ITEM 1: BUSINESS
GENERAL
Glenoit Corporation (the "Company"), founded in 1954, is a domestic manufacturer and marketer of specialty fabrics known as "sliver-knit" pile fabrics, a domestic manufacturer of printed rugs for the home and, through its recently acquired subsidiary, American Pacific Enterprises, Inc., ("APE") a designer, importer and marketer of decorative textile home furnishings. Through its Fabric Division, the Company produces an extensive line of sliver (pronounced "sly-ver") knit pile fabrics, principally made from acrylic, which are used in the manufacture of performance-oriented outerwear, sportswear, coats, accessories, home textiles, automotive interiors, military uniforms, toys and a variety of other end-use products. The Company principally manufactures fabrics on a made-to-order basis and currently has over 1,100 customers. Sliver-knit pile fabrics are produced through a specialized process in which fabric is manufactured directly from loose fibers, in contrast to the more traditional knitting process in which fibers are first spun into yarn and then knit into fabric. The Fabric Division's sales for fiscal 1998 totaled approximately $106.7 million. Through its Consumer Products Division, the Company manufactures a wide variety of printed kitchen rugs, welcome mats, bath rugs and children's area rugs sold primarily through national discount retailers. Fiscal 1998 sales for the Consumer Products Division totaled approximately $47.9 million. On October 2, 1998, the Company acquired all of the outstanding stock of APE. APE is a designer, importer and marketer of fashion-forward decorative textile home furnishings, principally quilts and specialty bedding items. Since the acquisition, APE's net sales were approximately $17.4 million in fiscal 1998. On February 12, 1999, the Company acquired all outstanding shares of Ex-Cell Home Fashions, Inc. ("Ex-Cell"). Ex-Cell is engaged in the design, manufacture, importation, and distribution of textile home furnishings, principally shower curtains, table linens and decorative pillows. As a result of these acquisitions, the Company believes it has transformed itself from a specialty textile manufacturer focused on profitable niche segments to a diversified manufacturer and distributor of consumer goods, with the majority of its revenues derived from the home textile market.
The Company has experienced growth in sales, operating income and earnings before interest, taxes, depreciation and amortization ("EBITDA") over the past five years. However, there was a decline in operating income and EBITDA from 1997 to 1998. In connection with this growth, the Company has incurred significant debt. As of January 2, 1999, the Company had outstanding indebtedness of $160.7 million (excluding trade payables, accrued liabilities, and unused commitments under its credit facilities). From fiscal 1994 to fiscal 1998, the Company's net sales have grown from $72.5 million to $172.0 million, representing a compound annual growth rate ("CAGR") of 24.1%. Excluding the impact of certain expenses totaling $6.9 million related to the results of APE subsequent to the acquisition, operating income for fiscal 1998 was $22.4 million and has grown from $10.3 million in fiscal 1994 representing a CAGR of 21.2% and EBITDA has grown from $11.7 million to $27.9 million representing a CAGR of 24.2%. The growth from fiscal 1994 to fiscal 1997 principally occurred in the Fabric Division and is attributable to the Company's development and introduction of branded, performance-oriented sliver-knit fabrics. During fiscal 1998, sales in the Fabric Division decreased slightly but were offset by sales growth in the Consumer Products Division and net sales of $17.4 million generated from APE since October 2, 1998.
The Company developed fabrics to target the increasing consumer preference towards more casual and comfortable dress and a growing emphasis on outdoor activities and styling related to outdoor activities. Beginning with Glenaura (TM) in 1993, the Company has introduced a series of branded, performance-oriented fabrics which have transformed the Company's Fabric Division from a traditional deep-pile fabric manufacturer dependent upon the coat market into a diversified fabric producer serving a broader range of faster growing end-use markets. Today, the Company's performance-oriented fabrics are principally manufactured from acrylic micro-fiber and are marketed under the brand names Berber by Glenoit(TM), Glenaura(TM), Zendura(TM) and GlenPile (TM). The Company believes that its performance-oriented sliver-knit fabrics offer apparel manufacturers greater design flexibility and superior performance characteristics in comparison with competing fleece fabrics. These qualities include the enhanced design and color capability of "Jacquard" knitting (which allows the fabrics to have intricate and colorful designs knitted into the fabric rather than printed onto the surface), added versatility in texture and feel and greater warmth-to-weight ratios and the ability to promote the evaporation of perspiration, thereby providing greater warmth to the wearer. These performance-oriented fabrics have been introduced by the Company's customers into sportswear lines marketed under brand names such as Liz Claiborne, Jones New York, Ralph Lauren and Anne Klein; outerwear lines marketed under brand names such as L.L. Bean, Lands' End, Columbia, Woolrich and Bogner; and private label programs for retailers such as Saks Fifth Avenue, Nordstrom, Lord & Taylor, Banana Republic, Victoria's Secret and The Gap.
In addition to performance-oriented sliver-knit fabrics, the Company is a manufacturer and marketer of FAUX furs in the United States. FAUX fur synthetically replicates animal fur such as mink, beaver and leopard and is typically used in women's and children's coats. The Company also manufactures fabrics used to cover audio speakers in certain models of automobiles, fireproof fabric marketed under the Glentec(TM) name used by the United States Navy, and a wide variety of other fabrics used in the manufacture of toys, golf club head covers, powder puffs, case linings and other end-use products.
The Company believes that it is currently the principal domestic manufacturer of sliver-knit fabrics made from micro-fiber (which is defined as fiber having a diameter of less than one denier). The Company's ability to produce these fabrics is a result of its (i) manufacturing expertise in the sliver-knitting process which is more complex and difficult to utilize than traditional knitting, (ii) state-of-the-art sliver-knitting equipment with proprietary manufacturing enhancements, (iii) experienced sliver-knitting workforce and (iv) exclusive supply agreement for Microsupreme(R) acrylic micro-fiber with Sterling Fibers, Inc. Over the last seven years, the Company has replaced or substantially upgraded all of its knitting equipment. Effective August 30, 1997, the Company, through its wholly-owned subsidiary, Glenoit Corporation of Canada, acquired certain assets and liabilities of Collins & Aikman's Canada, Inc. Management believes as a result of unseasonably warm weather during the last 18 months which affected retailer demand for our high performance outerwear fabrics and the influx of low priced apparel products, mostly from Asia, the Fabric Division's sales growth has slowed and may potentially decline. While the Company continues to develop new and innovative fabrics, there has been an overall decline in the sourcing of apparel fabric manufactured in the United States. As a result, the Company is taking steps in 1999 to consolidate operations and eliminate excess capacity. In connection with those actions, the Company will close its Tennessee facility and relocate certain machinery and equipment necessary to its North Carolina and Canadian facilities to support current and future sales volumes.
The Consumer Products Division manufactures a wide variety of printed kitchen rugs, welcome mats, bath rugs and children's area rugs which are sold to national discount retailers including Wal-Mart, Kmart and Target, which typically sell such rugs at retail prices ranging from $3.99 to $9.99. A majority of the Company's kitchen rugs are manufactured under an exclusive licensing agreement with Barth and Dreyfuss of California, Inc. ("B&D"), a major manufacturer of kitchen textiles such as towels and potholders. Under the licensing agreement, the Company has the exclusive right to use B&D's designs on the Company's kitchen rugs, which are marketed jointly with B&D's kitchen textile products.
The Company believes that its vertically integrated, state-of-the-art manufacturing and design operations provide the Consumer Products Division with efficient design capabilities, a low-cost, high-quality product line, and the ability to manufacture and ship large orders in a short time period. The Company's technology allows it to take a customer's design and produce numerous rug samples in as little as two hours, without incurring the expense and the one month time delay associated with full scale production. The Company's heat transfer and screen printing capabilities allow it to produce printed rugs that have an appearance similar to that of woven rugs but cost significantly less to produce. The Company has the ability to produce over 500,000 rugs per week and generally ships rugs within five business days after receiving an order.
Founded in 1984 and acquired by the Company on October 2, 1998, APE is a leading designer, importer and marketer of decorative textile home furnishings, principally quilts and decorative bedding items. APE's operating strategy is based on its ability to design products based on current and forecasted fashion trends and then contract for production with established, independent manufacturers principally located in China. This strategy results in a competitive advantage of being able to market high quality, fashion forward consumer products at competitive price points. APE's product mix consists of specialty decorative bedding, handmade quilts, seasonal and novelty home furnishings, fashion window coverings and complementary bath fashions. APE's overseas manufacturing infrastructure allows for a large quantity of customized designs without significant additional capital investment in plant and equipment. Key brands include American Pacific, Match, Hawthorne Hill, Tucker Lane and Country Classics. APE also maintains licensing agreement with Waverly and just recently Nautica. The Company believes that the acquisition of APE will expand its current product offerings to the large retailers, further penetrate the specialty retailing segment and diversify product sourcing capabilities beyond North America.
On August 31, 1998, the Company announced that it is expanding its presence in the home fashions arena with the launch of a new home textiles division, Madison Landing. This division will supply decorative pillows, table linens, duvets and other fashion accessories to the retail industry.
BUSINESS STRATEGY
Principal elements of the Company's strategy are:
LEVERAGE EXISTING DISTRIBUTION CHANNELS. The Company seeks to utilize its strong distribution relationships with large national discount retailers such as Wal-Mart, Kmart and Target to expand distribution of its expanded home furnishing products. Today, the Company primarily sells kitchen rugs through this distribution channel; however, the Company is planning to expand its distribution of APE's products through this channel. In addition, the Company intends to utilize APE's strong relationships with certain specialty retailers to expand its distribution of household rugs.
LEVERAGE FOREIGN SOURCING CAPABILITIES. As part of the acquisition of APE, Glenoit obtained the ability to source products for its operating units beyond North America. Glenoit intends to expand its ability to leverage the low-cost, high quality overseas sourcing capabilities.
MAKE SELECTIVE ACQUISITIONS. The Company intends to pursue selective strategic acquisitions in order to broaden consumer product offerings to the large national discount retailers as well as further penetrate the specialty retailing segment. As previously mentioned, the Company acquired all the outstanding shares of Ex-Cell, which will broaden the Company's product offerings to the above mentioned distribution channels.
INCREASE PENETRATION OF HOME TEXTILE MARKET WITH INNOVATIVE NEW PRODUCTS. The Company plans to continue to develop innovative fabric products for the home textile market, a relatively small but fast growing segment of the Fabric Division. The Company believes that its micro-fiber fabrics are well suited for use in products for the home textile market, and the Company recently began selling its micro-fiber fabrics for use in throws, covered pillows and comforters.
BUILD BRAND AWARENESS. The Company has been building brand awareness for its performance-oriented fabrics by promoting Glenoit's brand names through garment hang-tags, a print advertising campaign undertaken jointly with its supplier of acrylic micro-fiber and designers' advertisements and retailers' catalogs which mention the Company's fabric by name.
PRODUCTS
FABRIC DIVISION
The Fabric Division manufactures a diverse line of sliver-knit pile fabrics used in the manufacture of performance-oriented outerwear, sportswear, coats, accessories, home textiles, automotive interiors, military clothing and other products. The Fabric Division's largest and fastest growing segment is a line of performance-oriented micro-fiber fabrics which are principally made from Microsupreme(R) micro-fiber produced by Sterling Fibers, Inc. In 1993, the Company introduced the first of its performance-oriented fabrics, Glenaura(TM), and has since introduced Berber by Glenoit(TM)(1994), Zendura(TM)(1995) and GlenPile(TM)(1996). These fabrics are primarily used in the manufacture of outerwear, sportswear, and accessories, including coats, pullovers, heavy shirts, hats, gloves, scarves, robes and slippers, and are sold to manufacturers of sportswear marketed under brand names such as Liz Claiborne, Jones New York, Ralph Lauren and Anne Klein; manufacturers of outerwear marketed under brand names such as L.L. Bean, Lands' End, Columbia, Woolrich and Bogner; and private label programs for retailers such as Saks Fifth Avenue, Nordstrom, Lord & Taylor, Banana Republic, Victoria's Secret and The Gap. In addition, the Company sells micro-fiber fabrics in the home textile market for use in throws, covered pillows and comforters manufactured and marketed by Revman Industries Inc. under the brand name Indoor Outfitters(TM).
The Fabric Division's second largest product category is FAUX fur which is composed of fabrics with a heavier, deeper pile than performance-oriented fabrics and is used in women's and children's coats and linings, which was the Fabric Division's principal business prior to 1993. FAUX fur is typically used to replicate traditional animal fur such as mink, beaver, seal and leopard. The Company believes that it is the leading domestic supplier of FAUX fur and sells its fabrics to manufacturers of garments that are sold through retailers such as Saks Fifth Avenue, Bloomingdale's, Nordstrom, Neiman Marcus, Kmart and JC Penney.
In the automotive market, the Company's fabrics, which allow for greater sound penetration than other knit or woven fabrics, are used to cover audio speakers in the interiors of automobiles produced by the Cadillac, Buick and Oldsmobile divisions of General Motors Corporation. The Company also sells fabric to the U.S. Government, including a fireproof fabric marketed under the brand name Glentec(TM), which is used by the United States Navy. In addition, the Company's fabrics are used in the manufacture of toys, golf club head covers, powder puffs, linings for golf bags and musical instrument cases and other end-use products.
CONSUMER PRODUCTS DIVISION
The Consumer Products Division produces a wide variety of printed kitchen rugs, welcome mats, bath rugs and children's area rugs which are typically two-feet by three-feet in size. The Consumer Product Division's largest product category is kitchen rugs, which accounted for a substantial majority of its fiscal 1998 net sales. A majority of the Company's kitchen rugs are manufactured under an exclusive license agreement with B&D. Under this agreement, the Company has the exclusive right to use B&D copyrighted designs to produce kitchen rugs that are coordinated with B&D's towels, pot holders and other kitchen textiles. These products are marketed jointly to retailers as a coordinated package. In the children's area rug category, the Company produces rugs decorated with licensed cartoon characters for Couristan, Inc., a major manufacturer and distributor of area rugs. The Company's rugs have various surface textures and are made primarily from polyester. The Company also produces cotton and polypropylene rugs. The Consumer Products Division sells its rugs directly to national discount retailers such as Wal-Mart, Kmart and Target, which typically sell such rugs at retail prices ranging from $3.99 to $9.99.
AMERICAN PACIFIC ENTERPRISES
APE is a designer, importer and distributor of fashion forward home textile products. APE's principal products consist of quilts and specialty bedding items. APE also designs and distributes seasonal/novelty home furnishings, fashion window coverings and complementary bath products. These products are designed by APE's in-house design department and are then sourced through its overseas buying office. These products are typically sold to specialty retailers such as Bed, Bath and Beyond as well as national retailers.
SALES AND MARKETING
FABRIC DIVISION
The Fabric Division's marketing efforts are handled by an in-house sales force supported by a customer service department. The Fabric Division supplements its sales coverage with several experienced commissioned, outside sales organizations specializing in certain markets. The Fabric Division maintains a showroom at the Company's headquarters in New York. The Fabric Division has its own design and research and development departments that develop exclusive designs for the Company and certain of the Company's customers. No single customer accounted for more than 10% of the Fabric Division's net sales in fiscal 1998, reflecting the diversity of its customer base.
The Fabric Division principally manufactures fabrics on a made-to-order basis, thereby minimizing its inventory. The Company's performance-oriented fabrics are marketed principally under the brand names Berber by Glenoit(TM), Glenaura(TM), Zendura(TM) and GlenPile(TM), and are being increasingly promoted through garment hang-tags and through a print advertising campaign undertaken jointly with the Company's supplier of Microsupreme micro-fiber. As a result of growing consumer recognition of the Company's branded fabrics, designers and retailers are increasingly using the Company's brand names in their advertising and catalogs.
CONSUMER PRODUCTS DIVISION
The B&D sales force, supervised by the Consumer Products Division's marketing management, acts as representative agents for a large portion of all the Consumer Products Division's products. In return, the Company pays B&D a variable royalty on the sale of all rugs printed with B&D designs and also contributes to the compensation of the B&D sales force. The Consumer Products Division's marketing management maintains active relationships with key customers, and marketing calls to these customers are made jointly by the Company and B&D employees. The Consumer Products Division markets its products primarily to national discount retailers such as Wal-Mart, Kmart and Target, which collectively accounted for approximately 61% of the Consumer Products Division's net sales in fiscal 1998. The Consumer Products Division has recently entered into strategic marketing relationships in order to increase distribution of the Company's rugs through hardware stores and specialty retail gift shops.
In order to support its sales force and respond promptly to the delivery requirements of its customers, the Consumer Products Division utilizes Electronic Data Interchange ("EDI") with most of its principal customers. EDI minimizes the lead time for customer orders, permits a more efficient, targeted manufacturing schedule, and improves communication, planning and processing times at each stage of the production cycle. EDI, combined with the Company's manufacturing capabilities, allows the customer to place an order on Monday and in most cases have the products shipped by Friday. This rapid order turn-around has resulted in an expanded relationship with Wal-Mart, Kmart, Target and other major customers.
AMERICAN PACIFIC ENTERPRISES
APE's products are marketed through a network of home textile and seasonal sales representatives. APE maintains a customer service center in Columbus, Ohio that works closely with the various customers and production staff. Senior management is actively involved in customer relations and the development of licensing agreements. APE's current systems enables customers to participate in product design, to customize product assortments and to execute purchase orders electronically.
MANUFACTURING FACILITIES AND OPERATIONS
The Company operates two manufacturing facilities located in Tarboro, North Carolina, one manufacturing facility located in Jacksboro, Tennessee, and one manufacturing facility located in Elmira, Ontario, Canada. APE leases a 160,000 square foot warehouse in Columbus, Ohio, a sales and design office in San Francisco and a showroom in New York City. These leases terminate in April 2001, July 1999 and April 2002, respectively. Annual rental cost for the APE facilities total approximately $1,000,000. The Tennessee facility is leased with an expiration date in August, 2007, and an annual rental cost of approximately $580,000. As previously discussed, the Company is in the process of closing the Tennessee facility and is negotiating with the owner a potential early termination of this lease. The North Carolina and Canadian facilities are owned by the Company. The Company also maintains a 10,000-square-foot administrative office and sales showroom at 111 West 40th Street in New York City's garment district. The lease on the New York office expires on July 31, 2005, and has an annual rental cost of approximately $296,000. In the opinion of management, the Company's manufacturing capacity is sufficient to meet the Company's requirement for the foreseeable future. The following table sets forth certain information relating to the Company's facilities:
FABRIC DIVISION
The Company is a vertically integrated manufacturer involved in all aspects of the sliver-knitting process including dyeing, carding, knitting and finishing. Sliver-knit fabrics are produced using a process in which the fabric is knit directly from loose fibers, in contrast with the more traditional knitting process in which fibers are first spun into yarn before being knit into fabric. In the sliver-knitting process, pile is constructed by attaching loose fibers to a lightweight knit backing. Tufts of fibers are caught in the tight loops of the knit, allowing their loose ends to stand free from the backing to form the pile. Because the fibers are added individually, various colors and types of fiber can be mixed. This allows for versatility in fabric texture, appearance and technical features. In addition, the Company's computer controlled sliver-knitting machines have the capability of creating intricate "Jacquard" patterns by mixing various fibers and colors. The Company's equipment also performs a number of finishing processes that create different surface textures from sheared and velvet-like to curled "sherpa" to "hi-low" patterns with a subtle embossed look. With the Company's state-of-the-art equipment and experienced research and production personnel, the Company manufactures a wide variety of fabrics that can be used in a range of end-use products.
The sliver-knitting process begins with loose fibers that have been selected for the aesthetic and technical qualities they will lend to the finished fabric. Most of the fibers used by the Company are pre-dyed by the supplier and then mixed to create the required shade. The loose fibers are blown together in air chambers mixing their color and fiber type. The mixed fibers are subsequently sent through a series of carding machines that aligns them in the same direction, producing a soft rope called "roving" or "sliver." The sliver is fed into the sliver-knitting machine where portions of the fibers are blown by small air jets into the high speed needles. As the needles knit the lightweight but strong knit backing, the fibers are caught securely into each of the loops. The high-speed, computerized needles can be programmed to knit a large variety of patterns using multiple slivers simultaneously. After knitting, the pile fabric is sent to the finishing area and sheared to the desired height. The fabric is subsequently placed through a series of technical finishing processes developed by the Company to control the weight, thickness and surface texture of the final fabric. Since 1991, under a new management team, the Company has replaced or upgraded substantially all of its knitting machines. In addition, the Company has replaced or upgraded its blending and carding machines and made modifications to its dyeing and finishing equipment.
CONSUMER PRODUCTS DIVISION
The Consumer Products Division's rug manufacturing operations are vertically integrated. The rug manufacturing process begins with fabric formation (although the Company purchases certain pre-formed fabrics on the open market). The fabric is then coated with a durable textured backing. Next, the fabric is printed with a design and cut into individual rugs. After cutting, the rugs are "serged" and inspected for quality. The customer's unique price tag and bar code are attached, and the rugs are packaged for shipment.
The Company's technology allows it to take a customer's design and produce numerous rug samples in as little as two hours without incurring the expense and one month delay associated with full scale production. Accordingly, the Company commences full production only after it has received confirmed orders from its customers. The Company has the ability to produce over 500,000 rugs per week and generally ships rugs within five business days after receiving an order. The Company believes that its production capabilities are an important competitive advantage.
The Company uses a high-speed, continuous heat transfer printing process that results in deep and permanent colors which will withstand machine washing and drying. In addition, heat transfer printed rugs have an appearance similar to that of rugs woven from dyed yarn, yet can be produced at a substantially lower cost than woven rugs. In 1995, the Company added screen printing to its manufacturing capabilities to enable the printing of designs on cotton and polypropylene rugs as well as to facilitate shorter production runs.
AMERICAN PACIFIC ENTERPRISES
APE utilizes offshore independent manufacturers located principally in China for the majority of all production. APE fills decorative pillows in its Columbus, Ohio facility and sources the filling of imported comforter shells at independent contractors in North Carolina and South Carolina. Through a subsidiary, APE supervises overseas production with four expatriate senior managers and approximately 50 Chinese textile and administrative specialists. APE contracts for production with a number of manufacturers, many of which have served APE since 1984. Finished production is inspected by APE personnel overseas and is shipped to the Ohio warehousing facility or to a lesser extent directly to customers. Management believes this strategy allows it to focus investment in design, marketing and customer service as opposed to manufacturing equipment and a significant labor force.
LICENSES AND TRADEMARKS
The Company's principal trademarks are Glenoit(TM), Berber by Glenoit(TM), Glenaura(TM), Zendura(TM), GlenPile(TM) and Glentec(TM).
Under an agreement with B&D, the Company has the exclusive right to use B&D copyrighted designs on its printed kitchen rugs in all countries worldwide except Canada. Under the licensing agreement, the Company is required to pay B&D a variable royalty (subject to a $250,000 annual minimum) on all products utilizing B&D designs. This agreement terminates in November 1999 and may be extended indefinitely at the Company's option in successive one-year periods by giving written notice to B&D at least 90 days before the expiration of each term. Under this agreement, the Company is required to maintain a high level of quality and style and to comply with certain reporting obligations. B&D can terminate the agreement in the event of a material default by the Company (including a failure to pay the $250,000 minimum annual royalty).
APE's key brands are American Pacific, Match, Hawthorne Hill, Tucker Lane and Country Classics. APE also maintains licensing agreements with Waverly and recently, Nautica.
RAW MATERIALS AND SUPPLIERS
The Company's principal raw materials are acrylic and polyester, which the Company purchases from several large chemical companies. The Company's largest supplier is Sterling Fibers, Inc., which is the exclusive supplier of acrylic micro-fiber used in the Company's fabrics. The Company seeks to purchase sufficient amounts of acrylic and polyester to cover existing order commitments. The Company does not speculate on the price of raw materials. Although the Company has always been able to obtain sufficient supplies of raw materials, any shortage or interruption in the supply, variations in the quality or fluctuations in the cost of raw materials could have a material adverse effect on the Company's business, financial condition or results of operations.
The Company has entered into a supply agreement dated February 1, 1997 by and between the Company and Sterling Fibers, Inc. (the "Sterling Agreement"), pursuant to which the Company has the exclusive right to purchase from Sterling (and the Company has agreed not to purchase from any other supplier) colored micro-fiber for the purpose of manufacturing pile knits (other than pile knits based on stretchable yarns such as spandex) in the United States, Mexico and Canada, subject to the terms and conditions of the Sterling Agreement. Under the Sterling Agreement, the Company has agreed to purchase from Sterling certain minimum quantities of Sterling's Microsupreme(R) micro-fiber, and Sterling and the Company have agreed to promote and advertise micro-fiber and micro-fiber products. The Sterling Agreement has an initial term expiring on February 1, 2000, but will be automatically extended for successive one-year periods unless either party gives written notice to other party at least one year before the expiration of the current term. Either party may terminate the Sterling Agreement in the event of a default by the other party which is not cured within 30 days after notice.
COMPETITION
The textile industry is highly competitive, with no one company dominating the industry. The Company's competitors range from large vertically integrated textile companies producing a variety of goods to numerous smaller companies which direct their efforts at particular niches in the textile markets. Each of these competitors seeks to set or anticipate fashion trends and respond quickly to changes in styles with new products. The primary competitive factors in the textile industry are price, product styling and differentiation, quality, manufacturing flexibility, delivery time and customer service. In addition, imports of foreign-made textile and apparel products are a significant source of competition for many domestic textile manufacturers. The Company believes that its manufacturing presence in the United States and its emphasis on shortening production and lead times allows the Company to respond more quickly than foreign producers to changing fashion trends and to its domestic customers' requirement that suppliers meet tight production schedules and provide rapid delivery. The Company's continued success, however, will be affected by the ability of certain of the Company's customers to remain competitive, which may be affected by the level of imports. The Company's continued success will also depend upon the Company's ability to maintain its manufacturing flexibility and capacity and, most importantly, its ability to continue to produce innovative, quality products to satisfy specific customer needs.
The Fabric Division competes directly with several smaller manufacturers of sliver-knit pile fabrics, including Monterey Mills, Inc., Tex-Tenn Corporation, Draper Knitting Company, Inc. and Roller Fabrics Inc. The Company also competes with manufacturers of competing non-sliver-knit natural and synthetic fabrics such as high-end fleece. Such manufacturers include Malden Mills Distributors Corp., Dyersburg Corporation and Menra Mills Corporation.
The Consumer Products Division competes with various manufacturers of rugs for the home, including foreign rug producers. The Consumer Products Division's principal competitors are Bacova Guild Ltd., a subsidiary of Burlington Industries, Inc., and American Rug Craftsmen, Inc., a subsidiary of Mohawk Industries, Inc.
APE competes in the home furnishings industry. The key competitors include major domestic home textile manufacturers and selected niche importers. The largest competitors include the major textile mills such as Spring Industries, Westpoint Stevens and Dan River.
EMPLOYEES
The Company benefits from an experienced work force with which it maintains good working relationships. As of January 2, 1999, the Company employed 1,290 employees, of whom 1,005 were hourly and 285 were salaried.
Of the Company's hourly employees, approximately 294 are represented by the Union of Needletrades, Industrial Textile Employees and are located in Jacksboro, Tennessee and Elmira, Ontario. The Tennessee agreement with this union expired on February 21, 1999. As previously discussed, the Company is in the process of closing that facility. The Canadian agreement expires December 25, 1999. The Company's other facilities are non-unionized.
BACKLOG
The Company's order backlog was approximately $17.1 million at January 2, 1999 as compared to approximately $10.6 million at January 3, 1998. Included in the 1998 amount is APE's order backlog of approximately $11.3 million at January 2, 1999. Substantially all of the orders outstanding at January 2, 1999 are expected to be filled within three months of that date. Orders on hand are not necessarily indicative of total future sales.
No significant order backlog exists for the Consumer Products Division as most customers order on a weekly basis.
ENVIRONMENTAL, SAFETY AND HEALTH REGULATION
The Company is subject to increasingly stringent federal, state and local laws and regulations governing, among other things, the management of hazardous substances, discharges to air and water, and occupational health and safety. Such laws include the Federal Water Pollution Control Act, the Clean Air Act and the Resource Conservation and Recovery Act. The Company's operations, particularly its dyeing and finishing processes, result in the discharge of substantial quantities of wastewater and hazardous air emissions. Operating permits establishing discharge and emission limits for these processes are subject to revocation, modification or renewal, and violations of such permits may result in substantial fines and/or civil or criminal sanctions.
The Company may be subject to the requirements of the 1990 Amendments to the Federal Clean Air Act, including those relating to emissions of hazardous air pollutants. The Company believes that it will be able to achieve compliance with such requirements at a cost which will not be material. However, the Company cannot currently estimate with certainty the impact of future emissions limitations or enforcement practices upon its operations.
The Company's operations also are governed by certain requirements under the Occupational Safety and Health Act relating to workplace safety and worker health which, among other things, establish permissible exposure limits for cotton dust, formaldehyde, asbestos and noise. In addition, the Company may be liable under environmental laws, particularly the Federal Comprehensive Environmental Response, Compensation and Liability Act, for the cleanup of contamination that occurs on or from the Company's properties, including contamination that occurred prior to the Company's ownership or operation of the properties, or for cleanup of contamination on any off-site location to which the Company shipped hazardous substances for disposal.
The Company believes that it is in compliance in all material respects with all applicable environmental, health and safety requirements. However, there can be no assurance that the costs or liabilities related to such requirements that may be imposed in the future will not result in a material adverse effect on the Company's business, financial condition and results of operations.
LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the conduct of its business. The Company does not believe that the outcome of any of the matters in which it is currently involved will have a material adverse effect on the Company's business, financial condition or results of operations.
During 1998, the Company settled the previously outstanding examination and assessment that resulted from the Internal Revenue Service's ("IRS") review of the Company's and Holding's income tax returns for January 1, 1994 and December 31, 1994. The Company paid approximately $798,000 in tax, penalty and interest in connection with this settlement.
The Company's state income tax returns for the years ended January 1, 1994 and December 31, 1994, have been examined by the New York Department of Finance. In April 1997, the New York Department of Finance assessed taxes and interest in the amount of approximately $130,000. The Company is currently in the process of responding to the New York Department of Finance and believes that any potential settlements will be within amounts accrued.
Holdings has an indemnification agreement with a shareholder with respect to certain tax obligations. While tax obligations are the expense and liability of the Company and Holdings, the indemnification agreement provides for an additional contribution of capital to Holdings from this shareholder via reductions of long-term obligations due the shareholder from Holdings.
ITEM 2:
ITEM 2: PROPERTIES
For information concerning the principal physical properties of the Company and subsidiaries, see "Item 1: BUSINESS - - Manufacturing Facilities and Operations". . ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
For information concerning any material pending legal proceedings the Company or its subsidiaries are party to, see "Item 1: BUSINESS - - Legal Proceedings".
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MEETINGS
Glenoit Corporation is a privately held company with no established public trading market for its equity securities. The equity securities are held by Glenoit Universal, Ltd. ("Holdings"). Glenoit Asset Corporation is a wholly owned subsidiary of Glenoit Corporation.
Glenoit Corporation will be permitted (but will not be obligated) to make certain payments to Holdings, including payments (i) in respect of principal and interest of debt obligations of Holdings, (ii) to cover certain administrative and operating expenses of Holdings and (iii) to cover certain tax liabilities allocable to the Company, subject in each case to certain conditions and restrictive covenants in the agreements governing the Company's credit facility and 11% Senior Subordinated Notes.
During fiscal 1998 and 1997, the Company distributed $1.9 million and $7.3 million to Holdings respectively. No such distributions were made during fiscal 1996.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
Set forth below are selected historical consolidated financial data of the Company for the periods indicated. The historical consolidated financial data of the Company prior to December 13, 1995 reflect the historical results of Glenoit Mills, Inc. and subsidiary ("Mills"). The selected historical financial data of the Company as of and for the years ended January 4, 1997, January 3, 1998 and January 2, 1999 has been derived from the Consolidated Financial Statements of the Company included elsewhere herein. The selected historical financial data of the Company as of and for the year ended December 30, 1995 and December 31, 1994 has been derived from the Consolidated Financial Statements of the Company not included herein. The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and related notes thereto included elsewhere in this Annual Report.
(a) During fiscal 1995, the Company recognized an extraordinary loss, net of income tax benefit of $1,240,000, as a result of the early retirement of the Company's debt obligations. (b) During April 1997, the Company recognized an extraordinary loss, net of income tax benefit of $1,527,000, as a result of the refinancing of the Company's debt in connection with the Initial Offering. See Note 5 to the Consolidated Financial Statements. (c) During September 1998, the Company recognized an extraordinary loss, net of a tax benefit of $67,000, related to the purchase of senior subordinated notes with a face amount of $5 million. See Note 5 to the Consolidated Financial Statements. (d) EBITDA represents income before extraordinary loss plus income tax expense, interest expense (net), depreciation and amortization. The Company believes that EBITDA provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flow from operations, as defined by generally accepted accounting principles and should not be considered as a substitute for net income as an indicator of the Company's operating performance or cash flow as a measure of liquidity. The definition of EBITDA presented herein differs from the definition of EBITDA in the Indenture. EBITDA has not been adjusted to reflect certain costs and expenses payable to related parties prior to fiscal 1996, which were substantially reduced as a result of the Recapitalization. (e) Adjusted EBITDA represents EBITDA (See Note (d) above), plus (i) for fiscal 1996, (A) moving expenses of approximately $320,000 incurred to relocate the Company's Consumers Product Division and (B) fees of approximately $980,000 for a consulting project related to process improvement and cash flow management and (ii) for fiscal 1998 (A) non-cash, non-
recurring charges related to inventory sold during the fourth quarter that had been written up by $3,367,000 at time of the acquisition in accordance with generally accepted accounting principles and (B) $3,521,000 of compensation expense recorded for amounts owed to employees of APE in connection with incentive compensation arrangements entered into as part of the APE acquisition. Adjusted EBITDA is presented because the Company believes that it provides useful information regarding the Company's ability to incur and service debt; however, Adjusted EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as a substitute for net income as an indicator of the Company's operating performance or cash flow as a measure of liquidity. (f) Working capital represents consolidated current assets less consolidated current liabilities. (g) The Company's fiscal 1994 balance sheet includes indebtedness of Holdings which has been accounted for as indebtedness of the Company under the "push-down" method of accounting. This debt was paid off on December 13, 1995. The "push-down" method requires that the debt of Holdings guaranteed and collateralized by the assets of the Company be treated for accounting purposes as debt of the Company.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's net sales grew from $121.7 million in fiscal 1996 to $172.0 million in fiscal 1998 primarily as a result of increased sales of the Company's performance-oriented pile fabrics and the acquisition of American Pacific Enterprises, Inc. ("APE") on October 2, 1998. The growth in sales of pile fabric came during 1993 through 1997. Sales of these fabrics were flat in 1998 compared to 1997. The sales growth that occurred in 1998 was primarily due to APE's results being included in the fourth quarter of 1998 and increased sales of household rugs in the Company's Consumer Products Division.
RECENT DEVELOPMENTS
On February 12, 1999, the Company acquired all of the outstanding shares of capital stock of Ex-Cell Home Fashions, Inc. ("Ex-Cell") for $43.2 million, subject to post-closing adjustment. In addition, approximately $6.9 million of debt of Ex-Cell was extinguished in connection therewith. Ex-Cell is engaged in the design, manufacture, importation and distribution of textile home furnishings, principally shower curtains, table linens and decorative pillows. Since the acquisition occurred subsequent to fiscal 1998, Ex-Cell's operating results are not included in the discussions below.
On October 2, 1998, the Company acquired all the capital stock of APE for approximately $39.1 million, including fees and expenses, subject to post-closing adjustments. In addition, approximately $16.6 million of indebtedness of APE was extinguished by the Company in connection therewith. APE is a leading designer, importer and marketer of decorative textile home furnishings, principally quilts and decorative bedding items. The Company believes that the acquisitions of APE and Ex-Cell will (i) expand its current product offerings to the large retailers whereby strengthening its relationships with key customers, (ii) further penetrate the specialty retailing segment and (iii) diversify product sourcing capabilities beyond North America.
On February 25, 1999, the Company's Board of Directors approved a plan to consolidate its manufacturing operations of the Fabric Division into its facilities located in North Carolina and Canada. In connection with this activity, the Company will be discontinuing operations at its leased Tennessee facility and will terminate substantially all of the associates at that facility. During the first quarter of fiscal 1999, the Company will record a charge against operations to cover the estimated costs associated with the closing of that facility including the cost of operating leases, the write-off of the related goodwill, the write-down of machinery and equipment to fair market value and severance and other personnel costs. The Company currently estimates these total charges to total approximately $12 million to $18 million.
RESULTS OF OPERATIONS
The following table sets forth selected results of operations expressed in millions of dollars and as a percentage of total net sales for fiscal years 1996, 1997 and 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales for the year ended January 2, 1999 were $172.0 million compared to $146.9 million for fiscal 1997. This increase of $25.1 million or 17.1% is primarily related to the purchase of APE which generated approximately $17.4 million in sales subsequent to October 2, 1998 as well as increased sales of household rugs which increased to $47.9 million from $39.8 million. The Fabric Division sales for 1998 were down slightly to $106.7 million from $107.1 million in fiscal 1997.
Gross profit for fiscal 1998 was $48.3 million or 28.1% of net sales compared to $48.8 million or 33.2% of net sales for the prior year. This decrease is attributable to lower operating results in the Fabric Division, as a result of increased overhead costs including increased levels of depreciation as a result of the Company's capital expenditure program. This decrease was partially offset by improvements in the Consumer Products Division. In addition, gross profit for APE was $3.2 million which was negatively impacted by approximately $3.4 million of costs associated with inventory sold during the fourth quarter of 1998 that had been written up at time of the acquisition in accordance with generally accepted accounting principles.
Operating expenses for fiscal 1998 increased to $32.9 million from $22.9 million for the prior year. Of this $10.0 million increase, APE's operating expenses totaled $8.0 million. APE's results include a $3.5 million charge for incentive compensation expense related to employees of APE based on 1998 earnings as outlined in the acquisition agreement. Operating expenses increased $ .8 million as a result of Glenoit Canada being included in a full year of operations. Other increases were primarily related to sales categories such as commissions and compensation costs.
Operating income decreased to $15.4 million for fiscal 1998 from $25.9 million in fiscal 1997. The Fabric Division's operating income declined $6.7 million to $21.1 million and was partially offset by the improved operating results in the Consumer Products Division which increased 11.5% to $7.5 million. In addition, as a result of the $6.9 million of charges for APE described above, APE reported an operating loss of $4.8 million since October 2, 1998.
Interest expense for fiscal 1998 was $13.9 million compared to $10.9 million for 1997. Interest expense has increased due to higher levels of debt and a higher effective borrowing rate relating to senior subordinated debt issued at the end of the first quarter of 1997 and the acquisition of APE during October 1998.
The Company recognized a loss of approximately $ .1 million, net of an income tax benefit, during September 1998 related to the purchase of Senior Subordinated Notes with a face amount of $5 million. The Company recorded an extraordinary loss on the early extingishment of debt of $2.9 million, net of an income tax benefit, related to the refinancing of the Company's debt which took place on April 1, 1997.
Net income for 1998 was $ .3 million compared to $6.0 million for the same period in the prior year based on the factors discussed above.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 increased to $146.9 million or 20.7% compared to $121.7 million for fiscal 1996. Fabric Division sales increased $27.7 million or 34.9% over prior year due to both increased unit volume in the Company's performance-oriented fabrics in sportswear and outerwear and an improved average selling price which reflects an improved sales mix over the prior year. Sales in the Fabric Division were also positively impacted by the acquisition made by Glenoit Canada which generated sales of $4.2 million from the acquisition date through January 3, 1998. Fabric Division sales offset a decline in sales in the Consumer Products Division which occurred primarily in the second quarter as a result of a unit volume shortfall as well as a promotional mix in the third quarter which yielded lower selling prices.
Gross profit for fiscal 1997 was $48.8 million or 33.2% of net sales compared with $35.2 million or 28.9% of net sales for the prior year. This increase of $13.6 million or 38.7% resulted from increased unit volume and higher average selling prices in the Fabric Division. The improved results in the Fabric Division were partially offset by the margin effect of a second quarter decline in sales volume and the third quarter promotional mix in the Consumer Products Division.
Operating expenses for fiscal 1997 were $22.9 million or 15.6% of net sales compared to $18.0 million or 14.8% of net sales in the prior year. Dollar increases over the prior year were primarily in sales related categories such as commissions and credit collection expense as well as the acquisition by Glenoit Canada which reported operating expenses of $.3 million. Accruals for pension, professional fees, and profit related compensation plans increased over the prior year.
Operating income was $25.9 million for fiscal 1997 compared to $17.2 million in the prior year. This increase, resulting from the factors described above, represents an increase of $8.7 million or 50.9%. The Fabric Division's operating income increased approximately 84% which was offset by a $1.4 million decline in operating income in the Consumer Products Division.
Interest expense in fiscal 1997 was $10.9 million compared to $9.1 million for the same period last year. Interest expense has increased due to higher levels of debt and a higher effective borrowing rate as a result of the issuance of the $100 million 11% Senior Subordinated Notes ("the Initial Offering").
Net income for fiscal 1997 was $6.0 million (including the effect of an extraordinary loss on early extinguishment of debt of $2.9 million, net of an income tax benefit, related to the refinancing of the Company's debt which took place at April 1, 1997) compared to $4.1 million for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on internally generated cash flow from operations, supplemented by borrowings under its senior credit facility and vendor financing to meet its debt service requirements, capital expenditures and working capital needs. The Company is highly leveraged.
On April 1, 1997, the Company issued $100 million of senior subordinated notes (the "Notes"). Concurrently with the issuance of the Notes, the Company entered into a $70 million senior credit facility ("the New Credit Facility") with a syndicate of lenders led by Banque Nationale de Paris ("BNP"), pursuant to which the Company obtained available credit (i) up to $45.0 million for working capital and general corporate purposes (the "Working Capital Commitment"), subject to a Borrowing Base, and (ii) up to $25.0 million for acquisitions (the "Acquisition Commitment"). The Company also prepaid all outstanding indebtedness under the Old Facility. On October 2, 1998, the New Credit Facility was amended to increase the Acquisition Commitment to $76 million. On October 2, 1998, the Company borrowed approximately $55.7 million under the Acquisition Commitment in connection with the acquisition of APE. At January 2, 1999, there were borrowings of $15.0 million under the Working Capital Commitment and approximately $17.9 million available to borrow under the Working Capital Commitment and up to $20.3 million under the Acquisition Commitment. A more detailed description of the Notes and the New Credit Facility may be found in the notes to consolidated financial statements. In connection with the acquisition of Ex-Cell on February 12, 1999, the Company amended the New Credit Facility and increased total borrowings available to $200 million. This increased borrowing availability consists of the following (i) up to $90.0 million for working capital and general corporate purposes, subject to a Borrowing Base, (ii) $40.0 million Term A loan and (iii) $70.0 million Term B loan. Principal payments on the Term A and Term B loans begin in September 1999 and total $3.4 million during fiscal year 1999.
Principal and interest payments in respect of the Notes and the New Credit Facility will represent significant liquidity requirements for the Company. In addition, the Company will be permitted (but will not be obligated) to make certain payments to Holdings, including payments (i) in respect to certain amounts of principal and interest of the Seller Notes, (ii) to cover certain administrative and operating expenses of Holdings and (iii) to cover certain tax liabilities allocable to the Company, subject in each case to certain conditions as described in the Notes and the New Credit Facility.
The Company believes that cash generated from operations, together with vendor financing and amounts available under the New Credit Facility, will be adequate to meet its debt service requirements, capital expenditures and working capital needs for the foreseeable future, although no assurance can be given in this regard. The Company's future operating performance and ability to service or refinance the Notes and to extend or refinance its other indebtedness will be subject to future economic conditions and to financial, business and other factors beyond the Company's control.
Holdings is a holding company and as a result does not have any substantive assets or operations that generate revenues or cashflows. Accordingly, Holdings relies on the Company's distribution of dividends to meet its obligations, including interest and principal payments. As of January 2, 1999, Holdings has obligations with a face amount of $29.2 million, bearing interest at stated rates between 5% to 12.5%, to shareholders with principal due in 2004 and 2005. For further discussion see Note 11 of the Consolidated Financial Statements.
On March 5, 1997, the Company declared a dividend and issued a note in the amount of approximately $5.8 million to a shareholder of Holdings in satisfaction of a contingent earnout obligation of Holdings as discussed in Note 9 to the Consolidated Financial Statements.
In July 1998, Holdings settled a dispute regarding additional purchase price owed to a shareholder associated with the recapitalization in December 1995 discussed in Note 9 to the Consolidated Financial Statements. Accordingly, Holdings paid approximately $1.9 million to the shareholder during July 1998. These funds were paid to Holdings by the Company as a dividend.
During September 1998, the Company acquired $5 million of the Notes in the open market. These Notes were subsequently retired. In connection with this transaction, the Company recorded an extraordinary loss of approximately $117,000, net of a tax benefit, which consisted of the write off of a pro rata share of deferred financing costs associated with the Notes.
During fiscal 1998, net cash provided by operating activities was $17.8 million, which includes the impact of APE subsequent to October 2, 1998. Receivables decreased by $6.1 million, inventories and other assets decreased by $5.7 million. Accrued liabilities increased by $5.7 million, due primarily to compensation related costs including the amounts owed to APE employees as previously discussed. Accounts payable decreased by $4.4 million related to decreased raw material purchases and tax related accruals decreased $0.9 million.
During fiscal 1997, net cash provided by operating activities was $23.7 million. Accounts and other receivables decreased by $ 1.0 million, inventories and other current assets decreased by $2.1 million. Accrued liabilities increased by $3.2 million, due primarily to accrued interest on senior subordinated notes and profit related compensation plans. Accounts payable increased by $2.1 million and "Due to Holdings" increased $ .9 million related to accrued federal taxes.
During fiscal 1996, cash provided by operating activities was $6.4 million. Changes in operating assets resulted in a use of $0.5 million. Increases in receivables and a decrease in payables required $2.3 million and $3.0 million, respectively. Cash was provided by changes in accrued expenses of $1.3 million, changes in inventories and prepaid expenses totaling $1.0 million and a change in the amount "Due to Holdings" of $2.6 million.
CAPITAL IMPROVEMENTS
Capital expenditures for fiscal 1998 totaled $17.9 million. These additions were primarily to increase capacity in the Fabric Division as well as the Consumer Products Division. Expenditures were made for upgrades to Management Information System. Capital expenditures for the year ended January 3, 1998 were $19.6 million. These additions were primarily in the Fabric Division for additions of knitting and blending equipment to increase capacity as well as a plant expansion in Tarboro, N. C. Expenditures were also made for upgrades to management information systems. During fiscal 1996, the Company's capital expenditures were $1.7 million. These additions included upgrading equipment in the Fabric Division to accommodate the growth in micro-fiber products, as well as upgrading plant and equipment in the Consumer Products Division.
SEASONALITY
The Company's business is seasonal in nature. Generally, there is increased retail demand for garments and rugs during the fall (back-to-school) and December holiday selling seasons. Consequently, demand for the Company's products is generally higher during the Company's second and third fiscal quarters when such products are produced for these selling seasons.
INFLATION
The Company believes that inflation has not had a material impact on its results of operations for the three fiscal years ended January 2, 1999 due to the relatively low rates of inflation during this period.
IMPACT OF YEAR 2000 COMPLIANCE
The Company has evaluated its Year 2000 risk in three separate categories, information technology systems ("IT"), non-IT systems ("Non-IT") and third party relationships in which the Company has a material relationship ("Third Party Risk"). The Company has developed a plan in which the risks in each of these categories are being addressed and reviewed by the appropriate level of management as follows:
Due to conversions already in progress to improve operating performance, the Company believes that a failure of the IT system is unlikely and any possible failure would not result in a material adverse effect. Management expects the conversions and the review of its IT systems to be completed by June 1999 and, accordingly, a contingency plan for IT risks has not been developed. However, should the remaining review indicate a contingency plan is needed, the Company will react accordingly.
Non-IT systems involve embedded technologies such as microcontrollers or microprocessors. Examples of Non-IT systems include telephones, security systems and computer controlled manufacturing equipment. A malfunction in one of these areas could result in the Company not being able to manufacture and ship product on time to its customers. The Company's review of Non-IT systems is ongoing with expected completion by June 1999. To date, management believes the Non-IT risks are minimal. Any costs of addressing Non-IT risks are included in normal upgrade and replacement expenditures which were planned outside of the Company's Year 2000 review. Since these risks are believed to be minimal, a contingency plan for Non-IT risks has not
been developed. However, should the remaining review indicate a contingency plan is needed, the Company will react accordingly.
The Company's review of its Third Party Risk includes detailed reviews of critical relationships with suppliers and business partners, such as banking institutions and key raw material suppliers. The Third Party Risk review is ongoing and is expected to be completed by June 1999. The Company presently does not expect the risk associated with or costs of addressing the Company's Third Party Risk to be material.
The Company's greatest Year 2000 risk would manifest itself in a critical third party's system malfunction where the Company would suffer business interruption until the supplier or customer corrected the problem or an alternative supply was found. At this point in the Company's review, it is not aware of any potential situations which may cause this scenario to occur, but will formulate a contingency plan should its review indicate it is necessary to do so.
There can be no assurance that these conclusions will be achieved and actual results could differ from those anticipated. Specific factors that might cause differences include, but are not limited to, the ability of the third parties with which the Company has material relationships to modify or convert their systems to be Year 2000 compliant, the ability of the Company to complete its conversions on schedule, and similar uncertainties.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements concerning the Company's operations, economic performance and financial condition, including in particular, the likelihood of the Company's success in developing and expanding its business. These statements are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the Company, and reflect future business decisions which are subject to change. Some of these assumptions inevitably will not materialize, and unanticipated events will occur which will affect the Company's results. The forward looking statements in this Form 10-K are intended to be subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 (the "Safe Harbor Acts").
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk relates to changes in interest rates and foreign currency rates. The Company has not used derivative financial instruments. The Company's borrowings under its New Credit Facility bear interest rates based on either a floating Base Rate or the Eurodollar Rate. As of January 2, 1999, the Company had $65.7 million outstanding under its New Credit Facility. The Company's other borrowings consist of $95.0 million of senior subordinated debt due on April 2007 at a fixed rate of 11%. As of January 2, 1999, the average interest rate on the borrowings under the New Credit Facility was 7.9%. The definitive extent of the Company's interest rate risk under the New Credit Facility is not quantifiable or predictable because of the variability of future interest rates and borrowing requirements.
The Company is exposed to foreign currency risk by virtue of its Canadian operations. However, less than 10% of its annual revenues are generated by this subsidiary. Canada has traditionally had a relatively stable currency and therefore the Company feels its exposure to significant adjustments in the Canadian currency to be minimal. Additionally, the Company's consolidated financial statements are denominated in U. S. dollars and, accordingly, changes in the exchange rate between U. S. dollars and Canadian dollars affect the operating results as well as stockholder's deficit. These adjustments, to date, have not been material to the Company's consolidated balance sheet.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements of Glenoit Corporation and Subsidiaries included herein and listed on the indices to the Consolidated Financial Statements and Financial Statement Schedule as set forth in Item 14 of this Form 10-K.
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
The following table sets forth the names, ages as of January 2, 1999, and a brief account of the business experience of each director and executive officer of the Company. Under the terms of the Stockholders Agreement (as defined), the board of directors of Holdings will be the same as the board of directors of the Company. See "Certain Relationships and Related Transactions--Stockholders Agreement." The Company's By-laws, provide that each director shall hold office for a term of one (1) year or until his or her successor is elected and qualified.
THOMAS J. O'GORMAN. Mr. O'Gorman has served as the President, Chief Executive Officer and a Director of the Company since 1991. Mr. O'Gorman has been in the textile industry since 1956 and has served as the General Manager of the Menswear Business of Milliken & Co.; President of Knit-Away; and President of the Denim, Corduroy and Blended Fabrics Divisions of Burlington Industries, Inc., and Burlington's International Denim operations headquartered in London. Subsequently, Mr. O'Gorman was the President and a Director of Greenwood Mills Marketing Company, Inc. Mr. O'Gorman has served on the Market Committee of the American Textile Manufacturers Institute and as a member of the Steering Committee of Crafted With Pride in the U.S.A. Council.
LARRY LEVINE. Mr. Levine joined the Company in 1991 as Vice President of Marketing for the Company's Fabric Division and was promoted to President of the Fabric Division in 1996. Mr. Levine previously served as the President of Fabric View Ltd., a textile and marketing company, and was a Vice President and a founder of Monterey Mills, Inc.
KEVIN R. KENNEDY. Mr. Kennedy joined the Company in 1997 as President and Chief Operating Officer of the Consumer Products Division. Prior to that, Mr. Kennedy served in various executive positions with Couristan, Inc., most recently as Executive Vice President of Sales and Marketing. Mr. Kennedy was also employed by Abraham & Strauss as a buyer for the area rug business and participated in A & S's executive management training program.
LESTER D. SEARS. Mr. Sears joined the Company in 1996 as Executive Vice President and Chief Financial Officer. From 1989 to 1996, Mr. Sears was the Executive Vice President, Chief Financial Officer and an equity owner of Perfect Fit Industries, Inc., a privately held company. Prior to 1989, Mr. Sears was employed in various positions including as Controller of the Consumer Products Division of Springs Industries, Inc.; Vice President and Controller of Mill Fabrics, Inc.; and as a certified public accountant for Deloitte, Haskins and Sells.
JOHN MOWBRAY O'MARA. Mr. O'Mara has been a management consultant and private investor since January 1990. From July 1990 to May 1993, he served as Chairman of the Executive Committee of Quality Care Systems, Inc., a provider of computer-based "expert" medical cost containment systems. From August 1988 through December 1989, Mr. O'Mara served as Chairman of the Board and Chief Executive Officer of Global Natural Resources, Inc. Prior to serving as Chairman of Global Natural Resources, Inc., Mr. O'Mara spent 22 years as an investment banker, serving most recently as Managing Director for Chase Securities Inc., a subsidiary of The Chase Manhattan Bank. Mr. O'Mara is a director of Baldwin & Lyons, Inc., Plantronics, Inc. and The Midland Company.
SALEEM MUQADDAM. Mr. Muqaddam has served as a Vice President of Citicorp Venture Capital, Ltd. ("CVC") and its affiliated investment companies since 1989. Previously he spent 15 years with Citibank, N.A. and its affiliates in senior management positions. Mr. Muqaddam is a director of Pamida Holdings Corporation, Plantronics, Inc., Chromcraft Remington Inc. and Fairwood Corporation.
ISAAC SCHAPIRA. Mr. Schapira has served as a director of Stirling Investment Holdings, Inc. since December 1994. In addition, Mr. Schapira is the President of Glenoit (U.K.) Limited, and has been in this position for over 15 years.
JOSEPH M. SILVESTRI. Mr. Silvestri has been a director of the Company since his appointment by CVC in 1994. Mr. Silvestri has been employed by CVC since 1990 and has been a Vice President since 1995. Mr. Silvestri served as Assistant Vice President of CVC from 1990 to 1995. Mr. Silvestri serves on the Board of Directors of International Media Group, Triumph Group, Polyfibron Technologies, Inc., The GNI Group, ISG Resources, Inc. and Euramax International, Inc.
COMPENSATION OF DIRECTORS
The Company's Board of Directors receive no compensation for their service as directors. Directors are reimbursed for their out-of-pocket expenses in connection with their travel to and attendance at meetings of the Board of Directors or committees thereof.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth certain information for the fiscal year ended January 2, 1999, concerning cash and non-cash compensation earned by the Chief Executive Officer and the three other most highly compensated executive officers of the Company whose combined salary and bonus exceeded $100,000 during such year.
(1) Employed as of September 1997
(2) Employed as of August 1996.
(3) Mr. Dale resigned from the Company effective as of July 1, 1997.
(4) In August 1997, Mr. O'Gorman was granted 1,286.211 options for restricted shares of Holdings' Class A common stock at an exercise price of $37,500. Mr. O'Gorman exercised the shares immediately. At the time of exercise, the Company estimated fair market value for the shares to be $220,287. See "Item 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Holdings owns 100% of the Company's common stock. The following table sets forth, as of January 2, 1999, certain information with respect to each class of Holdings Common Stock (as defined) beneficially owned by each director of the Company, all officers and directors of the Company as a group, and each person known to the Company to own beneficially more than 5% of Holdings Common Stock of any such class. Unless otherwise noted, the individuals have sole voting and investment power. As described under "Description of Capital Stock and Indebtedness of Holdings," certain classes of Holdings Common Stock are convertible into other classes of Holdings Common Stock. Except as noted in the footnotes to the table, the information in the table assumes no such conversion.
* Represents less than 1% (a) Includes shares held by Stirling Investment Holdings, Inc., a British Virgin Islands corporation (the "Seller"). Under Rule 13d-3 under the Exchange Act, Mr. Schapira is deemed to beneficially own shares held by the Seller. (b) Includes a warrant to purchase 2,412 shares of Class A or Class E Stock with an exercise price of $0.01 per share and an expiration date of December 14, 2003. (c) Includes a warrant to purchase 1,715 shares of Class A or Class B Stock with an exercise price of $0.01 per share and an expiration date of December 14, 2003. (d) CCT Partners II, L.P. is a Delaware limited partnership, the limited partners of which are employees of CVC. (e) Does not include shares held by CVC or CCT Partners II, L.P. that may be deemed to be beneficially owned by Messrs. Muqaddam and Silvestri. Messrs. Muqaddam and Silvestri disclaim beneficial ownership of shares held by CVC and CCT Partners II, L.P. Includes shares owned by Mr. Sears, Mr. Levine and Mr. Kennedy not reflected above.
Certain stockholders of the Company have entered into the Stockholders Agreement, which contains certain agreements relating to the composition of the board of directors of Holdings and its subsidiaries. See "Certain Relationships and Related Transactions--Stockholders Agreement."
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEBTEDNESS OF MANAGEMENT
In connection with the O'Gorman Agreement, Mr. O'Gorman received a loan in the amount of $300,000 from the Company. Pursuant to the O'Gorman Agreement, the loan bears a simple interest rate equal to the lowest rate in effect pursuant to the Treasury Regulations so as to preclude the loan from bearing imputed interest. The loan shall be due on the last day of the Employment Period (as defined therein) or shall be forgiven if Mr. O'Gorman is still employed by the Company on December 31, 2003. During March 1998, Mr. O'Gorman received a loan in the amount of $100,000 from the Company and created an unsecured note receivable. The unsecured note bears an interest rate of 4%.
During June 1998, Holdings sold three officers of the Company a total of 857.46 shares of Holdings Class A common stock for approximately $158,000. Holdings loaned the officers an amount equal to the shares price and created full recourse notes receivable secured by the issued shares.
STOCKHOLDERS AGREEMENT
Holdings is a party to a stockholders agreement dated December 14, 1995 (the "Stockholders Agreement") by and among Holdings, CVC, John Mowbray O'Mara ("O'Mara"), BNP, The Equitable Life Assurance Society of the United States ("Equitable"), the Seller, Soannes Investment Corp. ("Soannes"), Thomas J. O'Gorman and certain other parties thereto (collectively, the "Stockholders"), which contains certain agreements among the Stockholders relating to the composition of the board of directors of Holdings and its subsidiaries and limiting the manner and terms by which the Stockholders may transfer their shares of Holdings Common Stock or warrants to purchase Holdings Common Stock.
Pursuant to the Stockholders Agreement, the Board of Directors of Holdings will be composed at all times of five directors as follows: the Chief Executive Officer of Holdings; two directors appointed by CVC; one director appointed by O'Mara or the party that then holds the Holdings Common Stock owned by O'Mara on the date of the execution of the Stockholders Agreement; one director appointed by the Seller until such time as the Seller and Soannes together own less than 9.9% of the outstanding Holdings Common Stock, at which time the remaining director shall be appointed by the holders of a majority of the shares of Holdings Common Stock owned by the original parties to the Stockholders Agreement. The composition of the boards of directors of the Company and its subsidiaries shall be the same as the composition of the board of directors of Holdings.
RIGHTS OFFERING. The Stockholders Agreement provides the stockholders with the right to participate ratably, in accordance with their fully-diluted common equity ownership, in all additional offerings of Holdings Common Stock or preferred stock, if any, or of securities exercisable, convertible or exchangeable for or into Holdings Common Stock (other than certain offerings permitted by the Stockholders Agreement relating primarily to then outstanding options and warrants and a public offering of Holdings Common Stock having an aggregate value of at least $20 million).
RIGHT OF FIRST OFFER. If a Stockholder wishes to transfer any Holdings Common Stock or if BNP or Equitable wish to transfer their warrants, Holdings must first be given the opportunity to purchase all of Holdings Common Stock or warrants offered (but not less than all) at the same price and on the same terms as those proposed by the Stockholder transferee. Each other Stockholder may elect to purchase its pro rata share (but not less than all of its pro rata share) of Holdings Common Stock or warrants at the same price and on the same terms, but only in the event that Holdings does not exercise its right to purchase such Common Stock or warrants.
TAG ALONG RIGHTS. In the event that CVC proposes to sell Holdings Common Stock which would result in CVC, O'Gorman and certain related investors collectively owning less than 50% of the then outstanding Holdings Common Stock (other than in a registered public offering or other permitted transaction), the other Stockholders will have the option to participate in the proposed sale on the same terms and conditions as CVC, with the participating Stockholders each selling a pro rata number of shares.
SALE OF HOLDINGS. If the board of directors of Holdings and holders of a majority of the Holdings Common Stock then outstanding approve the sale of Holdings (an "Approved Sale"), each Stockholder has agreed to (i) consent to such sale and raise no objections against it, (ii) waive any dissenter's rights and other similar rights and (iii) if such Approved Sale includes the sale of Holdings Common Stock, each Stockholder will sell all of such Stockholder's Holdings Common Stock on the terms and conditions approved by the board of directors of Holdings and holders of the majority of the Holdings Common Stock then outstanding.
REGISTRATION RIGHTS AGREEMENT
Holdings is a party to a registration rights agreement (the "Holdings Registration Rights Agreement") by and among Holdings and the Stockholders. Pursuant to the terms of the Holdings Registration Rights Agreement CVC, BNP and Equitable have the right to require Holdings, at the sole expense of Holdings and subject to certain limitations, to register under the Securities Act all or part of the shares of Holdings Common Stock (the "Registrable Securities") held by them. CVC is entitled to demand three long-form registrations and unlimited short-form registrations, while BNP and Equitable are entitled to demand one long-form registration and unlimited short-form registrations; PROVIDED, HOWEVER, that no registration may be demanded within six months of the effective date of a previous demand registration. Additionally, CVC is entitled to demand one shelf registration.
All Stockholders are entitled to an unlimited number of "piggyback" registrations, with Holdings paying all expenses of the offering, whenever Holdings proposes to register its Common Stock under the Securities Act (except in the case of an initial public offering).
Pursuant to the Holdings Registration Rights Agreement, Holdings has agreed to indemnify all holders of Registrable Securities against certain liabilities, including liabilities under the Securities Act.
TAX SHARING AGREEMENT
Holdings, the Company and its domestic subsidiaries will be included in the consolidated United States federal income tax return of Holdings. Holdings, the Company and its domestic subsidiaries have entered into a Tax Sharing Agreement whereby the Company and its domestic subsidiaries will pay Holdings their respective pro rata share of the total consolidated tax liability, as set forth in the Tax Sharing Agreement. Under the Tax Sharing Agreement, the Company and its domestic subsidiaries are treated as separate tax groups for purposes of the agreement. The Tax Sharing Agreement provides that if the Company or its domestic subsidiaries has losses that are absorbed by the rest of the consolidated tax group, the Company, as the case may be, cannot carry those losses forward to offset its own future taxable income. In the event that the Company and its subsidiaries are included in a joint, combined, consolidated or unitary state or local income or franchise tax return with Holdings, the Company will make payments to Holdings in a manner consistent with that described above for federal tax purposes. Under the Indenture, the Company will be permitted to make payments to Holdings under the Tax Sharing Agreement; PROVIDED, HOWEVER, that certain amendments to the Tax Sharing Agreement will be required if more than a nominal amount of gross income is generated by Holdings or any subsidiary of Holdings.
IMPORTANCE OF B&D LICENSE AGREEMENT; CVC'S INTEREST IN B&D; POSSIBLE SALE OF B&D
A substantial majority of the products sold by the Consumer Products Division are manufactured, marketed and sold under a license agreement with B&D. See "Business--Licenses and Trademarks." Although the Company has the right to perpetually renew the license agreement for successive one-year terms (subject to certain conditions), the loss of this license or a deterioration in B&D's business could have a material adverse effect on the Company's business, financial condition and results of operations.
CVC, the Company's largest shareholder, has an interest in B&D as a result of CVC's purchase in 1991 of certain notes of Papercraft Corporation ("Papercraft"), the then-parent company of B&D, while Papercraft was the subject of a bankruptcy proceeding in the Western District of Pennsylvania. During the bankruptcy proceeding, a committee of certain other creditors of Papercraft (the "Committee") sought to have CVC's claim equitably subordinated to the claims of other creditors. In October 1995, the bankruptcy court denied the Committee's request for equitable subordination, but limited CVC's claim to the purchase price of the Papercraft notes (resulting in CVC receiving an 11% interest in the reorganized entity, which emerged from bankruptcy as BDK Holdings Inc. ("BDK")), rather than the face value of the notes (which would result in CVC receiving a 41% interest in BDK). CVC and the Committee appealed the bankruptcy court's decision. In August 1997, the district court reversed and remanded the bankruptcy court decision for further finding on the proper extent of subordination. The District Court's order was affirmed by the Federal Court of Appeals for the Third Circuit in November 1998. The matter is now before the bankruptcy court.
The Company believes that its relationship with B&D is excellent and has no reason to believe that the matters relating to CVC's interest in BDK or any sale of BDK will have a material adverse effect on the Company's business, financial condition or results of operations.
PART IV:
ITEM 14:
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
On October 16, 1998, the Company filed on Form 8-K information regarding the acquisition of the capital stock of American Pacific Enterprises, Inc. which occurred on October 2, 1998. On December 11, 1998, the Company filed on Form 8-K/A, an amendment to the October 16 filing, to include financial statements and proforma financial information with respect to the APE acquisition.
On February 26, 1999, the Company filed on Form 8-K information regarding the acquisition of the capital stock of Ex-Cell Home Fashions, Inc. which occurred on February 12, 1999.
(c) Exhibits
3.1 Certificate of Incorporation of Glenoit Corporation is hereby incorporated by reference to Exhibit 3.1 to Glenoit Corporation's Registration Statement on Form S-4 (Registration No. 333-42411) filed on December 16, 1997. 3.2 By-Laws of Glenoit Corporation are hereby incorporated by reference to Exhibit 3.2 to Glenoit Corporation's Registration Statement on Form S-4 (Registration No. 333-42411) filed on December 16, 1997. 3.3 Certificate of Incorporation of Glenoit Asset Corporation is hereby incorporated by reference to Exhibit 3.3 of Amendment No. 1 to Glenoit Asset Corporation's Registration Statement of Form S-4 (Registration No. 333-42411-01) filed February 4, 1998. 3.4 By-Laws of Glenoit Asset Corporation are hereby incorporated by reference to Exhibit 3.4 of Amendment No. 1 to Glenoit Asset Corporation's Registration Statement of Form S-4 (Registration No. 333-42411-01) filed February 4, 1998. 4.1 Indenture dated as of April 1, 1997 between Glenoit Corporation, the Subsidiary Guarantors (as defined therein) and United States Trust Company of New York is hereby incorporated by reference to Exhibit 4.1 to Glenoit Corporation's Registration Statement on Form S-4 (Registration No. 333-42411) filed on December 16, 1997. 4.2 Purchase Agreement dated as of March 26, 1997 among Glenoit Corporation, the Subsidiary Guarantors (as defined therein), Salomon Brothers Inc. and CIBC Wood Gundy Securities Corp. is hereby incorporated by reference to Exhibit 4.2 to Glenoit Corporation's Registration Statement on Form S-4 (Registration No. 333-42411) filed on December 16, 1997. 4.3 Registration Agreement dated as of March 26, 1997 among Glenoit Corporation, the Subsidiary Guarantors (as defined therein), Salomon Brothers Inc. and CIBC Wood Gundy Securities Corp. is hereby incorporated by reference to Exhibit 4.3 to Glenoit Corporation's Registration Statement on Form S-4 (Registration No. 333-42411) filed on December 16, 1997. 10.1 Second Amended and Restated Credit Agreement dated as of April 1, 1997 among Glenoit Corporation, the banks, financial institutions and other institutional lenders listed on the signature pages thereto as the Restatement Lenders, the Banque Nationale de Paris, as Administrative Agent for the Lender Parties (as defined therein) is hereby incorporated by reference to Exhibit 10.1 to Glenoit Corporation's Registration Statement on Form S-4 (Registration No. 333-42411) filed on December 16, 1997. 10.2 Supply Agreement dated February 1, 1997 by and between the Company and Sterling Fibers, Inc. is hereby incorporated by reference to Exhibit 10.2 of Amendment No. 1 to Glenoit Corporation's Registration Statement on Form S-4 (Registration No. 333-42411) filed on February 4, 1998. 10.3 Employment Agreement dated October 28, 1997 by and among the Company, Glenoit Universal, Inc. and Thomas J. O'Gorman is hereby incorporated to reference to Exhibit 10.3 of Amendment No. 1 to Glenoit Corporation's Registration Statement on Form S-4 (Registration No. 333-42411) filed on February 4, 1998. 10.4 Employment Agreement dated August 5, 1996 by and between the Company and Lester D. Sears is hereby incorporated by reference to Exhibit 10.4 of Amendment No. 1 to Glenoit Corporation's Registration Statement on Form S-4 (Registration No. 333-42411) filed on February 4, 1998.
10.5 Stockholders Agreement dated as of December 14, 1995 by and among Glenoit Universal, Inc., Citicorp Venture Capital, John Mowbray O'Mara, Banque Nationale de Paris, The Equitable Life Assurance Society of the United States, the Seller, Soannes Investment Corporation, Thomas J. O'Gorman and certain other parties thereto to is hereby incorporated by reference to Exhibit 10.5 of Amendment No. 1 to Glenoit Corporation's Registration Statement on Form S-4 (Registration No.333-42411) filed on February 4, 1998. 10.6 Second Amendment and Waiver to the Credit Agreement, dated October 2, 1998, among Glenoit Corporation, the banks, financial institutions and other institutional lenders parties to the Credit Agreement and Banque Nationale de Paris as Agent is hereby incorporated by reference to Exhibit 4.1 of Glenoit Corporation's Form 8-K filed on October 16, 1998. 10.7 Stock Purchase Agreement dated October 2, 1998 among Glenoit Corporation, American Pacific Enterprises, Inc., Steven J. Block, Jeffrey J. Block and Gregory D. Block is hereby incorporated by reference to Exhibit 2.1 of Glenoit Corporation's Form 8-K filed on October 16, 1998 10.8 Third Amendment and Waiver to the Credit Agreement, dated October 30, 1998, among Glenoit Corporation, the banks, financial institutions and other institutional lenders parties to the Credit Agreement and Banque Nationale de Paris as Agent. 10.9 Third Amended and Restated Credit Agreement, dated February 12, 1999, among Glenoit Corporation, the banks, financial institutions and other institutional lenders parties to the Credit Agreement and Banque Nationale de Paris as Agent is hereby incorporated by reference to Exhibit 4.1 of Glenoit Corporation's Form 8-K filed on February 26, 1999. 10.10 Stock Purchase Agreement dated February 12, 1999, among Glenoit Corporation, Ex-Cell Home Fashions, Inc., Arnold Angerman, Irving Angerman, Samuel Samelson and two trusts is hereby incorporated by reference to Exhibit 2.1 of Glenoit Corporation's Form 8-K filed on February 26, 1999. 21.1 Subsidiaries of Glenoit Corporation is hereby incorporated by reference to Exhibit 21.1 to Glenoit Corporation's Registration Statement on Form S-4 (Registration No. 333-42411) filed on December 16, 1997. 27.1 Financial Data Schedule.
(d) Schedules
Not applicable.
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, in the city of New York, state of New York, on March 31, 1999.
GLENOIT CORPORATION
By /S/ THOMAS J. O'GORMAN ---------------------- Thomas J. O'Gorman President, Chief Executive Officer and Director (principal executive officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas J. O'Gorman and Lester D. Sears his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (including his capacity as a director and/or officer of Glenoit Corporation to sign any and all amendments (including post-effective amendments) to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report and power of attorney have been signed by the following persons on behalf of the registrant on March 31, 1999 in the capacities indicated:
By /S/ THOMAS J. O'GORMAN ---------------------- Thomas J. O'Gorman President, Chief Executive Officer and Director (principal executive officer)
By /S/ LESTER D. SEARS ---------------------- Lester D. Sears Executive Vice President and Chief Financial Officer (principal financial and accounting officer)
By /S/ JOHN MOWBRAY O'MARA ---------------------- John Mowbray O'Mara Director
By /S/ SALEEM MUQADDAM ---------------------- Saleem Muqaddam Director
By /S/ ISAAC SCHAPIRA ---------------------- Isaac Schapira Director
By /S/ JOSEPH M. SILVESTRI ---------------------- Joseph M. Silvestri Director
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, in the city of New York, state of New York, on March 31, 1999.
GLENOIT ASSET CORPORATION
By/S/ THOMAS J. O'GORMAN ---------------------- Thomas J. O'Gorman President, Chief Executive Officer and Director (principal executive officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas J. O'Gorman and Lester D. Sears his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (including his capacity as a director and/or officer of Glenoit Corporation to sign any and all amendments (including post-effective amendments) to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Annual Report and power of attorney have been signed by the following persons on behalf of the registrant on March 31, 1999 in the capacities indicated:
By/S/ THOMAS J. O'GORMAN ---------------------- Thomas J. O'Gorman President, Chief Executive Officer and Director (principal executive officer)
By/S/ PETER J. WINNINGTON ----------------------- Peter J. Winnington Secretary and Vice President
By/S/ WILLIAM S. RYMER -------------------- William S. Rymer Treasurer
GLENOIT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................................
Consolidated Balance Sheets as of January 3, 1998 and January 2, 1999........................................................
Consolidated Statements of Income for the years ended January 4, 1997, January 3, 1998 and January 2, 1999...................
Consolidated Statements of Stockholder's Deficit for the years ended January 4, 1997, January 3, 1998 and January 2, 1999...................
Consolidated Statements of Comprehensive Income (Loss) for the years ended January 4, 1997, January 3, 1998 and January 2, 1999........
Consolidated Statements of Cash Flows for the years ended January 4, 1997, January 3, 1998 and January 2, 1999...................
Notes to Consolidated Financial Statements...............................
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors Glenoit Corporation
In our opinion, the consolidated balance sheets and the related consolidated statements of income, stockholder's deficit, comprehensive income (loss), and cash flows present fairly, in all material respects, the financial position of Glenoit Corporation and subsidiaries (the "Company"), a wholly-owned subsidiary of Glenoit Universal, Ltd., as of January 3, 1998 and January 2, 1999, and the results of their operations and their cash flows for the years ended January 4, 1997, January 3, 1998 and January 2, 1999, in conformity with generally accepted accounting principles. 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 of these financial statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers L.L.P.
Raleigh, North Carolina March 22, 1999
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.) CONSOLIDATED BALANCE SHEETS
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.) CONSOLIDATED BALANCE SHEETS
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.) CONSOLIDATED BALANCE SHEETS
YEARS ENDED --------------------------------------- JANUARY 4, JANUARY 3, JANUARY 2, 1997 1998 1999 ----- ----- ----
Net sales.......................... $121,750,833 $146,920,759 $172,042,207 Cost of sales...................... 86,525,495 98,061,440 123,696,704 ------------ ------------ ------------ Gross profit............... 35,225,338 48,859,319 48,345,503 ------------ ------------ ------------ Operating expenses: Selling........................ 10,262,349 12,309,451 15,024,758 Administrative................. 5,635,692 8,780,595 16,115,200 Research and development....... 2,146,627 1,842,639 1,736,106 ------------ ------------ ----------- Total operating expenses... 18,044,668 22,932,685 32,876,064 ------------ ------------ ----------- Income from operations............. 17,180,670 25,926,634 15,469,439 ------------ ------------ ----------- Other income (expense): Interest expense, net.......... (9,124,655) (10,938,341) (13,941,672) Amortization of deferred financing costs........................ (641,806) (645,621) (690,656) Other.......................... 52,932 (86,853) (147,624) ----------- ----------- ---------- Total other expense........ (9,713,529) (11,670,815) (14,779,952) ---------- ----------- ----------- Income before income taxes and extraordinary loss............... 7,467,141 14,255,819 689,487 Income tax expense................. 3,354,504 5,390,412 307,915 --------- --------- ------- Income before extraordinary loss... 4,112,637 8,865,407 381,572 Extraordinary loss on early extinguishment of debt, net of tax benefit of $1,527,000 for the year ended January 3, 1998 and $67,000 for the year ended January 2, 1999.................. - 2,856,884 117,236 ---------- ---------- ------- Net income......................... $4,112,637 $6,008,523 $ 264,336 ========== ========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT FOR THE YEARS ENDED JANUARY 4, 1997, JANUARY 3, 1998 AND JANUARY 2, 1999
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company has three main operating units: (1) Fabric Division, which manufactures apparel and automotive fabric; (2) Consumer Products Division, which manufacturers household rugs and (3) American Pacific Enterprise, Inc. ("APE") an importer and distributor of home textile products. The Company's manufacturing facilities are located in eastern North Carolina, eastern Tennessee and Ontario, Canada.
BASIS OF PRESENTATION
In September 1997, Glenoit Corporation's newly formed wholly-owned subsidiary, Glenoit Corporation of Canada ("Glenoit Canada"), acquired certain assets and liabilities of Collins & Aikman Canada, Inc. (see Note 3). On October 2, 1998, the Company acquired all the capital stock of American Pacific Enterprises, Inc. ("APE") (see Note 3). Accordingly, as of January 2, 1999, the consolidated financial statements presented include the amounts of Glenoit Corporation and its wholly-owned subsidiaries Glenoit Canada, Glenoit Asset Corporation and APE.
PRINCIPLES OF CONSOLIDATION
All material intercompany accounts and transactions are eliminated. The Company reports its operations on a fifty-two/fifty-three week fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH FLOW STATEMENTS
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. During 1996, the Company entered into a capital lease of $1,636,246, which is a noncash investing and financing activity. During 1998, the Company accrued approximately $8.5 million as additional purchase price of APE, which is a non-cash investing activity.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost; property, plant and equipment obtained through purchase business combinations is stated at estimated fair value as of the date of acquisition. Property and equipment under capital leases are initially recorded at the lower of the present value of the future minimum lease payments or the fair value of the related equipment.
Depreciation (which includes the amortization of capital leased assets) is computed using the straight-line method over the related asset's estimated useful life as follows:
Buildings and improvements............................... 20 to 40 years Machinery and equipment.................................. 5 to 12 years Computer equipment....................................... 3 to 5 years Furniture and equipment.................................. 3 to 12 years
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED LOAN COSTS
Deferred loan costs, primarily composed of loan origination costs and legal fees, are amortized over the term of the related loan agreement using the straight-line method.
INTANGIBLE ASSETS
Intangible assets principally represent the amount by which the costs of acquired net assets exceeded their related fair value (goodwill) as of the date of acquisition. Goodwill is being amortized on a straight-line basis over lives of twenty to twenty-five years. The carrying value of goodwill will be reviewed if the facts and circumstances suggest that it is impaired. If this review indicates that goodwill will not be recoverable as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company will adjust the carrying value of goodwill.
NET SALES
The Company generally recognizes a sale when title passes to the customer (usually at the date of shipment). Amounts which are determined to be uncollectible are charged to operating expense. Sales returns and allowances are recorded against sales based on management's estimates of sales returns. Where right of return exists under guaranteed sales arrangements, revenue is recognized when the products are sold by the retailer. One customer for each of the years ended January 4, 1997 and January 2, 1999 accounted for approximately 11% of consolidated net sales. No single customer accounted for greater than 10% of consolidated net sales during the year ended January 3, 1998.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
INCOME TAXES
The Company follows the asset and liability method of accounting for income taxes pursuant to Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
CONCENTRATION OF CREDIT RISK
The Company's principal financial instruments subject to potential concentration of credit risk are cash and cash equivalents and trade accounts receivable. The Company places cash deposits with federally insured financial institutions; however, at times deposits have exceeded the amounts insured by the Federal Deposit Insurance Corporation. The concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers and their dispersion across different geographic locations. Although the Company does not require collateral for unpaid balances, credit losses have been within management's expectations.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
On January 1, 1995, the Company adopted the provisions of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("FAS No. 107"). The Company's primary financial instruments subject to the provisions of FAS No. 107 are debt instruments. The fair values of these instruments are based on market quotations for similar instruments and present value calculations using market interest rates. As of January 3, 1998 and January 2, 1999, the Company estimates the fair value of its debt instruments to be approximately $108,000,000 and $155,000,000, respectively.
FOREIGN CURRENCY
Foreign currency activity is reported in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation" ("FAS No. 52"). FAS No. 52 generally provides that the assets and liabilities of foreign operations be translated at the current exchange rate as of the end of the accounting period and that revenues and expenses be translated using average exchange rates. The resulting translation adjustments arising from foreign currency translations are accumulated as a separate component of stockholder's deficit. Gains and losses resulting from foreign currency transactions are recognized in income.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Standards No. 130 "Reporting Comprehensive Income" ("SFAS No. 130") for its 1998 fiscal year. SFAS No. 130 requires the Company to display an amount representing the total comprehensive income for the period in a financial statement which is displayed with the same prominence as other financial statements. Upon adoption, all prior period data presented was restated to conform to the provisions of SFAS No. 130.
The Company adopted Statement of Financial Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131") for its 1998 fiscal year. SFAS No. 131 requires the Company to report selected information about operating segments in its financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers.
The Company adopted Statement of Financial Standards No. 132 "Employers' Disclosures about Pensions and Other Post Retirement Benefits ("SFAS No. 132") for its 1998 fiscal year. SFAS No. 132 revises the Company's disclosures about pension benefit plans, but does not change the measurement or recognition of expenses related to those plans.
The adoption of these accounting pronouncements did not have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 is effective for financial statements for all fiscal quarters of all fiscal years beginning after June 15, 1999. The Company intends to adopt SFAS No. 133 when required; however, SFAS No. 133 is not expected to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. RECAPITALIZATION
On December 13, 1995, Holdings completed a series of transactions in order to consummate a leveraged recapitalization (the "Recapitalization"). The Company obtained two new financing arrangements: an $80 million credit facility from a financial institution and a $15 million note from another financial institution. The Company used the proceeds from these borrowings to pay off all of the Company's outstanding debt as of December 13, 1995 and to terminate the Company's factor agreement. In addition, the Company paid a cash dividend of $40,486,261 to Holdings.
3. ACQUISITIONS
Effective August 30, 1997, Glenoit Corporation through Glenoit Canada, acquired certain assets and certain liabilities of Collins & Aikman Canada, Inc. for cash consideration of approximately $8.2 million. The acquisition has been accounted for as a purchase and, accordingly, the operating results of the acquired business have been included in the results of operations since the acquisition date. The purchase price allocation attributed approximately $3.4 million to net working capital items, approximately $4.4 million to property, plant and equipment and approximately $ .4 million to goodwill. For the year ended December 28, 1996, the acquired business had sales of approximately $11.6 million. Net income for the periods presented in the accompanying consolidated statements of income would not differ significantly on a pro forma basis adjusted for this acquisition.
On October 2, 1998, the Company acquired all the capital stock of American Pacific Enterprises, Inc. ("APE") for approximately $39.1 million, including fees and expenses, subject to post-closing adjustments. In addition, approximately $16.6 million of indebtedness of APE was extinguished by the Company in connection therewith. The purchase agreement also includes additional payments to the former owners and current employees of APE if certain earning targets for APE's operations are met during 1998 and 1999. For fiscal 1998, approximately $12.0 million will be paid to the former owners and current employees. Of this amount, $3.5 million, representing the amount to be paid to current employees, has been recognized as compensation expense. The remaining $8.5 million was recorded as additional purchase price. A portion of payments, if any, made based on 1999 earnings will be recorded as compensation expense during 1999. APE is a leading designer, importer and marketer of decorative textile home furnishings, principally quilts and specialty decorative bedding items. The acquisition has been accounted for as a purchase.
The initial purchase price allocation attributed approximately $31.8 million to net working capital items, approximately $1.3 million to property, plant and equipment and approximately $22.6 million to goodwill. Goodwill is being amortized over 25 years.
The following unaudited proforma summary of consolidated results of operations have been prepared as if the acquisition of APE occurred at the beginning of the periods presented. In connection with the allocation of purchase price, the Company wrote up APE's inventory by an estimated $3.4 million. This write-up of inventory negatively impacted gross margin during the Company's fourth quarter of 1998 as this inventory was sold. This one-time nonrecurring adjustment of $2.0 million, net of tax, is not reflected in the proforma results presented below. The 1998 proforma operating results below reflect $3.5 million of compensation expense related to the consideration paid to employees of APE as previously discussed. The unaudited proforma operating results for the year ended January 3, 1998 also reflect the issuance of the Senior Subordinated Notes as of the beginning of the fiscal year.
YEARS ENDED ----------- JANUARY 3, JANUARY 2, 1998 1999 ---- ---- (Unaudited)
Net sales.................................. $204,800,000 $225,400,000 ============ ============ Income before extraordinary item........... 9,800,000 5,000,000 ========= ========= Net income................................. 9,800,000 4,900,000 ========= =========
These unaudited pro forma results do not purport to be indicative of the results that would have actually been obtained if APE had been acquired as of January 4, 1997 or results of future periods.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVENTORIES
Inventories are summarized as follows:
JANUARY 3, JANUARY 2, 1998 1999 ---- ----
Raw materials................................ $2,082,516 $2,843,387 Work-in-progress............................. 1,516,899 1,933,812 Finished goods............................... 3,332,857 14,956,843 ---------- ---------- Total Inventories........................ $6,932,272 $19,734,042 ========== ===========
5. LONG-TERM DEBT
As of January 3, 1998 and January 2, 1999 long-term debt consisted of the following:
January 3, January 2, 1998 1999 ---- ----
Senior credit facility........... $2,000,000 $65,707,499 11% Senior subordinated notes ... 100,000,000 95,000,000 ------------ ------------ Total long-term debt......... $102,000,000 $160,707,499 ============ ============
On April 1, 1997, the Company issued $100,000,000 of senior subordinated notes (the "Senior Subordinated Notes") in a private placement bond offering. The Senior Subordinated Notes bear interest at a fixed rate of 11% and mature on April 15, 2007. The Company at its option, can prepay these notes at a price of 105.5% of the original principal amount, beginning on April 15, 2002. The premium declines by 1.833% thereafter each year beginning on April 15 until reduced to the original principal amount. Additionally, prior to April 15, 2000, the Company may redeem in the aggregate up to 25% of the original aggregate principal amount with the proceeds of one or more Public Equity Offerings, as defined in the Indenture governing the Senior Subordinated Notes, at a redemption price of 110% of the original principal amount. Upon a Change of Control of the Company, as defined in the Indenture governing the Senior Subordinated Notes, the holder of a Senior Subordinated Note may require the Company to redeem the note at a price of 101% of the principal amount. Interest is payable semi-annually, and began on October 15, 1997.
During September 1998, the Company acquired $5 million of the Senior Subordinated Notes in the open market. These notes were subsequently retired. In connection with this transaction, the Company recorded an extraordinary loss of approximately $117,000, net of a tax benefit, which consisted of the write off of a pro rata share of deferred financing costs associated with the issuance of the Senior Subordinated Notes.
On April 1, 1997, the Company also entered into a $70 million senior credit facility (the "Facility") with a financial institution. Of the total commitment of $70 million under the Facility, $25 million is designated as an Acquisition Commitment and $45 million as a Working Capital Commitment, which is a revolving credit facility limited to the Borrowing Base as defined in the Facility. On October 2, 1998, the Facility was amended to increase the Acquisition Commitment to $76 million. On October 2, 1998, in connection with the acquisition of APE, discussed in Note 3, the Company borrowed approximately $55.7 million under the Acquisition Commitment of which $5 million was repaid during December, 1998. The Company may borrow under the Acquisition Facility through December 31, 1999. The bank also extended up to a total of $5 million in letters of credit to the Company; however, the amount is limited to the amount of the unused Working Capital Commitment. At January 2, 1999, the Company had $15.0 million outstanding under the Working Capital Commitment, and approximately $17.9 million available under the Working Capital Commitment and up to $20.3 million available under the Acquisition Commitment.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG TERM DEBT (CONTINUED)
At the option of the Company, the Company may designate advances under the Facility to bear interest at the Base Rate, as defined in the Facility, plus 1% for an Acquisition Commitment Advance and .5% for a Working Capital Commitment Advance or the Eurodollar Rate plus 2.5% for an Acquisition Commitment Advance or 2% for a Working Capital Commitment Advance. The Company must pay a commitment fee equal to five eighths of one percent per year of the unused Acquisition Commitment and one half of one percent per year of the unused Working Capital Commitment. Additionally, the Company must pay a letter of credit fee of two percent per year of the average available amount under the letters of credit for each quarter such letters of credit are outstanding. All interest, commitment fees and letter of credit fees under the Facility are payable quarterly and began on June 30, 1997. The principal balance of the Acquisition Commitment is repayable quarterly commencing on March 31, 2000 in amounts equal to one-twentieth of the aggregate principal balance then outstanding, with the balance due on December 31, 2001. The Working Capital commitment is due on December 31, 2001.
Prior to December 31, 1999, the Company may be required to prepay the Acquisition Commitment and Working Capital Commitment in amounts equal to the Net Cash Proceeds of the sale of assets, stock, debt securities or any other Net Cash Proceeds, as defined by the Facility. The Acquisition and Working Capital Commitments would then be permanently reduced by such payment.
As further discussed in Note 12, the Company acquired all outstanding shares of capital stock of Ex-Cell Home Fashions, Inc. on February 12, 1999. In connection with that acquisition, the Company amended and restated the Facility to increase the borrowing availability to $200 million. This additional availability is comprised of (i) $90.0 million as the Working Capital Commitment, subject to the Borrowing Base as defined, (ii) $40.0 million Term A loan and (iii) $70.0 million Term B loan. The borrowings under both the Working Capital Commitment and Term A loan bear interest at the Base Rate plus 1.75% or the Eurodollar Rate plus 3.00%. Advances under the Term B loan bear interest at the Base Rate plus 2.50% or the Eurodollar Rate plus 3.75%. Beginning in July 1999, the interest rate charged on the Term A and Working Capital Commitment borrowings could decrease by .5% if certain financial ratios are met. Principal payments on the Term A and Term B loans begin on September 30, 1999 at a total of $1.7 million per quarter and increase over the lives of the loans. Borrowings under the Term A loan and Working Capital Commitment are required to be fully repaid by December 31, 2003 and borrowings under the Term B loan are required to be fully repaid by June 30, 2004. On the date of the Ex-Cell acquisition, the Term A and Term B loans were fully drawn.
The Facility and Senior Subordinated Notes have various covenants that require the Company to: maintain key financial ratios, restrict corporate borrowings, limit the Company's ability to pay dividends, limit the type and amount of certain investments which may be undertaken by the Company, limit the Company's disposition of assets, limit the Company's ability to enter into operating and capital leases, and restrict the Company's ability to issue shares of its stock.
Substantially all of the Company's assets and operations are pledged as collateral for the Facility. Holdings and Glenoit Asset Corporation have guaranteed the Company's obligations under the Facility. Holdings and Glenoit Asset Corporation have no substantive assets or operations and rely on the Company to fund their obligations.
The Senior Subordinated Notes are fully and unconditionally guaranteed, on a joint and several basis, by Glenoit Asset Corporation and, as of October 2, 1998, APE. Glenoit Asset Corporation's operations consist solely of leasing certain trademarks and other intangibles to Glenoit Corporation. Accordingly, Glenoit Asset Corporation's assets and operations consist primarily of intercompany assets and operations with Glenoit Corporation. Glenoit Canada has not guaranteed the Senior Subordinated Notes. Prior to the formation of Glenoit Canada in June 1997, all of Glenoit Corporation's wholly-owned subsidiaries fully and unconditionally guaranteed the Senior Subordinated Notes. For periods prior to the formation of Glenoit Canada, the Company had no independent operations or assets other than its investment in its subsidiaries. The financial information of the subsidiary guarantors for these periods has been excluded because management believes that this information is not material to investors. Prior to the acquisition discussed in Note 3, Glenoit Canada had no operations.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. LONG TERM DEBT (CONTINUED)
The following tables present summarized balance sheet information of Glenoit Corporation, Glenoit Asset Corporation, American Pacific Enterprises, Inc. and Glenoit Canada as of January 2, 1999 and the related summarized operating statement and cash flow statement information for the period then ended. The Company believes that separate financial statements and other disclosures regarding Glenoit Asset Corporation and APE, the sole subsidiary guarantors of the Senior Subordinated Notes, are not material to investors. Summarized balance sheet information, in thousands, as of January 2, 1999 is as follows:
Summarized operating statements information, in thousands, for the year ended January 2, 1999 is as follows:
Summarized cash flow statement information, in thousands, for the year ended January 2, 1999 is as follows:
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. LONG TERM DEBT (CONTINUED)
Summarized balance sheet information, in thousands, as of January 3, 1998 is as follows:
Summarized operating statements information, in thousands, for the year ended January 3, 1998 is as follows:
Summarized cash flow statement information, in thousands, for the year ended January 3, 1998 is as follows:
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. LONG TERM DEBT (CONTINUED)
On April 1, 1997, the Company utilized the proceeds from the 11% Senior Subordinated Notes to retire the Company's existing debt with financial institutions, which included the balance of an $80 million senior credit facility (the Term A and B Notes and the working capital line of credit) (the "Old Facility") and a $15 million 12.5% Senior Subordinated Note payable (the $15 Million Senior Subordinated Note"). Additionally, on April 1, 1997, the Company retired a note to a shareholder of Holdings in the amount of approximately $5.8 million. As a result of the Company's payoff of these obligations, the Company charged to earnings $2,884,000 of net deferred loan costs and a $1,500,000 prepayment penalty related to the $15 million Senior Subordinated Note. During the first quarter of 1997, the Company recognized an extraordinary loss from the early extinguishment of debt of $2,857,000, which is net of a tax benefit of $1,527,000 related to these charges.
During the years ended January 4, 1997, January 3, 1998 and January 2, 1999, the Company paid $8,730,000, $9,017,000, and $13,570,000, respectively, in cash for interest.
6. LEASES
The Company leases certain equipment and facilities under operating leases that expire through August 2007. Rent expense was $3,640,000, $ 4,075,000 and $4,410,000 during the years ended January 4, 1997, January 3, 1998 and January 2, 1999, respectively.
As of January 2, 1999, future minimum rental payments required under operating leases that have initial or remaining noncancelable terms in excess of one year are as follows:
1999 $3,293,000 2000 3,172,000 2001 2,282,000 2002 1,517,000 2003 664,000 Thereafter................................................. 2,177,000 --------- Total minimum lease payments........................... $13,105,000 ===========
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
The provision, including tax benefits on extraordinary losses, for federal, state and foreign income taxes consist of the following components:
JANUARY 4, JANUARY 3, JANUARY 2, 1997 1998 1999 ---- ---- ---- Current: Federal .... $ 3,260,957 $ 2,867,333 $ 1,157,800 State ...... 371,943 891,521 (412,308) Foreign .... - 186,339 248,805 ----------- ----------- ----------- 3,632,900 3,945,193 994,297 ----------- ----------- ----------- Deferred: Federal .... (263,662) 730,402 (483,903) State ...... (14,734) (812,183) (294,311) Foreign .... - - 24,832 ----------- ----------- ----------- (278,396) (81,781) (753,382) ----------- ----------- ----------- Total .. $ 3,354,504 $ 3,863,412 $ 240,915 =========== =========== ===========
The 1997 and 1998 provisions for federal and state income taxes has been allocated to income before income taxes and extraordinary loss, and the extraordinary loss on early extinguishment of debt. Included in earnings before tax expense are foreign earnings of $517,000 and $760,000 in fiscal 1997 and 1998, respectively.
A reconciliation of the provision for income taxes to the federal statutory rate of 34% is as follows:
Undistributed earnings of the Company's foreign subsidiary amounted to approximately $815,000 at January 2, 1999. These earnings are considered to be indefinitely reinvested and, accordingly, no U. S. federal and state income taxes have been provided. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to additional income taxes.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the tax effects of differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The significant components of the Company's deferred tax assets and liabilities at January 3, 1998 and January 2, 1999 are as follows:
JANUARY 3, JANUARY 2, 1998 1999 ---- ---- Deferred tax assets: Capital loss carryforwards.................... $ 416,440 $ 431,723 Accrued liabilities........................... 305,778 1,963,663 Asset valuation allowances.................... 179,500 221,132 State net operating losses.................... 561,430 763,331 Inventory..................................... - 562,810 Other ........................................ 139,554 71,503 ---------- ---------- Gross deferred assets......................... 1,602,702 4,014,162 Valuation allowance........................... (416,440) (431,723) ---------- ---------- Deferred tax assets........................... 1,186,262 3,582,439 Less: Noncurrent portion..................... (409,702) (601,133) ---------- ---------- Current deferred tax assets................... $776,560 $2,981,306 ---------- ----------
Deferred tax liabilities: Depreciation and amortization................. $2,248,599 $3,926,856 Other ........................................ 91,797 56,335 ---------- ---------- Deferred tax liabilities...................... 2,340,396 3,983,191 Less: Noncurrent deferred tax asset.......... (409,702) (601,133) ---------- ---------- Noncurrent deferred tax liability............. $1,930,694 $3,382,058 ========== ==========
A deferred tax asset is required to be recognized for the tax benefit of deductible temporary differences and net operating loss carryforwards. A valuation allowance is recognized if it is more likely than not that some or all of the deferred tax asset will not be realized. The valuation allowance was provided for the charge-off of an investment in 1993 which is a capital loss realizable as an offset against capital gains in future periods. Since September 1997, the Company has generated net operating losses of approximately $15.4 million at the state level.
The Company and Holdings have entered into a Tax Sharing Agreement whereby the Company will pay Holdings its respective pro rata share of the total federal consolidated tax liability or receive its respective pro rata share of the total consolidated federal tax refund, as set forth in the Tax Sharing Agreement. Under the Tax Sharing Agreement, the Company and Holdings are treated as separate tax groups.
During 1998, the Company settled the previously outstanding examination and assessment that resulted from the Internal Revenue Service's ("IRS") review of the Company's and Holding's income tax returns for January 1, 1994 and December 31, 1994. The Company paid approximately $798,000 in tax, penalty and interest in connection with this settlement.
The Company's state income tax returns for the years ended January 1, 1994 and December 31, 1994, have been examined by the New York Department of Finance. In April 1997, the New York Department of Finance assessed taxes and interest in the amount of approximately $130,000. The Company is currently in the process of responding to the New York Department of Finance and believes that any potential settlements will be within amounts accrued.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES (CONTINUED)
Holdings has an indemnification agreement with a shareholder with respect to certain tax obligations. While tax obligations are the expense and liability of the Company and Holdings, the indemnification agreement provides for an additional contribution of capital to Holdings from this shareholder via reductions of long-term obligations due the shareholder from Holdings.
During the years ended January 4, 1997, January 3, 1998 and January 2, 1999, the Company paid $2,952,000, $ 2,033,000 and $1,150,000, respectively, in cash for taxes.
8. EMPLOYEE BENEFIT PLANS
The Company has a non-contributory defined benefit pension plan covering substantially all employees located in its North Carolina and New York operations hired prior to May 1, 1997. This plan also includes the salaried employees located in the Tennessee operation hired prior to May 1, 1997. Glenoit Canada maintains a defined benefit plan for substantially all of its hourly employees. The benefits for both plans are based on years of service and the employee's compensation during the years of credited service. The Company's policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Assets of the plans are managed by a trustee and invested in marketable securities, money market instruments and mutual funds.
YEARS ENDED JANUARY 3, JANUARY 2, Change in Benefit Obligation: 1998 1999 ---- ---- Benefit obligation at beginning of year........... $11,022,900 $11,931,128 Service cost....................................... 512,293 679,609 Interest cost...................................... 757,142 894,151 Actuarial losses/(gains)........................... 246 1,555,994 Benefits paid...................................... (361,453) (425,508) ----------- ----------- Benefit obligation at end of year..................$11,931,128 $14,635,374 =========== ===========
Change in plan assets: Fair value of plan assets at beginning of year.....$10,304,734 $12,100,951 Actual return on plan assets....................... 1,585,410 1,160,288 Company contributions.............................. 572,260 601,939 Benefits paid...................................... (361,453) (425,508) ----------- ----------- Fair value of plan assets at end of year.......... $12,100,951 $13,437,670 =========== ===========
Funded status of the plans: Funded status at end of year...................... $169,823 $(1,197,704) Unrecognized transition asset .................... (210,983) (96,504) Unrecognized prior service cost................... 322,825 250,976 Unamortized net actuarial (gains) losses.......... (408,170) 927,737 ----------- ----------- Accrued benefit cost.............................. $(126,505) $(115,495) =========== ===========
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
A weighted average discount rate of 7.5% and 6.75% for 1997 and 1998, respectively, and a 4.5% rate of increase in future compensation levels was used in determining the actuarial present value of the projected benefit obligations for both 1997 and 1998. The expected long-term rate of return of pension plan assets was 8% for both 1997 and in 1998.
In 1995, the Company established a defined contribution plan (the "Plan") for all hourly employees in Tennessee. Under the Plan, the Company must contribute 2.5% of employee salaries to the Plan each plan year. Contributions were approximately $20,000, $65,000 and $75,000 during the years ended January 4, 1997, January 3, 1998 and January 2, 1999, respectively. In 1997, the Company established a defined contribution plan (the "1997 Plan") for all other domestic employees not covered by the Plan. Under the 1997 Plan, the Company matches contributions made by the employees at 50% up to a maximum of 3% of the employee's earnings. Contributions made by the Company were approximately $240,000 and $325,000 during 1997 and 1998, respectively. Amounts contributed under the Plan and the 1997 Plan are invested by a trustee in a variety of investment options, including marketable securities and mutual funds. In connection with the acquisition of Glenoit Canada, the Company established a defined contribution plan for salaried employees in which Company contributions are based on years of service. Total contributions made by the Company were approximately $14,000 and $35,000 during 1997 and 1998, respectively.
9. RELATED PARTY TRANSACTIONS
The Company has an unsecured 4% note receivable from an officer with a face amount of $300,000. The note will be forgiven by the Company under certain circumstances and, accordingly, the Company is recognizing compensation expense over the term of the note, which is expected to be December 31, 2005. The unamortized balance at January 3, 1998 and January 2, 1999 was $187,500 and $163,500 respectively.
During the year ended January 4, 1997, the Company paid a total of approximately $175,000 to companies under common ownership and related parties for management and consulting fees. During the years ended January 3, 1998 and January 2, 1999, the Company paid $200,000 each year to related parties for management and consulting fees.
All expenses of the Company are reflected in the Consolidated Financial Statements. No costs are incurred by Holdings on behalf of the Company. As discussed in Note 7, the Company has a tax sharing agreement with Holdings whereby the Company will pay Holdings its respective prorata share of the total federal consolidated tax liability or receive its respective prorata share of the total federal consolidated tax refund. The impact to the Company is recorded in the "Due to Holdings" account.
On March 5, 1997, the Company declared a dividend and issued a note in the amount of approximately $5.8 million to a shareholder of Holdings in satisfaction of a contingent earnout obligation of Holdings related to the Recapitalization discussed in Note 2. This note contained a mandatory prepayment provision which required the Company to retire the Note and accrued interest as of the date of a bond offering of the Company. On April 1, 1997, the Company retired the Note with proceeds from the bond offering described in Note 5.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
On June 14, 1997, the Company declared a dividend in the amount of $1.6 million to enable Holdings to exercise an option to repurchase shares of Holdings' common stock and to repay a note due to a shareholder of Holdings. This transaction was related to the Recapitalization discussed in Note 2. Additionally, as part of the same transaction the Company made a loan of $931,263 to an officer at an interest rate of prime plus .5%. The principal and interest were repaid in full on August 12, 1997.
In August 1997, Holdings granted an officer of the Company 1,286.211 options for shares of Holdings' Class A common stock at an exercise price of $37,500 in the aggregate. The officer exercised the options immediately; however, the stock is restricted and subject to certain vesting requirements. On December 30, 1997, Holdings removed all vesting requirements and the Company recorded non-cash compensation expense of approximately $200,000 during the fourth quarter of 1997.
In March 1998, the Company loaned an officer $100,000 and created an unsecured note receivable. During June 1998, Holdings sold three officers of the Company a total of 857.46 shares of Holdings' Class A common stock for approximately $158,000. Holdings loaned the officers an amount equal to the sales price and created full recourse notes receivable secured by the issued shares. In connection with the stock issuance, the Company recorded non-cash compensation expense of $100,000.
In July 1998, Holdings settled a dispute regarding additional purchase price owed to a shareholder associated with the recapitalization in December 1995. Accordingly, Holdings paid approximately $1.9 million to the shareholder during July 1998. These funds were paid to Holdings by the Company as a dividend.
10. OPERATING SEGMENTS
DESCRIPTION OF SEGMENTS
Subsequent to the APE acquisition, the Company has three operating divisions: (1) Fabric Division ("Fabric"), manufacturer and distributor of fabric for the apparel, automotive and home furnishing industries, (2) Consumer Products Division ("CPD"), manufacturer and distributor of household rugs to large discount retailers and specialty retailers and (3) APE, designer, importer and distributor of decorative textile home furnishings, principally for the bedroom, to all major specialty and broadline retail distribution channels.
MEASUREMENT OF SEGMENT PROFIT
The Company evaluates performance and allocates resources based on operating income of each division. The accounting policies of the reportable segments are the same as described in Note 1 and exclude any costs associated with the Company's corporate administrative and finance functions.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. OPERATING SEGMENTS (CONTINUED)
FACTORS MANAGEMENT USED TO IDENTIFY THE REPORTABLE SEGMENTS
The Company's reportable segments are business units that offer different products and each are managed separately. The following tables present operating results and other financial information utilized by management in analyzing each operating division. All amounts are in thousands.
Fiscal Years 1996 1997 1998 ---- ---- ---- Net Sales Fabric ................. $ 79,435 $ 107,142 $ 106,679 CPD .................... 42,316 39,779 47,940 APE .................... 0 0 17,423 --------- --------- --------- Consolidated ................ $ 121,751 $ 146,921 $ 172,042 ========= ========= =========
Operating income (loss) Fabric ................. $ 15,101 $ 27,815 $ 21,162 CPD .................... 8,170 6,751 7,525 APE .................... 0 0 (4,792) Corporate/Other ........ (6,090) (8,639) (8,426) --------- --------- --------- Consolidated ................ $ 17,181 $ 25,927 $ 15,469 ========= ========= =========
Depreciation and amortization Fabric ................. $ 994 $ 1,535 $ 3,452 CPD .................... 604 743 843 APE .................... -- -- 331 Corporate/Other ........ 1,499 1,584 1,790 --------- --------- --------- Consolidated ................ $ 3,097 $ 3,862 $ 6,416 ========= ========= =========
As of Fiscal Year Ended 1997 1998 ---- ---- Inventory and accounts receivable Fabric .......... $20,601 $13,500 CPD ............. 7,547 11,684 APE ............. -- 24,216 ------- ------- Consolidated ......... $28,148 $49,400 ======= =======
Note 5 identifies sales and assets of the Company's Canadian operation. There were no other material sales or assets outside of the United States.
MAJOR CUSTOMERS
During fiscal 1996, a single customer of the Fabric Division had net sales of approximately $12.3 million. During fiscal 1998, a single customer of the Consumer Products Division had net sales of approximately $17.4 million.
GLENOIT CORPORATION AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF GLENOIT UNIVERSAL, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
Holdings is a holding company and as a result does not have any substantive assets or operations that generate revenues or cash flows. Accordingly, Holdings relies on the Company's distribution of dividends in order to fund its operations and meet its obligations, including its interest and principal payments.
As of January 2, 1999, Holdings has obligations with a face amount of approximately $29.2 million, bearing interest at stated rates between 5% to 12.5%, to shareholders ("Shareholder Notes") with principal due in 2004 and 2005. These obligations are not reflected in the Company's accompanying balance sheets or income statements. Subject to existing debt restrictions, Shareholder Notes with a face amount of approximately $9.8 million contain certain acceleration clauses. They include the sale of stock in a registered public offering, certain mergers and certain changes of existing shareholder ownership. At the option of Holdings, subject to the Company's existing debt restrictions (Note 5), the interest may be paid by the issuance of additional notes or in cash. However, Holdings must pay interest in cash on certain of the Shareholder Notes if defined levels of consolidated cash flows of Holdings are attained. Annual interest payments during the next five years are approximately $2.6 million per year, excluding interest on notes that may be issued to pay interest. Assuming Holdings pays all interest payments related to the Shareholder Notes with additional notes, the Company's ultimate distribution of dividends in order for Holdings to meet its existing debt obligations is expected to be approximately $63 million beginning December 2004 through December 2005. However, the Company may be required to declare dividends in order for Holdings to fund certain of its obligations in cash as discussed above. Such amounts could approximate $3 million in the aggregate and are due through December 2004, if the defined levels of consolidated cash flow of Holdings are met.
From time to time, the Company is involved in litigation which arises in the ordinary course of business. Management believes the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations.
12. SUBSEQUENT EVENTS
On February 12, 1999, the Company acquired all the outstanding shares of capital stock of Ex-Cell Home Fashions, Inc. ("Ex-Cell") in a single transaction for approximately $43.2 million, subject to post-closing adjustments. In addition, approximately $6.9 million of debt of Ex-Cell was extinguished in connection therewith. Ex-Cell is engaged in the design, manufacture, importation and distribution of textile home furnishings, principally shower curtains, table linens, and decorative pillows.
On February 25, 1999, the Company's Board of Directors approved a plan to consolidate its manufacturing operations of the Fabric Division into its facilities located in North Carolina and Canada. In connection with this activity, the Company will be discontinuing operations at its leased Tennessee facility and will terminate substantially all of the associates at that facility. During the first quarter of fiscal 1999, the Company will record a charge against operations to cover the estimated costs associated with the closing of that facility including the cost of operating leases, the write-off of the related goodwill, the write-down of machinery and equipment to fair market value and severance and other personnel costs. The Company currently estimates these charges to total approximately $12 million to $18 million.