ITEM 1. BUSINESS
THE COMPANY
CMI Industries, Inc. ("CMI" or the "Company") and its subsidiaries manufacture textile products that serve a variety of markets, including the home furnishings, woven apparel, elasticized knit apparel, furniture upholstery, transportation upholstery, consumer products and industrial/medical markets. The Company operates through three divisions: the Greige Fabrics Division, the Elastic Fabrics Division and the Chatham Division. The Company had net sales of $422.7 million in 1997. The Greige Fabrics Division accounted for 41% of 1997 net sales, the Elastic Fabrics Division accounted for 22% of 1997 net sales, and the Chatham Division accounted for 37% of 1997 net sales.
The Greige Fabrics Division is one of the largest domestic manufacturers of light to midweight greige (unfinished) fabrics for sale to third parties. The division's product line includes printcloths, broadcloths, twills, crepes and other fabrics of 100% cotton and blends of polyester and combed or carded cotton, and synthetic yarns. The division sells its fabrics primarily to integrated manufacturers and converters for use in a wide variety of home furnishings, woven apparel and industrial products. The Greige Fabrics Division also targets selected niches in markets where value-added services can differentiate its fabrics from imported fabrics. In addition, this division works closely with certain manufacturers to customize fabrics, packaging and services to their specific requirements.
The Elastic Fabrics Division manufactures fabrics and products for sale to the elasticized apparel fabric markets. The Elastic Fabrics Division is a leading manufacturer of dyed and finished elasticized fabrics primarily for use in intimate apparel and foundation garments and also for use in stretch fabric activewear and industrial and medical products. The division's vertically integrated manufacturing operations produce woven and knit fabrics using a variety of spandex, polyester, rayon, nylon and cotton yarns. Various dyeing and finishing technologies are utilized which enable the division to finish and dye its fabrics to achieve consistent specifications and color matching for its products.
The Chatham Division manufactures fabrics and products for sale to the furniture upholstery, transportation upholstery and consumer products markets. Furniture upholstery is
supplied for use in residential applications, office and public seating and wall panels for open-plan office systems. Customers include contract and residential furniture manufacturers. Furniture upholstery is also sold through an extensive distributor network. Transportation upholstery is supplied for use in automobile and light truck seating and interior component applications to domestic automobile manufacturers and to Japanese manufacturers with domestic production facilities. Consumer products such as blankets, mattress pads and afghans are manufactured for sale to major retailers.
The Company was formed in 1986 at the direction of Merrill Lynch Capital Partners, Inc. ("ML Capital Partners"), a wholly owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), together with certain members of present or former management for the purpose of acquiring Clinton Mills, Inc., a South Carolina corporation, a predecessor in interest to the Greige Fabrics Division. Affiliates of ML Capital Partners and certain members of management of the Company who acquired shares of the Company's common stock (the "Common Stock") in 1986 and thereafter and their affiliates (the "Management Investors") currently own 58.9% and 41.1% respectively, of the outstanding Common Stock.
SALES SUMMARY
The following table presents, for the last three fiscal years, the dollar sales and the percentages of the Company's sales contributed by each division.
The following table presents, for the last five fiscal years, the percentages of the Company's sales to the home furnishings, woven apparel, furniture upholstery, elasticized fabric, transportation upholstery, consumer products and industrial/medical/other markets, as estimated by the Company.
GREIGE FABRICS DIVISION
Products. The Greige Fabrics Division manufactures light to midweight greige (unfinished) fabrics, including printcloths, broadcloths, twills, crepes and other fabrics of 100% cotton and blends of polyester and combed or carded cotton, and 100% synthetic yarns. The division can manufacture fabric in a broad range of styles, which are determined by the fibers used, the number and size of the yarns and the width of the fabric, but concentrates on a limited number of styles and blends. The division currently produces fabric in widths ranging from 43 to 135 inches and typically produces between 60 and 100 styles at any one time. The division's production flexibility enables it to be a cost effective manufacturer of traditional fabric styles available from a large number of domestic and foreign producers and gives it the ability to respond to changes in demand in its markets. The division works closely with major integrated manufacturers to satisfy their specific requirements.
The fabrics sold by the Greige Fabrics Division are ultimately made into a variety of home furnishings, woven apparel and industrial products. In the home furnishings market, fabrics are used in comforters, bedspreads, sheets and coordinating accessories, as well as curtains and other home furnishing products. In the woven apparel markets, fabrics are used in a wide range of items, including women's apparel, men's boxer shorts, trousers, and uniforms and similar career apparel. Combed blends and 100% cotton fabrics are also used in bolts of finished cloth sold at retail for home sewing and crafts. The principal industrial uses for the division's fabrics are medical and athletic tapes.
Manufacturing and Capacity. The Greige Fabrics Division's manufacture of woven fabrics involves two principal operations: spinning cotton and blends of cotton and polyester into yarn, and weaving yarn into fabric.
Spinning. The division either spins or purchases the yarn it uses to produce woven fabrics. Two types of spinning equipment are used: air-jet spinning equipment, which combines spinning and winding into one process, and traditional ring spinning equipment. Approximately 35% of the division's current spinning capacity is air-jet spinning.
Weaving. The division employs only shuttleless weaving machines. The division's shuttleless machines are more versatile than shuttle weaving machines and are capable of weaving multiple fabrics of different widths simultaneously on the same machine, with some machines capable of producing fabrics as wide as 147 inches. The shuttleless machines require a lower labor complement and weave fabric at higher speeds and with higher quality levels than shuttle machines. The flexibility of the shuttleless machines permits production to be shifted among fabric widths to meet changing market requirements and demand levels.
The division currently operates six manufacturing plants. All of its plants are equipped with projectile and air-jet shuttleless machines and supporting equipment including carding,
spinning and yarn preparation equipment. The division plans to make further capital expenditures of $8 million during fiscal 1998. These expenditures will include additional air-jet spinning equipment. Capital expenditures have been designed to expand production capabilities, reduce production costs and increase quality.
All of the division's six plants are currently operating on a 24-hour, seven-day week. As in the past, if market conditions soften, the Company has the ability to curtail these operating schedules.
Marketing and Sales. The Greige Fabrics Division's fabrics are sold primarily through the Company's New York sales office. Fabrics are sold to integrated manufacturers and converters for use in various home furnishings products, woven apparel and a variety of industrial applications. None of the division's customers accounts for more than 10% of Company sales. Fabrics are typically manufactured to order. The division's sales are generally not seasonal.
ELASTIC FABRICS DIVISION
Products. The Elastic Fabrics Division manufactures a variety of dyed and finished elasticized knit and woven fabrics for use in intimate apparel and foundation garments. It also has a significant presence in the stretch fabric activewear market, including swimwear fabrics, and produces fabrics for use in industrial and medical products. The vertically integrated manufacturing operations produce warp knit, circular knit and woven fabrics using a variety of spandex, polyester, rayon, nylon, cotton and blends of cotton yarns. The division dyes and finishes the majority of its elasticized fabrics as well as lace products manufactured by others.
Manufacturing and Capacity. Manufacturing warp knit, circular knit and woven fabrics with elastomeric fibers is a more difficult and complicated process than that required for other fabrics. Customers who purchase elasticized fabrics typically require that the fabrics meet precise specifications related to physical characteristics, shades, shrinkage and the like.
Knitting. Several types of warp knitting machines are used. These machines are versatile with the capability of knitting high quality fabric in many different styles at high speeds and low defect levels. For circular knitting, the Company uses both single and double knit machines, some of which have mini-jacquard capability.
Weaving. Several types of looms are used. These looms are versatile with the capability of weaving high quality narrow elastic fabric up to twelve inches in width. Certain looms have jacquard capabilities, and can weave logo designs into the fabric.
Finishing and Dyeing. Various dyeing and finishing technologies are utilized which allow the division to dye and finish its fabrics on-site to achieve consistent specifications and color matching for its products. The processes used depend upon the type and style of fabrics being produced. The division scours and dyes most of its fabric
in either pressurized or non-pressurized dyeing vessels. Fabrics of regular warp construction are normally steamed in preparation for other finishing processes. Fabrics are sent through finishing frames that stretch and set the fabric at a desired width. Computerized color matching equipment enables the division to meet the stringent requirements of the markets it serves. For certain fabrics and shades, it uses dyed yarn for both knitting and weaving.
The division manufactures its elasticized knit fabrics at a plant located in Greensboro, North Carolina, which operates on a 24-hour, five or six-day week. Since the acquisition of the former United Elastic Corporation operations in January 1995, the division manufactures narrow elasticized woven fabrics in Stuart, Virginia. This plant operates on a 24-hour, five day week.
Marketing and Sales. The Elastic Fabrics Division sells its elasticized fabrics through the Company's New York and Los Angeles sales offices, and sales representatives located in Greensboro, North Carolina and Stuart, Virginia. These fabrics are manufactured only to order.
CHATHAM DIVISION
Products. The Chatham Division manufactures a variety of dyed and finished fabrics for use in diverse markets.
Furniture Upholstery. The division produces furniture upholstery for residential applications, office and public seating as well as wall panels for open office systems. The division's customers include contract and residential furniture manufacturers. Furniture upholstery is also sold through an extensive distributor network. Furniture upholstery fabrics are offered in both wool and a broad range of manmade fibers and in a variety of constructions, from jacquard and dobby wovens to knitted and tufted piles. These various fabric constructions primarily utilize internally produced woolen spun, filament and novelty type yarns. A wide variety of dyeing methods, including raw stock, yarn and piece dyeing, are used.
Transportation Upholstery. The division supplies upholstery fabrics for automobile and light truck seating and interior component applications as well as for a variety of other transportation uses such as heavy truck interiors, van conversions and after-market uses. Primary automotive customers include domestic automobile manufacturers and Japanese automobile manufacturers with United States manufacturing facilities. To a limited extent, the division also exports its automotive fabrics to Japan for overseas production. The Company has developed a strategic alliance with Tatsumura Textile Company, Ltd., a leading supplier of automotive fabrics to Toyota, Mazda and Mitsubishi, to help to increase its business with the Japanese automakers. A wide variety of upholstery fabrics are produced for the transportation market primarily from spun and filament polyester. For the transportation upholstery market, the division supplies flat and jacquard wovens, jacquard and dobby woven velours, jacquard circular knits and double needle bar knits, and employs stock, yarn, and piece dyeing technologies.
Consumer Products. The division produces blankets, mattress pads, electric mattress pads, fringed throws, cotton jacquard afghans and infant bedding for sale to the retail, institutional and health care markets. Its consumer products are manufactured through either a loom woven process or a non-woven Fiberwoven(R) process. In addition to domestic sales, market placements have been made in Mexico, Canada, Western Europe, Australia and the Far East.
Manufacturing and Capacity. The division operates a manufacturing complex in Elkin, North Carolina, containing approximately 1.7 million square feet in 11 buildings and a plant in Boonville, North Carolina. At the Elkin complex, manufacturing is vertically integrated from fiber to finished fabric. The Boonville plant produces yarn from fiber, which is then transferred to the Elkin facility for weaving. Manufacturing processes include garnetting waste fiber, extruding nylon and dyeing raw stock, yarn and fabric. The product of these processes may flow through other processes such as carding, spinning, weaving, knitting, the nonwoven Fiberwoven(R) process and finishing. The division employs computer systems that allow for the design of fabrics without the production cost associated with sampling, shorten fabric development time and promote faster response to customer inquiries.
Marketing and Sales. Sales and marketing functions are conducted at the product level. Furniture upholstery is sold by sales personnel in Elkin and High Point, North Carolina (including a showroom), New York, Chicago, Los Angeles, and Grand Rapids, Michigan, and sales agents in the Far East, Australia and South America. Transportation upholstery has sales and marketing offices in Elkin, North Carolina and Detroit, Michigan. Consumer products are sold and marketed through offices in Elkin, North Carolina and New York and sales associates located throughout the United States. Foreign bedding sales are handled through agents or distributors in Mexico, Canada, England, Western Europe, Australia and the Far East.
RAW MATERIALS
The principal raw materials the Company uses are cotton and man-made fibers and yarns. In 1997, raw materials accounted for approximately 54% of cost of sales. The Company uses many types of fibers, both natural (cotton and wool) and man-made (polyester, nylon, olefin, rayon and acrylic) as well as yarns including Lycra(R), a spandex elastomeric yarn produced by DuPont (E.I.) de Nemours & Company, in the manufacture of its textile products. The Company believes that availability and future price levels for fibers and yarns will depend primarily upon supply and demand conditions, crop conditions, general inflation, government agricultural programs and prices of petroleum-based raw materials.
Generally, the Company has had no difficulty in obtaining raw materials. Cotton is available from a large number of suppliers. The Company maintains a limited supply of cotton in inventory; its usual procedure is to purchase cotton only when firm orders have been obtained for the goods in which it will be used. When management concludes that a certain grade of cotton may be in short supply or that prices may be substantially higher in the near term,
however, the Company may deviate from this procedure and buy additional cotton for inventory. Historically, the Company has not purchased significant amounts of cotton for inventory and continues to purchase cotton for future delivery when orders are received.
The principal man-made fibers and yarns purchased by the Company are polyester and nylon. The Company maintains a limited supply of man-made fibers and yarns in inventory. The Company currently purchases man-made fibers for its Greige Fabrics Division from two suppliers, although other suppliers are available. The Company also purchases yarns of texturized filament polyester primarily from a limited number of suppliers for use in its woven and knit fabrics, although other suppliers are available. Currently, most of the elastomeric yarn used in the production of elasticized fabrics is Lycra(R).
PATENTS AND TRADEMARKS
The Company has registered a stylized "Clinton," "EFA" and "Chatham" as trademarks. The Company does not own or use any other patents, licenses or trademarks that are currently material in the conduct of its business.
BACKLOG
At January 3, 1998, the Company had aggregate unfilled orders of $108 million, as compared to $120 million at December 28, 1996. As of January 3, 1998, the Greige Fabrics Division had approximately $68 million of unfilled customer orders for woven fabrics, as compared to $87 million at December 28, 1996. The decrease in the Greige Fabrics Division's order backlog from 1996 to 1997 is indicative of the market conditions for greige fabrics as certain customers have reduced their forward order positions to backlog levels more representative of historical levels. The division expects to fill substantially all of these orders in 1998. At January 3, 1998, the Elastic Fabrics Division had unfilled orders totaling $16 million, as compared to $15 million at December 28, 1996. At January 3, 1998, the Chatham Division had unfilled orders totaling $24 million, as compared to $18 million at December 28, 1996. The increase in the Chatham Division's order backlog from 1996 to 1997 is indicative of the increase in placements for the Company's transportation upholstery fabrics. The division expects to fill all of these orders in 1998. These backlogs consist of orders that are not generally subject to cancellation prior to shipment, although the Company has in the past accommodated customer requests for order deferments due to unusual circumstances. See "Item 7 - -Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview".
COMPETITION AND INTERNATIONAL TRADE POLICY
The domestic textile industry is highly competitive with no one firm dominating the United States market. Many companies compete only in limited segments of the textile market. In recent years, there has been a trend toward consolidation in the United States textile industry. Textile competition is based in varying degrees on price, product styling and differentiation, quality and customer service. The importance of each of these factors depends upon the needs of particular markets and customers.
The domestic textile industry has been fundamentally affected by competition from imports. The level of import protection for domestic producers of textiles has been and will continue to be subject to domestic political and foreign policy considerations. Under the import tariff and quota framework developed under the Arrangement Regarding International Trade in Textiles and commonly known as the Multifiber Arrangement (the "MFA"), most significant exporters of fabrics were subject to annual quotas. However, the MFA expired on December 31, 1994, and was replaced by The Uruguay Round Agreement (the "Uruguay Agreement") on textiles and clothing which contains a schedule for the gradual phase-out of quotas established pursuant to the MFA over a ten year transition period. After the transition period, textile and clothing trade will be fully integrated into the World Trade Organization and subject to the same restrictions as other sectors. The Uruguay Agreement contains a provision for reducing tariffs on textiles and clothing products imposed by the United States by approximately 12% overall, with the reductions phased in over a ten year period. The reduction in the import protection accorded domestic fabric and apparel manufacturers could adversely affect the Company.
The Company believes that the North American Free Trade Agreement ("NAFTA") has and will continue to affect competition in the domestic textile manufacturing market by phasing out substantially all trade restrictions among Canada, Mexico and the United States while maintaining such restrictions on products imported from outside North America, subject to the Uruguay Agreement. While the Company believes that as a result of NAFTA some labor-intensive apparel production has and will continue to move to Mexico due to Mexico's lower labor costs, the Company expects to compete for sales of fabric to these apparel producers in what may become a larger market for the Company's products. To the extent that U.S. apparel manufacturers move production to Mexico and thus gain a competitive advantage over Asian producers facing continuing import restrictions, the Company believes that it would benefit from a resulting increase in North American production, as neither Mexico nor Canada are currently competitive producers of the fabrics used in the manufacture of apparel.
The impact of import competition varies among the Company's divisions. The Greige Fabrics Division sells its fabrics in markets where imports are a significant competitive factor--estimated by the Company at 25% of the division's United States markets. In addition, the division's fabrics are used in apparel products which compete with imported garments. In response to the increasing effect of imports, the division has engaged in an extensive modernization program which has added flexibility to its manufacturing process and increased its fabric offerings. This modernization program has resulted in increases in productivity and lower unit costs, net of depreciation. In addition, marketing has been redirected in an effort to reduce its dependence on commodity fabrics and has focused on developing long-term customer relationships where value added services can differentiate its fabrics from imports. To implement this strategy, the division has generally endeavored to decrease its sales to the apparel market and shift more of its sales to home furnishing markets where competition from imports is less severe. However, depending on market conditions, the division may from time to time redirect its sales from home furnishings to apparel to avoid market weakness or to obtain a benefit from opportunistic selling. The Greige Fabrics Division's principal competitors include Greenwood Mills and Alice Manufacturing.
The Elastic Fabrics Division and other United States manufacturers of elasticized fabrics and garments, including intimate apparel, swimwear and activewear, have not been subject to the same pressure from imports experienced by many other sportswear apparel manufacturers. Customers place significant emphasis on product design, component shade-matching and other quality-related criteria. Customers establish strict specifications that place a premium on customer service, which places foreign manufacturers at a disadvantage. The Company also believes that the swimwear market is less susceptible to import competition because sales in the U. S. retail market are generally made within a four-month period, and therefore close proximity of the swimwear manufacturer and the fabric producer is advantageous for initial orders and reorders. The division's principal elasticized fabrics competitors include Liberty Fabrics, Darlington and Worldtex.
The Chatham Division's furniture upholstery, transportation upholstery and consumer products compete in domestic markets that to date have experienced little competition from imports. In these markets, product styling and differentiation, quality and customer service are more significant considerations as compared to more commodity-oriented markets that are more susceptible to import competition. Principal competitors include Guilford of Maine (furniture upholstery), Milliken (furniture and transportation upholstery), Collins and Aikman (furniture and transportation upholstery) and Pillowtex (consumer products).
EMPLOYEES
On January 3, 1998 the Company had 4,066 employees, none of whom were covered by a collective bargaining agreement. Of these employees, 3,550 were employed as hourly associates while 516 were employed as salaried associates. All of the Company's employees are full-time. The Company believes that its employee relations are good.
IMPACT OF YEAR 2000
Management has initiated a plan to prepare the Company's computer systems and applications for the year 2000. At January 3, 1998, the Company had made substantial progress in programming its business systems for year 2000 compliance. Management estimates that all business critical computer systems and applications will be year 2000 compliant prior to that date. The Company expects to incur primarily internal staff costs related to enhancements necessary to prepare the systems for the year 2000. Testing and conversion of system applications is expected to cost approximately $2.0 million over the next two years. This estimate includes the cost to purchase and install certain software systems to replace systems which are currently not year 2000 compliant.
ENVIRONMENTAL, HEALTH AND SAFETY, AND OTHER REGULATORY MATTERS
The Company's operations are subject to federal, state and local laws and regulations relating to the environment, health and safety, and other regulatory matters. Certain of the Company's operations may from time to time involve the use of substances that are classified as toxic or hazardous substances within the meaning of these laws and regulations. Environmental
operating permits are, or may be required, for certain of the Company's operations and such permits are subject to modification, renewal and revocation. The Company monitors and reviews its operations, procedures and policies for compliance with these laws and regulations. Despite these compliance efforts, risk of environmental liability is inherent in the operation of the Company's businesses, as it is with other companies engaged in similar businesses, and there can be no assurance that environmental liabilities will not have a material adverse effect on the Company in the future.
The Company has identified certain groundwater and soil contamination which will require remediation and asbestos which may require abatement at its Elkin facility. The Company has accrued for the costs it expects to incur in connection with this remediation and abatement. See "Item 7 - -Management Discussion and Analysis of Financial Condition and Results of Operations--Environmental" and Notes 7 and 8 to Financial Statements.
In May 1993, the Greige Fabrics Division received a notice of potential liability and an information request from the EPA with respect to the AquaTech site in Greer, South Carolina. The Company has been designated by the EPA as a potentially responsible party ("PRP") at the site. The Company entered into a buyout agreement with a group of approximately 719 PRPs who funded a surface removal of hazardous substances from this site at a cost in excess of $14.0 million. The Company's allocated share of the costs of the surface cleanup under the buyout agreement was less than $1,000. The buyout agreement does not commit the Company to any additional expenditures nor protect it from liability for any additional costs. The Company has joined the AquaTech PRP Group for Subsurface Remediation which is awaiting the completion of soil and groundwater testing by the EPA at the AquaTech site. At this time neither the extent of further cleanup nor the Company's share of any additional remediation costs is known.
The Company has approval from the North Carolina Department of Environment, Health and Natural Resources and from Guilford County Environmental Health to begin cleanup of groundwater at its Greensboro facility resulting from previously removed leaking underground storage tanks. The Company estimates that remaining costs associated with the cleanup will be approximately $200,000. Partial reimbursement has been approved from the North Carolina Underground Storage Tank Trust Fund. Equipment has been delivered to begin the cleanup as approved in the corrective action plan.
ITEM 2.
ITEM 2. PROPERTIES
The following table sets forth certain information relating to the Company's principal facilities as of January 3, 1998. All of these facilities are owned by the Company, except for the New York sales office and the Columbia executive office. The Company's New York sales office is leased for a term expiring in 2005. The Columbia executive office is leased for a term expiring in 2000. The Company believes all of its facilities are in good repair and are in suitable condition for the purposes for which they are used.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation incidental to its business operations, as well as product liability litigation. In the opinion of the Company's management, none of the litigation in which it is currently involved is material.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the fourth quarter of fiscal 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
None of the issued shares of the Common Stock is publicly held and there is no established published trading market for the Common Stock.
During the two fiscal years ended January 3, 1998, the Company did not pay any dividends. The Company's ability to pay dividends was subject to limitations in its bank credit agreement and in the indenture pursuant to which its $125 million principal amount 9-1/2% Senior Subordinated Notes due 2003 were issued (the "Indenture"). Capitalized terms used in this Item 5 that are not defined in this Report have the same meaning as set forth in the Indenture.
The Indenture prohibits the Company from paying cash dividends or making other Restricted Payments if an Event of Default exists under the Indenture or the Company cannot incur additional Indebtedness (other than Permitted Indebtedness) because of an inadequate Fixed Charge Coverage Ratio. The Indenture limits the aggregate amount of cash dividends and other Restricted Payments that may be made subsequent to October 28, 1993 to an amount no greater than the sum of (i) 50% of the Company's Consolidated Adjusted Net Income accrued on a cumulative basis since October 1, 1993 (less 100% of any loss) plus (ii) the aggregate net proceeds received by the Company after October 28, 1993 from certain issues or sales of the Company's capital stock and from capital contributions. Notwithstanding the foregoing, so long as an Event of Default does not exist, the Indenture permits the Company to (i) repurchase its capital stock from Management Investors under certain circumstances in an aggregate amount of up to $2.0 million per year, with the right to carry forward into the immediately following year the aggregate amount of the unused portion, and (ii) pay cash dividends and make other Restricted Payments in an aggregate amount not to exceed $10.0 million.
Under a $65 million secured revolving credit facility from The First National Bank of Boston, which serves as the agent bank, NationsBank, N.A. and The Wachovia Bank of South Carolina, N.A. entered into in March 1996 and amended in February 1997 (the "Credit Agreement"), the Company is permitted to pay dividends of up to $3 million in any fiscal year. At January 3, 1998, under the terms of the Indenture the Company could acquire capital stock in an amount of $4.0 million from Management Investors and could pay cash dividends or make other Restricted Payments in an aggregate amount of $10.0 million. However, the limitation on restricted payments contained in the Credit Agreement as then in effect was more restrictive than the limitation contained in the Indenture, so that at January 3, 1998 the Company was able to only pay dividends or make restricted payments of up to $3 million.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information for the Company for fiscal years 1993 through 1997, which has been derived from the audited financial statements of the Company for such periods. The information contained in the following table reflects the results of operations of the Clarkesville plant from May 9, 1994, and the former United Elastic Corporation operations from January 3, 1995, the respective dates of acquisition. The selected financial data should be read in conjunction with "Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW
A number of factors influence the operating results for the Company including general economic conditions, competition, raw material prices and capital expenditures. Significant factors impacting the Company's operating results over the past several years are as follows:
History. In 1992, the Company began implementing a strategic plan with the primary goal of becoming the low-cost provider of greige fabrics while achieving greater market diversification through acquisitions. Important elements of this new business strategy included the continued modernization of the Company's manufacturing facilities and the acquisition of certain strategic companies in order to reduce the Company's reliance upon sales of greige fabrics. In February 1992, the Company acquired the assets of Chatham Manufacturing Company (the Chatham Division). In addition to increased product diversification, the acquisition provided the Company with access to markets with greater barriers to entry than the markets of the Company's other businesses. Continuing with its acquisition strategy, the Company acquired the Clarkesville Plant in 1994 and the former United Elastic Corporation operations in 1995. These acquisitions allowed the Company to further diversify its product offerings and provide its existing customer base with more value-added products and services. Throughout this time period, the Company continued to upgrade its manufacturing capacity by investing in new equipment capable of producing better quality fabrics more efficiently.
Although the Clarkesville Plant and United Elastic Corporation acquisitions added incremental sales with margin opportunities potentially above those of the Company's other businesses and the modernization efforts resulted in more flexible and cost-effective production capacity, the Company's financial performance deteriorated from 1992 through 1995. In 1993 and 1994, the Company experienced significant operating disruptions at the Chatham Division which negatively impacted operating margins and its ability to service certain customers. To address these issues, the Company initiated management changes and a reorganization of its divisional structure in 1994. During 1995, operating margins in the Chatham Division remained substantially below those of the Company's other businesses as the division worked to improve its product mix, complete the development of its information systems and correct certain quality and manufacturing inefficiencies. In 1995, the Company's financial performance also was negatively impacted by poor retail sales, excess supply and unprecedented increases in raw material costs.
Restructuring. The disappointing performance, coupled with declining asset utilization rates and the inability to service certain business segments, forced the Company to refocus its overall business strategy in late 1995. At that time, the Company initiated a restructuring plan to improve operating performance, reduce costs and realign certain resources in order to better serve its customers (the "Restructuring"). The
Restructuring consisted of: (1) changes in the senior management of the Company; (2) the closing of the Greige Fabrics Division's Lydia Plant in Clinton, South Carolina; (3) the consolidation of the Chatham Division's weaving operations in Elkin, North Carolina from three buildings to two buildings; (4) the downsizing of the Company's corporate offices in Columbia, South Carolina and relocation of certain resources back to the operating divisions; (5) the write-off and proposed sale of certain idle and impaired assets; (6) the increased emphasis on customer service and product development investments, particularly with systems and design resources; (7) the sale of excess inventories; and (8) other process improvement initiatives designed to reduce costs, improve customer service levels and maximize returns on current investments. As a result of the Restructuring the Company recorded severance, retirement, and other nonrecurring charges relating to the facility closures and overhead reductions. Each of the restructuring initiatives had been completed by the end of 1996. In total, the Company now estimates that approximately 900 manufacturing and administrative positions out of approximately 5,000 were permanently eliminated.
The Restructuring implemented by management allowed the Company to downsize its corporate offices, eliminate inefficient capacity and reorganize its resources to emphasize customer service and product development. These initiatives have helped position the Company to better utilize its investments while responding more quickly and cost effectively to market changes and customer demands. The initiatives to reduce inventories and to correct supply levels relative to market demand, particularly in the Greige Fabrics Division, have resulted in better internal operating disciplines and a better ability to market the Company's fabrics in certain segments. In 1996 and 1997, operating margins improved significantly in response to the business improvement initiatives and strategic investments in new equipment at Elkin. The Company intends to continue to invest in new equipment at its Elkin facility, and believes that current performance in quality, on-time delivery, product development and order backlog levels will allow the Chatham Division to better realize its earnings potential.
Although the turnaround of the Company's Stuart facility within the Elastic Fabrics Division has been slower than that of its other operations, the Company has been proactive with changes in this business segment more recently. As a result of these changes, the Company believes that its turnaround is forthcoming. The Company expects to continue to invest in all three of its divisions going forward in an effort to meet customer demands and market requirements, while continuing to emphasize improved returns by being well-positioned to operate a diversified, more value-added product mix and reducing its dependency on the sales of greige fabrics.
General Economic Conditions. The Company's past operating results have been affected by the general condition of the United States' economy. The ability of the Company to maintain its operating margins during downturns in the general economy is adversely affected by the capital intensive nature of its business. In 1997, the Company benefited from its restructuring initiatives and the correction of supply levels relative to
market demand. Consequently, operating margins in 1997 improved to more acceptable levels and were more indicative of the positive condition of the United States' economy. Although order backlog levels were down for the Greige Fabrics Division at January 3, 1998 as compared to the same time in 1997, the Company believes that current backlog levels are more representative of historical levels. See "Item 1 - -Business-Backlog." The Company does not believe that concerns over the Asian financial situation will have a significant negative impact on the Company's results of operations in 1998.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages that certain income and expense items bear to sales for such periods. All years refer to the Company's fiscal years.
Fiscal Year 1997 Compared to Fiscal Year 1996
The Company's net sales increased $48.7 million or 13.0% from $374.0 million in 1996 to $422.7 million in 1997. Sales of the Greige Fabrics Division increased $14.2 million or 9.1%, sales of the Elastic Fabrics Division increased $3.7 million or 4.1% while sales of the Chatham Division increased $30.8 million or 24.3%. The increase in sales for the Greige Fabrics Division was primarily attributable to the restructuring initiatives implemented by the Company in 1995 and 1996 to reduce inventory and capacity levels relative to market demand and the related improvement in market conditions for greige fabrics in 1997. These factors resulted in increased sales due to a 9.3% increase in average selling prices without a corresponding change in sales volume. The increase in sales for the Elastic Fabrics Division was principally attributable to stronger demand for warp knit fabrics and the Company's decision to resume shipments to a significant customer following the resolution of issues which arose in 1996 involving the customer's creditworthiness. Together, these factors helped to offset the continued
weakness in sales of narrow woven elasticized fabrics. The increase in sales for the Chatham Division consisted primarily of a $27.3 million increase in automotive upholstery sales due to the Company's success in securing new product placements and increasing market share. Sales of furniture fabrics and consumer products have remained relatively unchanged from prior year levels. Sales in 1997 were also favorably impacted compared to 1996 due to an additional week of sales and production as 1997 was a 53-week year.
In conjunction with the Company's increased sales, gross profit increased $28.1 million or 99.8% from $28.2 million to $56.3 million, and resulted in a gross margin increase from 7.6% to 13.3%. Additionally, the Company's depreciation expense declined by $5.3 million in 1997 as a majority of the fixed assets acquired when the Company was formed in 1986 became fully depreciated. The increase in gross profits was directly attributable to improved market conditions for greige fabrics which resulted in significantly higher selling prices and allowed the Company to operate its greige manufacturing facilities at full capacity. Gross profit in the Elastic Fabrics Division increased due to higher sales while gross margins also improved despite the weak performance of its Stuart facility. Gross profit in the Chatham Division increased due to higher sales while gross margins increased marginally as a result of the continued operating improvements.
Selling, general and administrative expenses increased $1.8 million or 5.8% from $31.1 million in 1996 to $32.9 million in 1997. The increase in selling, general and administrative expenses was principally due to the increased sales and the associated mix of commission based revenues. Additionally, the Company paid approximately $1.5 million in incentive compensation in 1997 as compared to only $0.4 million in 1996. The Company continued to realize benefits from its restructuring and downsizing initiatives from prior years and, consequently, selling, general and administrative expenses were down from 8.3% of sales in 1996 to 7.8% of sales in 1997.
Interest expense decreased $0.9 million or 6.0% from $15.4 million in 1996 to $14.5 million in 1997. This decrease was due to lower debt balances in 1997 which may be attributed to the Company's increased earnings, reduced capital spending and working capital reduction initiatives.
Income taxes (benefit) as a percent of income (loss) before taxes changed from 37% in 1996 to 40% in 1997.
As a result of the foregoing factors, the Company reported net income of $7.2 million in 1997 as compared to a net loss of $10.7 million in 1996.
Fiscal Year 1996 Compared to Fiscal Year 1995
The Company's net sales decreased $34.6 million or 8.5% from $408.6 million in 1995 to $374.0 million in 1996. Sales of the Greige Fabrics Division decreased $26.1 million or 14.3% and sales of the Elastic Fabrics Division decreased $12.8 million or 12.4%, while sales of the Chatham Division increased $4.3 million or 3.5%. The reduction in sales for the Greige Fabrics
Division was primarily attributable to the weak market conditions which led to an excess supply of lightweight greige printcloth fabrics and resulted in the Company's permanent closing of the Lydia Plant in May. These weak market conditions had the effect of reducing the average selling price for printcloth fabrics by 8.4%, and caused, together with the closing of the Lydia Plant, a volume decline of 8.6% in sales for these fabrics. The sales decrease for the Elastic Fabrics Division was primarily a result of weak market demand for the Company's woven elasticized fabrics and the Company's strategic decision to limit shipments to a specific customer because of the Company's concerns relating to the creditworthiness of the customer. The sales increase for the Chatham Division was principally due to an increase in the number of placements for its fabrics by automotive customers.
In conjunction with the Company's lower sales, gross profit decreased $12.6 million or 30.8% from $40.7 million to $28.1 million, as the gross margin declined from 10.0% to 7.6%. The decline in gross profits was directly attributable to the weak market conditions for lightweight greige fabrics, resulting in reduced volumes and lower selling prices. In response to these conditions, the Company curtailed its operating schedule at certain locations during the first half of 1996 and incurred unabsorbed fixed overhead costs in order to decrease inventories and production to levels more consistent with market demand. Although 1996 earnings for the Chatham Division were improved over 1995 levels, they only partially offset the significant reduction in the Greige Fabrics Division's gross profits and margins and the decline in earnings associated with the 12.4% reduction in sales of the Elastic Fabrics Division.
Selling, general and administrative expenses decreased $1.6 million or 4.9% from $32.7 million in 1995 to $31.1 million in 1996; however as a percentage of sales, expenses were up 0.3% from 8.0% to 8.3%. The reduction in selling, general and administrative expenses was related to the Company's downsizing of its Corporate offices. As a percentage of sales, costs were higher because of an increase in the mix of commission based sales.
Interest expense decreased $1.7 million or 10.2% from $17.2 million in 1995 to $15.4 million in 1996. This decrease was due to lower debt balances in 1996 and was attributed to the Company's reduced capital spending and inventory reduction initiatives.
Income taxes (benefit) as a percent of income (loss) before taxes remained unchanged at 37%.
As a result of the foregoing factors and the absence of any restructuring or other nonrecurring charges in 1996, the Company reported a net loss of $10.7 million in 1996 as compared to a net loss of $15.9 million in 1995
THE NOTES AND FINANCING AGREEMENTS
In October 1993, the Company consummated an underwritten public offering (the "Offering") of $125 million principal amount of 9-1/2% Senior Subordinated Notes due 2003 (the "Notes"). Immediately upon the issuance of the Notes, the Company's then principal
operating subsidiaries were merged with and into the Company. The net proceeds of the Offering, together with initial borrowings under a new $70 million revolving credit facility from The First National Bank of Boston, which served as the agent bank (the "Agent Bank"), NationsBank, N.A. and The Wachovia Bank of South Carolina, N.A. and a $5 million uncommitted line of credit from The Wachovia Bank of South Carolina, N.A., were used to refinance $118.7 million of outstanding debt, comprised of $40.9 million in term loans and $46.7 million in revolving credit loans under then-existing loan agreements with the Company's subsidiaries, and $31.1 million of 12% Senior Subordinated Debentures due 1999 issued by Clinton Mills, Inc. (the "Clinton Debentures"). In December 1994 the revolving credit facility was increased to $92 million and the Wachovia line of credit was increased to $8 million. In June 1995, the Wachovia line of credit was reduced to $4 million.
In March 1996, the Company replaced the $92 million unsecured revolving credit facility with the Credit Agreement and renewed the Wachovia line of credit at $4 million (the "Wachovia Credit Facility" and, together with the Credit Agreement constitute the "Bank Credit Facilities"). The Company and the lenders amended the Credit Agreement in February 1997 to reduce the borrowing limit to $65 million, to contemplate the realignment of the Company's assets into separate operating entities, which were completed during 1997, and to extend the maturity of the Credit Agreement by two years to January 2000.
The Credit Agreement provides for a revolving credit facility of up to $65.0 million, including a letter of credit facility of up to $5.0 million. The borrowings under the Credit Agreement are secured by certain inventories, all receivables and certain intangibles. The amount available under the revolving credit facility is limited to a percentage of the collateral pledged by the Company, as evidenced by a monthly borrowing base certificate to be delivered by the Company, and is reduced by any outstanding letters of credit issued under the letter of credit facility. The maximum and average amounts outstanding during 1997 were $30.6 million and $20.9 million, respectively; at January 3, 1998, $0.1 million was outstanding and the per annum interest rate was 8.5%.
Interest Rates and Fees. Interest under the Credit Agreement is payable at one of two specified rates, as selected by the Company, as follows: (i) the rate announced as the base rate of the Agent Bank and (ii) a Eurodollar rate plus 1.5%. The Company pays a commitment fee of 0.375% per annum on the unused portion of the revolving credit facility, payable quarterly in arrears. The Company also pays a quarterly agency fee of $12,500 to the Agent Bank. In addition, the Company will pay a fee on the date any letter of credit is issued under the Credit Agreement and each anniversary date thereafter in an amount equal to (i) 1.0% of the stated amount of any standby letter of credit and (ii) 0.375% of the stated amount of any documentary letter of credit.
Restrictive Covenants. The Credit Agreement contains covenants customary for a secured revolving credit facility including, among others, covenants restricting the incurrence of indebtedness, the creation or existence of liens, the declaration or the payment of dividends, the repurchase or redemption of debt and equity securities of the Company, certain transactions with related parties, and certain corporate transactions such as sales and purchases of assets, mergers
or consolidations. Under the Credit Agreement, the Company may incur additional senior indebtedness in an aggregate principal amount of up to $18.0 million, which amount includes borrowings under the Wachovia Credit Facility, without obtaining the consent of the lenders. Up to $10.0 million of such additional senior indebtedness may be secured by purchase money liens. The Credit Agreement also contains affirmative covenants relating to compliance with laws, preservation of corporate existence, maintenance of insurance, payment of taxes, maintenance of properties, delivery of financial and other information to the lenders under the Credit Agreement and other matters.
The Company is required to maintain certain financial ratios, including a minimum tangible net worth of $30.0 million in fiscal 1997, with minimum increases each year thereafter by 50% of the consolidated net income of the Company and certain of its subsidiaries for the previous fiscal year. The Company is required to maintain a minimum interest coverage ratio (EBITDA to interest) of not less than 1.5 to 1 for any four consecutive quarters. The Company must also maintain a fixed charge coverage ratio of 1.0 to 1, meaning that (i) consolidated EBITDA less cash used to pay for taxes and capital expenditures must exceed (ii) all interest plus principal due on long term indebtedness of the Company and its consolidated subsidiaries for the nine months ended September 30, 1997 and for any four consecutive fiscal quarters thereafter. As of January 3, 1998, the Company was in compliance with all of the covenants under the Credit Agreement.
Security. Borrowings under the Credit Agreement are secured by the Company's receivables, certain inventories and certain intangibles. The Credit Agreement contains a negative covenant limiting the Company's right to grant security interests or other liens in its other assets. However, up to $10.0 million of any additional senior indebtedness permitted under the Credit Agreement, excluding borrowings under the Wachovia Credit Facility, may be secured by assets of the Company other than inventory or receivables.
Events of Default. The Credit Agreement contains certain events of default customary for this type of credit facility, including, among others, payment events of default, covenant defaults, an event of default based on a change of control of the Company, and a cross-default to other indebtedness of, and bankruptcy and judgment defaults to, the Company.
Wachovia Credit Facility
Under the Wachovia Credit Facility, loan amounts, interest rates and maturities are offered by the bank in its discretion and are accepted by the Company at the time of borrowing, subject to the execution of a note and supporting loan documentation satisfactory to the bank. Borrowings under the Wachovia Credit Facility constitute additional senior indebtedness under the Credit Agreement and are unsecured. The maximum and average amounts outstanding during 1997 were $4 million and $3.1 million respectively; at January 3, 1998, $2.2 million was outstanding and the per annum interest rate was 7.9%.
LIQUIDITY AND CAPITAL RESOURCES
In 1997, net cash provided by operations increased $10.1 million from $18.8 million in 1996 to $28.9 million in 1997, primarily as a result of increased earnings in 1997 as compared to the prior year.
Net cash used in investing activities decreased $1.0 million from $9.3 million in 1996 to $8.3 million in 1997.
Net cash used in financing activities increased $13.7 million from 1996 to 1997. The decline in investment activities noted above coupled with increased cash flow from operations enabled the Company to make net repayments of $21.1 million on the revolving credit facilities in 1997.
Working capital (excluding cash, marketable securities and the current portion of long-term debt) decreased $4 million from $70.3 million at December 28, 1996 to $66.3 million at January 3, 1998. The decrease in working capital resulted from a reduction in the Company's inventory levels.
The Company's primary ongoing cash requirements will be to cover debt service, facilitate capital expenditures and position the Company to respond to better business conditions. The Company currently intends to make capital expenditures of approximately $24.8 million during 1998, of which a portion may be financed with operating lease facilities. The Company's ability to make scheduled payments or to refinance its indebtedness or to fund planned capital expenditures will depend on its future performance, which to a certain extent is subject to general economic, financial, competitive, regulatory and other factors that are beyond its control. Based upon the current level of operations, management believes that cash flow from operations and available cash, together with availability under the Bank Credit Facilities, will be adequate to meet the Company's future liquidity needs, meet its debt service requirements and fund capital expenditures. There can be no assurance that the Company's business will generate sufficient cash flow from operations or that future borrowings will be available under the Bank Credit Facilities in amounts sufficient to enable the Company to service its indebtedness or to fund its other liquidity needs.
ENVIRONMENTAL
Federal and state laws and regulations relating to the discharge of materials into the environment are continually changing; therefore it is difficult to gauge the total future impact of such regulations on the Company. In connection with the acquisition of the Elkin facility, environmental site evaluations were performed by the Company which concluded that some form of groundwater and soil remediation will be required and that some asbestos abatement may be required at the Elkin facility. The Company believes that sufficient amounts are accrued as of January 3, 1998 for the cost of these expenditures. In the future, the Company may also construct facilities to control flyash disposal and runoff from a coal pile at the Elkin facility. The Company may also have remediation obligations with respect to contamination at an off-site
treatment facility and a previously removed leaking underground storage tank. See "Item 1 - -Business -- Environmental, Health and Safety, and Other Regulatory Matters." The Company believes that based on all currently available information, the resolution of environmental matters will not have a material adverse effect on the Company. However, future events, such as changes in or modified interpretations of existing laws and regulations or enforcement policies, or further investigation or evaluation of potential health hazards of certain business activities, may give rise to additional compliance and other costs that could have a material adverse effect on the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements filed as a part of this Annual Report on Form 10-K are listed in the Index to Consolidated Financial Statements and Schedules.
ITEM 9.
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 following table sets forth certain information concerning the current executive officers and directors of the Company:
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Each member of the Board of Directors holds office until the next annual meeting of the stockholders and until his successor is elected and qualified. Officers are appointed by the Board of Directors and serve at the discretion of the Board.
Joseph L. Gorga was named President and Chief Executive Officer and appointed as a director of the Company in November 1995. Mr. Gorga joined a predecessor of the Elastic Fabrics Division as its President in 1991. He was employed by Milliken & Co., an integrated textile manufacturer, from 1975 through 1991 and served as General Manager of the Automotive & Elastic Fabrics Division from 1987 until his employment with the Company.
James A. Ovenden joined the Company in 1987 as Assistant Treasurer and became Treasurer in 1988. He was appointed to the newly-created office of Chief Financial Officer in 1993 and was elected Executive Vice President and Assistant Secretary in 1993. He became a director of the Company in 1990 and has served as Secretary since 1995.
Joshua T. Hamilton, Executive Vice President of the Company and President of the Greige Fabrics Division, joined a predecessor of the Greige Fabrics Division in 1983 and served as Vice President of Operations from 1989 until becoming President in 1992.
James F. Robbins joined the Company in 1992 as Executive Vice President for Marketing, Elastic Fabrics. In 1996, he was elected Executive Vice President and President in charge of the Elastic Fabrics Division.
W. James Raleigh was elected as a director of the Company on April 2, 1996. Mr. Raleigh previously served as President of the Greige Division's sales organization until his retirement in September 1995.
Rupinder S. Sidhu has served as a director of the Company since 1986. Mr. Sidhu is the President of Merion Capital Management LLC, a private investment company, a position he has held since 1994. He was also a Special Limited partner of Stonington Partners, Inc., a private investment firm, from 1993 through 1994. He has been a member of the Board of Directors of ML Capital Partners, a private investment firm affiliated with ML & Co., since 1987. From 1993 to July 1994, he was a Senior Vice President of MLCP from 1987 to 1994. Mr. Sidhu was also a Managing Director of the Investment Banking Division of ML & Co. from 1989 to 1994 and a Director of the Investment Banking Division of Merrill Lynch, Pierce, Fenner & Smith Incorporated from 1989 to 1994 and a Director of the Investment Banking Division of Merrill, Lynch, Pierce, Fenner & Smith from 1987 to 1989. Mr. Sidhu is a director of Paymentech Inc.
Stephen M. McLean has served as a director of the Company since 1992. Mr. McLean is a Partner and a Director of Stonington Partners, Inc., a private investment firm, a position that he has held since 1993 and is a Partner and a Director of Stonington Partners, Inc. II. He has also been a member of the Board of Directors of ML Capital Partners since 1987. Mr. McLean was a Senior Vice President of MLCP from 1987 to 1993. Mr. McLean was also a Managing Director of the Investment Banking Division of Merrill Lynch, Pierce, Fenner & Smith, Incorporated, from 1987 to 1994. Mr. McLean is a director of Dictaphone Corporation, Merisel, Inc., Packard BioScience Company, Pathmark Stores, Inc. and Supermarkets General Holding Corporation, as well as several privately held companies.
Michael H. deHavenon was first elected as a director of the Company in 1986 and served until 1994 when he did not stand for reelection. Mr. deHavenon was appointed to the Board on October 24, 1995. Since January 1997, Mr. deHavenon has been President of Kulen Capital Corp., a firm engaged primarily in making private investments. Prior thereto, Mr. deHavenon served as President of Merrill Lynch Capital Corporation and its predecessor, a wholly-owned subsidiary of ML & Co., which structured and managed leveraged private investments.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Summary. The following table shows, for the last three fiscal years of the Company, annual compensation paid by the Company to Joseph L. Gorga, the President and Chief Executive Officer and the three other executive officers of the Company serving at the end of the 1997 fiscal year (collectively, the "Named Executive Officers").
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(1) The Company does not maintain a "long-term incentive plan," as that term is defined by applicable rules of the Securities and Exchange Commission (the "Commission"), and has not made any awards of restricted stock or stock appreciation rights.
(2) Bonus amounts for Messrs. Gorga, Ovenden, Hamilton and Robbins represent amounts paid under the Company's Incentive Compensation Program, which provides for discretionary awards and for cash bonuses in years in which returns and earnings before interest, taxes and depreciation exceed predetermined levels. Bonuses for Messrs. Gorga and Ovenden are based on the performance of the Company and bonuses for Mr. Hamilton and Mr. Robbins are based on the performance of the Greige Fabrics Division and the Company's Elastic Fabrics Division, respectively. See "--Employment and Severance Agreements."
(3) Represents the Company's contribution on behalf of the Named Executive Officer to the Company's 401(k) Plan for Associates of CMI Industries, Inc. and the Company's 401(n) Deferred Compensation Plan.
Grants of Stock Options and Stock Appreciation Rights. The following table sets forth information with respect to options to purchase Common Stock granted to the Named Executive Officers in the 1997 fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR (1) -------------------------------------
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(1) The Company does not maintain a plan that authorizes the issuance of stock appreciation rights. (2) The options granted are non-qualified options, were granted at estimated fair market value on the date of grant, have a term of 10 years and are exercisable pro-rata over the first three years. (3) Based on options for 20,000 shares of Common Stock granted to all employees during 1997.
Stock Option Exercises. The following table sets forth information with respect to unexercised stock options held by the Named Executive Officers as of January 3, 1998. None of the Named Executive Officers exercised any options during the Company's 1997 fiscal year.
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(1) Calculated based on the difference between the estimated value of the Common Stock underlying the options at January 3, 1998 and the exercise price. Because the Common Stock is privately held and not listed on any securities exchange, the fair market value of the Common Stock is not readily ascertainable. Management's estimate of the value of the Common Stock underlying the options includes a discount to reflect the lack of a public market for the Common Stock and the restrictions applicable to the Common Stock held by Management Investors pursuant to the terms of the Management Subscription Agreements and the Restated Stockholders Agreement. See "--Management Subscription Agreements" and "Item 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial ownership of shares of Common Stock as of January 3, 1998 of all stockholders known by the Company to be the beneficial owners of more than five percent of its outstanding Common Stock, of each director of the Company, each Named Executive Officer named in the Summary Compensation Table, and of all directors and executive officers as a group.
*Less than 1%
(1) Ten limited partnerships, each of which is an affiliate of ML Capital Partners and Merrill Lynch, are record owners of 894,986 of the presently outstanding shares: Merrill Lynch Capital Appreciation Partnership No. VII, L.P., Merrill Lynch Capital Appreciation Partnership No. B-XVI, L.P., ML Offshore LBO Partnership No. VII, ML Offshore LBO Partnership No. B-XVI, ML Employees LBO Partnership No. I, L.P., ML Capital Partners Associates L.P. No. II, Merrill Lynch Kecalp L.P. 1986, Merrill Lynch Kecalp L.P. 1989, Merrill Lynch Kecalp L.P. 1991, and Merchant Banking L.P. No. 1. Merrill
Lynch LBO Partners No. II, L.P. ("LBO Partners II") is the general partner of Merrill Lynch Capital Appreciation Partnership No. VII, L.P. and the investment general partner of ML Offshore LBO Partnership No. VII. Merrill Lynch LBO Partners No. B-III ("LBO Partners III") is the general partner of Merrill Lynch Capital Appreciation Partnership No. B-XVI, L.P. and ML Offshore LBO Partnership No. B-XVI. ML Capital Partners is in turn the general partner of LBO Partners II and LBO Partners III. ML Employees LBO Managers, Inc., a wholly-owned subsidiary of ML Capital Partners, is the managing general partner of ML Employees LBO Partnership No. 1, L.P. ML Capital Partners is the general partner of ML Capital Partners Associates L.P. No. II. Kecalp, Inc., an indirect wholly-owned subsidiary of ML&Co., is the general partner of Merrill Lynch Kecalp L.P. 1986, Merrill Lynch Kecalp L.P. 1989 and Merrill Lynch Kecalp L.P. 1991. Merrill Lynch MBP, Inc., an indirect wholly-owned subsidiary of ML&Co., is the general partner of Merchant Banking L.P. No. 1. The remaining 99,401 outstanding shares deemed beneficially owned by ML Capital Partners are owned of record by ML IBK Positions, Inc., an indirect wholly-owned subsidiary of ML&Co. and an affiliate of ML Capital Partners and Merrill Lynch.
(2) Rupinder S. Sidhu and Stephen M. McLean, directors of the Company, are members of the Board of Directors of ML Capital Partners. By virtue of their status as directors of ML Capital Partners, Messrs. Sidhu and McLean may be deemed under the rules of the Commission to be beneficial owners of 856,165 shares of Common Stock owned of record by limited partnerships that are wholly owned by ML Capital Partners. Messrs. Sidhu and McLean disclaim beneficial ownership of these shares of Common Stock.
(3) Amounts for Mr. Williams include 45,000 shares of Common Stock issuable to Mr. Williams pursuant to presently exercisable options.
(4) Amounts for Mr. Warren include 60,000 shares of Common Stock held by a limited partnership in which Mr. Warren is a general partner.
(5) Amounts for Mr. Gorga include 75,000 shares issuable upon exercise of presently exercisable options to acquire Common Stock.
(6) Amounts for Mr. Raleigh do not include 60,000 shares of Common Stock held by a trust for the benefit of Mr. Raleigh's children, as to which Mr. Raleigh disclaims beneficial ownership.
(7) Amounts for Mr. Ovenden include 45,000 shares issuable upon exercise of presently exercisable options to acquire Common Stock.
(8) Amounts for Mr. Hamilton do not include 4,000 shares of Common Stock held by a trust for the benefit of Mr. Hamilton's children, as to which Mr. Hamilton disclaims beneficial ownership.
(9) Amounts for Mr. Robbins represent shares issuable upon exercise of presently exercisable options to acquire common stock.
RESTATED STOCKHOLDERS AGREEMENT
In connection with the original issuance of Common Stock to the ML Capital Partners affiliates, certain of the Management Investors and others upon the organization of the Company in 1986, all stockholders entered into a stockholders agreement with the Company, which was amended and restated in its entirety in February 1992 (the "Restated Stockholders Agreement"). The Restated Stockholders Agreement provides that the ML Capital Partners affiliates are entitled to designate four of the Company's seven directors and the Management Investors are entitled to designate three of the Company's directors. The Board of Directors is currently comprised of six members, three of whom (Messrs. Sidhu, McLean and deHavenon) have been designated by ML Capital Partners. Certain significant transactions between the Company and unrelated parties require the approval of the Board of Directors and the holders of more than two-thirds of the outstanding shares of Common Stock. Since the ML Capital Partners affiliates have the right to elect the majority of the Board of Directors, the approval of the directors elected by the ML Capital Partners affiliates and Management Investors holding approximately 8% of the outstanding Common Stock (in addition to the ML Capital Partners affiliated stockholders) will be required to approve significant transactions. The Restated Stockholders Agreement also provides for certain restrictions on the transfer of shares of Common Stock by the current stockholders and rights of first refusal in connection with certain proposed transfers of Common Stock. Pursuant to the Consulting Agreement, Mr. Williams' shares of Common Stock will not be subject to these transfer restrictions if the ML Capital Partners affiliated stockholders sell their shares of Common Stock to an unaffiliated person or distribute their shares of Common Stock to their respective partners or investors.
Under the Restated Stockholders Agreement, all the stockholders of the Company have certain registration rights with respect to their Common Stock. These rights include demand and "piggyback" registration rights. The Company is obligated to register shares of Common Stock under the demand registration rights if holders of more than two-thirds of the outstanding shares request registration. The registration rights extend until February 14, 2002 or terminate sooner upon (i) the merger or consolidation of the Company with an unaffiliated corporation in which the Management Investors and affiliates of ML Capital Partners own less than 65% of the surviving or resulting corporation or (ii) the sale of substantially all the assets of the Company to an unaffiliated person. The remaining provisions of the Restated Stockholders Agreement would terminate under the foregoing circumstances or sooner in the event of (i) a public offering of Common Stock at the conclusion of which at least 30% of the outstanding shares shall have been sold to the public or (ii) the sale of 60% or more of the shares of Common Stock owned by either the Management Investors as a group or the ML Capital Partners affiliates as a group (as fully diluted by shares to be issued upon exercise of options).
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Purchase of Common Stock. Pursuant to the terms of the Consulting Agreement with Mr. Williams and the Management Subscription Agreement, the Company in August 1995, purchased 83,000 shares of Common Stock owned by certain trusts for the benefit of Mr. Williams' descendants (the "Trusts") at a price of $40 per share or a total of $3.3 million. In addition, the Consulting Agreement provides that the Trusts will have the right under certain circumstances to receive an additional amount with respect to such shares if, on or before January 1, 1999 (i) the Company undertakes an initial public offering of Common Stock, (ii) the Company enters into a fundamental transaction such as a merger, recapitalization or similar transaction, or (iii) the ML Capital Partners affiliated stockholders agree to sell their shares of Common Stock to the Company or a party not affiliated with ML Capital Partners and in connection with any such transaction the shares of Common Stock are valued at a price higher than $40 per share. If such a transaction is consummated, the Trusts will be entitled to receive from the Company a payment equal to the difference between the per share value of Common Stock in such transaction and $40 multiplied by 83,000 shares.
In October 1997, Mr. Gorga, a director and the President and Chief Executive Officer of the Company, purchased 5,000 shares of Common Stock for a purchase price of $27.50. Mr. Gorga delivered a non-recourse promissory note to the Company in payment of 90% of the purchase price for these shares of Common Stock and paid the balance in cash. Mr. Gorga's note bears interest at a per annum rate of 6.55% and is payable in ten years. Mr. Gorga pledged the purchased shares as security for payment of his promissory note.
Market Making Activities. In October 1993, ML & Co. underwrote a public offering of the Notes. The Company used the proceeds of the Offering, together with initial borrowings under a credit agreement, to refinance the indebtedness outstanding under certain subsidiary loan agreements and to call the Clinton Debentures for redemption. ML & Co. received an underwriting discount of $3,046,875 in connection with the Offering. The Company has agreed to maintain the effectiveness of the registration statement pursuant to which the Notes were registered with the Commission to enable ML & Co. to make a market in the Notes. The Company also agreed to indemnify ML & Co. against certain liabilities, including liabilities under the federal securities laws. For a discussion of the relationship between each of ML & Co. and its affiliates and the Company, see "Item 12 - -Security Ownership of Certain Beneficial Owners and Management."
Registration Rights. All current stockholders of the Company have certain registration rights with respect to their Common Stock. See "Item 12 - -Security Ownership of Certain Beneficial Owners and Management."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
1. The financial statements filed as a part of this Report are listed in the attached index to consolidated financial statements and schedules.
2. The financial statement schedules filed as a part of this Report are listed in the attached index to consolidated financial statements and schedules.
3. Exhibits
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(1) Filed as an exhibit to the Registration Statement on Form -1 (Commission File No. 33-67854) filed by CMI Industries, Inc. with respect to its $125,000,000 principal amount 9-1/2% Senior Subordinated Notes due 2003 and declared effective October 22, 1993.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q on December 6, 1993 and incorporated herein by this reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K on March 29, 1994 and incorporated herein by this reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q on May 16, 1994 and incorporated herein by this reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K on March 31, 1995 and incorporated herein by this reference.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q on November 14, 1995 and incorporated herein by this reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K on March 29, 1996 and incorporated herein by this reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q on November 12, 1996 and incorporated herein by this reference.
* Identifies a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K.
(b) The Company did not file any Current Reports on Form 8-K during the last quarter of the Company's 1997 fiscal year.
SUPPLEMENTAL INFORMATION
The Company has not provided its security holders with an annual report covering the Company's last fiscal year, or a proxy statement, a form of proxy or other proxy soliciting material. After the filing of this Annual Report on Form 10-K, the Company will send to the holders of its 9 1/2% Senior Subordinated Notes an annual report containing audited financial statements of the Company, together with an opinion thereon expressed by the Company's independent auditors. The Company will furnish to the Securities and Exchange Commission four copies of such annual report when it is sent to such holders.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CMI INDUSTRIES, INC.
Date: March 23, 1998 /s/ JOSEPH L. GORGA --------------------------- Joseph L. Gorga, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of CMI Industries, Inc.:
We have audited the accompanying consolidated balance sheets of CMI Industries, Inc. (a Delaware corporation) and subsidiaries as of January 3, 1998 and December 28, 1996, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CMI Industries, Inc. and subsidiaries as of January 3, 1998 and December 28, 1996 and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Columbia, South Carolina March 13, 1998.
CMI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 28, 1996 AND JANUARY 3, 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
CMI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND JANUARY 3, 1998 (IN THOUSANDS)
The accompanying notes to consolidated financial statements are an integral part of these statements.
CMI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND JANUARY 3, 1998 (IN THOUSANDS)
The accompanying notes to consolidated financial statements are an integral part of these statements.
CMI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND JANUARY 3, 1998 (IN THOUSANDS)
The accompanying notes to consolidated financial statements are an integral part of these statements.
CMI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND JANUARY 3, 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
1. DESCRIPTION OF COMPANY
CMI Industries, Inc. ("CMI," a Delaware corporation and subsequently referred to as the "Company") is a diversified manufacturer of textile products serving a variety of markets. On October 28, 1993, the Company merged its two primary operating subsidiaries, Clinton Mills, Inc. and Chatham Manufacturing, Inc. ("Chatham"), with and into the Company upon the closing of the Offering (see note 3). The Company currently operates through three divisions: the Greige Fabrics Division, the Elastic Fabrics Division and the Chatham Division.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements include the accounts of the Company and its wholly-owned subsidiaries. The Company uses a 52-53 week fiscal year. There were 53 weeks in the Company's accompanying statements of operations for the year ended January 3, 1998, and 52 weeks for the years ended December 28, 1996 and December 30, 1995. All significant intercompany balances and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company includes cash, demand deposits and highly liquid investments with maturities of less than three months in cash and cash equivalents in its consolidated financial statements. The book overdraft consists of outstanding checks that had not been presented to a bank for payment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or market and include the costs of raw materials, direct labor and manufacturing overhead.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is calculated for financial reporting purposes using the straight-line method over the estimated useful lives of the assets. For income tax purposes, depreciation is calculated principally by accelerated methods. Estimated useful lives are as follows:
LONG-LIVED ASSETS
During fiscal year 1997, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The statement requires impairment losses to be recorded on long-lived assets used in operations when indicators are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The effect of adoption did not have a material impact on the Company's results of operation.
INTANGIBLE AND OTHER ASSETS
Capitalized debt issuance costs are amortized over the remaining terms of the respective debt using the straight-line method.
REVENUE RECOGNITION
The Company recognizes revenue when goods are shipped or when ownership is assumed by the customers.
LINE OF BUSINESS AND CREDIT RISK
The Company's line of business is the manufacturing and selling of fabrics and other textile products for the home furnishings, apparel, furniture upholstery, transportation upholstery, bedding and industrial markets. Export sales are insignificant. Substantially all of the Company's accounts receivable are due from companies in the above markets located throughout the United States. The Company generally does not require collateral for its accounts receivable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company performs ongoing credit evaluations of its customers' financial condition and carries credit insurance on a majority of its outstanding trade receivables. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information, including the amount of credit insurance on specific accounts.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes," which requires deferred income taxes to be recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.
PRIOR-YEAR RECLASSIFICATIONS
Certain amounts in the 1996 consolidated financial statements have been reclassified to conform with the 1997 presentation.
3. LONG-TERM DEBT
In October 1993, the Company completed a public offering ("the Offering") of $125,000 in aggregate principal amount of 9 1/2% Senior Subordinated Notes ("Notes") due October 1, 2003. The Offering was completed through an underwriter which is affiliated with the Company's principal shareholders. The Notes are general unsecured obligations of the Company and are due October 1, 2003. The Notes' interest is payable semiannually, and are redeemable at the option of the Company at any time after October 1, 1998. Redemption prices commence at 104-3/4% of the principal amount, declining annually to 100% of the principal amount in October 2000, plus accrued interest. The recorded balance of $124,440 at January 3, 1998, is presented net of $560 of unamortized bond issue discount that is being amortized over the period to maturity. The latest information available indicates the fair value of the Company's Notes was $125,000 at January 3, 1998. The fair value presented herein is not necessarily indicative of the amounts that the Company would realize in a current market exchange.
The Company had credit agreements at January 3, 1998 which provided a secured revolving credit facility of $65,000, including a letter of credit facility of up to $5,000, and a Wachovia Bank of South Carolina credit facility, which provided an unsecured, uncommitted line of credit of $4,000. The borrowings under the secured revolving credit facility are secured by all inventories, all receivables, and certain intangibles. The secured revolving credit facility matures on January 15, 2000.
3. LONG-TERM DEBT (CONTINUED)
Long-term debt at December 28, 1996 and January 3, 1998 consisted of:
The secured revolving credit facility requires a commitment fee of 3/8 of 1% per annum on all unused amounts and as of January 3, 1998, the Company could have borrowed an additional $49,229 under the facility. Interest on the secured revolving credit facility is based on a floating prime rate or an eurodollar rate plus 1 1/2%. At January 3, 1998, the average interest rate on the secured revolving credit facility was 8.5%. The Wachovia Bank of South Carolina facility is unsecured, requires no commitment fee and may be terminated by the bank with 100 days notice. Interest on the Wachovia Bank of South Carolina facility accrues at an amount based on the daily Federal Funds rate, which was 7.9% at January 3, 1998.
The credit agreements and indenture contain various restrictive covenants and conditions requiring, among other things, minimum levels of net worth, certain interest coverage ratios, prohibitions against certain borrowings and advances, and a negative covenant limiting the Company's right to grant security interests or other liens on its assets. In addition, the credit agreements and the indenture pursuant to which the Notes were issued contain restrictions on the Company's ability to pay cash dividends or purchase its capital stock. Under the most restrictive covenant, as of January 3, 1998, the Company was authorized to pay up to $3,000 in cash dividends or capital stock repurchases. At January 3, 1998, the Company was in compliance with all covenants under all credit agreements.
As part of the Company's workers' compensation insurance agreements in South Carolina, Alabama, Georgia and Virginia, the Company has obtained letters of credit for $750, $200, $250 and $75, respectively. The letters of credit expire on February 10, 1998, June 30, 1998, January 11, 1998 and April 10, 1998, respectively. At January 3, 1998, the Company owed no amount under these letters of credit.
4. INCOME TAXES
Components of income tax expense (benefit) for the years ended December 30, 1995, December 28, 1996 and January 3, 1998, consisted of the following:
Alternative minimum taxes that have been paid as of January 3, 1998 and are available indefinitely as carryforward credits for future federal income taxes aggregated approximately $5,403. Such carryforward credits have been considered in the determination of the net deferred income tax liability at January 3, 1998.
Total income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent in 1995, 1996 and 1997 to income (loss) before income taxes as a result of the following:
Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to the net deferred income tax liability (asset) at December 28, 1996, and January 3, 1998 relate to the following:
5. BENEFIT PLANS
Effective December 31, 1994, the Company curtailed future benefits and merged its two defined benefit plans, the Clinton Retirement Income Program (the "CRIP") and the Pension Plan of Chatham Manufacturing, Inc. into the CRIP, which covers substantially all of its associates who qualify as to age and service. In general, the pension benefits are based on either years of service and percentages of the average of the five highest years of compensation or total compensation earned through December 31, 1994. The Company's funding policy is to contribute the amounts recommended by its independent actuary, which are determined after considering the funding status of the Company's plans, ERISA guidelines and tax deductibility. The curtailment of these plans did not reduce either plan assets or vested benefits of the participants.
Effective December 30, 1995, the Company provided an early retirement window to certain associates who were participants in the CRIP. In general, associates offered the window were provided their age 65 benefit plus a social security supplement until age 62, if applicable. The Company reported this $1,202 charge as part of its provision for restructuring in 1995.
The following table sets forth the funded status of the plans and amounts recognized in the accompanying consolidated balance sheets at December 30, 1995, December 28, 1996, and January 3, 1998:
5. BENEFIT PLANS (CONTINUED)
Net pension expense (income) consists of the following components:
The assumptions used in determining the actuarial present value of benefit obligations and the net periodic pension costs are as follows:
The plans' assets include marketable equity securities, guaranteed interest contracts, and corporate and government debt securities.
The Company had a contributory Profit Sharing and Retirement Savings Plan for the employees of Chatham. The Plan provided for contributions to the Plan by the Company as designated by the Board of Directors and voluntary contributions by the employees from 1% to 10% of their compensation. Effective January 1, 1995, this plan was amended and restated, converting it into The 401(k) Plan for Associates of CMI Industries, Inc., which covers substantially all of the Company's associates. Under the 401(k) Plan, the Company matches 50% of employee contributions, not to exceed 2% of pay, for all eligible and participating associates. Additionally, the Company can make additional contributions at the discretion of the Board of Directors. The Company's matching contributions totaled $1,314 for 1995, $1,105 for 1996, and $1,156 for 1997.
The Company is substantially self-insured for employee health and workers' compensation benefits. Provision for claims under these self-insured programs is recorded based upon actuarially determined estimates of the aggregate liability for claims incurred. The Company has accrued $3,800 and $3,320 for payments under these plans at December 28, 1996 and January 3, 1998, respectively.
5. BENEFIT PLANS (CONTINUED)
In connection with the acquisition of Chatham, the Company assumed obligations under a Supplemental Executive Retirement Plan ("SERP"), which is a non-qualified plan that provides certain current and former Chatham officers defined pension benefits in excess of limits imposed by federal tax law. At December 28, 1996, and January 3, 1998, the accrued SERP liability was $3,359 and $3,360, respectively, which equals the projected benefit obligation and is included in other liabilities in the accompanying balance sheets. The expense was $287, $291 and $246 for the periods ended December 30, 1995, December 28, 1996, and January 3, 1998, respectively. An irrevocable trust has been established to hold certain assets of the Company (life insurance contracts with a net cash value of $1,695 at January 3, 1998) as a reserve for the discharge of liabilities under the plan.
The 1989 CMI Industries, Inc. Non-Qualified Stock Option Plan provided for the grant of up to 35,000 shares of common stock for $25 per share. All of the options granted under this plan are fully vested. In 1992, Chatham's Board of Directors adopted the Chatham Manufacturing, Inc. 1992 Non-Qualified Stock Option Plan which provided for the grant of up to 140,000 shares of Chatham common stock. Options for 9,000 shares vest upon the attainment of levels of earnings as defined in the agreement or at the end of 10 years, whichever occurs first, while 60,000 shares vested immediately, 26,000 shares were vested in 1993, and 8,000 shares were vested in 1994. Options to purchase Chatham common stock were converted to options to purchase the Company's stock. In 1996, the Company granted the remaining 37,000 shares from the 1992 Plan and vested the recipients' interest in these shares immediately. In 1994, the Company adopted the 1994 CMI Industries, Inc. Stock Option Plan which provided for the grant of up to 50,000 shares of the Company's stock. Options for 2,000 shares were granted and vested immediately in 1994 pursuant to the 1994 Plan. In 1995, options for 30,000 shares were granted pursuant to the 1994 Plan, with vesting upon the attainment of certain earnings levels as defined in the agreement or at the end of ten years, whichever comes first. In 1996, the Company granted the remaining 18,000 shares from the 1994 Plan and vested the recipients' interest in these shares immediately. As of January 3, 1998, options to acquire 225,000 shares of the Company's common stock were outstanding. Exercise prices of the options range from $25 to $45 per share. Management has determined that no compensation expense should be recorded based on these options. Since the inception of these plans, no options have been exercised. The Company accounts for stock option plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined in accordance with FASB Statement No. 123, there would not have been a material impact on the Company's net income.
6. RECEIVABLES, INVENTORIES, PROPERTY, PLANT AND EQUIPMENT, AND INTANGIBLE AND OTHER ASSETS
Receivables, inventories, property, plant and equipment, and intangible and other assets at December 28, 1996 and January 3, 1998 consisted of the following:
7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities at December 28, 1996, and January 3, 1998 consisted of the following:
8. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
The Company leases certain office facilities and equipment under various operating leases expiring at various dates through 2005. Future minimum lease payments under noncancelable operating leases are as follows at January 3, 1998:
Rental expense was $1,621 for 1995, $1,581 for 1996, and $2,152 for 1997. The majority of these leases require the Company to pay taxes, maintenance, insurance, and certain other operating expenses applicable to the leased property.
Environmental site evaluations have been performed which concluded that some form of groundwater and soil remediation will be required by the Company. In the future, the Company may also construct facilities to control flyash disposal and runoff from a coal pile, and may perform asbestos abatement. The Company believes that sufficient amounts are accrued as of January 3, 1998 for the cost of these expenditures.
8. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
The Company is involved in various legal proceedings arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial condition or results of operations.
As of January 3, 1998 the Company was committed to future capital expenditures of $3,248.
The Company purchases significant amounts of cotton, one of its primary raw materials, through commodity contracts. At January 3, 1998, all fixed contracts were at prices which approximated or were below current market prices, or were purchased to hedge firm sales orders from customers in which the Company believes it has maintained margins at, or above, historical levels. The Company's financial results are impacted by the variability of cotton and other raw material prices.
Under the stockholders agreement, all of the stockholders of the Company have certain registration rights with respect to their common stock. These rights include demand and "piggyback" registration rights. The Company is obligated to register shares of common stock under the demand registration rights if holders of more than two-thirds of the outstanding shares request registration. The registration rights extend until February 14, 2002 or terminate sooner upon (i) the merger or consolidation of the Company with an unaffiliated corporation in which the management investors and affiliates of Merrill Lynch Capital Partners, Inc. own less than 65% of the surviving or resulting corporation or (ii) the sale of substantially all the assets of the company to an unaffiliated person. The remaining provisions of the stockholders agreement would terminate under the foregoing circumstances or sooner in the event of (i) a public offering of common stock at the conclusion of which at least 30% of the outstanding shares shall have been sold to the public or (ii) the sale of 60% or more of the shares of common stock owned by either the management investors as a group or the Merrill Lynch Capital Partners, Inc. affiliates as a group (as fully diluted by shares to be issued upon exercise of options). Under the management subscription agreement, the Company has an option to purchase, and each of the management investors have an option under certain circumstances to sell, at fair market value the shares of common stock owned by such management investor in the event of his death, incapacity or termination of employment.
9. RESTRUCTURING CHARGES AND ACCRUED SEVERANCE LIABILITY
In December 1995, the Company approved a plan to pursue restructuring initiatives in all divisions. These initiatives were completed by December 1996. In the Greige Fabrics Division, the Company closed one of its manufacturing facilities and is disposing of idle equipment and inventories. In the Finished Fabrics Division, the Company consolidated certain operations and is disposing of idle equipment and inventories. The Company also downsized its corporate operations. The restructuring charges also consist of costs for the severance and retirement of approximately 700 associates, including the termination of consulting contracts, insurance, vacation, and related expenses. Related to this decision, the Company reported a $12,900 charge to earnings in 1995 and has reserved for the following items:
Included in the $12,900 of restructuring and related nonrecurring amounts in 1995 were approximately $5,048 of incremental cash expenditures, of which $2,494 had not been paid as of December 28, 1996. The Company expects to fund the early retirement amount from assets in the Company's defined benefit plan and the balance from operations or amounts available under the credit agreements. During 1997, the Company funded $387 of cash related restructuring items and disposed of $2,349 of assets related to the restructuring.
In August 1995, the former President and Chief Executive Officer retired from the Company. In connection with the retirement, the Company repurchased the common stock of the former officer at a cost of $3,320. The repurchase price is subject to future adjustment based on the occurrence of certain equity transactions. The executive severance charges reported in the Company's accompanying 1995 statement of operations of $4,782 includes retirement benefits, salary, life insurance, consulting fees and other items.
CMI INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
For the Three Years Ended December 30, 1995, December 28, 1996 and January 3, 1998
CMI INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
For the Three Years Ended December 30, 1995, December 28, 1996, and January 3, 1998 (in thousands)
(1) Depreciation is provided for financial reporting purposes on the straight-line method over the following estimated useful lives for the periods indicated.
(2) The Company has recorded the 1995 nonrecurring write-off of property, plant and equipment in other changes to accumulated depreciation and amortization.
CMI INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND JANUARY 3, 1998 (IN THOUSANDS)
Report of Independent Public Accountants
To The Board of Directors of CMI Industries, Inc.:
We have audited in accordance with generally accepted auditing standards, the financial statements of CMI Industries, Inc. and subsidiaries included in this annual report and have issued our report thereon dated March 13, 1998. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index are the responsibility of the Company's management and are presented for the purposes of complying with the Securities and Exchange Commission's rules and are not a required part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Columbia, South Carolina March 13, 1998.
INDEX TO EXHIBITS