STEVENS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. CASH FLOW INFORMATION
10. SEGMENT AND MAJOR CUSTOMER INFORMATION
The Company is engaged in the manufacturing and marketing of products in two industry segments, consumer home fashions and knitted apparel fabrics, through Home Fashions and the Alamac Knits Subsidiary, respectively. Intersegment sales, export sales and foreign operations each comprise less than 10% of consolidated totals. "Other assets" consist mainly of prepaid pension costs, deferred financing fees and other corporate assets.
WESTPOINT STEVENS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SEGMENT AND MAJOR CUSTOMER INFORMATION--CONTINUED
Segment information is as follows (in thousands of dollars):
WESTPOINT STEVENS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SEGMENT AND MAJOR CUSTOMER INFORMATION--CONTINUED
Products of Home Fashions are sold primarily to domestic chain stores, mass merchants, department and specialty stores. Products of Alamac Knits Subsidiary are sold to branded and private label manufacturers who cover virtually all segments of the knitted apparel market. Sales to two customers as a percent of net sales, amounted to approximately 11% each for the year ended December 31, 1996. Sales to two customers as a percent of net sales, amounted to approximately 10% each for the year ended December 31, 1995. Sales to two customers as a percent of net sales, amounted to approximately 11% and 10% for the year ended December 31, 1994. During 1996, the Company's six largest customers accounted for approximately 47% of the Company's net sales.
11. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
(1)Net income (loss) per common share calculations for each of the quarters is based on the weighted average number of common and common equivalent shares outstanding for each period and the sum of the quarters may not necessarily be equal to the full year net income (loss) per common share amount.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
The information called for in this item is incorporated by reference from the Company's 1997 definitive proxy statement (under the caption "Board of Directors") to be filed with the Securities and Exchange Commission by April 11, 1997 (the "1997 Proxy Statement").
IDENTIFICATION OF EXECUTIVE OFFICERS
The information called for in this item is incorporated by reference from the Company's 1997 Proxy Statement (under the caption "Management").
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated by reference from the Company's 1997 Proxy Statement (under the caption "Executive Compensation").
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated by reference from the Company's 1997 Proxy Statement (under the caption "Security Ownership of Certain Beneficial Owners and Management").
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated by reference from the Company's 1997 Proxy Statement (under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Certain Relationships and Related Transactions").
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES
FINANCIAL STATEMENTS.
Consolidated Financial Statements for the three years ended December 31, 1996.
All financial statements required to be filed as part of this Annual Report on Form 10-K are filed under "Item 8. Financial Statements and Supplementary Data."
FINANCIAL STATEMENT SCHEDULES
Note: All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended December 31, 1996.
EXHIBITS
WESTPOINT STEVENS INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
(1)Accounts written off, less recoveries of accounts previously written off. (2)Net change. (3)Reserves are deducted from assets to which they apply.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WESTPOINT STEVENS INC. (Registrant)
By: /s/ Holcombe T. Green, Jr. ------------------------------------ Holcombe T. Green, Jr. Chairman of the Board and Chief Executive Officer
February 13, 1997
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.