ITEM 1. BUSINESS
GENERAL
The Company is one of the largest domestic manufacturers of indigo-dyed denim fabrics, cotton and cotton-blend piece dyed fabrics, and cotton and cotton-blend yarns. The Company operates 23 manufacturing facilities in four southeastern states and is organized in three principal business segments: apparel fabrics, greige and specialty fabrics, and yarns.
The Company's predecessor was founded in 1895 by the family of G. Stephen Felker, the Company's Chairman, President and Chief Executive Officer. Prior to 1986, the Company's predecessor primarily manufactured and marketed greige fabrics. In July 1986, the Company's predecessor, together with Mr. Felker and certain other investors, acquired Avondale Mills, Inc., now a wholly owned subsidiary of the Company ("Avondale Mills"). The acquisition of Avondale Mills expanded the Company's product line to include yarns and finished fabrics. In April 1996 the Company acquired the assets of the textile business of Graniteville Company and its subsidiaries ("Graniteville"). The acquisition of Graniteville, founded in 1845, enhanced the Company's manufacturing and marketing of cotton and cotton-blend finished fabrics.
DESCRIPTION OF THE BUSINESS
Products
Apparel fabrics. The Company's apparel fabrics consist of cotton and cotton-blend fabrics used in the manufacture of jeans, utilitywear, sportswear and other apparel.
The Company is a leading manufacturer of indigo-dyed denim fabrics used in the production of branded and private label fashion apparel, as well as casual jeans, sportswear and outerwear. The Company develops and manufactures new and innovative colors, textures, weaves and finishes for its customers, which has helped make the Company's denim fabrics a leader in the branded and private label, fashion-oriented segment of the apparel market.
The Company is one of the largest domestic manufacturers and marketers of fabrics used in the production of utilitywear (principally uniforms and other occupational apparel) for the U.S. rental and retail markets. The Company's utilitywear fabric customers require durable fabrics characterized by long wear and easy care. The Company works closely with customers to develop fabrics with these and other enhanced performance characteristics.
The Company is a leading manufacturer and marketer of woven cotton piece-dyed fabrics used in the production of sportswear, casual wear and outerwear. Fabrics are produced for customers in a wide variety of styles, colors, textures and weights according to individual customer specifications. The Company's product design staff develops fabric designs that are presented to customers and, once approved, are produced into fabrics to meet customers' specifications.
Apparel fabrics sales accounted for 67%, 73% and 74%, respectively, of the Company's net sales in fiscal 1998, 1999 and 2000.
Greige and Specialty Fabrics. The Company produces undyed, unfinished cotton and cotton-blend greige fabrics that are marketed to apparel, home furnishing and industrial products manufacturers. The Company's product design staff works with greige fabric customers to create new fabric styles and constructions, and the Company is able to alter its overall product mix to meet changing customer needs. The Company also has the manufacturing flexibility to maintain high production efficiencies by producing greige fabric for consumption within the apparel fabrics operation.
The Company produces a variety of specialty fabrics that are marketed to recreational, industrial and military products manufacturers. The Company's specialty products include coated fabrics for awnings, tents, boat covers and life vests. The Company also finishes customers' fabrics on a commission basis, which enables customers to meet short delivery schedules while minimizing inventories.
The Company's greige and specialty fabrics sales accounted for 8%, 8% and 10%, respectively, of the Company's net sales in fiscal 1998, 1999 and 2000.
Yarns. The Company is one of the largest domestic producers and marketers of cotton and cotton-blend yarns, which are used internally in the production of woven fabrics or marketed to outside customers in the knitting and weaving industries. The Company's yarns are used in the manufacture of a broad range of items, including apparel (primarily T-shirts, underwear, hosiery, knitted outerwear, denim, and woven and fleece sportswear) and home furnishings. The Company's yarn sales accounted for approximately 27%, 22% and 23%, respectively, of the Company's net sales in fiscal 1998, 1999 and 2000.
Intersegment Sales. Intersegment sales represent the transfer of yarns and greige fabrics among the three business segments. These items ultimately are consumed in the production of finished products, and therefore are not included in net sales. Intersegment sales accounted for (2%), (4%) and (7%), respectively, of the Company's net sales in fiscal 1998, 1999 and 2000.
Sales and Marketing
The Company sold apparel fabrics, greige and specialty fabrics, and yarns to approximately 1,200, 200 and 400 customers, respectively, in fiscal 2000. The Company believes it is the leading supplier of denim to V.F. Corporation (the maker of Lee(R), Rider(R), Wrangler(R), Rustler(R), Brittania(R), Red Kap(R), Timbercreek(R), Chic(R), ANd HealthTex(R) brands), with total sales of apparel fabrics and yarns to V.F. Corporation accounting for 15% of the Company's net sales in fiscal 2000. The Company believes that it has a strong working relationship with V.F. Corporation. Other than V.F. Corporation, none of the Company's customers accounted for 10% or more of the Company's net sales in fiscal 2000.
The Company targets customers who demand a high level of customer service. The Company's two yarn sales offices are located geographically to be close to customers' manufacturing facilities, and its six fabric sales offices are generally located near the headquarters of key customers. Sales associates visit their customers on a regular basis and are primarily responsible for interpreting customers' needs, processing customer orders and interacting with the Company's production scheduling personnel. The Company's sales associates are paid a base salary plus sales incentives to the extent certain performance targets are met. The Company's independent sales representatives are paid on a commission basis.
Manufacturing
The Company is a vertically integrated manufacturer of yarns and fabrics. Through modernizing its manufacturing facilities, the Company has sought to reduce lead times, lower costs, minimize inventory levels and maximize flexibility to respond to changes in customer demand and market conditions.
Manufacturing Processes. The Company's manufacturing processes involve producing yarn, dyeing yarn, weaving yarn into fabrics and dyeing and finishing fabrics. The Company's manufacturing plants employ computer control systems to monitor the manufacturing process and computer product testing equipment to measure the quality of the Company's yarns and fabrics.
The Company's yarn manufacturing operations involve spinning raw cotton and synthetic fibers into cotton and cotton-blend yarns. The Company uses modern carding, drawing, combing, open-end spinning and ring spinning equipment and offers a full line of yarns to respond to varied customer demand. Yarn produced by the Company is either sold to outside customers or used internally in the production of woven fabrics.
Yarn to be used in the manufacture of apparel fabrics may be dyed using "range" dyeing techniques. The Company weaves dyed or undyed yarn using modern, high-speed looms to manufacture fabrics that have a variety of widths and weaves. The woven fabrics may be piece-dyed and finished according to customer specifications. The Company's dyeing and finishing facilities use a wide range of technologies, including sophisticated computer monitoring and control systems. These systems allow the Company to continuously monitor and control each phase of the dyeing and finishing process, which helps to improve productivity, efficiency, consistency and quality.
Manufacturing Facilities. The Company currently operates 23 manufacturing facilities in the U.S. Of the Company's manufacturing facilities, nine produce yarn, six manufacture fabrics, four are dyeing facilities and four are engaged in fabric finishing.
Expansion and Modernization. The Company has expanded its operations through acquisitions, an ongoing capital improvements program and management's efforts to optimize the productive output of the Company's manufacturing facilities. As part of its expansion and modernization efforts, the Company has also redeployed capital by closing certain manufacturing facilities and, in some cases, moving manufacturing equipment to other locations. The Company's expansion and modernization efforts over the past six fiscal years have included, among others, the following principal initiatives:
- 1995 -- Replaced earlier generation drawing systems and open-end spinning equipment with state-of-the art drawing and open-end spinning equipment, and installed a fiber reclamation system;
- 1996 -- Replaced carding equipment in two plants with modern carding and drawing systems and earlier generation winders in a third plant with fully automated winders;
- 1996 -- Acquired Graniteville, which consisted of four integrated yarn and fabric weaving plants, three indigo-dyeing facilities, one piece-dyeing and finishing facility, one fabric coating and finishing facility, and one garment dyeing facility;
- 1996 and 1997 -- Replaced earlier generation projectile looms with new, high speed air jet looms and installed two new integrated finishing ranges;
- 1997 -- Purchased additional computer controlled cleaning and blending equipment for one plant, replaced earlier generation open-end spinning equipment with technologically advanced spinning equipment at a second plant, and replaced opening and carding equipment at a third plant;
- 1997 and 1998 -- Constructed a new denim weaving facility, completed in April 1998, housing technologically advanced slashing equipment and high speed air jet looms, upgraded fabric finishing equipment, and executed a lease for a new distribution center;
- 1998 and 1999 -- Completed expansion of an existing weaving facility in June 1999, which included the installation of technologically advanced slashing equipment and high speed air jet looms for the production of additional greige fabrics to be piece-dyed for sportswear and utilitywear end uses;
- 1998 and 1999 - Completed construction of a new piece-dyeing range in February 1999, and installed technologically advanced fabric inspection equipment for piece-dyed fabrics;
- 2000 -- Completed replacement of earlier generation air jet looms with new, high speed air jet looms in November 1999 for production of greige fabrics to be piece dyed for sportswear and utilitywear end uses;
- 2000 -- Completed modernization of an existing ring spinning facility in August 2000, including the replacement of earlier generation roving, ring spinning and winding equipment with technologically advanced linked ring spinning;
- 2000 -- Initiated expansion of an existing piece dyed finishing facility, to be completed in January 2001, for the production of additional finished piece dyed fabrics for sportwear and utilitywear end uses; and
- 2000 -- Began expansion of an existing weaving facility, to be completed in May, 2001, to include the installation of modern air jet looms for the production of additional greige fabrics.
Raw Materials
The Company believes that it is one of the largest U.S. consumers of raw cotton, the principal raw material used in the Company's manufacturing processes. Consequently, the Company's results of operations may be impacted significantly due to fluctuations in the price of cotton. Since cotton is an agricultural product, its supply and quality, which affect prevailing prices, are subject to forces of nature. Significant increases in cotton prices due to any material shortage or interruption in the supply or variations in the quality of cotton by reason of weather, disease or other factors could have a material adverse effect on the Company's results of operations.
Because the importation of cotton into the U.S. has generally been prohibited, historically imbalances between the domestic and world price of cotton have occurred. In recent years, Congress has passed a series of legislative initiatives to ensure that U.S. cotton was priced competitively with world markets. The Food, Agriculture, Conservation and Trade Act of 1990 (the "1990 Trade Act") and the regulations promulgated thereunder established a three-step competitiveness program designed to make domestic cotton prices approximate world cotton prices. This program includes a mechanism that triggers tariff free quotas for the importation of cotton if U.S. prices exceed world prices for an extended period of time.
In addition, the Federal Agricultural Improvement and Reform Act of 1996 established certain support programs that, among other things, continue through the year 2002 the three-step competitiveness program established under the 1990 Trade Act. In fiscal 1998 and 1999, the Company received payments from the U.S. Department of Agriculture under these support programs representing the differential between domestic cotton prices and world cotton prices. However, these payments ceased as of December 15, 1998 as financing for the program was exhausted, and tariff-free quotas for the importation of cotton opened in March 1999.
On October 22, 1999 the Fiscal 2000 Agriculture Appropriations Bill was signed into law, restoring funding of payments effective October 1, 1999 under the three-step competitiveness program and redefining import quota triggers. Accordingly, during fiscal 2000 the Company received renewed payments from the U.S. Department of Agriculture for the differential between domestic cotton prices and world cotton prices for cotton consumed on or after October 1, 1999.
The Company closely monitors the cotton market and manages its cotton-buying practices. The Company's Chief Executive Officer is an officer of the National Cotton Council, a trade organization that spearheads initiatives to implement U.S. cotton industry policy, which helps the Company stay abreast of developments in the cotton market. The Company generally purchases cotton in sufficient quantities to achieve planned manufacturing schedules. Such purchases may be short of, or in excess of, the quantities needed to satisfy customers' orders depending upon such factors as the Company's outlook for the cotton market.
The Company generally enters into cotton purchase contracts several months in advance of the scheduled date of delivery. Prices for such purchases are fixed either on the date of the contract or thereafter on a date prior to delivery and, as a result, the Company may be favorably or adversely affected if cotton prices fluctuate during the contract period. Periodically, the Company also purchases cotton futures and option contracts to hedge exposure to price fluctuations in cotton acquired from various suppliers.
The principal man-made fiber purchased by the Company is polyester. The Company currently purchases substantially all of the man-made fibers used in its products from one supplier, but such fibers are readily available from other suppliers. The Company maintains a limited supply of such fibers in inventory. The Company generally has no difficulty in obtaining sufficient quantities of man-made fibers.
The Company purchases dyes and chemicals used in its dyeing and finishing processes, and these dyes and chemicals normally have been available in adequate supplies through a number of suppliers. In connection with the acquisition of Graniteville, the Company entered into a 10-year supply agreement (the "Supply Agreement") with C.H. Patrick & Co., Inc. which was subsequently acquired by B.F. Goodrich ("Goodrich"). The Supply Agreement generally stipulates that Goodrich will have the opportunity to provide certain dyes and chemicals utilized by the Company if Goodrich meets certain conditions, including competitive pricing and the ability to provide the applicable dyes and chemicals in accordance with the Company's specifications and delivery requirements. The Supply Agreement is terminable by the Company prior to the end of the 10-year term in the event of a pattern of repeated, material failures by Goodrich to satisfy its obligations with respect to product specifications, delivery schedules or other material terms.
The Company purchases yarns and greige fabrics to supplement its internal yarn and fabric production, and consumes these products in the production of greige and finished fabrics for its customers. These yarns and greige fabrics are readily available from a number of suppliers.
Competition
The textile industry is highly competitive, and no single company is dominant. Management believes that the Company is one of the largest domestic manufacturers of indigo-dyed denim, piece dyed fabrics for utilitywear and sportswear and cotton and cotton-blend yarns. The Company's competitors include large, vertically integrated textile companies and numerous smaller companies. In recent years there has been a trend toward consolidation within certain markets of the textile industry and, within the Company's markets, increases in manufacturing capacity. The primary competitive factors in the textile industry are price, product styling and differentiation, quality, manufacturing flexibility, delivery time and customer service. The importance of these factors is determined by the needs of particular customers and the characteristics of particular products. The failure of the Company to compete effectively with respect to any
of these key factors or to keep pace with rapidly changing markets could have a material adverse effect on the Company's results of operations and financial condition.
Increases in domestic capacity and imports of foreign-made textile and apparel products are a significant source of competition for many domestic textile manufacturers. The U.S. government attempts to regulate the growth of certain textile and apparel imports by establishing quotas on imports from countries that historically account for significant shares of U.S. imports. Although imported apparel represents a significant portion of the U.S. apparel market, in recent years, a significant portion of import growth has been attributable to imports of apparel products manufactured outside the U.S. of (or using) domestic textile components. During fiscal 1999 and 2000, imports of certain textile products into the U.S. increased primarily as a result of declines in consumer demand within Asia, heightened liquidity requirements of Asian textile producers and devaluation of Asian currencies vis-a-vis the U.S. dollar.
The extent of import protection afforded by the U.S. government to domestic textile producers has been, and is likely to remain, subject to considerable domestic political deliberation and foreign considerations. In January 1995, a new multilateral trade organization, the World Trade Organization (the "WTO"), was formed by the members of the General Agreement on Tariffs and Trade ("GATT") to replace GATT. This new body has set forth the mechanisms by which world trade in textiles and clothing will be progressively liberalized with the elimination of quotas and the reduction of duties. The implementation began in January 1995 with the phasing-out of quotas and the reduction of duties to take place over a 10-year period. The selection of products at each phase is made by each importing country and must be drawn from each of the four main textile groups: yarns, fabrics, made-up textiles and apparel. As it implements the WTO mechanisms, the U.S. government is negotiating bilateral trade agreements with developing countries (which generally are exporters of textile products) that are members of the WTO for the purpose of reducing their tariffs on imports of textiles and apparel. The elimination of quotas and reduction of tariffs under the WTO may result in increased imports of certain textile products and apparel into North America. These factors could make the Company's products less competitive against low cost imports from third world countries.
The North American Free Trade Agreement ("NAFTA") among the United States, Canada and Mexico, which became effective on January 1, 1994, has created the world's largest free-trade zone. The agreement contains safeguards sought by the U.S. textile industry, including a rule of origin requirement that products be processed in one of the three countries in order to benefit from NAFTA. In addition, NAFTA requires merchandise to be made from yarns and fabrics originating in North America in order to avoid trade restrictions. Thus, not only must apparel be made from North American fabric but the fabric must be woven from North American spun yarn. Based on experience to date, NAFTA has had a favorable impact on the Company's business.
On May 2, 2000, the United States passed the Caribbean Basin Initiative ("CBI")/Sub-Saharan Africa Trade Bill. Under the bill, apparel manufactured in the Caribbean and Sub-Saharan regions using yarns or fabrics produced in the United States may be imported to the U.S. duty and quota-free. In effect, this legislation extends the favorable trade terms afforded to Mexico under NAFTA to the Caribbean and Sub-Saharan countries. Management believes that NAFTA parity for the CBI region will have a favorable effect on the Company by providing access to lower cost labor for apparel assembly, making the U.S. a more attractive location for textile sourcing.
Backlog
The Company's order backlog was approximately $400 million at August 25, 2000, as compared to approximately $340 million at August 27, 1999. Orders on hand are not necessarily indicative of total
future sales. Substantially all of the orders outstanding at August 25, 2000 are expected to be filled by the end of fiscal 2001.
Governmental Regulation
The Company is subject to various federal, state and local environmental laws and regulations limiting the discharge, storage, handling and disposal of a variety of substances and wastes used in or resulting from its operations and potential remediation obligations thereunder, particularly the Federal Water Pollution Control Act, the Clean Air Act, the Resource Conservation and Recovery Act ("RCRA") (including amendments relating to underground storage tanks) and the Comprehensive Environmental Response, Compensation and Liability Act, commonly referred to as "Superfund" or "CERCLA". The Company has obtained, and is in compliance in all material respects with, all material permits required to be issued by federal, state or local law in connection with the operation of the Company's business as described herein.
The Company's operations are also governed by laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations thereunder which, among other things, establish cotton dust, formaldehyde, asbestos and noise standards, and regulate the use of hazardous chemicals in the workplace. The Company uses resins containing formaldehyde in processing some of its products. Although the Company does not use asbestos in the manufacture of its products, some of its facilities contain some structural asbestos that management believes is properly contained.
Many of the Company's manufacturing facilities have been in operation for several decades. Historical waste disposal and hazardous substance releases and storage practices may have resulted in on-site and off-site remediation liability for which the Company may be responsible. In addition, certain wastewater treatment facilities and air emission sources may have to be upgraded to meet more stringent environmental requirements in the future. The Company cannot with certainty assess at this time the impact of future emission standards or enforcement practices under the foregoing environmental laws and regulations and, in particular, under the 1990 Clean Air Act, upon its operations or capital expenditure requirements. The Company believes it is currently in compliance in all material respects with the foregoing environmental and health and safety laws and regulations.
In 1987, Graniteville Company was notified by the South Carolina Department of Health and Environmental Control ("DHEC") that it had discovered certain contamination of a pond near Graniteville, South Carolina and that Graniteville may be one of the responsible parties. In 1990 and 1991, Graniteville provided reports to DHEC summarizing its required study and investigation of the alleged pollution and its sources which concluded that pond sediments should be left undisturbed and that other remediation alternatives either provided no significant benefit or themselves involved adverse effects. In 1995, Graniteville submitted a proposal regarding periodic monitoring of the site, to which DHEC responded with a request for additional information. Graniteville provided such information to DHEC in February 1996. The Company is unable to predict at this time whether any further actions will be required with respect to the site or what the cost thereof may be. The Company has provided a reserve for management's estimate of the cost of monitoring the site and believes the ultimate outcome of this matter will not have a material adverse effect on its results of operations or financial condition.
As a result of the acquisition of Graniteville, the Company owns a nine acre site in Aiken County, South Carolina, which was operated jointly by Graniteville and Aiken County as a landfill from approximately 1950 through 1973. DHEC conducted a site screening investigation in 1990. The United States Environmental Protection Agency conducted a site investigation in 1991 and an Expanded Site Inspection in January 1994. Graniteville conducted a groundwater quality investigation in 1992 and a supplemental site assessment in 1994. Based on these investigations, DHEC requested that Graniteville
enter into a consent agreement providing for comprehensive assessment of the nature and extent of soil and groundwater contamination at the site, if any, and an evaluation of appropriate remedial alternatives. DHEC and the Company entered into a consent agreement in December 1997. The cost of the comprehensive assessment required by the consent agreement is estimated to be between $200,000 and $400,000. Because this investigation has not concluded, the Company is currently unable to predict what further actions, if any, will be necessary to address the landfill. The Company has provided a reserve for management's estimate of the cost of investigating and remediating the site and believes the ultimate outcome of this matter will not have a material adverse effect on its results of operations or financial condition.
The Company is currently defending three environmentally related lawsuits, described under Item 3, Legal Proceedings.
Associates
At August 25, 2000, the Company had approximately 6,600 associates. None of the Company's associates is covered by a collective bargaining agreement, and management believes that the Company's relations with its associates are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company currently operates 23 manufacturing facilities in the U.S., of which eight are located in Alabama, three are located in North Carolina, three are located in Georgia and nine are located in South Carolina. The Company owns 21 of these facilities and leases two facilities in connection with its issuance of industrial revenue bonds. Of the Company's manufacturing facilities, fourteen of the Company's manufacturing facilities produce yarn, six manufacture fabrics, four are dyeing facilities and four are engaged in fabric finishing. Additionally, the Company operates six warehouses.
The Company's plants generally operate 24 hours a day, seven days a week throughout the year. The Company considers its plants and equipment to be in good condition and adequate for its current operations. The Company's principal executive offices are located in Monroe, Georgia in a building owned by the Company. The Company also has executive offices in Sylacauga, Alabama, and Graniteville, South Carolina, which are located in buildings owned by the Company. All of the Company's sales offices are leased from unrelated third parties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On March 3, 1993, a case was filed in the Circuit Court of Jefferson County, Alabama by Joe and Darnell Sullivan and Tommy and Stella Fay Gould and other parties against the Alabama Power Company, Russell Corporation, the Company and certain other parties ("Sullivan"). The complaint alleges that the Company and such other parties negligently or willfully discharged industrial wastewater containing hazardous materials, which allegedly damaged the plaintiffs' real properties and caused mental anguish to the plaintiffs. The complaint seeks an award of compensatory and punitive damages. After two years and eleven months of litigation, the plaintiffs amended their complaint to include class action claims and treatment. Although the Trial Court granted class certification, the Supreme Court of Alabama reversed the class certification order, and the case proceeded as to the individual claims of the five plaintiffs.
On November 17, 1998, the trial court handed down a verdict of $155,200 in compensatory damages and $52,398,000 in punitive damages against the Alabama Power Company, Russell Corporation and the Company, on a joint and several basis, in favor of the plaintiffs. This case is now on appeal to the Supreme Court of Alabama. Oral argument was held in January 2000, and on August 4, 2000, the Alabama Supreme Court issued a 6-3 opinion reversing and ordering a judgment to be entered in favor of the defendants because of plaintiff's failure of proof. The plaintiffs filed an Application for Rehearing on August 18, 2000, and the Company filed its response on September 1, 2000. On October 16, 2000, the Alabama Supreme Court scheduled further limited oral arguments during November 2000 to include all parties except the Alabama Power Company. While the outcome of this case cannot be predicted with certainty, based on currently available information, the Company does not believe that it will have a material adverse effect on the Company's financial condition or results of operations.
On February 28, 1999, a case was filed in the Circuit Court of Jefferson County, Alabama by Chris and Regina Christian against Russell Corporation, Russell Lands, Inc., Alabama Power, the Company and certain other parties. The complaint alleges that the Company, among others, negligently and/or wantonly caused or permitted the discharge and disposal of sewage sludge and contaminants into the lake adjacent to the plaintiffs' property, which allegedly interfered with the plaintiffs' use of the property. As a result of these alleged actions, the plaintiffs claim that the value of their property has been diminished and that they suffered mental anguish, bodily injury and other pecuniary loss. The complaint seeks compensatory and punitive damages in an undisclosed amount. The Company intends to vigorously defend this case and believes that it has a number of defenses available to it. This case has been stayed by the trial court pending resolution of the appeals in the Sullivan case. While the outcome of this case cannot be predicted with
certainty, based upon currently available information, the Company does not believe that it will have a material adverse effect on the Company's financial condition or results of operations.
On January 13, 2000, a case was filed in the Circuit Court of Jefferson County, Alabama by Larry and Cynthia Locke and the owners of fourteen other residences in the Raintree subdivision of Lake Martin, against Russell Corporation, Alabama Power and the Company. The complaint alleges that the Company, among others, negligently and/or wantonly caused or permitted the discharge and disposal of sewage sludge and contaminants into the lake adjacent to the plaintiffs' property, which allegedly interfered with the plaintiffs' use of the property. As a result of these alleged actions, the plaintiffs claim that the value of their property has been diminished and that they suffered other damages. The complaint seeks compensatory and punitive damages in an undisclosed amount. The Company intends to vigorously defend this case and believes that it has a number of defenses available to it. This case has been stayed by the trial court pending resolution of the appeal in the Sullivan case. While the outcome of this case cannot be predicted with certainty, based upon currently available information, the Company does not believe that it will have a material adverse effect on the Company's financial condition or results of operations.
Avondale Mills, along with Russell Corporation and the municipality of Alexander City, Alabama, was named during fiscal 1998 in two almost identical citizen suits. The first suit, filed on May 18, 1998, was brought pursuant to the federal Clean Water Act ("CWA"). The second suit, filed on August 28, 1998, was brought pursuant to both the CWA and the RCRA. In both lawsuits, the plaintiff has alleged that Avondale Mills' permitted discharges of wastewater from its facility in Alexander City into the waste water treatment plant of Alexander City have indirectly caused the wastewater treatment plant to exceed the effluent limitation imposed upon the treatment plant's discharges into a local body of water, thereby violating the CWA. The plaintiff repeated that claim in the second lawsuit, but also alleged that Avondale Mills also violated RCRA by contributing to the disposal of a hazardous waste in such a manner as to endanger human health or the environment. In September 1998, the cases were consolidated, and the first case filed was designated the "lead case". In each of these cases, Avondale Mills filed motions to dismiss and for summary judgment which it believed to be meritorious. However, prior to the court's ruling on Avondale's motions, the plaintiff moved the court to dismiss the suits. On September 30, 1999, pursuant to the plaintiff's motion, the court dismissed the lead case and terminated the remaining case. The dismissal of these cases was "without prejudice". Concurrent with this litigation, the United States Environmental Protection Agency had initiated an investigation of the possibility of CWA violations at Avondale Mills' facility, and this investigation is continuing at the present time.
The Company is also a party to other litigation incidental to its business from time to time. The Company is not currently a party to any litigation that management believes, if determined adversely to the Company, would have a material adverse effect on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's Class A Common Stock or Class B Common Stock (collectively, "Common Stock"). As of August 25, 2000 there were 130 and one holders of record of Class A Common Stock and Class B Common Stock, respectively. The Company paid dividends aggregating $5.1 million and $5.1 million in respect of its outstanding Common Stock during fiscal 1999 and 2000, respectively.
The Company has issued and outstanding $125 million aggregate principal amount of 10 1/4% Senior Subordinated Notes due 2006 (the "Notes") under an Indenture dated as of April 23, 1996 among the Company, Avondale Mills and The Bank of New York, as trustee (the "Indenture"). The Indenture contains certain covenants that could indirectly restrict the Company's ability to pay dividends. As amended effective September 28, 2000, the Company maintains a $125 million revolving credit facility under a loan agreement among Avondale Mills and a syndicate of banks (the "Credit Facility"). The Credit Facility contains certain covenants that could indirectly restrict the Company's ability to pay dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated statement of income data and selected consolidated balance sheet data of the Company for each of the five fiscal years in the period ended August 25, 2000. Such data were derived from the audited Consolidated Financial Statements of the Company. The audited Consolidated Financial Statements and Notes thereto of the Company for each of the three fiscal years in the period ended August 25, 2000 are included elsewhere in this Annual Report. 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 and Notes thereto of the Company included elsewhere in this Annual Report.
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(1) EBITDA is defined as net income plus (i) provision for income taxes, (ii) interest expense, net, (iii) discount and expenses on sale of receivables, (iv) depreciation and amortization, (v) loss attributable to investment in Oneita, (vi) facility restructuring charges and (vii) plus or minus, as the case may be, adjustments to cost of goods sold made under the LIFO inventory valuation method. EBITDA is presented not as an alternative measure of operating results or cash flow from operations (as determined in accordance with generally accepted accounting principles), but because it is a widely accepted financial indicator of a company's ability to incur and service debt. EBITDA as calculated by the Company is not necessarily comparable with similarly-titled measures proposed by other companies.
(2) The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. For this purpose, "earnings" include income before income taxes plus fixed charges. Fixed charges include interest, whether expensed or capitalized, amortization of deferred financing costs, discount and expenses on sale of receivables and the portion of rental expense that is representative of the interest factor in these rentals.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto of the Company included elsewhere in this Annual Report.
RESULTS OF OPERATIONS
The table below sets forth for the periods indicated statement of income data expressed as a percentage of net sales:
Fiscal 2000 Compared to Fiscal 1999
Net Sales. Net sales decreased 6.2% to $826.6 million for fiscal 2000 from $880.9 million for fiscal 1999, as the Company experienced intensely competitive conditions in its markets. Global supply of textile and apparel products continued to exceed demand, creating highly competitive market conditions worldwide. As a result, weak foreign economies continued to offer their textile and apparel production to the U.S. market, driving prices down in the Company's principal distribution channels. The Company expects these conditions to continue, adversely impacting sales during fiscal 2001.
Operating Income. Operating income increased 71.8% to $77.9 million for fiscal 2000 from $45.3 million for fiscal 1999. In response to the intensely competitive market conditions, the Company significantly increased its consumption of internally produced yarns and greige fabrics in the production of finished apparel fabrics and thereby improved capacity utilization and sales rationalization. This improvement in capacity utilization, more favorable raw material costs and unit cost reductions achieved through plant management programs and capital expenditure projects resulted in a 10.8% decline in cost of goods sold to $668.0 million for fiscal 2000 from $748.9 million for fiscal 1999. Cost of goods sold as a percentage of net sales decreased to 80.8% for fiscal 2000 from 85.0% for fiscal 1999.
RESULTS OF OPERATIONS (CONTINUED)
Selling and administrative expenses increased 1.0% to $38.5 million for fiscal 2000 from $38.1 million for fiscal 1999, primarily reflecting increased accrual of certain associate benefits and performance based incentives corresponding to the improvement in operating income for the period. Selling and administrative expenses as a percentage of net sales increased to 4.7% for fiscal 2000 from 4.3% for fiscal 1999.
Segment Performance. Apparel fabric sales decreased 4.0% to $615.8 million for fiscal 2000 from $641.2 million for fiscal 1999. The decline in sales reflected a 1.2% increase in yards sold and a 5.1% decrease in average selling prices. Declines in average selling prices were experienced across the board. The slight improvement in unit shipments reflected the recent improvement in demand for denim and other bottomweight fabrics. Operating income for apparel fabrics increased 18.5% to $86.4 million for fiscal 2000 from $72.9 million for fiscal 1999. The improvement in operating income was largely due to more favorable raw material costs and lower unit costs achieved through improved capacity utilization, plant management programs and capital expenditure projects.
Greige and specialty fabric sales increased 7.2% to $79.0 million for fiscal 2000 from $73.7 million for fiscal 1999. The increase in sales reflected a 12.3% increase in units sold and a 4.5% decrease in average selling prices. Unit sales of specialty fabrics experienced significant improvement during fiscal 2000 while capacity utilization within the greige fabrics operation benefited from increased production of yarns for consumption within the apparel fabrics operation. Operating income for greige and specialty fabrics increased 43.0% to $10.1 million for fiscal 2000 from $7.1 million for fiscal 1999, reflecting higher unit sales, lower raw material costs and continued reduction of manufacturing costs.
Yarn sales decreased 5.6% to $186.3 million for fiscal 2000 from $197.4 million for fiscal 1999, reflecting a 5.6% increase in pounds sold and a 10.6% decrease in average selling prices. Although the Company's decision to significantly increase its consumption of internally produced yarns within its fabrics operations resulted in a decline in outside yarn sales, the improvement in capacity utilization generated the improvement in overall yarn volume. Market pricing for sales yarns remained very competitive, reflecting continued excess production capacity within the domestic industry and continued imports of yarns and knitted apparel from Asia. Operating income for yarns increased to $7.5 million for fiscal 2000 from a loss of $0.1 million for fiscal 1999. Operating income was positively impacted by lower raw material costs and unit cost reductions related to the improved capacity utilization.
Intersegment sales increased 73.6% percent to $54.5 million for fiscal 2000 from $31.4 million for fiscal 1999, primarily reflecting the significant increase in consumption of internally produced yarns within the Company's fabrics operations.
Interest Expense, Net. Interest expense, net decreased 12.0% to $20.2 million for fiscal 2000 from $23.0 million for fiscal 1999. This decrease reflected lower average outstanding borrowings during fiscal 2000.
Discount and Expenses on Sale of Receivables. Discount and expenses on sale of receivables were $5.6 million for fiscal 2000 and fiscal 1999.
Provision for Income Taxes. Provision for income taxes increased to $18.6 million for fiscal 2000 from $6.3 million for fiscal 1999, reflecting the increase in income before income taxes. The Company's effective tax declined to 36.0% for fiscal 2000, due to state incentive program credits related to the Company's investments in its manufacturing facilities, compared to 38.5% for fiscal 1999.
Fiscal 1999 Compared to Fiscal 1998
Net Sales. Net sales decreased 16.6% to $880.9 million for fiscal 1999 from $1,056.1 million for fiscal 1998, as the Company experienced intensely competitive conditions in its markets. Global supply continued to surpass demand as weak foreign economies directed their production to the U.S. consumer. In response, the Company was able to employ its sourcing flexibility to increase its consumption of internally produced yarns and greige fabrics in the production of finished fabrics and thereby minimize the detrimental effects of underutilized manufacturing capacity.
Operating Income. Operating income decreased 47.6% to $45.3 million for fiscal 1999 from $86.6 million for fiscal 1998. The Company continued efforts to reduce unit costs through strategic capital expenditure projects. However, reduced capacity utilization and a corresponding reduction in absorption of fixed manufacturing costs resulted in increased unit costs during fiscal 1999. Cost of goods sold decreased 14.8% to $748.9 million for fiscal 1999 from $879.3 million for fiscal 1998. Cost of goods sold as a percentage of net sales increased to 85.0% for fiscal 1999 from 83.3% for fiscal 1998.
Selling and Administrative Expenses. Selling and administrative expenses decreased 20.7% to $38.1 million for fiscal 1999 from $48.1 million for fiscal 1998. This decrease reflected continued expense reduction efforts, and reduced charges for certain associate benefits and performance based incentives corresponding with the reduced results of operations of the Company for the period. Selling and administrative expenses as a percentage of net sales decreased to 4.3% for fiscal 1999 from 4.5% for fiscal 1998.
Segment Performance. Apparel fabric sales decreased 9.9% to $641.2 million for fiscal 1999 from $711.6 million for fiscal 1998. This decrease in sales reflected a 5.5% decrease in yards sold and a 4.7% decline in average selling prices for those yards. Although reports of retail sales and consumer preferences indicated that domestic sales of denim jeans continued to demonstrate growth during fiscal 1999, the substantial increase in denim productive capacity worldwide in recent years caused the global supply of denim to far exceed demand. As a result, the market for denim fabrics became very competitive and selling prices declined accordingly. These declines in denim sales were partially offset during fiscal 1999 by growing demand for khaki and other pant-weight fabrics.
Greige and specialty fabric sales decreased 8.9% to $73.7 million for fiscal 1999 from $80.9 million for fiscal 1998. This decrease reflected a 4.5% decrease in units sold and a 4.6% decrease in average selling prices for those units. The decrease in units sold and average selling prices was primarily the result of softening demand during fiscal 1999 for greige and specialty fabrics in the apparel, tent and marine products industries. The Company also increased its consumption of internally produced greige fabrics in the production of finished apparel fabrics.
Yarn sales decreased 30.0% to $197.4 million for fiscal 1999 from $282.0 million for fiscal 1998. This decrease reflected a 20.9% decrease in pounds sold and an 11.5% decrease in average selling prices. The decrease in pounds sold was partly the result of the Company's decision to significantly increase its consumption of internally produced yarn within the Company's weaving facilities, thereby reducing dependence on outside yarn sourcing, and to discontinue the operation of higher cost production equipment. Continuing its yarn restructuring efforts, the Company also announced the closing of the yarn spinning operation at its Sibley plant located in Augusta, Georgia. Market demand and pricing for sales yarn remained very competitive during fiscal 1999, reflecting continued excess productive capacity within the industry, a condition that has persisted for several years, and increased imports of yarn and knitted apparel from Asia during fiscal 1998 and 1999.
Intersegment sales increased 71.0% to $31.4 million for fiscal 1999 from $18.4 million for fiscal 1998, primarily reflecting an increase in consumption of internally produced yarns within the Company's fabrics operations.
Interest Expense, Net. Interest expense, net decreased 1.2% to $23.0 million for fiscal 1999 from $23.3 million for fiscal 1998. This decrease reflected lower interest rates during fiscal 1999.
Discount and Expenses on Sale of Receivables. Discount and expenses on sale of receivables were $5.6 million for fiscal 1999 compared to $7.3 million for fiscal 1998. This decrease was primarily attributable to a net decrease in the amount of accounts receivable sold under the facility, reflecting the overall decline in net sales of the Company.
Facility Restructuring. Charges incurred to consolidate facilities and dispose of certain inefficient equipment in the Company's Graniteville, South Carolina and Augusta, Georgia operations were $6.2 million for fiscal 1999.
Provision for Income Taxes. Provision for income taxes decreased to $6.3 million for fiscal 1999 from $21.1 million for fiscal 1998, reflecting the decrease in income before income taxes. The Company's effective tax rate was 38.5% for fiscal 1999 compared to 38.1% for fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company has funded its working capital requirements and capital expenditures with cash generated from operations, borrowings under its Credit Facility, proceeds received in connection with sales of trade receivables and proceeds received in connection with the issuance of equity and debt securities. At August 25, 2000, the Company had borrowings of $50.2 million outstanding under the Credit Facility and $149.8 million of borrowing availability thereunder ($74.8 million of borrowing availability as amended effective September 28, 2000). Such borrowings bore interest at a weighted average rate of 7.6% per annum at August 25, 2000. In addition, at August 25, 2000, $125 million aggregate principal amount of the Notes (which are fully and unconditionally guaranteed by the Company) issued by Avondale Mills during fiscal 1996 were outstanding.
Credit Facility
As amended effective September 28, 2000, the Credit Facility consists of a forty-month revolving line of credit of up to $125 million. Borrowings under the Credit Facility include revolving loans to be provided by the lenders ("Revolver Loans") and up to $12.5 million of revolving swing loans ("Swing Revolver Loans") to be provided by Wachovia Bank, N.A. ("Wachovia"). Interest accrues on Revolver Loans at the Company's option at either LIBOR (adjusted for reserves) plus a specified number of basis points or the base rate, which is the higher of Wachovia's prime rate or the overnight federal funds rate plus 0.5%. Interest accrues on Swing Revolver Loans at the Company's option at either the base rate or at the "set" rate, which shall be an interest rate agreed to by the Company and Wachovia at the time such Swing Revolver Loan is made. In addition, the Company is required to pay certain structuring, administration and funding fees under the Credit Facility. The Credit Facility is secured by substantially all of the Company's assets. The Credit Facility contains customary covenants, including requirements to maintain certain financial ratios.
Swap Agreements
The Company has used interest rate swap agreements to effectively fix the interest rate with respect to a portion of the borrowings outstanding under the Credit Facility, which otherwise bear interest at floating rates. Such agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments during the term of such agreements without an exchange of the underlying principal amounts. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense related to the borrowings outstanding under the Credit Facility. The related amount payable to or receivable from counterparties is included in other liabilities or assets. At August 25, 2000, the Company had swap agreements with notional amounts aggregating $60.0 million, providing an effective weighted average interest rate of 5.5% on that equivalent portion of the outstanding Revolver Loans.
Receivables Securitization Facility
Pursuant to an agreement between Avondale Mills and Bank One, formerly The First National Bank of Chicago, Bank One has provided to the Company, through a special purpose vehicle administered by it, a securitization facility ("Receivables Securitization Facility") of up to $120 million for the securitization of certain trade receivables (the "Receivables") originated by the Company. The Company acts as the servicer for the Receivables.
Under the Receivables Securitization Facility, the Company transfers Receivables to a wholly owned, limited-purpose subsidiary of the Company (the "Receivables Company"), which sells the Receivables to a trust (the "Trust"). The Trust issues variable funding certificates to lending or financial institutions or other investors evidencing undivided interests in the assets of the Trust (the "Certificates"). The Receivables Securitization Facility permits draws and repayments on a revolving basis prior to November 15, 2002 or such earlier time as certain events occur (the "Amortization Commencement Date"). The Certificates, which represent beneficial interests in the Trust, entitle the holders thereof to (i) receipt of collections from the Receivables, (ii) all rights of the Company or the Receivables Company in goods, the sale of which gave rise to the Receivables, (iii) all collateral and other arrangements supporting the Receivables, (iv) all rights to proceeds of any of the foregoing held in lock-boxes and bank accounts of the Company or the Receivables Company, (v) rights and interests of the Receivables Company under the documents for the Receivables Securitization Facility and (vi) all collections and other proceeds of the assets described above. The Certificates represent beneficial interests in the Trust only, and do not represent obligations of, or interests in, and are not guaranteed or insured by, the Receivables Company or the Company. At August 25, 2000, certificates of $86.0 million were outstanding.
The rate of interest on the Receivables Securitization Facility is tied to the Eurodollar rate (adjusted for any reserves) or Bank One's alternate base rate. The final maturity of the Certificates is expected to occur six months after the Amortization Commencement Date. All collections attributable to the Certificates will be set aside commencing on the Amortization Commencement Date to repay the Certificates in full. Amounts set aside will be applied on a monthly basis to repay the Certificates in full.
The Receivables Securitization Facility contains covenants, representations and warranties customary for such facilities and consistent with those that Bank One reasonably believes are required to obtain an "A" rating from the rating agencies. Financial covenants are not included in the provisions of the Receivables Securitization Facility nor are any provisions relating to cross defaults to any other obligations of the Company.
Capital Expenditures and Cash Flows Analysis
The Company's capital expenditures aggregated $30.5 million for fiscal 2000. These expenditures were primarily to continue the modernization of a fabric finishing facility in South Carolina, replace earlier generation air jet looms with new high speed air jet looms at an existing greige weaving facility, install new linked ring spinning equipment in a yarn production facility and purchase other equipment. Management estimates that capital expenditures for fiscal 2001 will be approximately $85 million, and that such amounts will be used primarily to improve fabric finishing, greige weaving and yarn spinning facilities.
Net cash provided by operating activities was $74.7 million in fiscal 2000. Principal working capital changes included a $2.4 million decrease in accounts receivable, a $7.0 million increase in other assets, primarily deposits on equipment orders, and a $4.7 million increase in accounts payable and accrued expenses. The Company's investing activities were primarily the capital improvements described above. Net cash used in financing activities aggregated $46.3 million, including $5.1 million used to pay dividends on Common Stock, a net reduction in revolver loans and other long term debt of $31.9 million, and a $7.0 million decrease in accounts receivable sold under the securitization facility.
Net cash provided by operating activities was $99.4 million in fiscal 1999. Principal working capital changes included a $31.5 million decrease in accounts receivable, an $8.1 million decrease in inventories and a $7.0 million decrease in accounts payable and accrued expenses. The Company's investing activities were primarily capital improvements of $50.1 million. Net cash used in financing activities aggregated $51.4 million, including $5.1 million used to pay dividends on Common Stock, a net reduction
in revolver loans and other long term debt of $27.3 million, and a $19.0 million decrease in accounts receivable sold under the securitization facility.
Net cash provided by operating activities was $81.8 million in fiscal 1998. Principal working capital changes included a $5.2 million decrease in accounts receivable, a $6.2 million decrease in inventories and an $8.3 million decrease in accounts payable and accrued expenses. The Company's investing activities were primarily capital improvements of $66.3 million. Net cash used in financing activities aggregated $15.1 million, including $5.2 million used to pay dividends on Common Stock, $15.4 million used to repurchase approximately 592,000 shares of Class A Common Stock pursuant to a tender offer distributed by the Company to all shareholders and vested stock option holders of Class A Common Stock, and receipt of $10.0 million from the sale of additional accounts receivable under the securitization facility.
Management believes that cash generated from operations, together with borrowings available under the Credit Facility and proceeds received in connection with sales of trade receivables, will be sufficient to meet the Company's working capital and capital expenditure needs in the foreseeable future. The Company will also continue to consider other options available to it in connection with future working capital and capital expenditure needs, including the issuance of additional debt and equity securities.
SEASONALITY
The Company's sales are broadly distributed over markets with staggered seasonality and, therefore, generally do not exhibit significant seasonal trends.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or a liability measured at its fair value, and changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company plans to adopt Statement No. 133 in fiscal 2001. Management does not believe the adoption of this statement will have a material effect on the consolidated financial position or results of operations of the Company.
During December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin 101, "Revenue Recognition" to establish guidelines for revenue recognition and enhance revenue recognition disclosure requirements. The Bulletin clarifies basic criteria for the culmination of the earnings process and will be effective for the third quarter of fiscal year 2001. Management does not believe the adoption of Staff Accounting Bulletin 101 will have a material effect on the consolidated financial statements of the Company.
During the first quarter of fiscal 1999, the Company adopted Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income", which requires the reporting and display of net income plus other comprehensive income items such as unrealized gains and losses on securities or foreign currency translation adjustments. The adoption of this statement did not have a material impact on the presentation of the Company's condensed consolidated financial statements, as the Company does not have any material other comprehensive income items to report.
During September 2000, the Financial Accounting Standards Board issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which supersedes an earlier statement and enhances the disclosure requirements relating to securitization transactions and collateral. Statement No. 140 is effective for transfers occurring after March 31, 2001. Management is currently assessing the implications of adopting the disclosure requirements of Statement No. 140.
FORWARD LOOKING STATEMENTS.
Statements herein regarding the Company's anticipated capital expenditures and anticipated performance in future periods constitute forward looking statements within the meaning of the Securities Act of 1993 and Securities Act of 1934. Such statements are subject to certain risks and uncertainties that could cause actual amounts to differ materially from those projected. With respect to anticipated capital expenditures, management has made certain assumptions regarding, among other things, maintenance of existing facilities and equipment, availability and desirability of new, technologically advanced equipment, installation and start up times, cost estimates and continued availability of financial resources. The estimated amount of capital expenditures is subject to certain risks, including, among other things, the risk that unexpected capital expenditures will be required and unexpected costs and expenses will be incurred. Further, statements herein regarding the Company's performance in future periods are subject to risks relating to, among other things, the cyclical and competitive nature of the textile industry in general, pressures on sales prices due to competitive and economic conditions, deterioration of relationships with, or loss of, significant customers, availability, sourcing and pricing of cotton and other raw materials, technological advancements, employee relations, continued availability of financial resources, difficulties integrating acquired businesses and possible changes in governmental policies affecting raw material costs. Management believes these forward looking statements are reasonable; however, undue reliance should not be placed on such forward looking statements, which are based on current expectations.
OTHER DATA
EBITDA, which is presented not as an alternative measure of operating results or cash flow from operations (as determined in accordance with generally accepted accounting principles) but because it is a widely accepted financial indicator of the ability to incur and service debt, is calculated by the Company as follows (amounts in thousands):
EBITDA as calculated by the Company is not necessarily comparable with similarly-titled measures presented by other companies.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Upward or downward changes in market interest rates and their impact on the reported interest expense of the Company's variable rate borrowings may affect the Company's earnings. However, the Company's use of interest rate swap agreements will limit the negative impact of higher interest rates. Assuming the revolving credit facility and interest rate swap agreements at August 25, 2000 remain in effect throughout fiscal 2001, a 10% change in the effective average interest rate would not have a material effect on the Company's pretax earnings for fiscal 2001. In addition, a 10% change in interest rates would not have a material effect on the fair value of the Company's interest rate swap agreements and senior subordinated notes.
Increases or decreases in the market price of cotton may affect the valuation of the Company's inventories and fixed purchase commitments and, accordingly, the Company's earnings. The potential decline in fair value of these inventories and fixed purchase commitments resulting from a 10% decline in market prices is estimated to be approximately $14 to $15 million.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AVONDALE INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS AUGUST 25, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Avondale Incorporated:
We have audited the accompanying consolidated balance sheets of Avondale Incorporated as of August 27, 1999 and August 25, 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended August 25, 2000. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Avondale Incorporated at August 27, 1999 and August 25, 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 25, 2000 in conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the Index at Item 14 (a) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia October 6, 2000
AVONDALE INCORPORATED
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
AVONDALE INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
AVONDALE INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
AVONDALE INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
AVONDALE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 25, 2000
1. Basis of Presentation: The accompanying consolidated financial statements include the accounts of Avondale Incorporated and its wholly owned subsidiaries, Avondale Mills, Inc. ("Avondale Mills") and Avondale Receivables Company (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated. Certain prior year financial statement amounts have been reclassified to conform with the current year's presentation. Unless otherwise stated, all references to years relate to the Company's fiscal year, which ends on the last Friday in August, rather than calendar years.
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.
Avondale Incorporated is a holding company and has no operations, liabilities or assets other than those related to its investment in Avondale Mills, Inc.
Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Inventories: Inventories are stated at the lower of cost or market value. Except for certain supply inventories valued on an average cost basis, cost is determined on a last-in, first-out ("LIFO") basis.
Periodically, the Company purchases cotton futures and option contracts to hedge exposure to price fluctuations in the cotton acquired from various suppliers. Gains and losses on these hedging contracts, which are immaterial, are deferred as an adjustment to the carrying value of inventories and recognized when these inventories are sold.
Property, Plant and Equipment: Property, plant and equipment is stated at cost and depreciated over the estimated useful lives of the related assets, which range from three to thirty years. Depreciation is calculated primarily using the straight-line method. Capital lease amortization is included with depreciation expense in the consolidated financial statements.
Long-Lived Assets: The Company periodically reviews the values assigned to long-lived assets, such as property, plant and equipment and goodwill. The associated depreciation and amortization periods are reviewed on an annual basis. Recoverability is measured based on the anticipated undiscounted cash flows from operations. Management believes that long-lived assets included in the accompanying balance sheets are appropriately valued.
Associate Benefit Plans: The Company has a discretionary profit sharing plan covering substantially all associates. Annual contributions by the Company are made to the plan in amounts determined by the board of directors. In addition, the plan has 401(k) savings options that are available to all associates. The Company matches 25% of the first 3% of compensation contributed by each associate. The Company also has a deferred compensation plan for certain key personnel. The related expense for these profit sharing and deferred compensation plans is charged to operations currently and totaled $8.1 million, $3.5 million and $7.3 million for fiscal 1998, 1999 and 2000, respectively.
Other Assets and Other Long-Term Liabilities: Other assets consist primarily of unamortized loan fees, goodwill, cash surrender value of life insurance, and deposits on machinery and equipment purchases. Loan fees are amortized on a straight line basis over the outstanding term of the related debt. Goodwill is amortized on a straight line basis over 20 years. Other long-term liabilities consist of accrued postretirement and workers' compensation benefits and deferred compensation for certain key management personnel.
Fair Value of Financial Instruments: The carrying values of cash, accounts receivable, certain other assets, accounts payable and accrued expenses approximate reasonable estimates of their fair values at August 27, 1999 and August 25, 2000. See Note 7 for disclosures related to the fair values of long-term debt and interest rate swap agreements.
Earnings Per Share: Earnings per share is calculated by dividing the reported net income for the period by the appropriate weighted average number of shares of common stock outstanding, as shown below (in thousands):
Stock Based Compensation: The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee and director stock options and adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("FAS 123"). The Company grants stock options for a fixed number of shares to employees and directors with an exercise price equal to the fair value of the shares at the date of grant and, accordingly, recognizes no compensation expense for the stock option grants.
Comprehensive Income: During the first quarter of fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income," which requires the reporting and display of net income plus other comprehensive income items such as unrealized gains and losses on securities or foreign currency translation adjustments. The adoption of this statement did not have a material impact on the presentation of the Company's consolidated financial statements, as the Company does not have any material other comprehensive income to report.
Recent Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or a liability measured at its fair value, and changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company plans to adopt Statement No. 133 in the first quarter of fiscal 2001. Management does not believe the adoption of this statement will have a material effect on the consolidated financial statements of the Company.
During December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin 101, "Revenue Recognition", to establish guidelines for revenue recognition and enhance revenue recognition disclosure requirements. The Bulletin clarifies basic criteria for the culmination of the earnings process and is effective for the third quarter of fiscal year 2001. Management does not believe the adoption
of Staff Accounting Bulletin 101 will have a material effect on the consolidated financial statements of the Company.
During September 2000, the Financial Accounting Standards Board issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which supersedes an earlier statement and enhances the disclosure requirements relating to securitization transactions and collateral. Statement No. 140 is effective for transfers occurring after March 31, 2001. Management is currently assessing the implications of adopting the disclosure requirements of Statement No. 140.
Revenue Recognition: The Company records revenues principally when products are shipped to customers. Consistent with recognized practice in the textile industry, the Company also records revenues to a lesser extent throughout the year (10%, 9% and 7% of total revenues in fiscal 1998, 1999 and 2000, respectively) on a bill and hold basis, invoicing goods that have been produced, packaged and made ready for shipment. These goods are effectively segregated from inventory which is available for sale, the risks of ownership of the goods have passed to the customer, and the remittance terms and collection experience on the related invoicing is consistent with all other sales by the Company.
The credit status of each customer is approved and monitored by the Company. Sales to V.F. Corporation and its affiliates represented 16% of net sales for fiscal 1998, 16% of net sales for fiscal 1999, and 15% of net sales for fiscal 2000.
2. Facility Restructuring: During the fourth quarter of fiscal 1999, the Company recorded pretax charges of $6.2 million to consolidate manufacturing facilities and dispose of certain inefficient equipment in its Graniteville, South Carolina and Augusta, Georgia operations.
During the third quarter of fiscal 1998, the Company recorded pretax charges of $2.7 million to consolidate manufacturing facilities and dispose of certain inefficient equipment in its Graniteville, South Carolina operations.
3. Segment Information: The Company operates principally in three segments: apparel fabrics, greige and specialty fabrics and yarns. Apparel fabrics manufactures and markets cotton and cotton-blend fabrics used in the manufacture of jeans, sportswear and utilitywear. Greige and specialty fabrics manufactures and markets a variety of fabrics to apparel, home furnishings, industrial, military and recreational product manufacturers. Yarns manufactures and markets cotton and cotton-blend yarns to customers in the knitting and weaving industries. The unallocated amounts reflect expenses, assets and capital expenditures for centralized transportation, warehouse and administrative services (in thousands).
4. Receivables Securitization Facility: On November 21, 1997, the Company executed a 5-year amendment to its April 29, 1996 agreement with a bank (the "Agreement") under which it may sell an undivided interest in a defined pool of revolving trade accounts receivable (the "Receivables") held by Avondale Receivables Company. Under the facility, the Receivables are transferred to a trust at a discount. The trust sells variable funding certificates to lending institutions or other investors representing undivided ownership interests in a defined portion of the Receivables. Such certificates do not represent obligations of, or interests in, and are not guaranteed or insured by, the Company. The proceeds from the issuance of the certificates are remitted to the Company.
The Company retains a residual interest in the Receivables in an amount equal to the excess of the Receivables over the certificates sold. Such residual interest is included in accounts receivable in the Consolidated Balance Sheets. All losses, credits or other adjustments relating to the Receivables constitute deductions applicable to the Company's residual interest in the Receivables. Accordingly, the Company maintains an allowance for such deductions based upon the expected collectibility of the Receivables. At August 27, 1999 and August 25, 2000, an allowance of $5.0 million and $4.8 million, respectively, related to the Receivables is included in other accrued expenses in the Consolidated Balance Sheets.
The Agreement requires the Company to maintain sufficient levels of Receivables to collateralize the outstanding certificates. The Agreement also contains various covenants, representations and warranties customary to the operation of such securitization programs, but does not include financial covenants or cross defaults to any other obligations of the Company. The Company, as agent for the trust, is responsible for the collection and administrative processing of the Receivables.
Under the Agreement, the trust may issue certificates of up to $120.0 million. Certificates of $93.0 million and $86.0 million, respectively, were outstanding at August 27, 1999 and August 25, 2000. Accounts receivable in the Consolidated Balance Sheets have been reduced by approximately $94.0 million and $87.1 million, respectively, representing the face amount of the outstanding receivables sold at those dates.
For the fiscal years ended August 28, 1998, August 27, 1999 and August 25, 2000, discounts of $7.3 million, $5.6 million and $5.6 million, respectively, on sales of Receivables have been included in discounts and expenses on sales of receivables in the Consolidated Statements of Income. The Company sells the Receivables as an alternative to incurring additional debt. Viewed on this basis, the Company's ongoing cost of the facility at August 25, 2000 is equal to the Eurodollar rate (adjusted for any reserves) plus 0.40% or the bank's base rate of interest.
5. Inventories: Components of inventories are as follows (in thousands):
6. Income Taxes: Provision for income taxes is composed of the following (in thousands):
The following table shows the reconciliation of federal income tax expense at the statutory rate on income before income taxes to reported income tax expense (in thousands):
The Company made income tax payments of $11.5 million, $4.6 million and $17.3 million during fiscal 1998, 1999 and 2000, respectively.
Deferred income taxes are provided for temporary differences in financial and income tax reporting. Significant components of the Company's year-end deferred tax liabilities and assets are as follows (in thousands):
7. Long-Term Debt: Long-term debt consists of the following (in thousands):
The Company maintains a secured revolving credit facility with a group of banks, amended effective September 28, 2000, which provides aggregate borrowing availability of a maximum of $125 million through January 2004. Under the terms of this agreement, the Company can designate an interest rate tied to the Eurodollar rate (adjusted for any reserves) or the banks' base rate, or at alternative rates negotiated with the lead bank, for specified time periods. A commitment fee is payable quarterly on the average daily unused portion of the revolving credit commitment. The revolving credit facility is secured by substantially all of the Company's assets. Covenants of the credit agreement require the Company to maintain certain cash flow ratios and debt to equity ratios, and contain restrictions on payment of dividends. Under the most restrictive of these covenants, $20.0 million of retained earnings was available for payment of dividends at August 25, 2000.
The Company uses interest rate swap agreements to effectively convert a portion of its outstanding revolving credit facility and industrial revenue bonds to a fixed rate basis, thus reducing the impact of interest rate changes on future income. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the lives of the agreements without an exchange of the underlying principal amounts. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense related to the debt. The related amount payable to or receivable from counterparties is included in other liabilities or assets. At August 25, 2000, the Company had interest rate swap agreements with notional amounts aggregating $60 million providing an effective weighted average interest rate of 5.5% on that equivalent portion of the revolving credit facility. These interest rate swap agreements had no significant market value at August 25, 2000. The Company does not anticipate realization of any gain or loss as the interest rate swap agreements are anticipated to remain outstanding through maturity.
During fiscal 2000, the Company issued $7.5 million of floating rate, industrial revenue bonds in connection with a linked ring spinning modernization program at a facility in Rockford, Alabama. The bonds mature on April 1, 2010 and represent a capital lease obligation which is secured by a letter of credit agreement issued under the revolving credit facility.
One of the remaining industrial revenue bonds also represents a capital lease obligation. This lease obligation plus the other industrial revenue bonds are secured by letter of credit agreements with a bank. The letter of credit agreements are, in turn, secured by the property, plant and equipment at four plant locations, which had a carrying value of approximately $29.9 million at August 25, 2000. Covenants of the letter of credit agreements substantially adopt the restrictive covenant provisions of the revolving credit facility.
Avondale Mills has $125 million of 10.25% senior subordinated notes outstanding which mature on May 1, 2006. The notes are unsecured and the guarantee of these notes by the Company is subordinated
to all existing and future senior indebtedness of the Company. Interest on the notes is due on May 1 and November 1 of each year. At August 27, 1999 and August 25, 2000, the market value of the notes was approximately $116 million and $119 million, respectively. The Company does not anticipate settlement of the notes at fair value and currently expects the notes to remain outstanding through maturity.
On or after May 1, 2001, the senior subordinated notes will be redeemable at the Company's option, in whole or in part, at a scheduled redemption price of 105.125% in 2001 declining to 100% in 2004 and thereafter.
The indenture under which the senior subordinated notes were issued contains, among other things, certain restrictive covenants which apply to Avondale Mills on issuance of additional debt, payment of dividends, retirement of capital stock or indebtedness, purchase of investments, sales or transfers of assets, certain consolidations or mergers and certain transactions with affiliates.
At August 25, 2000, the Company was in compliance with the covenants of the revolving credit facility, subordinated note indenture and letter of credit agreements.
The carrying value of the Company's revolving credit facility and industrial revenue bonds approximates fair value.
Aggregate maturities of long-term debt, as amended effective September 28, 2000, are as follows (in thousands):
In connection with the Company's borrowings, no interest has been capitalized. The Company paid interest on revolving credit, long-term debt and interest rate swap agreements of approximately $23.5 million , $21.9 million and $19.3 million in fiscal 1998, 1999 and 2000, respectively.
8. Common Stock: Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to 20 votes with respect to matters submitted to a vote of shareholders. Each share of the Class B Common Stock is convertible at any time, at the option of its holder, into one share of Class A Common Stock. The Class B Common Stock will convert automatically into Class A Common Stock, and thereby lose its special voting rights, if such Class B Common Stock is sold or otherwise transferred to any person or entity other than certain designated transferees.
During fiscal 1998, the Company repurchased approximately 592,000 shares of Class A Common Stock for an aggregate purchase price of $15.4 million. These shares were repurchased pursuant to a tender offer, distributed to all shareholders and vested stock option holders of the Company's Class A Common Stock, to purchase for cash up to $18.0 million worth of Class A Common Stock.
During fiscal 2000, the Company repurchased approximately 155,000 shares of Class A Common Stock for an aggregate purchase price of $2.8 million, pursuant to offers to sell made by various shareholders.
All shares repurchased have been canceled and reinstated as authorized but unissued shares of Class A Common Stock.
The Company maintains an employee Stock Option Plan that allows for the grant of non-qualified and incentive stock options. Under this Stock Option Plan, options to purchase up to 1,081,250 shares of Class A Common Stock may be granted to full-time employees, including executive officers of the Company. Activity under the plan is summarized as follows (option shares in thousands):
The exercise prices of the options granted approximated the fair market value of the Company's Common Stock on the dates of grant. In conjunction with the fiscal 1998 stock repurchase described above, certain participants in the Company's Stock Option Plan redeemed options in exchange for an aggregate cash payment of $1.2 million. The Company recorded the cost of the redemption as compensation expense, which is included in selling and administrative expenses. Options forfeited by employees leaving the Company are reinstated as available for grant. All options granted vest ratably over five years and may be exercised for a period of ten years. At August 25, 2000, there were 71,000 stock options available for grant.
The Company maintains a Stock Option Plan for Non-employee Directors, under which 100,000 shares of the Company's Class A Common Stock are reserved for issuance. Under the plan, each director will automatically be granted annually, on the fifth day following the annual shareholders meeting, a fully vested option to purchase 2,000 shares of Class A Common Stock, at an option price equal to the fair market value of such stock on the date the option is granted. Options granted are exercisable for a period of ten years, subject to certain limitations. During fiscal 1998, 1999 and 2000, 12,000 non-qualified options were granted in each year at an exercise price of $18.00, $22.00 and $19.00 per share, respectively. At August 25, 2000, 36,000 non-qualified options remain outstanding and exercisable.
Pro forma information regarding the effect on the Company's results of operations, assuming employee and non-employee director stock options had been accounted for under the fair value method of
FAS 123, was calculated using the "minimum value" method which is permitted for companies with nonpublic equity. The following weighted average assumptions were used in these calculations for options granted in fiscal 1998, 1999 and 2000:
The total value of the options granted during fiscal 1998, 1999 and 2000 was computed as approximately $32,000, $44,000 and $332,000, respectively, which would be amortized over the vesting period of the options. If the Company had accounted for these plans in accordance with FAS 123, the reported net income and net income per share would have decreased by the following pro forma amounts (in thousands, except per share data):
Because the accounting provisions of FAS 123 only apply to options granted after December 1995, the pro forma compensation cost presented may not be representative of that to be expected in future years.
9. Commitments and Contingencies: The Company is involved in certain environmental matters and claims. The Company has provided reserves to cover management's estimates of the costs of investigating, monitoring and remediating these and other environmental conditions. If more costly remediation measures are necessary than those believed to be probable based on current facts and circumstances, actual costs may exceed the reserves provided. However, based on the information currently available, management does not believe that the outcome of these matters will have a material adverse effect on its future results of operations or financial position.
On March 3, 1993, a case was filed in the Circuit Court of Jefferson County, Alabama by Joe and Darnell Sullivan and Tommy and Stella Fay Gould and other parties against the Alabama Power Company, Russell Corporation, the Company and certain other parties ("Sullivan"). The complaint alleges that the Company and such other parties negligently or willfully discharged industrial wastewater containing hazardous materials, which allegedly damaged the plaintiffs' real properties and caused mental anguish to the plaintiffs. The complaint seeks an award of compensatory and punitive damages. After two years and eleven months of litigation, the plaintiffs amended their complaint to include class action claims and treatment. Although the Trial Court granted class certification, the Supreme Court of Alabama reversed the class certification order, and the case proceeded as to the individual claims of the five plaintiffs.
On November 17, 1998, the trial court handed down a verdict of $155,200 in compensatory damages and $52,398,000 in punitive damages against the Alabama Power Company, Russell Corporation and the Company, on a joint and several basis, in favor of the plaintiffs. This case is now on appeal to the
Supreme Court of Alabama. Oral argument was held in January 2000, and on August 4, 2000, the Alabama Supreme Court issued a 6-3 opinion reversing the verdict and ordering a judgment to be entered in favor of the defendants due to plaintiff's failure of proof. The plaintiffs filed an Application for Rehearing on August 18, 2000, and the Company submitted its response on September 1, 2000. On October 16, 2000, the Alabama Supreme Court scheduled further limited oral arguments for November 16, 2000 to include all parties except the Alabama Power Company. While the outcome of this case cannot be predicted with certainty, based on currently available information, the Company does not believe that it will have a material adverse effect on the Company's financial condition or results of operations.
On February 28, 1999, a case was filed in the Circuit Court of Jefferson County, Alabama by Chris and Regina Christian against Russell Corporation, Russell Lands, Inc., Alabama Power, the Company and certain other parties. The complaint alleges that the Company, among others, negligently and/or wantonly caused or permitted the discharge and disposal of sewage sludge and contaminants into the lake adjacent to the plaintiffs' property, which allegedly interfered with the plaintiffs' use of the property. As a result of these alleged actions, the plaintiffs claim that the value of their property has been diminished and that they suffered mental anguish, bodily injury and other pecuniary loss. The complaint seeks compensatory and punitive damages in an undisclosed amount. The Company intends to vigorously defend this case and believes that it has a number of defenses available to it. This case has been stayed by the trial court pending resolution of the appeals in the Sullivan case. While the outcome of this case cannot be predicted with certainty, based upon currently available information, the Company does not believe that it will have a material adverse effect on the Company's financial condition or results of operations.
On January 13, 2000, a case was filed in the Circuit Court of Jefferson County, Alabama by Larry and Cynthia Locke and the owners of fourteen other residences in the Raintree subdivision of Lake Martin, against Russell Corporation, Alabama Power and the Company. The complaint alleges that the Company, among others, negligently and/or wantonly caused or permitted the discharge and disposal of sewage sludge and contaminants into the lake adjacent to the plaintiffs' property, which allegedly interfered with the plaintiffs' use of the property. As a result of these alleged actions, the plaintiffs claim that the value of their property has been diminished and that they suffered other damages. The complaint seeks compensatory and punitive damages in an undisclosed amount. The Company intends to vigorously defend this case and believes that it has a number of defenses available to it. This case has been stayed by the trial court pending resolution of the appeal in the Sullivan case. While the outcome of this case cannot be predicted with certainty, based upon currently available information, the Company does not believe that it will have a material adverse effect on the Company's financial condition or results of operations.
The Company is also a party to other litigation incidental to its business from time to time. The Company is not currently a party to any litigation that management, in consultation with legal counsel, believes, if determined adversely to the Company, would have a material adverse effect on the Company's financial condition or results of operations.
The Company leases certain of its facilities and equipment, primarily a warehouse, several sales offices and computer equipment. Future minimum rental payments required under such leases that have lease terms in excess of one year are as follows (in thousands):
Rent expense for operating leases totaled $2.6 million, $2.7 million and $2.3 million for fiscal 1998, 1999 and 2000, respectively.
Commitments for future additions to plant and equipment were approximately $88.5 million at August 25, 2000. Commitments for the purchase of raw materials were approximately $110.4 million at August 25, 2000.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company and its wholly owned subsidiary, Avondale Mills, are as follows:
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(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Mr. Calhoun has been elected a director of the Company pursuant to that certain shareholder's agreement dated as of April 29, 1996 by and among the Company and certain shareholders of the Company.
G. Stephen Felker has served as Chairman of the Board of the Company since 1992, President and Chief Executive Officer of the Company since 1980, and in various other capacities since 1974. Mr. Felker has served as Chairman of the Board and Chief Executive Officer of Avondale Mills since 1986, when the Company acquired Avondale Mills, and President of Avondale Mills since 1995. Mr. Felker serves as Chairman of the Georgia State Advisory Board of Wachovia Bank, N.A. and is a director of American Fibers and Yarns, Inc.
Jack R. Altherr, Jr. has served as Vice Chairman of the Company and Avondale Mills since May 1996, Chief Financial Officer and a director of the Company since December 1989, Chief Financial Officer of Avondale Mills since October 1988 and a director of Avondale Mills since 1993. With the exception of fiscal 1995, he served as Secretary of the Company and Avondale Mills from August 1993 until November 1998. Mr. Altherr has served the Company and Avondale Mills in various other capacities since July 1982.
T. Wayne Spraggins has served as Vice President of Avondale Mills and President, Manufacturing Operations since May 1996. Mr. Spraggins joined Avondale Mills as a standards engineer in August 1961 and has served Avondale Mills in various other capacities, including Vice President, Manufacturing of Avondale Mills, since that time.
Keith M. Hull has served as President, Marketing and Sales, of Avondale Mills, Inc. since August 1999, having served as President, Apparel Fabrics, the apparel fabrics division of Avondale Mills since May 1996 and Vice President of Avondale Mills since April 1989. He has served the Company in various other capacities including Vice President, Marketing since 1977. Mr. Hull serves as a director of Cherokee, Inc.
Craig S. Crockard has served as Vice President, Planning and Development of Avondale Mills since September 1983. Mr. Crockard has served Avondale Mills in various other capacities, including Vice President, Corporate Services, since September 1966.
M. Delen Boyd has served as Vice President, Controller of Avondale Mills since May 1996 and Secretary of the Company and Avondale Mills since November 1998. Mr. Boyd served as Assistant Secretary of the Company and Avondale Mills from May 1996 until November 1998. Mr. Boyd has served as Controller of Avondale Mills since 1987. Mr. Boyd joined Avondale Mills in 1982 and has served in various capacities, including Assistant Controller and Corporate Director of Accounting and Taxes.
J. Elliott Woodward has served as Vice President, Treasurer of Avondale Mills since May 1996. Mr. Woodward served as Vice President and Controller of Graniteville Company from November 1993 to May 1996. Mr. Woodward joined Graniteville Company in 1984 and served in various capacities from 1984 to May 1996, including Manager of General Accounting and Controller.
Sharon L. Rodgers has served as Vice President, Human Resources of Avondale Mills since May 1996. Ms. Rodgers served as Vice President, Legal and Assistant Secretary of Graniteville Company from 1993 to May 1996. Ms. Rodgers joined Graniteville Company in 1980 and served in various other capacities at Graniteville Company during the thirteen years ended in 1993.
Kenneth H. Callaway has served as a director of the Company since November 1987 and of Avondale Mills since August 1993. Mr. Callaway has been President of Calgati Chemical Company, a specialty chemical manufacturer, since December 1991.
Robert B. Calhoun has served as a director of the Company since August 1993 and of Avondale Mills since November 1991. He is presently a Managing Director and Co-founder of Monitor Clipper Partners. Mr. Calhoun is also President of Clipper Asset Management Corporation, the sole general partner of The Clipper Group, L.P., a private investment firm, since January 1991, and of Clipper Capital Corporation, the sole general partner of Clipper, an affiliated private investment firm, since 1993. From 1975 to 1991, Mr. Calhoun was a Managing Director of Credit Suisse First Boston Corporation, an investment banking firm. Mr. Calhoun is also a director of Interstate Bakeries Corporation, Travel Centers of America, Inc., and Lord Abbett Family of Funds.
Harry C. Howard has served as a director of the Company since August 1993 and of Avondale Mills since July 1986. Mr. Howard retired from the law firm of King & Spalding, where he had practiced law since 1956, as of December 31, 1992.
C. Linden Longino, Jr. has served as a director of the Company since November 1975 and of Avondale Mills since August 1993. Mr. Longino was a Senior Vice President of SunTrust Bank, Atlanta from December 1978 until his retirement in July 1996. During his 34-year career with SunTrust Bank, Atlanta, Mr. Longino served in various management positions. He now serves in various capacities with several community and educational organizations.
Dale J. Boden has served as a director of the Company and Avondale Mills since November 1994. Mr. Boden has served as President and Chief Executive Officer of B.F. Capital, Inc., a private investment company, since January 1993.
John P. Stevens has served as a director of the Company since January 1970 and of Avondale Mills since July 1986. Mr. Stevens served as Executive Vice President of Wachovia Bank, N.A. from April 1981 until his retirement in January 1994 and was responsible for managing the Government Banking and Public Finance Department. Mr. Stevens served as a consultant to Wachovia Bank, N.A. from February 1994 to February 1996. In addition, from February 1994 until the present time, Mr. Stevens has been a partner in The Stevens Group, a consulting firm specializing in providing assistance in a wide range of business and governmental affairs.
All executive officers of the Company are elected annually by and serve at the discretion of the Board of Directors.
The directors of the Company are elected annually by the shareholders of the Company. During the fiscal year ended August 25, 2000, the Board of Directors of the Company held four meetings.
The Compensation Committee of the Board of Directors during fiscal 2000 consisted of John P. Stevens, Chairman of the Compensation Committee, Dale J. Boden, Robert B. Calhoun and Kenneth H. Callaway. None of the Members of the Compensation Committee is an employee of the Company. The Compensation Committee's principal responsibilities consist of establishing the compensation for the Company's Named Executive Officers and administering the Company's Stock Option Plan. During the fiscal year ended August 25, 2000, the Compensation Committee held one meeting. See Report on Executive Compensation.
The Audit Committee of the Board of Directors during fiscal 2000 consisted of Harry C. Howard, Chairman of the Audit Committee, Robert B. Calhoun and C. Linden Longino, Jr. None of the members of the Audit Committee is an employee of the Company. During the fiscal year ended August 25, 2000, the Audit Committee held three meetings.
The Audit Committee meets with the independent public accountants, management and internal auditors to assure that all are carrying out their respective responsibilities. The Audit Committee reviews the performance and fees of the independent public accountants prior to recommending their appointment, and meets with them, without management present, to discuss the scope and results of their audit work, including the adequacy of internal controls and the quality of financial reporting. Both the independent public accountants and the internal auditors have full access to the Audit Committee. A written charter for the Audit Committee was approved by the Board of Directors effective July 13, 2000.
During fiscal 2000, the Company paid each non-employee director a quarterly fee of $5,250 plus reimbursement of out-of-pocket expenses.
The Company adopted a stock option plan for its non-employee directors, effective September 1, 1997, under which 100,000 shares of the Company's Class A Common Stock are reserved for issuance. Under the plan, each director will automatically be granted annually, on the fifth day following the annual
shareholders meeting, a fully vested option to purchase 2,000 shares of Class A Common Stock, at an option price equal to the fair market value of such stock on the date the option is granted. Options granted are exercisable for a period of ten years, subject to certain limitations. During fiscal 1998, 1999, and 2000, 12,000 non-qualified options were granted in each respective year. At August 25, 2000, 36,000 non-qualified options remained outstanding and exercisable.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Summary Compensation Table. The table below sets forth certain information concerning the compensation earned during fiscal 2000, 1999 and 1998 by the Company's Chief Executive Officer and its four other most highly compensated executive officers (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
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(1) The aggregate amount of perquisites and other personal benefits, if any, did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported for each Named Executive Officer and has therefore been omitted.
(2) Amounts shown include cash bonuses earned under the Company's management incentive plan, payments received in the Company's distribution of cash profit sharing to all eligible associates of the Company, payments received in lieu of profit sharing contributions under the Company's Associate Profit Sharing and Savings Plan on compensation in excess of qualified plan limits, and such other payments as the Compensation Committee of the Board of Directors elects to make based upon the Company's and respective officer's performance.
(3) Amounts shown reflect for fiscal 1998, (i) matching 401(k) contributions made by the Company to the Company's Associate Profit Sharing and Savings Plan of $1,200 on behalf of each Named Executive Officer, (ii) profit sharing contributions made by the Company to the Company's Associate Profit Sharing and Savings Plan of $5,032 on behalf of each Named Executive Officer and (iii) life insurance premiums of $4,181, $9,767, $2,804 and $2,537 paid by the Company on behalf of Messrs. Altherr, Spraggins, Hull and Crockard, respectively and taxable income of $807
to Mr. Felker, in conjunction with a split dollar insurance agreement. Amounts shown reflect, for fiscal 1999, (i) matching 401(k) contributions made by the Company to the Company's Associate Profit Sharing and Savings Plan of $1,200 on behalf of each Named Executive Officer and (ii) life insurance premiums of $3,933, $9,242, $2,505 and $2,534 paid by the Company on behalf of Messrs. Altherr, Spraggins, Hull and Crockard, respectively and taxable income of $1,010 to Mr. Felker in conjunction with a split dollar insurance agreement. Amounts shown reflect, for fiscal 2000, (i) matching 401(k) contributions made by the Company to the Company's Associate Profit Sharing and Savings Plan of $1,275 on behalf of Messrs. Felker, Altherr, Spraggins and Hull, respectively, and $1,002 on behalf of Mr. Crockard, (ii) profit sharing contributions made by the Company to the Company's Associate Profit Sharing and Savings Plan of $4,617 on behalf of Messrs. Felker, Altherr, Spraggins and Hull, respectively, and $3,590 on behalf of Mr. Crockard and (iii) life insurance premiums of $4,006, $9,138, $2,509, and $2,596 paid by the Company on behalf of Messrs. Altherr, Spraggins, Hull and Crockard, respectively, and taxable income of $1,339 to Mr. Felker in conjunction with a split dollar insurance agreement.
Option Grants Table. The table below sets forth certain information relating to options granted during fiscal 2000 to each Named Executive Officer.
OPTION GRANTS TABLE
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Aggregated Options Table. The table below sets forth certain information with respect to options held at the end of fiscal 2000 by each Named Executive Officer.
AGGREGATED OPTIONS TABLE
(1) All options are options to purchase Class A Common Stock of Avondale Incorporated. There is no existing public market for the Class A Common Stock. The values shown are based on management's estimate of the fair market value of the Class A Common Stock at August 25, 2000.
Long-Term Incentive Plans. The table below sets forth certain information with respect to phantom units held at the end of fiscal 2000 by each Named Executive Officer. No phantom units were awarded during fiscal 2000.
LONG-TERM INCENTIVE PLANS -- UNITS HELD AT AUGUST 25, 2000
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(1) Each phantom unit equals 398.606 phantom shares. The value of each phantom share is equal to the result obtained by dividing (i) five times Avondale's earnings before depreciation, amortization, LIFO inventory adjustments, interest and income taxes for the 10 fiscal quarters immediately preceding such date divided by 2.5, plus (ii) certain "balance sheet adjustments" by the sum of (i) the aggregate number of outstanding phantom shares plus (ii) the aggregate number of outstanding shares of Class A Common Stock and Class B Common Stock of the Company. Phantom units vest at the rate of 5.0% per year for each full and uninterrupted year that the Named Executive Officer remains employed by the Company after August 31, 1989, and vest fully if the Named Executive Officer dies before his employment is terminated. The value of vested phantom
units is payable beginning on the later of the date on which the Named Executive Officer reaches the age of 65 or the date on which the employment of such Named Executive Officer terminates (the "Normal Payment Date"), in 10 equal annual installments, with interest equal to the one-year U.S. Treasury Bill rate in effect on the Normal Payment Date. If the Named Executive Officer dies before his employment with the Company is terminated, the value of his phantom units on the date of death is payable to his beneficiary as described above. If the Named Executive Officer dies after his Normal Payment Date, the present value of the balance of the annual installments is payable in a lump sum to his beneficiary. A Named Executive Officer will forfeit all interest in his Phantom Stock Units (whether or not vested) if he violates certain non-compete covenants applicable during such Named Executive Officer's employment and for a period of five years after termination of such employment.
(2) There are no threshold, target or maximum amounts payable with respect to phantom unit awards made by the Company. The amounts shown reflect the future value, excluding interest payable during the installment payment period, as of September 1, 2000, of vested and non-vested phantom units held at the end of fiscal 2000 based on the results of the Company for the 10 fiscal quarters ended August 25, 2000.
REPORT ON EXECUTIVE COMPENSATION
Compensation Policy. The Company's executive compensation policy is designed to attract, retain and motivate executive officers to maximize the Company's performance and shareholder value by:
- providing base salaries that are market-competitive;
- rewarding the achievement of the Company's business plan goals and earnings objectives; and
- creating stock ownership opportunities to align the interests of executive officers with those of shareholders.
In light of the Company's compensation policy, the primary components of its executive compensation program for fiscal 2000 included base salaries, cash bonuses and stock options.
Base Salary. Each executive officer's base salary, including the Chief Executive Officer's base salary, is determined based upon a number of factors including the executive officer's responsibilities, contribution to the achievement of the Company's business plan goals, demonstrated leadership skills and overall effectiveness, and length of service. Base salaries are also designed to be competitive with those offered in the various markets in which the Company competes for executive talent and are analyzed with a view towards desired base salary levels over a three-year to five-year time period. Each executive officer's salary is reviewed annually and although these and other factors are considered in setting base salaries, no specific weight is given to any one factor. During fiscal 2000, the base salary of each Named Executive Officer other than the Chief Executive Officer was increased by 4% to 5% over each such executive officer's fiscal 1999 base salary. Mr. Felker's base salary has not been adjusted since November 1, 1995.
Cash Bonuses. Each executive officer, including the Chief Executive Officer, is eligible to receive an annual cash bonus under the management incentive plan. The Company's management incentive plan is designed to motivate key managers and sales people as well as executive officers and reward the achievement of specific business plan goals. Under the Company's management incentive plan, in fiscal 2000, certain executive officers were eligible to earn a cash bonus in an amount from 25% up to 125% of their respective base salaries depending on a number of factors including, without limitation, the Company's financial performance. In addition, the executive officers may receive payments in lieu of profit sharing contributions under the Company's Associate Profit Sharing and Savings Plan on compensation in excess of qualified plan limits. During fiscal 2000, the Named Executive Officers other than the Chief Executive Officer earned bonuses ranging from 40% to 65% of their respective base salaries. Mr. Felker's bonus was equal to 125% of his base salary.
Stock Options. The grant of stock options is designed to align the interests of executive officers with those of shareholders in the Company's long-term performance. Stock options granted have exercise prices equal to the fair market value of the underlying shares on the date of grant so that compensation is earned only through long-term appreciation in the fair market value of the underlying shares. Stock options are granted from time to time if warranted by the Company's growth and profitability and individual grants are based on, among other things, the executive officer's responsibilities and individual performance. To encourage an executive officer's long-term performance, stock options generally vest over five years and terminate ten years after the date of grant. The creation of opportunities to own stock is considered the most significant component in an executive officer's compensation package. During fiscal 2000, Craig S. Crockard received options to purchase 10,000 shares of Class A Common Stock.
John P. Stevens Dale J. Boden
Robert B. Calhoun Kenneth H. Callaway
THE FOREGOING REPORT SHALL NOT BE DEEMED INCORPORATED BY REFERENCE BY ANY GENERAL STATEMENT INCORPORATING BY REFERENCE THIS ANNUAL REPORT INTO ANY FILING UNDER THE SECURITIES ACT OF 1993, AS AMENDED, OR UNDER THE SECURITIES EXCHANGE ACT OF 1934 (TOGETHER, THE "ACTS"), EXCEPT TO THE EXTENT THAT THE COMPANY SPECIFICALLY INCORPORATES THIS INFORMATION BY REFERENCE, AND SHALL NOT OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth certain information regarding the beneficial ownership of the Common Stock of the Company as of November 1, 2000, by (i) each person who is known to the Company to be the beneficial owner of more than 5% of the outstanding Class A Common Stock or Class B Common Stock, (ii) each of the Named Executive Officers, (iii) each of the directors of the Company and (iv) all directors and executive officers of the Company as a group. Except as set forth below, the shareholders named below have sole voting and investment power with respect to all shares of Common Stock shown as being beneficially owned by them.
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* Less than 1%
(1) Except as otherwise noted, the address of each person who is an officer or a director of the Company is c/o Avondale Mills, Inc., 506 South Broad Street, Monroe, Georgia 30655.
(2) Includes (i) 2,093,750 shares of Class A Common Stock held of record by Felker Investments, Ltd., a partnership of which Mr. Felker is the general partner (as the general partner, Mr. Felker is deemed to beneficially own such shares under Rule 13d-3 under the Exchange Act), (ii) 978,939 shares of Class A Common Stock issuable upon conversion of the 978,939 shares of Class B Common Stock beneficially owned by Mr. Felker and (iii) 260,000 shares of Class A Common Stock issuable upon exercise of stock options beneficially owned by Mr. Felker, which shares are deemed beneficially owned by Mr. Felker under Rule 13d-3 under the Exchange Act.
(3) Includes 120,000 shares of Class A Common Stock issuable upon exercise of stock options beneficially owned by Mr. Altherr, which shares are deemed beneficially owned by Mr. Altherr under Rule 13d-3 under the Exchange Act.
(4) Includes 40,000 shares of Class A Common Stock issuable upon exercise of stock options beneficially owned by Mr. Spraggins, which shares are deemed beneficially owned by Mr. Spraggins under Rule 13d-3 under the Exchange Act.
(5) Includes 66,001 shares of Class A Common Stock issuable upon exercise of stock options beneficially owned by Mr. Hull, which shares are deemed beneficially owned by Mr. Hull under Rule 13d-3 under the Exchange Act.
(6) Reflects (i) 6,000 shares of Class A Common Stock issuable upon exercise of stock options beneficially owned by Mr. Boden, which shares are deemed beneficially owned by Mr. Boden under Rule 13d-3 under the Exchange Act, and (ii) 6,333 shares beneficially owned by Textile Capital Partners with respect to which Mr. Boden has shared voting and investment power, and (iii) 8,500 shares beneficially owned by Textile Captial Partners II with respect to which Mr. Boden has shared voting and investment power, and (iv) 100,000 shares beneficially owned by The Sterling Trust; Hilliard Lyons Trust Co. Trustee, with respect to which Mr. Boden is a beneficiary and has shared voting and investment power. Mr. Boden is the majority shareholder of Textile Capital Partners and, consequently is deemed to beneficially own under Rule 13d-3 under the Exchange Act all of the shares beneficially owned by these entities.
(7) Includes 6,000 shares of Class A Common Stock issuable upon exercise of stock options beneficially owned by Mr. Callaway, which shares are deemed beneficially owned by Mr. Callaway under Rule 13d-3 under the Exchange Act.
(8) The address of Mr. Calhoun is c/o Monitor Clipper Partners, Two Canal Park, Cambridge, MA 02141.
(9) Includes (i) 6,000 shares of Class A Common Stock issuable upon exercise of stock options beneficially owned by Mr. Calhoun, which shares are deemed beneficially owned by Mr. Calhoun under Rule 13d-3 under the Exchange Act, (ii) shares beneficially owned by Clipper Capital Associates, L.P. ("CCA"), Clipper/Merchant Partners, L.P., Clipper Equity Partners I, L.P., Clipper/Merban L.P. ("Merban"), Clipper/European Re, L.P. and CS First Boston Merchant Investments 1995/96, L.P. ("Merchant"), (whose address is 650 Madison Avenue, 9th Floor, New York, New York 10022).
(10) CCA is the general partner of all of the Clipper Group partnerships other than Merchant. The general partner of CCA is Clipper Capital Associates, Inc. ("CCI"), and Mr. Calhoun is the sole stockholder and a director of CCI. Clipper, an affiliate of Mr. Calhoun, has sole voting and investment power with respect to the shares of Class A Common Stock beneficially owned by Merchant. As a result, each of Mr. Calhoun, CCA and CCI is deemed to beneficially own all shares of Class A Common Stock beneficially owned by the Clipper Group (other than Merchant), and Mr. Calhoun is deemed to beneficially own the shares of Class A Common Stock beneficially owned by Merchant. It is anticipated that Merban will beneficially own shares of Class A Common Stock representing approximately 5.9% of the outstanding Class A Common Stock and Clipper/Merchant Partners, L.P., will beneficially own shares of Class A Common Stock representing approximately 5.0% of the outstanding Class A Common Stock. Each of the other members of the Clipper Group will beneficially own less than 5.0% of the outstanding Class A Common Stock.
(11) Includes 6,000 shares of Class A Common Stock issuable upon exercise of stock options beneficially owned by Mr. Howard, which shares are deemed beneficially owned by Mr. Howard under Rule 13d-3 under the Exchange Act.
(12) Includes (i) 6,000 shares of Class A Common Stock issuable upon exercise of stock options beneficially owned by Mr. Longino, which shares are deemed beneficially owned by Mr. Longino under Rule 13d-3 under the Exchange Act.
(13) Includes (i) 2,500 shares beneficially owned by Mr. Stevens' spouse, for which Mr. Stevens shares neither voting nor investment power, and (ii) 6,000 shares of Class A Common Stock issuable upon exercise of stock options beneficially owned by Mr. Stevens, which shares are deemed beneficially owned by Mr. Stevens under Rule 13d-3 under the Exchange Act.
(14) Merchant Capital, Inc. ("Merchant Capital"), an affiliate of CS First Boston Corporation, is the general partner of Merchant and the 99% limited partner of Clipper/Merchant Partners, L.P. CS Holding, an affiliate of CS First Boston Corporation, is the indirect 99% limited partner of
Merban. None of Merchant, Merchant Capital, CS First Boston Corporation and CS Holding is an affiliate of Clipper or CCA.
(15) Grayward Company's address is c/o SunTrust Bank, Nashville, N.A., P.O. Box 305110, Nashville, Tennessee 37230. Grayward Company is a trust of which SunTrust Bank, Nashville, N.A. serves as trustee. As trustee, SunTrust Bank, Nashville, N.A. is deemed to beneficially own under Rule 13d-3 under the Exchange Act all of the shares beneficially owned by Grayward Company.
(16) The address of Felker Investments, Ltd. is c/o G. Stephen Felker, 506 South Broad Street, Monroe, Georgia 30655.
(17) The address of the Avondale Mills, Inc. Associate Profit Sharing and Savings Plan (the "Plan") is c/o Scudder Trust Company, P.O. Box 957, Salem, New Hampshire 03079. Scudder Trust Company serves as trustee for the Plan and, as such, is deemed to beneficially own under Rule 13d-3 under the Exchange Act all of the shares beneficially owned by the Plan.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Kenneth H. Callaway, a director, is president of Calgati Chemical Company, Ltd. During fiscal 2000, the Company purchased specialty chemicals from Calgati Chemical Company, Ltd. in the aggregate amount of approximately $235,000.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The following Consolidated Financial Statements of the Company and its consolidated subsidiaries and the Report of the Independent Auditors, included in the Registrant's Annual Report to Shareholders for the year ended August 25, 2000 are included in Part II, Item 8.
Report of Independent Public Accountants Consolidated Balance Sheets as of August 27, 1999 and August 25, 2000 Consolidated Statements of Income -- Fiscal Years Ended August 28, 1998, August 27, 1999 and August 25, 2000 Consolidated Statements of Shareholders' Equity-- Fiscal Years Ended August 28, 1998, August 27, 1999 and August 25, 2000 Consolidated Statements of Cash Flows-- Fiscal Years Ended August 28, 1998, August 27, 1999 and August 25, 2000 Notes to Consolidated Financial Statements
2. Financial Statement Schedules of the Company.
Schedule II -- Valuation and Qualifying Accounts
3. Exhibits.
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(b) Reports on Form 8-K
Not applicable.
(c) See Item 14(a)(3) and separate Index to Exhibits attached hereto.
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.
AVONDALE INCORPORATED
By: /s/ G. STEPHEN FELKER --------------------------------- Name: G. Stephen Felker Title: Chairman of the Board, President and Chief Executive Officer
Date: November 10, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR:
SCHEDULE II
AVONDALE INCORPORATED
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE VALUATION AND QUALIFYING ACCOUNTS (in thousands)
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(A) Deductions represent customer account balances written off during the period.
(B) At August 28, 1998, August 27, 1999, and August 25, 2000, the balance at end of period includes $4,510, $5,035, and $4,814 respectively, related to accounts receivable sold. These amounts are included in other accrued expenses in the Consolidated Balance Sheets.