UNIFI INC
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
June 25, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-10542
Unifi, Inc.
(Exact name of registrant as
specified in its charter)
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New York
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11-2165495
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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Identification No.)
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P.O. Box 19109
7201 West Friendly Avenue
Greensboro, NC
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27419-9109
(Zip Code)
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(Address of principal executive
offices)
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Registrants telephone number, including area code:
(336) 294-4410
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by checkmark if the registrant is a well-know seasoned
issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ
Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of December 23, 2005, the aggregate market value of the
registrants voting common stock held by non-affiliates of
the registrant was $145,387,494. The Registrant has no
non-voting stock.
As of September 5, 2006, the number of shares of the
Registrants common stock outstanding was 52,208,467.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be filed with the
Securities and Exchange Commission (the SEC) in
connection
with the solicitation of proxies for the Annual Meeting of
Shareholders of Unifi, Inc., to be held on October 25,
2006, are incorporated by reference into Part III. (With
the exception of those portions which are specifically
incorporated by reference in this
Form 10-K,
the Proxy Statement is not deemed to be filed or incorporated by
reference as part of this report.)
UNIFI,
INC.
ANNUAL REPORT ON
FORM 10-K
TABLE OF
CONTENTS
2
PART I
Unifi, Inc., a New York corporation formed in 1969 (together
with its subsidiaries the Company or
Unifi), is a diversified North American producer and
processor of multi-filament polyester and nylon yarns, including
specialty yarns with enhanced performance characteristics. The
Company manufactures partially oriented, textured, dyed, twisted
and beamed polyester yarns as well as textured nylon and nylon
covered spandex products. The Company sells its products to
other yarn manufacturers, knitters and weavers that produce
fabrics for the apparel, hosiery, home furnishings, automotive,
industrial and other end-use markets. The Company maintains one
of the industrys most comprehensive product offerings and
emphasizes quality, style and performance in all of its
products. The Companys net sales and net loss for fiscal
year 2006 were $738.8 million and $14.4 million,
respectively.
The Company works across the supply chain to develop and
commercialize specialty yarns that provide performance, comfort,
aesthetic and other advantages that enhance demand for its
products. The Company has branded the premium portion of its
specialty value-added yarns in order to distinguish its products
in the marketplace. The Company currently has more than 20
premium value-added yarns in its portfolio, commercialized under
several brand names, including
Sorbtek®,
A.M.Y.®,
Mynx®
UV,
Reflexx®,
MicroVista®,
aio®
and
Repreve®.
A significant number of customers, particularly in the apparel
market, produce finished goods that they seek to make eligible
for duty-free treatment in the regions covered by the North
American Free Trade Agreement (NAFTA), the
U.S. Dominican Republic Central American
Free Trade Agreement (CAFTA), the Caribbean Basin
Initiative (CBI) and the Andean Trade Preferences
Act (ATPA) (collectively, the regional
free-trade markets). When
U.S.-origin
partially oriented yarn (POY) is used to produce
finished goods in these regional free-trade markets, and other
origin criteria are met, then the finished goods are eligible
for duty-free treatment. The Company uses advanced production
processes to manufacture its high-quality yarns
cost-effectively. The Company believes that its flexibility and
experience in producing specialty yarns provides important
development and commercialization advantages. The Company has
state-of-the-art
manufacturing operations in North and South America and
participates in joint ventures in China, Israel and the United
States.
Recent
Developments
On May 26, 2006, the Company consummated a series of
refinancing transactions pursuant to which it issued and sold
$190 million in aggregate principal amount of
11.5% senior secured notes due 2014 (the 2014
notes) and amended its existing senior secured asset-based
revolving credit facility (the old credit facility)
to extend its maturity to 2011, permit the issuance and sale of
the 2014 notes, give the Company the ability to request that the
borrowing capacity be increased up to $150 million under
certain circumstances and revise some of its other terms and
covenants (such facility as so amended, the amended
revolving credit facility). The Company used the proceeds
from the 2014 notes offering, cash on hand of $55.7 million
and borrowings of $3.0 million under its amended revolving
credit facility to fund the purchase price of
$248.7 million in aggregate principal amount of its
6.5% senior unsecured notes due 2008 (the 2008
notes) that had been tendered into a tender offer for all
such notes launched by the Company on April 28, 2006. 99.5%
of the then outstanding principal amount of the 2008 notes was
tendered in the tender offer and substantially all of the
restrictive covenants and certain events of default were removed
from the indenture governing the 2008 notes. The Company paid a
total consideration of $253.9 million for the tendered 2008
notes. The 2008 notes that were not tendered and purchased in
the tender offer remain outstanding in accordance with their
amended terms. The offering of the 2014 notes, the tender offer
for the 2008 notes, the execution of the amended revolving
credit facility and the use of proceeds from the 2014 notes
offering, cash on hand and borrowings under the amended
revolving credit facility to pay the consideration of the tender
offer and all associated fees and expenses are collectively
referred to throughout this Annual Report on
Form 10-K
as the refinancing transactions.
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Industry
Overview
The textile and apparel market consists of natural and synthetic
fibers used for apparel and non-apparel applications. The
industry is characterized by dependence upon a wide variety of
end-markets which primarily include apparel, home textiles,
industrial and consumer products, floor coverings, fiber fill
and tires. The apparel and hosiery markets account for 25% of
total production, the floor covering market accounts for 32%,
the industrial and consumer markets account for 20%, the home
textiles market accounts for 13% and other end-uses account for
10%.
According to the National Council of Textile Organizations, the
U.S. textile markets total shipments were
$75.1 billion for the twelve month period ended November
2005. Approximately $30 billion of capital expenditures has
been invested in the textile industry over the past ten years.
In calendar year 2005, the U.S. textile and apparel market
employed more than 650,000 workers.
Textiles and apparel goods are made from natural fiber, such as
cotton and wool, or synthetic fiber, such as polyester and
nylon. Since 1980, global demand for polyester has grown
steadily, and in calendar year 2003, polyester replaced cotton
as the fiber with the largest percentage of sales worldwide. In
calendar year 2005, global polyester accounted for an estimated
40% of global fiber consumption and demand is projected to
increase by 6% to 7% annually through 2009. In the U.S., the
synthetic fiber sector accounts for approximately 55% of the
textile and apparel market.
The synthetic filament industry includes petrochemical and raw
material producers, fiber and yarn manufacturers (like Unifi),
fabric and product producers, retailers and consumers. Among
synthetic filament yarn producers, pricing is highly
competitive, with innovation, product quality and customer
service being essential for differentiating the competitors
within the industry. Both product innovation and product quality
are particularly important, as product innovation gives
customers competitive advantages and product quality provides
for improved manufacturing efficiencies.
The North American synthetic yarn market has contracted since
1999, primarily as a result of intense foreign competition in
finished goods on the basis of price. In addition, due to
consumer preferences, demand for sheer hosiery products has
declined in recent years, which negatively impacts nylon
manufacturers. Despite this decline, U.S. retailers and
other end-users have consistently expressed their need for a
balanced procurement strategy with both global and regional
production to satisfy their need for readily available
production capacity, quick response times, specialized products,
product changes based on customer feedback and more customized
orders. As a result, the contraction in the U.S. synthetic
yarn market continues; however, the Company expects a lesser
rate of decline in the future as regional manufacturers continue
to demand U.S. manufactured synthetic yarn. There has also
been growing emphasis domestically towards premium value-added
yarns as consumers, retailers and manufacturers demand products
with enhanced performance characteristics. This emphasis on
incorporating specialty synthetic yarn in finished goods has
greatly increased domestic demand for value-added synthetic
fibers. The U.S. government has attempted to regulate the
growth of certain textile and apparel imports by establishing
quotas and duties on imports from countries that historically
account for significant shares of U.S. imports. Under the
January 1995 Agreement on Textiles and Clothing, the World Trade
Organization (WTO) began implementing a phased-in
elimination of import quotas and a reduction of duties among its
members, which culminated with the elimination of all remaining
quotas for all members of WTO on January 1, 2005. After
extensive negotiations, the United States and China entered into
a bilateral agreement in November 2005, reinstating quotas on a
number of categories of Chinese textile and apparel products.
These quotas under this agreement will end on December 31,
2008. Nevertheless, duties on imported textile and apparel
products, including textile and apparel products from China,
remain in effect. The Company believes that duties are a more
effective method than quotas in providing protection for the
U.S. textile and apparel industry.
In the Americas region, regional free-trade agreements, such as
NAFTA and CAFTA, and U.S. unilateral duties preference
programs, such as ATPA and CBI, have a significant impact on the
flow of goods among the region and the relative costs of
production. The cost advantages offered by these regional
free-trade agreements and duties preference programs on finished
goods which incorporate
U.S.-origin
synthetic fiber and the desire for quick inventory turns have
enabled regional synthetic yarn producers to effectively compete
with imported finished goods from lower wage-based countries.
The Company estimates that the duty-free benefit of processing
synthetic textiles
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and apparel finished goods under the terms of these regional
free-trade agreements and duties preference programs typically
represents a wholesale cost advantage up to 30% on these
finished goods. As a result of such cost advantages, it is
expected that these regions will continue to grow in their
supply of textiles to the United States.
Products
The Company manufactures polyester POY and synthetic polyester
and nylon yarns for a wide range of end-uses. The Company
processes and sells POY, as well as high-volume commodity yarns
and specialty yarns, domestically and internationally.
Polyester POY is used to make polyester yarn. Polyester yarn
products include textured, dyed, twisted and beamed yarns. The
Company sells its polyester yarns to other yarn manufacturers,
knitters and weavers that produce fabrics for the apparel,
automotive and furniture upholstery, home furnishings,
industrial, military, medical and other end-use markets. Nylon
products include textured nylon and covered spandex products,
which the Company sells to other yarn manufacturers, knitters
and weavers that produce fabrics for the apparel, hosiery, sock
and other end-use markets.
In addition to producing high-volume yarns, the Company
develops, manufactures and commercializes specialty yarns that
provide performance, comfort, aesthetic and other advantages.
For example, it has developed a line of products that are made
from recycled materials in order to appeal to environmentally
conscious consumers. The Company has branded the premium portion
of its specialty value-added yarns in order to distinguish its
products in the marketplace and it currently has more than 20
premium value-added yarn products in its portfolio. Such branded
yarn products include:
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Sorbtek®,
a permanent moisture management yarn primarily used in
performance base layer applications, compression apparel,
athletic bras, sports apparel, socks and other non-apparel
related items;
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A.M.Y.
®,
a yarn with permanent antimicrobial and odor control;
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Mynx®
UV, an ultraviolet protective yarn;
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Reflexx®,
a family of stretch yarns, that can be found in a wide array of
end-use applications from home furnishings to performance wear
and from hosiery and socks to workwear and denim;
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MicroVista®,
a family of microfiber yarns;
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aio®,
all-in-one
performance yarns, which combine multiple performance properties
into a single yarn; and
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Repreve®,
an eco-friendly yarn made from 100% recycled materials.
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The Companys net sales of polyester and nylon accounted
for 77% and 23% of total net sales, respectively, for fiscal
year 2006.
Sales
and Marketing
The Company employs a sales force of approximately 30 persons
operating out of sales offices in the United States, Brazil and
Colombia. The Company relies on independent sales agents for
sales in several other countries. The Company seeks to create
strong customer relationships and continually seeks ways to
build and strengthen those relationships throughout the supply
chain. Through frequent communications with customers,
partnering with customers in product development and engaging
key downstream brands and retailers, Unifi has created
significant pull-through sales and brand recognition for its
products. For example, the Company works with brands and
retailers to educate and create demand for its value-added
products. The Company then works with key fabric mill partners
assisting in the development of fabrics for those brands and
retailers utilizing these value-added products. Based on many
commercial and branded programs, this strategy has proven to be
successful for Unifi. Examples include:
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Sorbtek®,
which is used in many well-known apparel brands and retailers,
including Wal-Mart, Reebok, the U.S. military, Dicks
Sporting Goods, Duofold, Hind and Icy Hot. Today
Sorbtek®
can be found in over 2,500 Wal-Mart stores under the Athletic
Works brand;
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A.M.Y.®,
which can be found in many apparel brands, including Reebok,
Eastern Mountain Sports, the U.S. military, Everlast,
Duofold, Jerzees Socks and Russell Athletics;
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Mynx®
UV, which can be found in Asics Running Apparel and Terry
Cycling; and
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Reflexx®,
which can be found in major brands, including VF
Corporations Wrangler and Red Kap, Dockers and Majestic
Athletic (a maker of uniforms for several major league baseball
teams, including the New York Yankees).
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Customers
The Company sells its polyester yarns to approximately 900
customers and its nylon yarns to approximately 200 customers in
a variety of geographic markets. In fiscal year 2006, the
Companys nylon segment had sales to Sara Lee Branded
Apparel of $76.4 million which is in excess of 10% of its
consolidated revenues. The loss of this customer would have a
material adverse effect on the Companys nylon segment.
Products are generally sold on an
order-by-order
basis for both the polyester and nylon segments, even for
premium value-added yarn with enhanced performance
characteristics. For substantially all customer orders,
including those involving more customized yarns, the manufacture
and shipment of yarn is in accordance with firm orders received
from customers specifying yarn type and delivery dates. The
Company does not currently provide raw yarn consignment
arrangements to any customers.
Customer payment terms are generally consistent for both the
polyester and nylon reporting segments and are usually based on
prevailing industry practices for the sale of yarn domestically
or internationally. In certain cases, payment terms are subject
to further negotiation between the Company and individual
customers based on specific circumstances impacting the customer
and may include the extension of payment terms or negotiation of
situation specific payment plans. The Company does not believe
that any such deviations from normal payment terms are
significant to either of its reporting segments or the Company
taken as a whole. See Item 1A Risk
Factors The Companys business could be
negatively impacted by the financial condition of its
customers.
Manufacturing
Polyester POY is made from petroleum-based chemicals such as
terephthalic acid (TPA) and monoethylene glycol
(MEG). The production of polyester POY consists of
two primary processes, polymerization (performed at the
Companys Kinston facility) and spinning (performed at the
Companys Yadkinville and Kinston facilities). The
polymerization process is the production of polymer by a
chemical reaction involving TPA and MEG, which are combined to
form chip. The spinning process involves the extrusion of molten
polymer, directly from polymerization or using polyester polymer
beads (chip) into polyester POY. The molten polymer
is extruded through spinnerettes to form continuous
multi-filament raw yarn.
The Companys polyester and nylon yarns can be sold
externally or further processed internally. Additional
processing of polyester products includes texturing, package
dyeing, twisting and beaming. The texturing process, which is
common to both polyester and nylon, involves the processing of
polyester POY, which is either natural or solution-dyed raw
polyester or natural nylon filament fiber. Texturing polyester
POY involves the use of high-speed machines to draw, heat and
twist the polyester POY to produce yarn having various physical
characteristics, depending on its ultimate end-use. This process
gives the yarn greater bulk, strength, stretch, consistent
dyeability and a softer feel, thereby making it suitable for use
in knitting and weaving of fabrics.
Package dyeing allows for matching of customer specific color
requirements for yarns sold into the automotive, home
furnishings and apparel markets. Twisting incorporates real
twist into the filament yarns, which can be sold for such uses
as sewing thread, home furnishings and apparel. Beaming places
both textured and covered yarns on beams to be used by customers
in knitting and weaving applications. Warp drawing converts
polyester POY into flat yarn, also packaged on beams.
Additional processing of nylon products mostly includes
covering, which involves the wrapping or air entangling of
filament or spun yarn around a core yarn. This process enhances
a fabrics ability to stretch, recover its original shape
and resist wrinkles.
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The Company works closely with its customers to develop yarns
using a research and development staff that evaluates trends and
uses the latest technology to create innovative, premium
value-added yarns reflecting current consumer preferences.
Suppliers
The primary raw material suppliers for the polyester segment are
Nanya Plastics Corp. of America (Nanya) for chip,
DAK Americas LLC (DAK) for TPA and E.I. DuPont de
Nemours (DuPont) for MEG. The primary suppliers of
nylon POY to the nylon segment are U.N.F. Industries Ltd.
(UNF), Invista S.a.r.l., Sara Lee Nilit Fibers, Ltd
and Universal Premier Fibers, LLC (formerly Cookson Fibers,
Inc.). UNF is a 50/50 joint venture with Nilit Ltd.
(Nilit), located in Israel. The joint venture
produces nylon POY at Nilits manufacturing facility in
Migdal Ha Emek, Israel. The nylon POY production is
being utilized in the domestic nylon texturing operations. The
Company has entered into long-term supply agreements with each
of Nanya, DAK, DuPont and UNF. The agreement with Nanya will
expire in October 2007 and may otherwise be terminated earlier
upon six months prior notice. The agreements with DAK can be
terminated upon two years prior notice. The agreement with
DuPont will terminate on December 31, 2006 and the
agreement with UNF will terminate in April 2008. The supply
agreements typically provide for formula-driven pricing.
Although the Company does not generally expect having any
significant difficulty in obtaining raw nylon POY or chemical
and other raw materials used to manufacture polyester POY, the
Company has in the past and may in the future experience
interruptions or limitations in supply which could materially
and adversely affect its operations. See
Item 1A Risk Factors The
Company depends upon limited sources for raw materials, and
interruptions in supply could increase its costs of production
and cause its operations to suffer.
Joint
Ventures and Other Equity Investments
The Company participates in joint ventures in China, Israel and
the United States. See Managements Discussion and
Analysis of Financial Condition and Results of
Operation Joint Ventures and Other Equity
Investments for a more detailed description of its joint
ventures.
Competition
The industry in which the Company currently operates is highly
competitive. The Company processes and sells both high-volume
commodity products and more specialized yarns both domestically
and internationally into many end-use markets, including the
apparel, automotive upholstery and home furnishing markets. The
Company competes with a number of other foreign and domestic
producers of polyester and nylon yarns as well as with imports
of textile and apparel products.
The polyester segments major regional competitors are
Nanya, Dillon Yarn Corporation (Dillon),
OMara, Inc., Spectrum Yarns, Inc. (Spectrum),
KOSA and AKRA, S.A. de C.V. The nylon segments major regional
competitors are Sapona Manufacturing Company, Inc., McMichael
Mills, Inc. and Worldtex, Inc.
The Company also competes against a number of foreign
competitors that not only sell polyester and nylon yarns in the
United States but also import foreign sourced fabric and apparel
into the United States and other countries in which it does
business, which adversely impacts the sale of its polyester and
nylon yarns.
The Companys foreign competitors include yarn
manufacturers located in the regional free-trade markets who
also benefit from the NAFTA, CAFTA, CBI and ATPA trade
agreements which provide for duty-free treatment of most apparel
and textiles between the signatory (and qualifying) countries.
The cost advantages offered by these trade agreements and the
desire for quick inventory turns have enabled commodity yarn
producers from these regions to effectively compete. As a result
of such cost advantages, the Company expects that the CAFTA and
ATPA regions will continue to grow in their supply to the United
States. The Company is the largest of only a few significant
producers of eligible yarn under these trade agreements. As a
result, one of the Companys business strategies is to
leverage its eligibility status to increase its share of
business with regional fabric producers and domestic producers
who ship their products into the region for further processing.
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On a global basis, the Company competes not only as a yarn
producer but also as part of a supply chain. As one of the many
participants in the textile industry supply chain, its business
and competitive position are directly impacted by the business,
financial condition and competitive position of the several
other participants in the supply chain in which it operates.
In the apparel market, a significant source of overseas
competition comes from textile and apparel manufacturers that
operate in lower labor and lower raw materials cost countries
such as China. The primary competitive factors in the textile
industry include price, quality, product styling and
differentiation, flexibility of production and finishing,
delivery time and customer service. The needs of particular
customers and the characteristics of particular products
determine the relative importance of these various factors.
Several of the Companys foreign competitors have
significant competitive advantages, including lower wages, lower
raw materials and energy costs and favorable currency exchange
rates against the U.S. dollar, which could make the
Companys products less competitive and may cause its sales
and profits to decrease. In addition, while traditionally these
foreign competitors have focused on commodity production, they
are now increasingly focused on premium value-added products
where the Company continues to generate higher margins. In
recent years, international imports of fabric and finished goods
in the United States have significantly increased, resulting in
a significant reduction in the Companys customer base. The
primary drivers for that growth are the reduction in equipment
costs which have reduced barriers to entry in the market, the
currency devaluation of Asian currencies following the Asian
financial crisis, the entry of China into the free-trade markets
and the staged elimination of all textile and apparel quotas. In
May 2005, the U.S. government imposed safeguard quotas on
various categories of Chinese-made products, citing market
disruption. Following extensive negotiations, the United
States and China entered into a bilateral agreement in November
2005 resulting in the imposition of annually decreasing quotas
on a number of categories of Chinese textile and apparel
products until December 31, 2008. The Company expects
competitive pressures to intensify as a result of the gradual
elimination of trade protections. See Trade
Regulation.
The U.S. automotive upholstery market has been less
susceptible to import penetration because of the exacting
specifications and quality requirements often imposed on
manufacturers of automotive upholstery and the often short time
frame for deliveries. Effective customer service and prompt
response to customer feedback are logistically more difficult
for an importer to provide. Nevertheless, to the extent the
U.S. automotive industry itself faces competition from
imports, the U.S. automotive upholstery industry is also
affected by imports.
The nylon hosiery market has been experiencing a decline in
recent years due to changing consumer preferences, but is
expected to decline at a much lower rate compared to previous
years. The Company supplies the largest domestic ladies hosiery
producer, Sara Lee Branded Apparel.
General economic conditions, such as raw material prices,
interest rates, currency exchange rates and inflation rates that
exist in different countries have a significant impact on
competitiveness, as do various
country-to-country
trade agreements and restrictions.
The Company believes that the continuing development and
marketing of new and improved products, the growing need for
quick response, speed to market, quick inventory turns and cost
of capital will continue to require a sizable portion of the
textile industry to remain based in North America. The
Companys success will continue to be primarily based on
its ability to improve the mix of product offerings to more
premium value-added products, to implement cost saving
strategies and to pass along raw material price increases, which
will improve its financial results, and to strategically
penetrate growth markets such as China.
See Item 1A Risk Factors The
Company faces intense competition from a number of domestic and
foreign yarn producers and importers of textile and apparel
products.
Backlog
and Seasonality
The Company generally sells products on an
order-by-order
basis for both the polyester and nylon reporting segments, even
for premium value-added yarns. Changes in economic indicators
and consumer confidence levels can have a significant impact on
retail sales. Deviations between expected sales and actual
consumer demand result in significant adjustments to desired
inventory levels and, in turn, replenishment orders placed with
suppliers. This changing demand ultimately works its way through
the supply chain and impacts the Company. As a result, the
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Company does not track unfilled orders for purposes of
determining backlog but will routinely reconfirm or update the
status of potential orders. Consequently, backlog is generally
not applicable to the Company and it does not consider its
products to be seasonal.
Intellectual
Property
The Company has a limited number of patents and approximately 26
U.S. registered trademarks, 4 trademark applications and
several foreign trademark registrations, none of which is
material to any of the Companys reporting segments or its
business taken as a whole. The Company does license certain
trademarks, including
Dacron®
and
Softectm
from INVISTA S.a.r.l. (INVISTA).
Employees
The Company employs approximately 3,300 employees of which
approximately 3,275 are full-time and approximately 25 are
part-time employees. Approximately 2,500 employees are employed
in the polyester segment, approximately 700 employees are
employed in the nylon segment and approximately 100 employees
are employed in corporate offices. While employees of the
Companys foreign operations are generally unionized, none
of the domestic employees are currently covered by collective
bargaining agreements. The Company believes that its relations
with its employees are good.
Trade
Regulation
Increases in capacity and imports of foreign-made textile and
apparel products are a significant source of competition for the
Company. The U.S. government attempts to regulate the
growth of certain textile and apparel imports by establishing
quotas and duties on imports from countries that historically
account for significant shares of U.S. imports. Although
imported apparel represents a significant portion of the
U.S. apparel market, in recent years, a significant portion
of import growth has been attributable to imports of apparel
products manufactured outside the United States of (or using)
domestic textile components. In addition, imports of certain
textile products into the United States have increased in recent
years as a result of significant depreciation of the currencies
of other textile producing countries, particularly within Asia,
against the U.S. dollar, and perhaps as a result of unfair
trade practices.
The extent of import protection afforded by the
U.S. government to domestic textile producers has been, and
is likely to remain, subject to considerable domestic political
deliberation and foreign considerations. In January 1995, a
multilateral trade organization, the WTO, was formed by the
members of the General Agreement on Tariffs and Trade
(GATT), to replace GATT. The WTO has set forth the
mechanisms by which world trade in textiles and clothing will be
progressively liberalized through the elimination of quotas and
the reduction of duties. The implementation began in January
1995 with the phasing-out of quotas and the gradual reduction of
duties to take place over a
10-year
period. All textile and apparel quotas expired on
January 1, 2005. In May 2005, however, the
U.S. government imposed safeguard quotas on various
categories of Chinese-made products, citing market
disruption. Following extensive negotiations, the United
States and China entered into a bilateral agreement in November
2005 resulting in the imposition of annually increasing quotas
on a number of categories of Chinese textile and apparel
products that will remain in effect until December 31, 2008.
NAFTA, which is a free trade agreement between the United
States, Canada and Mexico that became effective on
January 1, 1994, has created the worlds largest
free-trade area. The agreement contains safeguards sought by the
U.S. textile industry, including certain rules of origin
for textile and apparel products that must be met for these
products to receive benefits under NAFTA. Under these rules of
origin, to receive NAFTA benefits, the textile and apparel
products must be produced from yarn or fabric made in the NAFTA
region, and all subsequent processing must occur in the NAFTA
region. Thus, in general, not only must eligible apparel be made
from North American fabric, but the fabric must be woven from
North American spun yarn. Based on experience to date, NAFTA has
had a favorable impact on the Companys business.
In 2000, the United States passed the United States-Caribbean
Basin Trade Partnership Act, which was amended by the Trade Act
of 2002, and allows apparel products manufactured in the
Caribbean region using yarns or fabrics produced in the United
States to be imported into the United States duty and quota
free. Also in 2000, the
9
United States passed the African Growth and Opportunity Act
(AGOA), which was amended by the Trade Act of 2002,
and allows apparel products manufactured in the sub-Saharan
African region using yarns or fabrics produced in the United
States to be imported to the United States duty and quota free.
On August 2, 2005, the United States passed CAFTA, which is
a free trade agreement between seven signatory countries: the
United States, the Dominican Republic, Costa Rica, El Salvador,
Guatemala, Honduras and Nicaragua. Qualifying textile and
apparel products that are produced in any of the seven signatory
countries from fabric, yarn or fibers that are also produced in
any of the seven signatory countries may be imported into the
United States duty-free.
The Andean Trade Promotion and Drug Eradication Act was passed
on August 6, 2002 to renew and enhance the ATPA. Under the
enhanced ATPA, apparel manufactured in Bolivia, Colombia,
Ecuador and Peru using yarns and fabrics produced in the United
States, or in these four Andean countries, may be imported into
the United States duty and quota free through December 31,
2006. This legislation effectively granted these four countries
the favorable trade terms afforded Mexico and the Caribbean
region. A free trade agreement was recently completed with Peru
and Colombia which follows, for the most part, the same yarn
forward rules of origin as the ATPA. These agreements require
congressional action which is expected by early 2007.
The Deficit Reduction Act of 2005, which was signed into law on
February 8, 2006, contains statutory changes to the Step 2
cotton program and export credit guarantee programs to comply
with parts of a WTO ruling against U.S. cotton subsidies.
The legislative changes eliminate the Step 2 program, which
provides for payments to U.S. cotton and textile producers.
The measure, part of an agriculture budget reconciliation
process, does away with the subsidy program as of August 1,
2006. Parkdale America, LLC (PAL), the
Companys joint venture with Parkdale Mills, Inc., will no
longer receive payments under the Step 2 program after
August 1, 2006. Measures such as additional quotas for
foreign cotton are under discussion to help ease the transition.
Environmental
Matters
The Company is subject to various federal, state and local
environmental laws and regulations limiting the use, storage,
handling, release, discharge and disposal of a variety of
hazardous substances and wastes used in or resulting from its
operations and potential remediation obligations thereunder,
particularly the Federal Water Pollution Control Act, the Clean
Air Act, the Resource Conservation and Recovery Act (including
provisions relating to underground storage tanks) and the
Comprehensive Environmental Response, Compensation, and
Liability Act, commonly referred to as Superfund or
CERCLA and various state counterparts. The Company
has obtained, and is in compliance in all material respects
with, all significant permits required to be issued by federal,
state or local law in connection with the operation of its
business as described in this Annual Report on
Form 10-K.
The Companys operations are also governed by laws and
regulations relating to workplace safety and worker health,
principally the Occupational Safety and Health Act and
regulations thereunder which, among other things, establish
exposure standards regarding hazardous materials and noise
standards, and regulate the use of hazardous chemicals in the
workplace.
The Company believes that the operation of its production
facilities and the disposal of waste materials are substantially
in compliance with applicable federal, state and local laws and
regulations and that there are no material ongoing or
anticipated capital expenditures associated with environmental
control facilities necessary to remain in compliance with such
provisions. However, the Company is evaluating several options
with respect to the upgrade of its industrial boilers at the
Kinston site. The estimated investment ranges from $0 to
$2.0 million. No determination has been made with respect
to which alternative to pursue, if any. The Company incurs
normal operating costs associated with the discharge of
materials into the environment but does not believe that these
costs are material or inconsistent with other domestic
competitors.
The land associated with the Companys Kinston facility in
North Carolina (the Kinston Site) is leased pursuant
to a 99 year ground lease (the Ground Lease)
with DuPont. Since 1993, DuPont has been investigating and
cleaning up the Kinston Site under the supervision of the
U.S. Environmental Protection Agency (the EPA)
and the North Carolina Department of Environment and Natural
Resources pursuant to the Resource Conservation
10
and Recovery Act Corrective Action Program. The Corrective
Action Program requires DuPont to identify all potential areas
of environmental concern, known as solid waste management units
or areas of concern, assess the extent of contamination at the
identified areas and clean them up to applicable regulatory
standards. Under the terms of the Ground Lease, upon completion
by DuPont of required remedial action, ownership of the Kinston
Site will pass to the Company. Thereafter, the Company will have
responsibility for future remediation requirements, if any, at
the solid waste management units and areas of concern previously
addressed by DuPont and at any other areas at the plant. At this
time the Company has no basis to determine if and when it will
have any responsibility or obligation with respect to the solid
waste management units and areas of concern or the extent of any
potential liability for the same. Accordingly, the possibility
that the Company could face material
clean-up
costs in the future relating to the Kinston Site cannot be
eliminated.
Available
Information
The Companys Internet address is: www.unifi.com. Copies of
the Companys reports, including annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports, that the Company files with or
furnishes to the SEC pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, and beneficial ownership
reports on Forms 3, 4, and 5, are available as
soon as practicable after such material is electronically filed
with or furnished to the SEC and maybe obtained without charge
by accessing the Companys web site or by writing
Mr. William M. Lowe, Jr. at Unifi, Inc. P.O.
Box 19109, Greensboro, North Carolina
27419-9109.
The
Companys substantial level of indebtedness could adversely
affect its financial condition.
The Company has substantial indebtedness. As of June 25,
2006, the Company had a total of $204.0 million of debt
outstanding, including $190.0 million outstanding in
aggregate principal amount of 2014 notes, $1.3 million
outstanding in aggregate principal amount of 2008 notes,
$10.5 million outstanding in loans relating to a Brazilian
government tax program and $2.2 million outstanding on a
sales leaseback obligation. There were no amounts outstanding
under the Companys amended revolving credit facility.
The Companys outstanding indebtedness could have important
consequences to investors, including the following:
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high level of indebtedness could make it more difficult for the
Company to satisfy its obligations with respect to its
outstanding notes, including its repurchase obligations;
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the restrictions imposed on the operation of its business may
hinder its ability to take advantage of strategic opportunities
to grow its business;
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its ability to obtain additional financing for working capital,
capital expenditures, acquisitions or general corporate purposes
may be impaired;
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the Company must use a substantial portion of its cash flow from
operations to pay interest on its indebtedness, which will
reduce the funds available to the Company for operations and
other purposes;
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its high level of indebtedness could place the Company at a
competitive disadvantage compared to its competitors that may
have proportionately less debt;
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its flexibility in planning for, or reacting to, changes in its
business and the industry in which it operates may be
limited; and
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its high level of indebtedness makes the Company more vulnerable
to economic downturns and adverse developments in its business.
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Any of the foregoing could have a material adverse effect on the
Companys business, financial condition, results of
operations, prospects and ability to satisfy its obligations
under its indebtedness.
11
Despite
its current indebtedness levels, the Company may still be able
to incur substantially more debt. This could exacerbate further
the risks associated with its substantial
leverage.
The Company and its subsidiaries may be able to incur
substantial additional indebtedness, including additional
secured indebtedness, in the future. The terms of its current
debt restrict, but do not completely prohibit, the Company from
doing so. The Companys amended revolving credit facility
permits up to $100 million of borrowings, which the Company
can request be increased to $150 million under certain
circumstances, with a borrowing base specified in the credit
facility as equal to specified percentages of eligible accounts
receivable and inventory. In addition, the indenture for its
2014 notes allows the Company to issue additional notes under
certain circumstances and to incur certain other additional
secured debt, and allows its foreign subsidiaries to incur
additional debt. The indenture for its 2014 notes does not
prevent the Company from incurring other liabilities that do not
constitute indebtedness. If new debt or other liabilities are
added to its current debt levels, the related risks that the
Company now faces could intensify
The
Company will require a significant amount of cash to service its
indebtedness and its ability to generate cash depends on many
factors beyond its control.
For fiscal year 2006, after giving effect to the refinancing
transactions, interest expense, net, would have been
approximately $24.2 million. The Companys principal
sources of liquidity are cash flow generated from operations and
borrowings under its amended revolving credit facility. The
Companys ability to make payments on and to refinance its
indebtedness and to fund planned capital expenditures will
depend on its ability to generate cash in the future. This, to a
certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are
beyond its control.
The business may not generate cash flow from operations, and
future borrowings may not be available to the Company under its
amended revolving credit facility in an amount sufficient to
enable the Company to pay its indebtedness and to fund its other
liquidity needs. If the Company is not able to generate
sufficient cash flow or borrow under its amended revolving
credit facility for these purposes, the Company may need to
refinance or restructure all or a portion of its indebtedness,
on or before maturity, reduce or delay capital investments or
seek to raise additional capital. The Company may not be able to
implement one or more of these alternatives on terms that are
acceptable or at all. The terms of its existing or future debt
agreements may restrict the Company from adopting any of these
alternatives. The failure to generate sufficient cash flow or to
achieve any of these alternatives could materially adversely
affect the Companys financial condition.
In addition, without such refinancing, the Company could be
forced to sell assets to make up for any shortfall in its
payment obligations under unfavorable circumstances. The
Companys amended revolving credit facility and the
indenture for its 2014 notes limit its ability to sell assets
and also restrict the use of proceeds from any such sale.
Furthermore, the 2014 notes and its amended revolving credit
facility are secured by substantially all of its assets.
Therefore, the Company may not be able to sell its assets
quickly enough or for sufficient amounts to enable the Company
to meet its debt service obligations.
The
terms of the Companys outstanding indebtedness impose
significant operating and financial restrictions, which may
prevent the Company from pursuing certain business opportunities
and taking certain actions.
The terms of the Companys outstanding indebtedness impose
significant operating and financial restrictions on its
business. These restrictions will limit or prohibit, among other
things, its ability to:
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incur and guarantee indebtedness or issue preferred stock;
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repay subordinated indebtedness prior to its stated maturity;
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pay dividends or make other distributions on or redeem or
repurchase the Companys stock;
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issue capital stock;
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make certain investments or acquisitions;
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12
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create liens;
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sell certain assets or merge with or into other companies;
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enter into certain transactions with stockholders and affiliates;
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make capital expenditures; and
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restrict dividends, distributions or other payments from its
subsidiaries.
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In addition, the Companys amended revolving credit
facility also requires the Company to meet a minimum fixed
charge ratio test if borrowing capacity is less than
$25 million at any time during the quarter and restricts
its ability to make capital expenditures or prepay certain other
debt. The Company may not be able to maintain this ratio. These
restrictions could limit its ability to plan for or react to
market conditions or meet its capital needs. The Company may not
be granted waivers or amendments to its amended revolving credit
facility if for any reason the Company is unable to meet its
requirements or the Company may not be able to refinance its
debt on terms that are acceptable, or at all.
The breach of any of these covenants or restrictions could
result in a default under the indenture for its 2014 notes or
its amended revolving credit facility. An event of default under
its debt agreements would permit some of its lenders to declare
all amounts borrowed from them to be due and payable.
The
Company faces intense competition from a number of domestic and
foreign yarn producers and importers of textile and apparel
products.
The Companys industry is highly competitive. The Company
competes not only against domestic and foreign yarn producers,
but also against importers of foreign sourced fabric and apparel
into the United States and other countries in which the Company
does business. The Companys major regional competitors are
Nanya, Dillon, OMara, Inc., Spectrum, KOSA and AKRA, S.A.
de C.V. in the polyester yarn segment and Sapona Manufacturing
Company, Inc., McMichael Mills, Inc. and Worldtex, Inc. in the
nylon yarn segment. The importation of garments and fabrics from
lower wage-based countries and overcapacity throughout the world
has resulted in lower net sales, gross profits and net income
for both its polyester and nylon segments. The primary
competitive factors in the textile industry include price,
quality, product styling and differentiation, flexibility of
production and finishing, delivery time and customer service.
The needs of particular customers and the characteristics of
particular products determine the relative importance of these
various factors. Because the Company, and the supply chain in
which the Company operates, do not typically operate on the
basis of long-term contracts with textile and apparel customers,
these competitive factors could cause the Companys
customers to rapidly shift to other producers. A large number of
the Companys foreign competitors have significant
competitive advantages, including lower labor costs, lower raw
materials and energy costs and favorable currency exchange rates
against the U.S. dollar. If any of these advantages
increase, the Companys products could become less
competitive, and its sales and profits may decrease as a result.
In addition, while traditionally these foreign competitors have
focused on commodity production, they are now increasingly
focused on value-added products, where the Company continues to
generate higher margins. Competitive pressures may also
intensify as a result of the gradual elimination of quotas and
the potential elimination of duties. See
Changes in the trade regulatory environment
could weaken the Companys competitive position
dramatically and have a material adverse effect on its business,
net sales and profitability. The Company, and the supply
chain in which the Company operates, may therefore not be able
to continue to compete effectively with imported foreign-made
textile and apparel products, which would materially adversely
affect its business, financial condition, results of operations
or cash flows.
Changes
in the trade regulatory environment could weaken the
Companys competitive position dramatically and have a
material adverse effect on its business, net sales and
profitability.
A number of sectors of the textile industry in which the Company
sells its products, particularly apparel and home furnishings,
are subject to intense foreign competition. Other sectors of the
textile industry in which the Company sells its products may in
the future become subject to more intense foreign competition.
There are currently a number of trade regulations, quotas and
duties in place to protect the U.S. textile industry
against competition from low-priced foreign producers, such as
China. Changes in such trade regulations, quotas and duties
13
may make its products less attractive from a price standpoint
than the goods of its competitors or the finished apparel
products of a competitor in the supply chain, which could have a
material adverse effect on the Companys business, net
sales and profitability. In addition, increased foreign capacity
and imports that compete directly with its products could have a
similar effect. Furthermore, one of the Companys key
business strategies is to expand its business within countries
that are parties to free-trade agreements with the United
States. Any relaxation of duties or other trade protections with
respect to countries that are not parties to those free-trade
agreements could therefore decrease the importance of the trade
agreements and have a material adverse effect on its business,
net sales and profitability. See Item 1
Business Trade Regulation.
The
significant price volatility of many of the Companys raw
materials and rising energy costs may result in increased
production costs, which the Company may not be able to pass on
to its customers, which could have a material adverse effect on
its business, financial condition, results of operations or cash
flows.
A significant portion of the Companys raw materials are
petroleum-based chemicals and a significant portion of its costs
are energy costs. The prices for petroleum and petroleum-related
products and energy costs are volatile and have recently
increased significantly. While the Company frequently enters
into raw material supply agreements, as is the general practice
in its industry, these agreements typically provide for
formula-based pricing. Therefore, its supply agreements provide
only limited protection against price volatility. As a result,
its production costs have increased significantly in recent
times. While the Company has in the past matched cost increases
with corresponding product price increases, the Company may not
always be able to immediately raise product prices, and,
ultimately, pass on underlying cost increases to its customers.
The Company has in the past lost and expects that it will
continue to lose, customers to its competitors as a result of
these price increases. In addition, its competitors may be able
to obtain raw materials at a lower cost due to market
regulations. Additional raw material and energy cost increases
that the Company is not able to fully pass on to customers or
the loss of a large number of customers to competitors as a
result of price increases could have a material adverse effect
on its business, financial condition, results of operations or
cash flows.
The
Company depends upon limited sources for raw materials, and
interruptions in supply could increase its costs of production
and cause its operations to suffer.
The Company depends on a limited number of third parties for
certain raw material supplies, such as chip, TPA and MEG.
Although alternative sources of raw materials exist, the Company
may not continue to be able to obtain adequate supplies of such
materials on acceptable terms, or at all, from other sources
when its existing supply agreements expire. In addition, the
Company has in the past and may in the future experience
interruptions or limitations in the supply of its raw materials,
which would increase its product costs and could have a material
adverse effect on its business, financial condition, results of
operations or cash flows. For example, in the Louisiana area in
2005, Hurricane Katrina created shortages in the supply of
paraxlyene, a feedstock used in polymer production, because
refineries diverted production to mixed xylene to increase the
supply of gasoline. As a result, supplies of paraxlyene were
reduced, and prices increased. Additionally, five of the six
refineries in Texas that produce MEG shut down, including the
supplier to the Companys Kinston operation due to
Hurricane Rita. The supply of MEG was reduced, and prices
increased as well. These disruptions had an adverse effect on
the Companys net sales and product costs. Any future
disruption or curtailment in the supply of any of its raw
materials could cause the Company to reduce or cease its
production in general or require the Company to increase its
pricing, which could have a material adverse effect on its
business, financial condition, results of operations or cash
flows. See The significant price volatility of
many of the Companys raw materials and rising energy costs
may result in increased production costs, which the Company may
not be able to pass on to its customers, which could have a
material adverse effect on its business, financial condition,
results of operations or cash flows.
A
decline in general economic or political conditions and changes
in consumer spending could cause the Companys sales and
profits to decline.
The Companys products are used in the production of
fabrics primarily for the apparel, hosiery, home furnishing,
automotive, industrial and other similar end-use markets. Demand
for furniture and durable goods, such as automobiles, is often
affected significantly by economic conditions. Demand for a
number of categories of
14
apparel also tends to be tied to economic cycles. Domestic
demand for textile products therefore tends to vary with the
business cycles of the U.S. economy as well as changes in
global economic and political conditions. Future armed
conflicts, terrorist activities or natural disasters in the
United States or abroad and any consequent actions on the part
of the U.S. government and others may cause general
economic conditions in the United States to deteriorate or
otherwise reduce U.S. consumer spending. A decline in
general economic conditions or consumer confidence may also lead
to significant changes to inventory levels and, in turn,
replenishment orders placed with suppliers. These changing
demands ultimately work their way through the supply chain and
could adversely affect demand for the Companys products
and have a material adverse effect on its business, net sales
and profitability.
Failure
to successfully reduce the Companys production costs may
adversely affect its financial results.
A significant portion of the Companys strategy relies upon
its ability to successfully rationalize and improve the
efficiency of its operations. In particular, the Companys
strategy relies on its ability to reduce its production costs in
order to remain competitive. Over the past three years, the
Company has consolidated multiple unprofitable businesses and
production lines in an effort to match operating rates to the
market; reduced overhead and supply costs; focused on optimizing
the product mix amongst its reorganized assets; and made
significant capital expenditures to more completely automate its
production facilities, lessen the dependence on labor and
decrease waste. If the Company is not able to continue to
successfully implement cost reduction measures, or if these
efforts do not generate the level of cost savings that it
expects going forward or result in higher than expected costs,
there could be a material adverse effect on its business,
financial condition, results of operations or cash flows.
Changes
in customer preferences, fashion trends and end-uses could have
a material adverse effect on the Companys business, net
sales and profitability and cause inventory
build-up if
the Company is not able to adapt to such changes.
The demand for many of the Companys products depends upon
timely identification of consumer preferences for fabric
designs, colors and styles. In the apparel sector, a failure by
the Company or its customers to identify fashion trends in time
to introduce products and fabrics consistent with those trends
could reduce its sales and the acceptance of its products by its
customers and decrease its profitability as a result of costs
associated with failed product introductions and reduced sales.
The Companys nylon segment has been adversely affected by
changing customer preferences that have reduced demand for sheer
hosiery products. In all sectors, changes in customer
preferences or specifications may cause shifts away from the
products which the Company provides, which can also have an
adverse effect on its business, net sales and profitability.
The
Company has significant foreign operations and its results of
operations may be adversely affected by currency
fluctuations.
The Company has a significant operation in Brazil, operations in
Colombia and joint ventures in China and Israel. The Company
serves customers in Canada, Mexico, Israel and various countries
in Europe, Central America, South America and South Africa.
Foreign operations are subject to certain political, economic
and other uncertainties not encountered by its domestic
operations that can materially affect sales, profits, cash flows
and financial position. The risks of international operations
include trade barriers, duties, exchange controls, national and
regional labor strikes, social and political risks, general
economic risks, required compliance with a variety of foreign
laws, including tax laws, the difficulty of enforcing agreements
and collecting receivables through foreign legal systems, taxes
on distributions or deemed distributions to the Company or any
of its U.S. subsidiaries, maintenance of minimum capital
requirements and import and export controls. Through its foreign
operations, the Company is also exposed to currency fluctuations
and exchange rate risks. Because a significant amount of its
costs incurred to generate the revenues of its foreign
operations are denominated in local currencies, while the
majority of its sales are in U.S. dollars, the Company has
in the past been adversely impacted by the appreciation of the
local currencies relative to the U.S. dollar, and currency
exchange rate fluctuations could have a material adverse effect
on its business, financial condition, results of operations or
cash flows. The Company has translated its revenues and expenses
denominated in local currencies into U.S. dollars at the
average exchange rate during the relevant period and its assets
and liabilities denominated in local currencies into
U.S. dollars at the exchange rate at the end of the
relevant period. Fluctuations in the foreign exchange rates will
affect
period-to-period
comparisons of its reported
15
results. Additionally, the Company operates in countries with
foreign exchange controls. These controls may limit its ability
to repatriate funds from its international operations and joint
ventures or otherwise convert local currencies into
U.S. dollars. These limitations could adversely affect the
Companys ability to access cash from these operations.
The
Company may be exposed to liabilities under the Foreign Corrupt
Practices Act and any determination that the Company violated
the Foreign Corrupt Practices Act could have a material adverse
effect on its business.
To the extent that the Company operates outside the United
States, it is subject to the Foreign Corrupt Practices Act (the
FCPA) which generally prohibits U.S. companies
and their intermediaries from bribing foreign officials for the
purpose of obtaining or keeping business or otherwise obtaining
favorable treatment. In particular, the Company may be held
liable for actions taken by its strategic or local partners even
though such partners are foreign companies that are not subject
to the FCPA. Any determination that the Company violated the
FCPA could result in sanctions that could have a material
adverse effect on its business.
The
Companys business could be negatively impacted by the
financial condition of its customers.
The U.S. textile and apparel industry faces many
challenges. Overcapacity, volatility in raw material pricing,
and intense pricing pressures has led to the closure of many
domestic textile and apparel plants. Continued negative industry
trends may result in the deteriorating financial condition of
its customers. Certain of the Companys customers are
experiencing financial difficulties. The loss of any significant
portion of its sales to any of these customers could have a
material adverse impact on its business, results of operations,
financial condition or cash flows. In addition, any receivable
balances related to its customers would be at risk in the event
of their bankruptcy.
As one of the many participants in the U.S. and regional textile
and apparel supply chain, the Companys business and
competitive position are directly impacted by the business and
financial condition of the other participants across the supply
chain in which it operates, including other regional yarn
manufacturers, knitters and weavers. If other supply chain
participants are unable to access capital, fund their operations
and make required technological and other investments in their
businesses or experience diminished demand for their products,
there could be a material adverse impact on the Companys
business, financial condition, results of operations or cash
flows.
Failure
to implement future technological advances in the textile
industry or fund capital expenditure requirements could have a
material adverse effect on the Companys competitive
position and net sales.
The Companys operating results depend to a significant
extent on its ability to continue to introduce innovative
products and applications and to continue to develop its
production processes to be a competitive producer. Accordingly,
to maintain its competitive position and its revenue base, the
Company must continually modernize its manufacturing processes,
plants and equipment. To this end, the Company has made
significant investments in its manufacturing infrastructure over
the past fifteen years and does not currently anticipate any
significant additional capital expenditures to replace or expand
its production facilities over the next five years. Accordingly,
the Company expects its capital requirements in the near term
will be used primarily to maintain its manufacturing operations,
but the Company may nevertheless require significant capital
expenditures for expansion purposes. Future technological
advances in the textile industry may result in the availability
of new products or increase the efficiency of existing
manufacturing and distribution systems, and the Company may not
be able to adapt to such technological changes or offer such
products on a timely basis or establish or maintain competitive
positions. Existing, proposed or yet undeveloped technologies
may render its technology less profitable or less viable, and
the Company may not have available the financial and other
resources to compete effectively against companies possessing
such technologies. To the extent sources of funds are
insufficient to meet its ongoing capital improvement
requirements, the Company would need to seek alternative sources
of financing or curtail or delay capital spending plans. The
Company may not be able to obtain the necessary financing when
needed or on terms acceptable to us. The Company is unable to
predict which of the many possible future products and services
will meet the evolving industry standards and consumer demands.
If the Company fails to make the capital
16
improvements necessary to continue the modernization of its
manufacturing operations and reduction of its costs, its
competitive position may suffer, and its net sales may decline.
Unforeseen
or recurring operational problems at any of the Companys
facilities may cause significant lost production, which could
have a material adverse effect on its business, financial
condition, results of operations and cash flows.
The Companys manufacturing process could be affected by
operational problems that could impair its production
capability. Each of its facilities contains complex and
sophisticated machines that are used in its manufacturing
process. Disruptions at any of its facilities could be caused by
maintenance outages; prolonged power failures or reductions; a
breakdown, failure or substandard performance of any of its
machines; the effect of noncompliance with material
environmental requirements or permits; disruptions in the
transportation infrastructure, including railroad tracks,
bridges, tunnels or roads; fires, floods, earthquakes or other
catastrophic disasters; labor difficulties; or other operational
problems. Any prolonged disruption in operations at any of its
facilities could cause significant lost production, which would
have a material adverse effect on its business, financial
condition, results of operations and cash flows.
The
Company has made and may continue to make investments in
entities that it does not control.
The Company has established joint ventures and made minority
interest investments designed to increase its vertical
integration, increase efficiencies in its procurement,
manufacturing processes, marketing and distribution in the
United States and other markets. The Companys principal
joint ventures and minority investments include UNF, Unifi-SANS
Technical Fibers, LLC (USTF), PAL and Yihua Unifi
Fibre Industry Company Limited (YUFI). See
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations Joint Ventures and Other Equity
Investments. The Companys inability to control
entities in which it invests may affect its ability to receive
distributions from those entities or to fully implement its
business plan. The incurrence of debt or entry into other
agreements by an entity not under its control may result in
restrictions or prohibitions on that entitys ability to
pay dividends or make other distributions. Even where these
entities are not restricted by contract or by law from making
distributions, the Company may not be able to influence the
occurrence or timing of such distributions. In addition, if any
of the other investors in these entities fails to observe its
commitments, that entity may not be able to operate according to
its business plan or the Company may be required to increase its
level of commitment. If any of these events were to occur, its
business, results of operations, financial condition or cash
flows could be adversely affected. Because the Company does not
own a majority or maintain voting control of these entities, the
Company does not have the ability to control their policies,
management or affairs. The interests of persons who control
these entities or partners may differ from the Companys,
and they may cause such entities to take actions which are not
in its best interest. If the Company is unable to maintain its
relationships with its partners in these entities, the Company
could lose its ability to operate in these areas which could
have a material adverse effect on its business, financial
condition, results of operations or cash flows.
The
Companys acquisition strategy may not be successful, which
could adversely affect its business.
The Company has expanded its business partly through
acquisitions and anticipates that it will continue to make
selective acquisitions. The Companys acquisition strategy
is dependent upon the availability of suitable acquisition
candidates, obtaining financing on acceptable terms, and its
ability to comply with the restrictions contained in its debt
agreements. Acquisitions may divert a significant amount of
managements time away from the operation of its business.
Future acquisitions may also have an adverse effect on its
operating results, particularly in the fiscal quarters
immediately following their completion while the Company
integrates the operations of the acquired business. Growth by
acquisition involves risks that could have a material adverse
effect on business and financial results, including difficulties
in integrating the operations and personnel of acquired
companies and the potential loss of key employees and customers
of acquired companies. Once integrated, acquired operations may
not achieve the levels of revenues, profitability or
productivity comparable with those achieved by its existing
operations, or otherwise perform as expected. While the Company
has experience in identifying and integrating acquisitions, the
Company may not be able to identify suitable acquisition
candidates, obtain the capital necessary
17
to pursue its acquisition strategy or complete acquisitions on
satisfactory terms or at all. Even if the Company successfully
completes an acquisition, it may not be able to integrate it
into its business satisfactorily or at all.
Increases
of illegal transshipment of textile and apparel goods into the
United States could have a material adverse effect on the
Companys business.
There has been a significant increase recently in illegal
transshipments of apparel products into the United States.
Illegal transshipment involves circumventing quotas by falsely
claiming that textiles and apparel are a product of a particular
country of origin or include yarn of a particular country of
origin to avoid paying higher duties or to receive benefits from
regional free-trade agreements, such as NAFTA and CAFTA. If
illegal transshipment is not monitored and enforcement is not
effective, these shipments could have a material adverse effect
on its business.
The
Company is subject to many environmental and safety regulations
that may result in significant unanticipated costs or
liabilities or cause interruptions in its
operations.
The Company is subject to extensive federal, state, local and
foreign laws, regulations, rules and ordinances relating to
pollution, the protection of the environment and the use or
cleanup of hazardous substances and wastes. The Company may
incur substantial costs, including fines, damages and criminal
or civil sanctions, or experience interruptions in its
operations for actual or alleged violations of or compliance
requirements arising under environmental laws, any of which
could have a material adverse effect on its business, financial
condition, results of operations or cash flows. The
Companys operations could result in violations of
environmental laws, including spills or other releases of
hazardous substances to the environment. In the event of a
catastrophic incident, the Company could incur material costs.
In addition, the Company could incur significant expenditures in
order to comply with existing or future environmental or safety
laws. For example, the land associated with the Kinston
acquisition is leased pursuant to a 99 year Ground Lease
with DuPont. Since 1993, DuPont has been investigating and
cleaning up the Kinston Site under the supervision of the EPA
and the North Carolina Department of Environment and Natural
Resources pursuant to the Resource Conservation and Recovery Act
Corrective Action Program. The Corrective Action Program
requires DuPont to identify all potential areas of environmental
concern, known as solid waste management units or areas of
concern, assess the extent of contamination at the identified
areas and clean them up to applicable regulatory standards.
Under the terms of the Ground Lease, upon completion by DuPont
of required remedial action, ownership of the Kinston Site will
pass to the Company. Thereafter, the Company will have
responsibility for future remediation requirements, if any, at
the solid waste management units and areas of concern previously
addressed by DuPont and at any other areas at the plant. At this
time, the Company has no basis to determine if and when it will
have any responsibility or obligation with respect to
contaminated solid waste management units and areas of concern
or the extent of any potential liability for the same.
Accordingly, the possibility that the Company could face
material
clean-up
costs in the future relating to the Kinston facility cannot be
eliminated. Capital expenditures and, to a lesser extent, costs
and operating expenses relating to environmental or safety
matters will be subject to evolving regulatory requirements and
will depend on the timing of the promulgation and enforcement of
specific standards which impose requirements on its operations.
Therefore, capital expenditures beyond those currently
anticipated may be required under existing or future
environmental or safety laws. See Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources Environmental Liabilities.
Furthermore, the Company may be liable for the costs of
investigating and cleaning up environmental contamination on or
from its properties or at off-site locations where the Company
disposed of or arranged for the disposal or treatment of
hazardous materials or from disposal activities that pre-dated
the purchase of its businesses. If significant previously
unknown contamination is discovered, existing laws or their
enforcement change or its indemnities do not cover the costs of
investigation and remediation, then such expenditures could have
a material adverse effect on the Companys business,
financial condition, results of operations or cash flows.
Health
and safety regulation costs could increase.
The Companys operations are also subject to regulation of
health and safety matters by the United States Occupational
Safety and Health Administration and comparable statutes in
foreign jurisdictions where the
18
Company operates. The Company believes that it employs
appropriate precautions to protect its employees and others from
workplace injuries and harmful exposure to materials handled and
managed at its facilities. However, claims that may be asserted
against the Company for work-related illnesses or injury, and
changes in occupational health and safety laws and regulations
in the United States or in foreign jurisdictions in which the
Company operates could increase its operating costs. The Company
is unable to predict the ultimate cost of compliance with these
health and safety laws and regulations. Accordingly, the Company
may become involved in future litigation or other proceedings or
be found to be responsible or liable in any litigation or
proceedings, and such costs may be material to us.
The
Companys business may be adversely affected by adverse
employee relations.
The Company employs approximately 3,300 employees, approximately
2,900 of which are domestic employees and approximately 400 of
which are foreign employees. While employees of its foreign
operations are generally unionized, none of its domestic
employees are currently covered by collective bargaining
agreements. The failure to renew collective bargaining
agreements with employees of the Companys foreign
operations and other labor relations issues, including union
organizing activities, could result in an increase in costs or
lead to a strike, work stoppage or slow down. Such labor issues
and unrest by its employees could have a material adverse effect
on the Companys business.
The
Company depends on the continued services of key managers and
employees.
The Companys ability to maintain its competitive position
is dependent to a large degree on the services of its senior
management team, including its Chief Executive Officer,
Mr. Parke, and its Chief Operating Officer and Chief
Financial Officer, Mr. Lowe. The Company currently does not
have any employment agreements with its senior management team
other than Mr. Parke and Mr. Lowe, and cannot assure
investors that any of these individuals will remain with it. The
Company currently does not have a life insurance policy on any
of the members of the senior management team. The death or loss
of the services of any of its senior managers or the inability
to attract and retain additional senior management personnel
could have a material adverse effect on its business.
The
Companys future financial results could be adversely
impacted by asset impairments or other charges.
Under Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company is required to assess the impairment
of the Companys long-lived assets, such as plant and
equipment, whenever events or changes in circumstances indicate
that the carrying value may not be recoverable as measured by
the sum of the expected future undiscounted cash flows. When the
Company determines that the carrying value of certain long-lived
assets may not be recoverable based upon the existence of one or
more impairment indicators, the Company then measures any
impairment based on a projected discounted cash flow method
using a discount rate determined by management to be
commensurate with the risk inherent in its current business
model. In accordance with SFAS No. 144, any such
impairment charges will be recorded as operating losses. See
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations Critical Accounting Policies
Impairment of Long-Lived Assets.
In addition, the Company evaluates the net values assigned to
various equity investments it holds, such as its investment in
YUFI, PAL, USTF and UNF, in accordance with the provisions of
Accounting Principles Board Opinion No. 18, The
Equity Method of Accounting for Investments in Common
Stock. APB No. 18 requires that a loss in value of an
investment, which is other than a temporary decline, should be
recognized as an impairment loss. Any such impairment losses
will be recorded as operating losses. See
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations Joint Ventures and Other Equity
Investments for more information regarding the
Companys equity investments.
Any operating losses resulting from impairment charges under
SFAS No. 144 or APB No. 18 could have an adverse
effect on its net income and therefore the market price of its
securities, including its common stock.
The
Companys business could be adversely affected if the
Company fails to protect its intellectual property
rights.
The Companys success depends in part on its ability to
protect its intellectual property rights. The Company relies on
a combination of patent, trademark, and trade secret laws,
licenses, confidentiality and other agreements to
19
protect its intellectual property rights. However, this
protection may not be fully adequate: its intellectual property
rights may be challenged or invalidated, an infringement suit by
the Company against a third party may not be successful
and/or third
parties could design around its technology or adopt trademarks
similar to its own. In addition, the laws of some foreign
countries in which its products are manufactured and sold do not
protect intellectual property rights to the same extent as the
laws of the United States. Although the Company routinely enters
into confidentiality agreements with its employees, independent
contractors and current and potential strategic and joint
venture partners, among others, such agreements may be breached,
and the Company could be harmed by unauthorized use or
disclosure of its confidential information. Further, the Company
licenses trademarks from third parties, and these agreements may
terminate or become subject to litigation. Its failure to
protect its intellectual property could materially and adversely
affect its competitive position, reduce revenue or otherwise
harm its business. The Company may also be accused of infringing
or violating the intellectual property rights of third parties.
Any such claims, whether or not meritorious, could result in
costly litigation and divert the efforts of its personnel.
Should the Company be found liable for infringement, the Company
may be required to enter into licensing arrangements (if
available on acceptable terms or at all) or pay damages and
cease selling certain products or using certain product names or
technology. The Companys failure to prevail in any
intellectual property litigation could materially adversely
affect its competitive position, reduce revenue or otherwise
harm its business.
Forward-Looking
Statements
Forward-looking statements are those that do not relate solely
to historical fact. They include, but are not limited to, any
statement that may predict, forecast, indicate or imply future
results, performance, achievements or events. They may contain
words such as believe, anticipate,
expect, estimate, intend,
project, plan, will, or
words or phrases of similar meaning. They may relate to, among
other things, the risks described under the caption
Item 1A Risk Factors above and:
|
|
|
|
|
the competitive nature of the textile industry and the impact of
worldwide competition;
|
|
|
|
changes in the trade regulatory environment and governmental
policies and legislation;
|
|
|
|
the availability, sourcing and pricing of raw materials;
|
|
|
|
general domestic and international economic and industry
conditions in markets where the Company competes, such as
recession and other economic and political factors over which
the Company has no control;
|
|
|
|
changes in consumer spending, customer preferences, fashion
trends and end-uses;
|
|
|
|
its ability to reduce production costs;
|
|
|
|
changes in currency exchange rates, interest and inflation rates;
|
|
|
|
the financial condition of its customers;
|
|
|
|
technological advancements and the continued availability of
financial resources to fund capital expenditures;
|
|
|
|
the operating performance of joint ventures, alliances and other
equity investments;
|
|
|
|
the impact of environmental, health and safety
regulations; and
|
|
|
|
employee relations.
|
These forward-looking statements reflect the Companys
current views with respect to future events and are based on
assumptions and subject to risks and uncertainties that may
cause actual results to differ materially from trends, plans or
expectations set forth in the forward-looking statements. These
risks and uncertainties may include those discussed above or in
Item 1A Risk Factors. New risks can
emerge from time to time. It is not possible for the Company to
predict all of these risks, nor can it assess the extent to
which any factor, or combination of factors, may cause actual
results to differ from those contained in forward-looking
statements. The Company will not update these forward-looking
statements, even if its situation changes in the future, except
as required by federal securities laws.
20
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Following is a summary of principal properties owned or leased
by the Company as of June 25, 2006:
|
|
|
Location
|
|
Description
|
|
Polyester Segment
Properties:
|
|
|
|
|
|
Domestic:
|
|
|
Yadkinville, NC
|
|
Five plants and three warehouses
|
Kinston, NC
|
|
One plant and one warehouse
|
Reidsville, NC
|
|
One plant
|
Mayodan, NC
|
|
One plant
|
Staunton, VA
|
|
One plant and one warehouse
|
|
|
|
Foreign:
|
|
|
Alfenas, Brazil
|
|
One plant and one warehouse
|
Sao Paulo, Brazil
|
|
One corporate office
|
|
|
|
Nylon Segment
Properties:
|
|
|
|
|
|
Domestic
|
|
|
Madison, NC
|
|
One plant
|
Fort Payne, AL
|
|
One central distribution center
|
|
|
|
Foreign:
|
|
|
Bogota, Colombia
|
|
One plant
|
In addition to the above properties, the corporate
administrative office for each of its segments is located at
7201 West Friendly Ave. in Greensboro, North Carolina. Such
property consists of a building containing approximately
100,000 square feet located on a tract of land containing
approximately 9 acres.
All of the above facilities are owned in fee simple, with the
exception of a plant in Mayodan, North Carolina which is leased
from a financial institution pursuant to a sale-leaseback
agreement entered into on May 20, 1997, as amended; one
warehouse in Staunton, Virginia, one warehouse in Kinston, North
Carolina and one office in Sao Paulo, Brazil. Management
believes all the properties are well maintained and in good
condition. In fiscal year 2006, the Companys manufacturing
plants in the U.S. and Brazil operated below capacity.
Accordingly, management does not perceive any capacity
constraints in the foreseeable future.
In March 2006 the Company classified several properties as
assets held for sale. During the fourth quarter of fiscal year
2006, the Company sold an idle manufacturing facility in
Staunton, Virginia and a central distribution center in Madison,
North Carolina. The remaining assets held for sale are not
included in the property listing table above.
The Company also leases two manufacturing facilities to other
manufacturers, one of which is leased to USTF, a joint venture
in which the Company is a 50% owner.
|
|
Item 3.
|
Legal
Proceedings
|
There are no pending legal proceedings, other than ordinary
routine litigation incidental to the Companys business, to
which the Company is a party or of which any of its property is
the subject.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter for the fiscal year ended June 25, 2006.
21
EXECUTIVE
OFFICERS OF THE COMPANY
The following is a description of the name, age, position and
offices held, and the period served in such position or offices
for each of the executive officers of the Company.
Chairman
of the Board and Chief Executive Officer
BRIAN R. PARKE Age: 58
Mr. Parke has been the Chief Executive Officer of the
Company since January 2000 and the President of the Company
since 1999. Mr. Parke has also been the Chairman of the
Board of Directors since 2004. Prior to that, Mr. Parke had
been the President and Chief Operating Officer of the Company
since January 1999 and the Manager or President of its former
Irish subsidiary (Unifi Textured Yarns Europe Limited) since its
acquisition by the Company in 1984. Additionally, Mr. Parke
had been a Vice President of the Company since October 1993.
Mr. Parke was elected to the Companys Board of
Directors in July 1999.
Vice
Presidents
WILLIAM M. LOWE, JR. Age: 53
Mr. Lowe has been Vice President and Chief Financial
Officer of the Company since January 2004 and Chief Operating
Officer of the Company since April 2004. Prior to being employed
by the Company, Mr. Lowe was Executive Vice President and
Chief Financial Officer of Metaldyne Corporation, an automotive
component and systems manufacturer from 2001 to 2003. From 1991
to 2001 Mr. Lowe held various financial positions at
Arvinmeritor, Inc. a diversified manufacturer of automotive
components and systems.
R. ROGER BERRIER Age: 37
Mr. Berrier has been the Vice President of Commercial
Operations of the Company since April 2006. Prior to that,
Mr. Berrier had been the Commercial Operations Manager
responsible for Corporate Product Development, Marketing and
Brand Sales Management since April 2004. Mr. Berrier joined
the Company in 1991 and has held various management positions
within operations, including International Operations, Machinery
Technology, Research & Development and Quality Control.
THOMAS H. CAUDLE, JR. Age: 54
Mr. Caudle has been the Vice President of Global Operations
of the Company since April 2003. Prior to that, Mr. Caudle
had been Senior Vice President in charge of manufacturing for
the Company since July 2000 and Vice President of Manufacturing
Services of the Company since January 1999. Mr. Caudle has
been an employee of the Company since 1982.
BENNY L. HOLDER Age: 44
Mr. Holder has been the Vice President and Chief
Information Officer of the Company since January 2001, and has
been an employee of the Company since January 1995.
Mr. Holder has held various management positions within the
Companys information technology group since joining the
Company, overseeing all of the Companys information
technology operations as Managing Director from June 1999 until
January 2001. Prior to joining the Company, Mr. Holder held
various management positions in the information technology
departments of Memorex Telex from 1990 until 1994 and Revlon,
Inc. from 1994 until 1995.
WILLIAM L. JASPER Age: 53
Mr. Jasper has been the Vice President of Sales since April
2006. Prior to that, Mr. Jasper was the General Manager of
the Polyester segment, having responsibility for all natural
polyester businesses. He joined the Company with the purchase of
the Kinston polyester POY assets from INVISTA in September 2004.
Prior to joining the Company, he was the Director of
INVISTAs
Dacron®
polyester filament business. Prior to that, Mr. Jasper held
various management positions in Operations, Technology, Sales
and Business for DuPont since 1980.
CHARLES F. MCCOY Age: 42
Mr. McCoy has been the Vice President, Secretary and
General Counsel of the Company since October 2000, the Corporate
Compliance Officer of the Company since 2002 and the Corporate
Governance Officer of the Company since 2004. Mr. McCoy
became an employee of the Company in January 2000, when he
joined the Company as its Assistant Secretary and General
Counsel. Prior to that, Mr. McCoy was a partner with the
law firm of Frazier, Frazier & Mahler, LLP, the firm
serving as outside counsel to the Company.
These executive officers, unless otherwise noted, were elected
by the Board of Directors of the Registrant at the Annual
Meeting of the Board of Directors held on October 19, 2005.
Each executive officer was elected to serve until the next
Annual Meeting of the Board of Directors or until his successor
was elected and qualified. No executive officer has a family
relationship as close as first cousin with any other executive
officer or director.
22
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The Companys common stock is listed for trading on the New
York Stock Exchange (NYSE) under the symbol
UFI. The following table sets forth the high and low
sales prices of the Companys common stock as reported on
the NYSE Composite Tape for the Companys two most recent
fiscal years.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal year 2005:
|
|
|
|
|
|
|
|
|
First quarter ended
September 26, 2004
|
|
$
|
3.24
|
|
|
$
|
1.80
|
|
Second quarter ended
December 26, 2004
|
|
|
4.05
|
|
|
|
2.00
|
|
Third quarter ended March 27,
2005
|
|
|
4.55
|
|
|
|
3.02
|
|
Fourth quarter ended June 26,
2005
|
|
|
4.12
|
|
|
|
2.75
|
|
Fiscal year 2006:
|
|
|
|
|
|
|
|
|
First quarter ended
September 25, 2005
|
|
$
|
4.49
|
|
|
$
|
3.33
|
|
Second quarter ended
December 25, 2005
|
|
|
3.49
|
|
|
|
2.33
|
|
Third quarter ended March 26,
2006
|
|
|
3.37
|
|
|
|
2.82
|
|
Fourth quarter ended June 25,
2006
|
|
|
3.76
|
|
|
|
2.84
|
|
As of September 5, 2006 there were approximately 515 record
holders of the Companys common stock. A significant number
of the outstanding shares of common stock which are beneficially
owned by individuals and entities are registered in the name of
Cede & Co. Cede & Co. is a nominee of The
Depository Trust Company, a securities depository for banks and
brokerage firms. The Company estimates that there are
approximately 4,200 beneficial owners of its common stock.
No dividends were paid in the past two fiscal years and none are
expected to be paid in the foreseeable future. The indenture
governing the 2014 notes and the Companys amended
revolving credit facility restrict its ability to pay dividends
or make distributions on its capital stock. See
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations Long-Term Debt Senior Secured
Notes and Amended Revolving Credit
Facility.
The following table summarizes information as of June 25,
2006 regarding the number of shares of common stock that may be
issued under the Companys equity compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Number of Securities Remaining
|
|
|
|
Number of Shares to be
|
|
|
Weighted-Average
|
|
|
Available for Future Issuance
|
|
|
|
Issued Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Under Equity Compensation
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Plans (Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
Equity compensation plans approved
by shareholders
|
|
|
3,946,341
|
|
|
$
|
6.85
|
|
|
|
2,218,460
|
|
Equity compensation plans not
approved by shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,946,341
|
|
|
$
|
6.85
|
|
|
|
2,218,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the terms of the 1999 Unifi Inc. Long-Term Incentive Plan
(1999 Long-Term Incentive Plan), the maximum number
of shares to be issued was approved at 6,000,000. Of the
6,000,000 shares approved for issuance, no more than
3,000,000 may be issued as restricted stock. To date,
258,466 shares have been issued as restricted stock and are
deemed to be outstanding. Any option or restricted stock that is
forfeited may be reissued under the terms of the plan. The
amount forfeited or canceled is included in the number of
securities remaining available for future issuance in column
(c) in the above table.
23
During the fiscal quarter ended June 25, 2006, the maximum
number of shares available for purchase under Company plans or
programs were 6,807,241. The Company did not make any
repurchases under such plans or programs during this time.
On April 25, 2003, the Company announced that its Board of
Directors had reinstituted the Companys previously
authorized stock repurchase plan at its meeting on
April 24, 2003. The plan was originally announced by the
Company on July 26, 2000 and authorized the Company to
repurchase of up to 10.0 million shares of its common
stock. During fiscal years 2004 and 2003, the Company
repurchased approximately 1.3 million and 0.5 million
shares, respectively. The repurchase program was suspended in
November 2003 and the Company has no immediate plans to
reinstitute the program. There is remaining authority for the
Company to repurchase approximately 6.8 million shares of
its common stock under the repurchase plan. The repurchase plan
has no stated expiration or termination date.
For information regarding the Companys equity compensation
plans, see Item 12 Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.
24
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25, 2006
|
|
|
June 26, 2005
|
|
|
June 27, 2004
|
|
|
June 29, 2003
|
|
|
June 30, 2002
|
|
|
|
(52 Weeks)
|
|
|
(52 Weeks)
|
|
|
(52 Weeks)
|
|
|
(52 Weeks)
|
|
|
(53 Weeks)
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
Summary of
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
738,825
|
|
|
$
|
793,796
|
|
|
$
|
666,383
|
|
|
$
|
747,681
|
|
|
$
|
813,635
|
|
Cost of sales
|
|
|
696,055
|
|
|
|
762,717
|
|
|
|
625,983
|
|
|
|
675,829
|
|
|
|
739,623
|
|
Selling, general and
administrative expenses
|
|
|
41,534
|
|
|
|
42,211
|
|
|
|
45,963
|
|
|
|
48,182
|
|
|
|
44,707
|
|
Provision for bad debts
|
|
|
1,256
|
|
|
|
13,172
|
|
|
|
2,389
|
|
|
|
3,812
|
|
|
|
6,285
|
|
Interest expense
|
|
|
19,247
|
|
|
|
20,575
|
|
|
|
18,698
|
|
|
|
19,736
|
|
|
|
22,948
|
|
Interest income
|
|
|
(4,489
|
)
|
|
|
(2,152
|
)
|
|
|
(2,152
|
)
|
|
|
(1,420
|
)
|
|
|
(2,260
|
)
|
Other (income) expense, net
|
|
|
(3,118
|
)
|
|
|
(2,300
|
)
|
|
|
(2,590
|
)
|
|
|
(115
|
)
|
|
|
4,129
|
|
Equity in (earnings) losses of
unconsolidated affiliates
|
|
|
(825
|
)
|
|
|
(6,938
|
)
|
|
|
6,877
|
|
|
|
(10,728
|
)
|
|
|
1,659
|
|
Minority interest (income) expense
|
|
|
|
|
|
|
(530
|
)
|
|
|
(6,430
|
)
|
|
|
4,769
|
|
|
|
|
|
Restructuring charges (recovery)(1)
|
|
|
(254
|
)
|
|
|
(341
|
)
|
|
|
8,229
|
|
|
|
10,597
|
|
|
|
|
|
Arbitration costs and expenses(2)
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
19,185
|
|
|
|
1,129
|
|
Alliance plant closure costs
(recovery)(3)
|
|
|
|
|
|
|
|
|
|
|
(206
|
)
|
|
|
(3,486
|
)
|
|
|
|
|
Write down of long-lived assets(4)
|
|
|
2,366
|
|
|
|
603
|
|
|
|
25,241
|
|
|
|
|
|
|
|
|
|
Goodwill impairment(5)
|
|
|
|
|
|
|
|
|
|
|
13,461
|
|
|
|
|
|
|
|
|
|
Loss on early extinguishment of
debt(6)
|
|
|
2,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes and extraordinary item
|
|
|
(15,896
|
)
|
|
|
(33,221
|
)
|
|
|
(69,262
|
)
|
|
|
(18,680
|
)
|
|
|
(4,585
|
)
|
Benefit for income taxes
|
|
|
(1,170
|
)
|
|
|
(13,483
|
)
|
|
|
(25,113
|
)
|
|
|
(2,590
|
)
|
|
|
(2,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before extraordinary Item
|
|
|
(14,726
|
)
|
|
|
(19,738
|
)
|
|
|
(44,149
|
)
|
|
|
(16,090
|
)
|
|
|
(2,453
|
)
|
Income (loss) from discontinued
operations, net of tax
|
|
|
360
|
|
|
|
(22,644
|
)
|
|
|
(25,644
|
)
|
|
|
(11,087
|
)
|
|
|
(3,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary item and
cumulative effect of accounting change
|
|
|
(14,366
|
)
|
|
|
(42,382
|
)
|
|
|
(69,793
|
)
|
|
|
(27,177
|
)
|
|
|
(6,074
|
)
|
Extraordinary gain net
of taxes of $0(7)
|
|
|
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting
change, net of tax(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,366
|
)
|
|
$
|
(41,225
|
)
|
|
$
|
(69,793
|
)
|
|
$
|
(27,177
|
)
|
|
$
|
(43,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share of Common Stock: (basic
and diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(.28
|
)
|
|
$
|
(.38
|
)
|
|
$
|
(.85
|
)
|
|
$
|
(.30
|
)
|
|
$
|
(.05
|
)
|
Income (loss) from discontinued
operations, net of tax
|
|
|
|
|
|
|
(.43
|
)
|
|
|
(.49
|
)
|
|
|
(.21
|
)
|
|
|
(.06
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
|
|
|
|
.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting
change, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(.28
|
)
|
|
$
|
(.79
|
)
|
|
$
|
(1.34
|
)
|
|
$
|
(.51
|
)
|
|
$
|
(.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25, 2006
|
|
|
June 26, 2005
|
|
|
June 27, 2004
|
|
|
June 29, 2003
|
|
|
June 30, 2002
|
|
|
|
(52 Weeks)
|
|
|
(52 Weeks)
|
|
|
(52 Weeks)
|
|
|
(52 Weeks)
|
|
|
(53 Weeks)
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
179,540
|
|
|
$
|
242,440
|
|
|
$
|
236,881
|
|
|
$
|
183,973
|
|
|
$
|
167,469
|
|
Gross property, plant and equipment
|
|
|
916,337
|
|
|
|
955,459
|
|
|
|
943,555
|
|
|
|
978,200
|
|
|
|
961,327
|
|
Total assets
|
|
|
732,637
|
|
|
|
845,375
|
|
|
|
872,535
|
|
|
|
1,002,201
|
|
|
|
1,019,555
|
|
Long-term debt and other
obligations
|
|
|
202,110
|
|
|
|
259,790
|
|
|
|
263,779
|
|
|
|
259,395
|
|
|
|
280,267
|
|
Shareholders equity
|
|
|
382,953
|
|
|
|
383,575
|
|
|
|
401,901
|
|
|
|
479,748
|
|
|
|
498,040
|
|
|
|
|
(1) |
|
During fiscal year 2003, the Company developed a plan of
reorganization that resulted in the termination of management
and production level employees. In fiscal year 2004, the Company
recorded a restructuring charge which consisted of severance and
related employee termination costs and facility closure costs. |
|
(2) |
|
The arbitration costs and expenses include the award owed by the
Company to DuPont as a result of an arbitration panel ruling in
June 2003 and professional fees incurred. |
|
(3) |
|
In fiscal year 2001, the Company recorded its share of the
anticipated costs of closing DuPonts Cape Fear, North
Carolina facility which was in accordance with the
Companys manufacturing alliance with DuPont. During fiscal
year 2003, the project was substantially complete; and as a
result, the Company obtained updated cost estimates which
resulted in reductions to the reserve. |
|
(4) |
|
In fiscal year 2004, management performed impairment testing for
the domestic textured polyester business due to the continued
challenging business conditions and reduction in volume and
gross profit. As a result, management determined that the assets
were in fact impaired, resulting in a charge of
$25.2 million. |
|
(5) |
|
In fiscal year 2004, management performed an impairment test for
the entire domestic polyester segment. As a result of the
testing, the Company recorded a goodwill impairment charge of
$13.5 million to reduce the segments goodwill to $0. |
|
(6) |
|
In April 2006, the Company commenced a tender offer for all of
its outstanding 2008 notes. In May 2006, the Company issued
$190 million of notes due in 2014. The $2.9 million
charge related to the fees associated with the tender offer as
well as the unamortized bond issuance costs on the 2008 notes. |
|
(7) |
|
In fiscal year 2005, the Company completed its acquisition of
the INVISTA polyester POY manufacturing assets located in
Kinston, North Carolina, including inventories, valued at
$24.4 million. As part of the acquisition, the Company
announced its plans to curtail two production lines and downsize
the workforce at its newly acquired manufacturing facility. At
that time, the Company recorded a reserve of $10.7 million
in related severance costs and $0.4 million in
restructuring costs which were recorded as assumed liabilities
in purchase accounting; and therefore, had no impact on the
Consolidated Statements of Operations. As of March 27,
2005, both lines were successfully shut down and a reduction in
the original restructuring estimate for severance was recorded.
As a result of the reduction to the restructuring reserve, a
$1.2 million extraordinary gain, net of tax, was recorded. |
|
(8) |
|
The 2002 fiscal year cumulative effect of accounting change
represents the write-off of goodwill associated with the nylon
reporting segment. Upon adoption of Financial Accounting
Standard No. 142, Goodwill and Other Intangible
Assets (SFAS 142), the Company wrote off
$46.3 million ($37.9 million after tax) or
$.71 per diluted share of the unamortized balance of the
goodwill associated with the nylon business segment as of
June 25, 2001, as a cumulative effect of an accounting
change. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion of managements views on the
financial condition and results of operations of the Company
should be read in conjunction with the Consolidated Financial
Statements and Notes included elsewhere in this Annual Report on
Form 10-K.
The discussion contains forward-looking statements that reflect
managements current expectations, estimates and
projections. Actual results for the Company could differ
materially from those discussed in the forward-looking
statements. Factors that could cause such differences are
discussed in Forward-Looking Statements above in
Item 1A Risk Factors and elsewhere
in this Annual Report on
Form 10-K.
26
Business
Overview
The Company is a diversified producer and processor of
multi-filament polyester and nylon yarns, including specialty
yarns with enhanced performance characteristics. Unifi adds
value to the supply chain and enhances consumer demand for its
products through the development and introduction of branded
yarns that provide unique performance, comfort and aesthetic
advantages. The Company manufactures partially oriented,
textured, dyed, twisted and beamed polyester yarns as well as
textured nylon and nylon covered spandex products. Unifi sells
its products to other yarn manufacturers, knitters and weavers
that produce fabrics for the apparel, hosiery, home furnishings,
automotive, industrial and other end-use markets. The Company
maintains one of the industrys most comprehensive product
offerings and emphasizes quality, style and performance in all
of its products.
Polyester Segment. The polyester segment
manufactures partially oriented, textured, dyed, twisted and
beamed yarns with sales to other yarn manufacturers, knitters
and weavers that produce fabrics for the apparel, automotive and
furniture upholstery, hosiery, home furnishings, automotive,
industrial and other end-use markets. The polyester segment
primarily manufactures its products in Brazil, Colombia and the
United States, which has the largest operations and number of
locations. For fiscal years 2006, 2005, and 2004 polyester
segment net sales were $566.4 million, $587.0 million,
and $481.9 million, respectively.
Nylon Segment. The nylon segment manufactures
textured nylon and covered spandex products with sales to other
yarn manufacturers, knitters and weavers that produce fabrics
for the apparel, hosiery, sock and other end-use markets. The
nylon segment consists of operations in the United States and
Colombia. For fiscal years 2006, 2005, and 2004 nylon segment
net sales were $172.5 million, $206.8 million, and
$184.5 million, respectively.
Sourcing Segment. In July 2005, the Company
announced its decision to exit the sourcing business, and as of
the end of fiscal year 2006 the Company had fully liquidated the
business. All periods have been presented as discontinued
operations in accordance with generally accepted accounting
principles in the United States (GAAP).
The Companys fiscal year is the 52 or 53 weeks ending
in the last Sunday in June. Fiscal years 2006, 2005 and 2004 had
52 weeks.
Line
Items Presented
Net sales. Net sales include amounts billed by
the Company to customers for products, shipping and handling,
net of allowances for rebates. Rebates may be offered to
specific large volume customers for purchasing certain
quantities of yarn over a prescribed time period. The Company
provides for allowances associated with rebates in the same
accounting period the sales are recognized in income. Allowances
for rebates are calculated based on sales to customers with
negotiated rebate agreements with the Company. Non-defective
returns are deducted from revenues in the period during which
the return occurs. The Company records allowances for customer
claims based upon its estimate of known claims and its past
experience for unknown claims.
Cost of sales. The Companys cost of
sales consists of direct material, delivery and other
manufacturing costs, including labor and overhead, depreciation
and amortization expense with respect to manufacturing assets,
fixed asset depreciation, amortization of intangible assets and
reserves for obsolete and slow-moving inventory. Cost of sales
also includes amounts directly related to providing
technological support to the Companys Chinese joint
venture discussed below.
Selling, general and administrative
expenses. The Companys selling, general and
administrative expenses consist of selling expense (which
includes sales staff salaries and bonuses), advertising and
promotion (which includes direct marketing expenses) and
administrative expense (which includes corporate expenses and
bonuses). In addition, selling, general and administrative
expenses also include depreciation and amortization with respect
to certain corporate administrative assets.
Recent
Developments and Outlook
Although the global textile and apparel industry continues to
grow, the U.S. textile and apparel industry has contracted
since 1999, caused primarily by intense foreign competition in
finished goods on the basis of price,
27
resulting in ongoing U.S. domestic overcapacity, many
producers moving their operations offshore and the closure of
many domestic textile and apparel plants. More recently, the
U.S. textile and apparel industry has continued to decline
although it has been experiencing low negative growth rates. In
addition, due to consumer preferences, demand for sheer hosiery
products has declined significantly in recent years, which
negatively impacts nylon manufacturers. Because of these general
industry trends, the Companys net sales, gross profits and
net income have been trending downward for the past several
years. These challenges continue to impact the U.S. textile
and apparel industry, and the Company expects that they will
continue to impact the U.S. textile and apparel industry
for the foreseeable future. The Company believes that its
success going forward is primarily based on its ability to
improve the mix of its product offerings to shift to more
premium value-added products, to exploit the free-trade
agreements to which the United States is a party and to
implement cost saving strategies which will improve its
operating efficiencies. The continued viability of the
U.S. domestic textile and apparel industry is dependent, to
a large extent, on the international trade regulatory
environment. For the most part, because of protective duties
currently in place and NAFTA, CAFTA, CBI, ATPA and other
free-trade agreements or duties preference programs, the Company
has not experienced significant declines in its market share due
to the importation of Asian products.
The Company is also highly committed and dedicated to
identifying strategic opportunities to participate in the Asian
textile market, specifically China, where the growth rate is
estimated to be within a range of 7% to 9%. As further discussed
below in Joint Ventures and Other Equity
Investments, the Company has invested $30.0 million
in a joint venture in China to manufacture, process and market
polyester filament yarn.
During fiscal year 2006, the Company continued its focus away
from selling large volumes of products in order to focus on
making each product line profitable. The Company has identified
unprofitable product lines and raised sales prices accordingly.
In some cases, this strategy has resulted in reduced sales of
these products or even the elimination of the unprofitable
product lines. The Company expects that the reduction of these
unprofitable businesses will improve its future operating
results. This program has resulted in significant restructuring
charges in recent periods, and additional losses of volume
associated with these actions may require additional plant
consolidations in the future, which may result in further
restructuring charges.
The Company entered into a manufacturing alliance with DuPont in
June 2000 to produce polyester POY at DuPonts facility in
Kinston and at the Companys facility in Yadkinville, North
Carolina. DuPont later transferred its interest in this alliance
to Invista, Inc. This alliance resulted in significant annual
benefits to the Company of approximately $30 million,
consisting of reductions in fixed costs, variable costs savings
and product development enrichment. On September 30, 2004,
the Company acquired the Kinston facility, including
inventories, for approximately $24.4 million, in the form
of a note payable to Invista (the Kinston
acquisition). The Company closed two of the Kinston
facilitys four production lines, increased efficiency and
automation and reduced the workforce. See
Corporate Restructurings. The
acquisition resulted in the termination of the Companys
alliance with DuPont. As a result of the Kinston acquisition,
the Companys results for periods subsequent to the Kinston
acquisition will not be fully comparable to its results for the
prior periods, which include the annual benefit of the alliance.
The impact of Hurricane Katrina on the oil refineries in the
Louisiana area in August 2005 created shortages of supply of
gasoline and as a result a shortage of paraxlyene, a feedstock
used in polymer production in its polyester segment, because
producers diverted production to mixed xlyene to increase the
supply of gasoline. As a result, while supplies were tight,
paraxlyene continued to be available at a much higher price.
During September 2005, the Company received notices from several
raw material suppliers declaring force majeure under its
contracts and increasing the price the Company paid under those
contracts effective September 1, 2005. As a result of this
increase, and other energy-related cost increases, the Company
imposed a 14 cents per pound surcharge on its polyester products
in an effort to maintain its margins. Throughout the second
quarter of fiscal year 2006, the surcharge stayed in effect at
different levels as raw material prices declined. In other
operations that have a high usage of natural gas, the Company
also increased sales prices effective November 1, 2005 to
compensate for the increase in utility costs.
Though polyester raw material prices declined during the end of
the second quarter of fiscal year 2006, a different set of
paraxylene industry dynamics emerged during the third quarter of
fiscal year 2006 that led to further increases of raw material
prices. Polyester raw material prices once again increased
during the last two quarters of
28
fiscal year 2006 and continue to be steady. The belief is that
the pressure from strong gasoline demand coupled with the phase
out of Methyl Tert-butyl Ether (MTBE) from gasoline
has had an impact on paraxylene pricing as it has raised the
value of mixed xylenes (feedstock to paraxylene) as a blend
component for gasoline, as xylenes are diverted into gasoline as
a replacement for MTBE.
Hurricane Rita shut down five of the six refineries in Texas
that produce MEG in September 2005, including the supplier to
the Companys Kinston polyester filament manufacturing
operation. In addition, an unrelated accident closed one of the
suppliers facilities in early October 2005. With five of
the six facilities closed, the supply of MEG in the marketplace
became temporarily tight, and MEG became unavailable at
historical prices. At the time of Hurricane Rita, the Company
had approximately 22 days of inventory of MEG. The Company
started purchasing MEG on the spot market and trucking the MEG
to Kinston, which increased its costs compared to its more
economical method of transportation by railroad.
The Company successfully managed through these transportation
and access issues to meet its delivery commitments. As of the
close of the second quarter of fiscal year 2006, the
availability of raw materials had returned to normal levels, but
pricing had not returned to pre-hurricane levels. Effective
January 1, 2006, the Company removed the surcharge on its
products and instituted a price increase to maintain its margins.
In spite of the Companys ability to pass to its customers
nearly all of the cost increases resulting from the 2005
hurricanes and the associated supply shortages, revenues in the
polyester segment for the second and third quarters of fiscal
year 2006 were lower than for the comparable period in fiscal
year 2005 due to lower overall purchases by its customers
because of the increased prices. The polyester segment revenues
lost during the second and third quarters of fiscal year 2006
have not been fully offset by increased orders in subsequent
periods. In addition to the decrease in overall polyester
segment revenues, increased prices also resulted in smaller
order size for the polyester segment products during the second
quarter of fiscal year 2006, as customers sought to purchase
only their minimum requirements during the supply disruption
period. Smaller order sizes affected margins negatively during
that period, as repeated changes in production lines increased
per-unit costs for smaller orders. As a result, in February
2006, the Company instituted small order pricing surcharges to
offset this effect on margins.
On April 28, 2006, the Company commenced a tender offer for
all of its then outstanding $250 million in aggregate
principal amount of 2008 notes simultaneously with a consent
solicitation from the holders of the 2008 notes to remove
substantially all of the restrictive covenants and certain
events of default under the indenture governing the 2008 notes.
The tender offer expired on May 25, 2006, and
$248.7 million in aggregate principal amount of 2008 notes
were tendered in the tender offer, representing 99.5% of the
then outstanding aggregate principal amount of 2008 notes. The
tender consideration was 100% of the principal amount of 2008
notes validly tendered plus accrued but unpaid interest to, but
not including, May 26, 2006. The Company paid a total
consideration of $253.9 million for the tendered 2008 notes
and accrued interest. The proceeds from the sale of the 2014
notes were used to fund, in part, the purchase price for the
tendered 2008 notes. The $1.3 million in aggregate
principal amount of 2008 notes that were not tendered and
purchased in the tender offer remain outstanding in accordance
with their amended terms.
On May 26, 2006 the Company issued $190 million in
aggregate principal amount of 2014 notes. Interest is payable on
the notes on May 15 and November 15 of each year, beginning on
November 15, 2006. The 2014 notes are unconditionally
guaranteed on a senior, secured basis by each of the
Companys existing and future restricted domestic
subsidiaries. The 2014 notes and guarantees are secured by
first-priority liens, subject to permitted liens, on
substantially all of the Companys and the Companys
subsidiary guarantors assets (other than the assets
securing the Companys obligations under its amended
revolving credit facility on a first-priority basis, which
consist primarily of accounts receivable and inventory),
including, but not limited to, property, plant and equipment,
the capital stock of the Companys domestic subsidiaries
and certain of the Companys joint ventures and up to 65%
of the voting stock of the Companys first-tier foreign
subsidiaries, whether now owned or hereafter acquired, except
for certain excluded assets. The 2014 notes and guarantees are
secured by second-priority liens, subject to permitted liens, on
the Company and its subsidiary guarantors assets that
secure the Companys amended revolving credit facility on a
first-priority basis. In connection with the issuance, the
Company incurred $6.8 million in professional fees and
other expenses which will be amortized to expense over the life
of the 2014 notes. The estimated fair value of the 2014 notes,
based on quoted market prices, at June 25, 2006 was
approximately $182.4 million.
29
Concurrently with the closing of the offering of the 2014 notes,
the Company amended its existing senior secured asset-based
revolving credit facility to extend its maturity to 2011, permit
the 2014 notes offering, give the Company the ability to request
that the borrowing capacity be increased up to $150 million
under certain circumstances and revise some of its other terms
and covenants. The Company drew $3.0 million under its
amended revolving credit facility to fund, in part, the purchase
price of the tendered 2008 notes. The remainder of the purchase
price of the tender 2008 notes was funded with cash on hand of
$55.7 million.
Key
Performance Indicators
The Company continuously reviews performance indicators to
measure its success. The following are the indicators management
uses to assess performance of the Companys business:
|
|
|
|
|
sales volume, which are an indicator of demand;
|
|
|
|
margins, which are an indicator of product mix and profitability;
|
|
|
|
net loss before interest, taxes, depreciation and amortization
and loss or income from discontinued operations
(EBITDA), which is an indicator of its ability to
pay debt; and
|
|
|
|
working capital of each business unit as a percentage of sales,
which is an indicator of its production efficiency and ability
to manage its inventory and receivables.
|
Corporate
Restructurings
Over the last three fiscal years, the Company has focused on
reducing costs throughout its operations and continuing to
improve working capital. The Company closed one of its air-jet
texture operations in Altamahaw, North Carolina in mid-2004. The
Company closed its dyed facility in Manchester, England, in June
2004. On July 28, 2004, the Company announced the closing
of its European manufacturing operations and associated sales
offices. The Company ceased its manufacturing operations in
Ireland on October 31, 2004. The Company ceased all other
European operations by June 2005 and sold the real property,
plant and equipment of its European division in fiscal year 2005
and 2006 for total proceeds of $38.0 million that resulted
in a net gain of approximately $4.6 million. In connection
with these closings and consolidations, the Company
significantly reduced its workforce. As a result, the Company
incurred a restructuring charge of $27.7 million in fiscal
year 2004 for employee severance costs, fixed asset write-offs
associated with the closure of the dyed facility in Manchester
and lease related costs associated with the closure of the
air-jet texture operation in North Carolina. All payments,
excluding lease related payments which continue until May 2008,
have been paid and the Company reclassified the financial
results of its UK and Ireland facilities as discontinued
operations for all periods prescribed in its financial
statements.
On October 19, 2004, the Company announced plans to close
two production lines and downsize its facility in Kinston, North
Carolina, which had been acquired in September 2004. During the
second quarter of fiscal year 2005, the Company recorded a
severance reserve of $10.7 million for approximately 500
production level employees and a restructuring reserve of
$0.4 million for the cancellation of certain warehouse
leases. The entire restructuring reserve was recorded as assumed
liabilities in purchase accounting; and accordingly, was not
recorded as a restructuring expense in the Companys
consolidated statements of operations. During the third quarter
of fiscal year 2005, the Company completed the closure of both
production lines as scheduled, which resulted in an actual
reduction of 388 production level employees and a reduction to
the initial restructuring reserve. Since no long-term assets or
intangible assets were recorded in purchase accounting, the net
reduction of $1.2 million was recorded as an extraordinary
gain in fiscal year 2005. During the first quarter of fiscal
year 2006, the Company determined that there were additional
costs relating to the termination of two warehouse leases which
resulted in a $0.2 million extraordinary loss. During the
second quarter of fiscal year 2006, the Company negotiated a
favorable settlement on the two warehouse leases that resulted
in a reduction to the reserve and the recognition of an
extraordinary gain of $0.2 million.
In fiscal year 2005, the Company closed its central distribution
center in Mayodan, North Carolina, and moved the operations to
its warehouse and logistics facilities in Yadkinville, North
Carolina, and relocated one of its plants from Mayodan to
Madison, North Carolina. In connection with this initiative, the
Company determined to offer for
30
sale a plant, a warehouse and a central distribution center
(CDC) located in Mayodan. Based on appraisals
received in September 2005, the Company determined that the
warehouse was impaired and recorded an impairment charge of
$1.5 million, which included $0.2 million in estimated
selling costs that will be paid from the proceeds of the sale
when it occurs. On March 13, 2006, the Company entered into
a contract to sell the CDC and related land located in
Mayodan, North Carolina. The terms of the contract call for a
sale price of $2.7 million, which was approximately
$0.7 million below the propertys carrying value. In
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets,
(SFAS No. 144) the Company recorded an
impairment charge of approximately $0.8 million during the
third quarter of fiscal year 2006 which included selling costs
of $0.1 million. The sale of the CDC closed in the fourth
quarter of fiscal 2006 with no further expense to the Company.
On July 28, 2005, the Company announced its decision to
discontinue the operations of its external sourcing business,
Unimatrix Americas, and as of the end of the third quarter
fiscal year 2006, the Company had substantially liquidated the
business resulting in the reclassification of the sourcing
segments losses for the current and prior periods as
discontinued operations. The sourcing segment was completely
liquidated as of June 25, 2006.
On April 20, 2006, the Company re-organized its domestic
business operations, and as a result, recorded a restructuring
charge for severance of approximately $0.8 million in the
fourth quarter of fiscal 2006. Approximately 45 management level
salaried employees were affected by the plan of reorganization.
The table below summarizes changes to the accrued severance and
accrued restructuring accounts for fiscal years 2006, 2005 and
2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Additional
|
|
|
|
|
|
Amounts
|
|
|
Balance at
|
|
|
|
June 26, 2005
|
|
|
Charges
|
|
|
Adjustments
|
|
|
Used
|
|
|
June 25, 2006
|
|
|
Accrued severance
|
|
$
|
5,252
|
|
|
$
|
812
|
|
|
$
|
44
|
|
|
$
|
(5,532
|
)
|
|
$
|
576
|
|
Accrued restructuring
|
|
|
5,053
|
|
|
|
|
|
|
|
(195
|
)
|
|
|
(1,308
|
)
|
|
|
3,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Additional
|
|
|
|
|
|
Amounts
|
|
|
Balance at
|
|
|
|
June 27, 2004
|
|
|
Charges
|
|
|
Adjustments
|
|
|
Used
|
|
|
June 26, 2005
|
|
|
Accrued severance
|
|
$
|
2,949
|
|
|
$
|
10,701
|
|
|
$
|
(834
|
)
|
|
$
|
(7,564
|
)
|
|
$
|
5,252
|
|
Accrued restructuring
|
|
|
6,654
|
|
|
|
391
|
|
|
|
(695
|
)
|
|
|
(1,297
|
)
|
|
|
5,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Additional
|
|
|
|
|
|
Amounts
|
|
|
Balance at
|
|
|
|
June 29, 2003
|
|
|
Charges
|
|
|
Adjustments
|
|
|
Used
|
|
|
June 27, 2004
|
|
|
Accrued severance
|
|
$
|
13,893
|
|
|
$
|
7,847
|
|
|
$
|
(10
|
)
|
|
$
|
(18,781
|
)
|
|
$
|
2,949
|
|
Accrued restructuring
|
|
|
|
|
|
|
6,739
|
|
|
|
|
|
|
|
(85
|
)
|
|
|
6,654
|
|
Joint
Ventures and Other Equity Investments
YUFI. In August 2005, the Company formed YUFI,
a 50/50 joint venture with Sinopec Yizheng Chemical Fiber Co.,
Ltd., or (YCFC), to manufacture, process and market
polyester filament yarn in YCFCs facilities in Yizheng,
Jiangsu Province, China. YCFC is a publicly traded (listed in
Shanghai and Hong Kong) enterprise with approximately
$1.3 billion in annual sales. The Company believes that the
addition of a high-quality, globally cost competitive operation
in China allows the Company to pursue long-term, profitable
revenue growth in Asia. By forming a joint venture with a
long-established and highly respected fiber industry leader like
YCFC, the Company also has an immediately accessible customer
base in Asia at lower
start-up
costs and with fewer execution risks. The principal goal of YUFI
is to supply premium value-added products to the Chinese market,
which is currently an importer of such products. On
August 4, 2005, the Company contributed to YUFI its initial
capital contribution of $15.0 million in cash. On
October 12, 2005, the Company transferred an additional
$15.0 million in the form of shareholder loan with a
thirteen month term to complete the capitalization of the joint
venture. Effective July 25, 2006, the shareholder loan was
converted to registered capital of the joint venture. During
fiscal year 2006, the Company recognized equity losses relating
to YUFI of $3.2 million which is reported net of
elimination of intercompany support provided . The Company
expects that YUFI will continue to incur losses for at least the
next six months as it continues to transition the business from
the sale of commodity products to value-added products which
have a higher gross margin. In addition, the Company recognized
$2.7 million in operating expenses for
31
fiscal year 2006, which were primarily reflected on the
Cost of sales line item in the consolidated
statements of operations, directly related to providing
technological support in accordance with the Companys
joint venture contract. The Company has granted YUFI an
exclusive, non-transferable license to certain of its branded
product technology (including
Mynx®,
Sorbtek®,
Reflexx®,
dye springs and other products) in China for a license fee of
$6.0 million that is payable over four years.
PAL. In June 1997, the Company contributed all
of the assets of its spun cotton yarn operations, utilizing
open-end and air jet spinning technologies, into PAL, a joint
venture with Parkdale Mills, Inc. in exchange for a 34%
ownership interest in the joint venture. PAL is a producer of
cotton and synthetic yarns for sale to the textile and apparel
industries primarily within North America. PAL has 14
manufacturing facilities primarily located in central and
western North Carolina. The Companys investment in PAL at
June 25, 2006 was $140.9 million. For the fiscal years
2006, 2005, and 2004, the Company reported equity income (loss)
of $3.8 million, $6.4 million, and
$(6.9) million, respectively, from PAL. The Company is
currently exploring ways to monetize its interest in PAL.
USTF. On September 13, 2000, the Company
formed USTF a 50/50 joint venture with SANS Fibres of South
Africa (SANS Fibres), to produce low-shrinkage high
tenacity nylon 6.6 light denier industrial, or LDI
yarns in North Carolina. The business is operated in its plant
in Stoneville, North Carolina. The Company manages the
day-to-day
production and shipping of the LDI produced in North Carolina
and SANS Fibres handles technical support and sales. Sales from
this entity are primarily to customers in the Americas. For the
fiscal years 2006, 2005, and 2004, the Company reported equity
income (loss) of $0.8 million, $(0.1) million and
$(1.3) million, respectively, from USTF. The Company has a
put right under this agreement to sell its entire interest in
the joint venture at fair market value and the related
Stoneville, North Carolina manufacturing facility for
$3.0 million (or fair market value if the sale is
consummated after March 2011) in cash to SANS Fibres. This
right can be exercised beginning on December 31, 2006 upon
one years prior written notice. SANS Fibres has a call
option upon the same terms as the Companys put right.
UNF. On September 27, 2000, The Company
formed UNF a 50/50 joint venture with Nilit, which produces
nylon POY at Nilits manufacturing facility in Migdal
Ha-Emek, Israel, that is its primary source of nylon POY for its
texturing and covering operations. The Company has entered into
a supply agreement, on customary terms, with UNF which expires
in April 2008 pursuant to which the Company has agreed to
purchase from UNF all of the nylon POY produced from three
dedicated production lines at a rate determined by index prices,
subject to certain adjustments for market downturns. This
vertical integration allows the Company to realize advantageous
raw material pricing in its domestic nylon operations. The
Companys investment in UNF at June 25, 2006 was
$6.3 million. For the fiscal years 2006, 2005, and 2004,
the Company reported income (losses) in equity investees of
$(0.8) million, $0.7 million, and $1.1 million,
respectively, from UNF.
Condensed balance sheet information as of June 25, 2006 and
June 26, 2005, and income statement information for fiscal
years 2006, 2005 and 2004, of combined unconsolidated equity
affiliates were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 25, 2006
|
|
|
June 26, 2005
|
|
|
Current assets
|
|
$
|
149,278
|
|
|
$
|
127,188
|
|
Noncurrent assets
|
|
|
217,955
|
|
|
|
176,265
|
|
Current liabilities
|
|
|
48,334
|
|
|
|
28,235
|
|
Noncurrent liabilities
|
|
|
44,460
|
|
|
|
18,840
|
|
Shareholders equity and
capital accounts
|
|
|
274,439
|
|
|
|
256,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 25, 2006
|
|
|
June 26, 2005
|
|
|
June 27, 2004
|
|
|
Net sales
|
|
$
|
567,223
|
|
|
$
|
471,786
|
|
|
$
|
469,512
|
|
Gross profit
|
|
|
31,853
|
|
|
|
40,312
|
|
|
|
7,880
|
|
Income (loss) from continuing
operations
|
|
|
8,435
|
|
|
|
16,991
|
|
|
|
(15,928
|
)
|
Net income (loss)
|
|
|
6,279
|
|
|
|
14,003
|
|
|
|
(20,183
|
)
|
32
UTP. Minority interest (income) expense was
$0.0 million, $(0.5) million and $(6.4) million,
respectively, for fiscal year 2006, 2005 and 2004. The minority
interest (income) expense recorded in the consolidated
statements of operations for the fiscal year 2006, 2005 and 2004
primarily relates to the minority owners share of the
earnings of UTP. The Company had an 85.4% ownership interest in
UTP and Burlington Industries, LLC had a 14.6% interest in UTP.
In April 2005, the Company acquired ITGs ownership
interest in UTP for $0.9 million in cash.
Review of
Fiscal Year 2006 Results of Operations (52 Weeks) Compared to
Fiscal Year 2005 (52 Weeks)
The following table sets forth the loss from continuing
operations components for each of the Companys business
segments for fiscal year 2006 and fiscal year 2005. The table
also sets forth each of the segments net sales as a
percent to total net sales, the net income components as a
percent to total net sales and the percentage increase or
decrease of such components over the prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2006
|
|
|
Fiscal Year 2005
|
|
|
|
|
|
|
|
|
|
% to
|
|
|
|
|
|
% to
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
% Inc. (Dec.)
|
|
|
|
(Amounts in thousands, except percentages)
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
$
|
566,367
|
|
|
|
76.7
|
|
|
$
|
587,008
|
|
|
|
73.9
|
|
|
|
(3.5
|
)
|
Nylon
|
|
|
172,458
|
|
|
|
23.3
|
|
|
|
206,788
|
|
|
|
26.1
|
|
|
|
(16.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
738,825
|
|
|
|
100.0
|
|
|
$
|
793,796
|
|
|
|
100.0
|
|
|
|
(6.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% to
|
|
|
|
|
|
% to
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Net Sales
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
$
|
527,354
|
|
|
|
71.4
|
|
|
$
|
558,498
|
|
|
|
70.4
|
|
|
|
(5.6
|
)
|
Nylon
|
|
|
168,701
|
|
|
|
22.8
|
|
|
|
204,219
|
|
|
|
25.7
|
|
|
|
(17.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
696,055
|
|
|
|
94.2
|
|
|
|
762,717
|
|
|
|
96.1
|
|
|
|
(8.7
|
)
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
|
32,771
|
|
|
|
4.4
|
|
|
|
30,291
|
|
|
|
3.8
|
|
|
|
8.2
|
|
Nylon
|
|
|
8,763
|
|
|
|
1.2
|
|
|
|
11,920
|
|
|
|
1.5
|
|
|
|
(26.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
41,534
|
|
|
|
5.6
|
|
|
|
42,211
|
|
|
|
5.3
|
|
|
|
(1.6
|
)
|
Restructuring charges (recovery)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
|
533
|
|
|
|
0.1
|
|
|
|
(212
|
)
|
|
|
|
|
|
|
(351.4
|
)
|
Nylon
|
|
|
(787
|
)
|
|
|
(0.1
|
)
|
|
|
(129
|
)
|
|
|
|
|
|
|
510.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(254
|
)
|
|
|
0.0
|
|
|
|
(341
|
)
|
|
|
|
|
|
|
(25.5
|
)
|
Write down of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
|
Nylon
|
|
|
2,315
|
|
|
|
0.3
|
|
|
|
603
|
|
|
|
0.1
|
|
|
|
283.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,366
|
|
|
|
0.3
|
|
|
|
603
|
|
|
|
0.1
|
|
|
|
292.4
|
|
Other (income) expenses
|
|
|
15,020
|
|
|
|
2.0
|
|
|
|
21,827
|
|
|
|
2.7
|
|
|
|
(31.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(15,896
|
)
|
|
|
(2.1
|
)
|
|
|
(33,221
|
)
|
|
|
(4.2
|
)
|
|
|
(52.2
|
)
|
Benefit for income taxes
|
|
|
(1,170
|
)
|
|
|
(0.2
|
)
|
|
|
(13,483
|
)
|
|
|
(1.7
|
)
|
|
|
(91.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(14,726
|
)
|
|
|
(1.9
|
)
|
|
|
(19,738
|
)
|
|
|
(2.5
|
)
|
|
|
(25.4
|
)
|
Income (loss) from discontinued
operations, net of tax
|
|
|
360
|
|
|
|
|
|
|
|
(22,644
|
)
|
|
|
(2.9
|
)
|
|
|
(101.6
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
|
|
|
|
|
|
|
|
1,157
|
|
|
|
0.1
|
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,366
|
)
|
|
|
(1.9
|
)
|
|
$
|
(41,225
|
)
|
|
|
(5.2
|
)
|
|
|
(65.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
For the fiscal year 2006, the Company recognized a
$15.9 million loss from continuing operations before income
taxes which was a $17.3 million improvement from the prior
year. The improvement in continuing operations was primarily
attributable to increased polyester conversion margins,
decreased selling, general and administrative expenses, reduced
charges of $11.9 million for bad debt expenses offset by
asset impairment charges and debt extinguishment expenses. The
last-in,
first-out (LIFO) reserve increased $3.9 million
for fiscal year 2006 compared to $2.4 million for the prior
fiscal year. During fiscal year 2006 raw material prices
increased for polyester ingredients in POY whereas in fiscal
year 2005 the primary drivers to the LIFO reserve were increases
in nylon raw material prices and higher values in the nylon
inventories due to the product mix.
Consolidated net sales from continuing operations decreased from
$793.8 million to $738.8 million, or 6.9%, for the
current fiscal year. For the fiscal year 2006, the weighted
average price per pound for the Companys products on a
consolidated basis increased 6.1% compared to the prior year.
Unit volume from continuing operations decreased 13.0% for the
fiscal year primarily due to managements decision to focus
on profitable business as well as market conditions.
At the segment level, polyester dollar net sales accounted for
76.7% in fiscal year 2006 compared to 73.9% in fiscal year 2005.
Nylon accounted for 23.3% of dollar net sales for fiscal year
2006 compared to 26.1% for the prior fiscal year.
Gross profit from continuing operations increased
$11.7 million to $42.8 million for fiscal year 2006.
This increase is primarily attributable to higher average
selling prices for both the polyester and nylon segments.
Selling, general, and administrative expenses decreased by 1.6%
or $0.7 million for the fiscal year. The decrease in
selling, general, and administrative expenses is due to the
downsizing of the Companys corporate departments and their
related costs. During the fiscal year 2005, the Company incurred
approximately $1.1 million in professional fees associated
with its efforts in becoming compliant with the Sarbanes-Oxley
Act of 2002 (Sarbanes-Oxley). During the fiscal year
2006, the Company incurred $0.3 million in professional
fees associated with Sarbanes-Oxley 404.
For the fiscal year 2006, the Company recorded a
$1.3 million provision for bad debts. This compares to
$13.1 million recorded in the prior fiscal year. The
decrease relates to the Companys domestic operations and
is primarily due to the write off of one customer who filed
bankruptcy in May 2005 resulting in $8.2 million in
additional bad debt expense. Although the Company experienced
significant improvements in its collections during fiscal year
2006, the financial viability of certain customers continue to
require close management scrutiny. Management believes that its
reserve for uncollectible accounts receivable is adequate.
Interest expense decreased from $20.6 million in fiscal
year 2005 to $19.2 million in fiscal year 2006. The
decrease in interest expense is primarily due to the payment by
the Company of a notes payable relating to the Kinston
acquisition. The Company had no outstanding borrowings under its
amended revolving credit facility as of June 25, 2006 or
its old credit facility as of June 26, 2005. The weighted
average interest rate of Company debt outstanding at
June 25, 2006 and June 26, 2005 was 6.9% and 6.7%,
respectively. Interest income increased from $2.1 million
in fiscal year 2005 to $4.5 million in fiscal year 2006
which was due to the increased cash position that the Company
maintained throughout most of fiscal year 2006.
Other (income) expense increased from $2.3 million of
income in fiscal year 2005 to $3.1 million of income in
fiscal year 2006. Fiscal year 2006 other income includes net
gains from the sale of property and equipment of
$1.8 million, offset by charges relating to currency
translations and other expenses of $0.7 million. Fiscal
year 2005 other income includes net gains from the sale of
property and equipment of $1.8 million and net unrealized
gains on hedging contracts of $1.7 million; offset by
charges relating to currency translations and other expenses of
$0.9 million.
Equity in the net income of its equity affiliates, PAL, USTF,
UNF, and YUFI was $0.8 million in fiscal year 2006 compared
to equity in net income of $6.9 million in fiscal year
2005. The decrease in earnings is primarily attributable to the
$3.2 million loss that the Company incurred on its newly
acquired investment in YUFI as discussed above. The
Companys share of PALs earnings decreased from a
$6.4 million income in fiscal year 2005 to
$3.8 million of income in fiscal year 2006. PAL realized
net losses on cotton futures contracts of $1.4 million for
34
fiscal year 2006 compared to $1.4 million in realized net
gains for fiscal year 2005. The Company expects to continue to
receive cash distributions from PAL.
The Company recorded no minority interest income for fiscal year
2006 compared to minority interest income of $0.5 million
in the fiscal year 2005. Minority interest recorded in the
Companys Consolidated Statements of Operations primarily
relates to the minority owners share of the earnings of
UTP. The Company had an 85.4% ownership interest and ITG, had a
14.6% interest in UTP. In April 2005, the Company acquired
ITGs ownership interest for $0.9 million in cash.
In fiscal year 2006, the Companys nylon segment recorded
charges of $2.3 million to write down to fair value less
cost to sell a nylon manufacturing plant and a nylon warehouse.
In the fourth quarter of fiscal year 2005, the Companys
nylon segment recorded a $0.6 million charge to write down
to fair value less cost to sell 166 textile machines that are
held for sale.
The Company has established a valuation allowance against its
deferred tax assets relating primarily to North Carolina income
tax credits. The valuation allowance decreased $1.7 million
in fiscal year 2006 compared to a decrease of $2.2 million
in fiscal year 2005. The gross decrease of $3.6 million in
fiscal year 2006 consisted of the expiration of unused North
Carolina income tax credits. The gross decrease of
$3.0 million in fiscal year 2005 consisted of the
expiration of unused North Carolina income tax credits of
$2.2 million and the expiration of a long-term capital loss
carryforward of $0.8 million. Due to lower estimates of
future state taxable income, the portion of the valuation
allowance that relates to North Carolina income tax credits
increased $1.9 million and $0.8 million in fiscal
years 2006 and 2005, respectively. The net impact of changes in
the valuation allowance to the effective tax rate reconciliation
for fiscal years 2006 and 2005 were 11.9% and 2.5%,
respectively. The percentage increase from fiscal year 2006 to
fiscal year 2005 was primarily attributable to lower forecasted
state taxable income.
The Company recognized an income tax benefit in fiscal year
2006, at a 7.4% effective tax rate, compared to an income tax
benefit, at a 40.6% effective tax rate, in fiscal year 2005. The
fiscal year 2006 effective rate was negatively impacted by
foreign losses for which no tax benefit was recognized, the
change in the deferred tax valuation allowance and tax expense
not previously accrued for repatriation of foreign earnings. In
fiscal year 2006, the Company recognized a state income tax
benefit net of federal income tax of 10.4% as compared to 4.2%
in fiscal year 2005. The increase in fiscal year 2006 was
primarily attributable to the pass through of $1.2 million
of state income tax credits from an equity affiliate.
With respect to repatriation of foreign earnings, the American
Jobs Creation Act of 2004 (the AJCA) created a
temporary incentive for U.S. multinational corporations to
repatriate accumulated income earned outside the U.S. by
providing an 85% dividend received deduction for certain
dividends from controlled foreign corporations. According to the
AJCA, the amount of eligible repatriation was limited to
$500 million or the amount described as permanently
reinvested earnings outside the U.S. in the most recent
audited financial statements filed with the SEC on or before
June 30, 2003. Dividends received must be reinvested in the
U.S. in certain permitted uses. The Company repatriated
$31 million in fiscal year 2006 resulting from
approximately $45 million of proceeds from the liquidation
of its European manufacturing operations less approximately
$30 million re-invested in YUFI as well as $16 million
of accumulated income earned by its Brazilian manufacturing
operation. The Company has not made any changes to its position
on the reinvestment of other foreign earnings.
35
The following summarizes the results of the above and the prior
year after restatements:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2006
|
|
|
Fiscal Year 2005
|
|
|
Loss from continuing operations
before extraordinary item
|
|
$
|
(14,726
|
)
|
|
$
|
(19,738
|
)
|
Income (loss) from discontinued
operations, net of tax
|
|
|
360
|
|
|
|
(22,644
|
)
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary item
|
|
|
(14,366
|
)
|
|
|
(42,382
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,366
|
)
|
|
$
|
(41,225
|
)
|
|
|
|
|
|
|
|
|
|
Income (losses) per common share
(basic and diluted):
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before extraordinary item
|
|
$
|
(.28
|
)
|
|
$
|
(.38
|
)
|
Loss from discontinued operations,
net of tax
|
|
|
|
|
|
|
(.43
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
|
|
|
|
.02
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(.28
|
)
|
|
$
|
(.79
|
)
|
|
|
|
|
|
|
|
|
|
Polyester
Operations
The following table sets forth the segment operating gain (loss)
components for the polyester segment for fiscal year 2006 and
fiscal year 2005. The table also sets forth the percent to net
sales and the percentage increase or decrease over the prior
year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2006
|
|
|
Fiscal Year 2005
|
|
|
|
|
|
|
|
|
|
% to
|
|
|
|
|
|
% to
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Net Sales
|
|
|
% Inc. (Dec.)
|
|
|
|
(Amounts in thousands, except percentages)
|
|
|
Net sales
|
|
$
|
566,367
|
|
|
|
100.0
|
|
|
$
|
587,008
|
|
|
|
100.0
|
|
|
|
(3.5
|
)
|
Cost of sales
|
|
|
527,354
|
|
|
|
93.1
|
|
|
|
558,498
|
|
|
|
95.1
|
|
|
|
(5.6
|
)
|
Selling, general and
administrative expenses
|
|
|
32,771
|
|
|
|
5.8
|
|
|
|
30,291
|
|
|
|
5.2
|
|
|
|
8.2
|
|
Restructuring charges (recovery)
|
|
|
533
|
|
|
|
0.1
|
|
|
|
(212
|
)
|
|
|
|
|
|
|
(351.4
|
)
|
Write down of long-lived assets
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
$
|
5,658
|
|
|
|
1.0
|
|
|
$
|
(1,569
|
)
|
|
|
(0.3
|
)
|
|
|
(460.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2006 polyester net sales decreased
$20.6 million, or 3.5% compared to fiscal year 2005. The
Companys polyester segment sales volumes decreased
approximately 11.8% while the weighted-average unit prices
increased approximately 8.3%.
Domestically, polyester sales volumes decreased 15.2% while
average unit prices increased approximately 8.7%. Sales from the
Companys Brazilian texturing operation, on a local
currency basis, decreased 11.2% over fiscal year 2005 due
primarily to the devaluation of the U.S. dollar against the
Brazilian Real. The Brazilian texturing operation predominately
purchased all of its fiber in U.S. dollars. The impact on
net sales from this operation on a U.S. dollar basis as a
result of the change in currency exchange rate was an increase
of $17.2 million in fiscal year 2006.
Gross profit on sales for the polyester operations increased
$10.5 million, or 36.8%, over fiscal year 2005, and gross
margin (gross profit as a percentage of net sales) increased
from 4.9% in fiscal year 2005 to 6.9% in fiscal year 2006. The
increase from the prior year is primarily attributable to an
increase in higher average selling prices as well as costs
savings realized from the consolidation of warehousing and
transportation services, and the curtailment of two POY
production lines at the Kinston facility. In addition, fiber
cost decreased as a percent of net sales from 54.8% in fiscal
year 2005 to 52.4% in fiscal year 2006.
Selling, general and administrative expenses for the polyester
segment increased $2.5 million from fiscal years 2005 to
2006. While the methodology to allocate domestic selling,
general and administrative costs remained consistent between
fiscal year 2005 and fiscal year 2006, the percentage of such
costs allocated to each segment are determined at the beginning
of every year based on specific cost drivers. The polyester
segment had a higher percentage in fiscal year 2006 compared to
fiscal year 2005 due to the addition of the Kinston
manufacturing operations to the polyester segment.
36
The polyester segment net sales, gross profit and selling,
general and administrative expenses as a percentage of total
consolidated amounts were 73.9%, 91.7% and 71.8% for fiscal year
2005 compared to 76.7%, 91.2% and 78.9% for fiscal year 2006,
respectively.
Restructuring charges of $0.5 million in fiscal year 2006
were related to adjustments for severance, retiree reserves and
charges related to the polyester segment of Unifi Latin America.
The Companys international polyester pre-tax results of
operations for the polyester segments Brazilian location
increased $0.2 million in fiscal year 2006 over fiscal year
2005. This increase is primarily due to a $0.9 million
increase in interest income, a $0.2 million reduction in
bad debt expense, a $1.1 million increase in Other (income)
expense, net offset by a $0.9 million reduction in gross
margin and a $1.1 million increase in selling, general and
administrative costs.
Nylon
Operations
The following table sets forth the segment operating loss
components for the nylon segment for fiscal year 2006 and fiscal
year 2005. The table also sets forth the percent to net sales
and the percentage increase or decrease over fiscal year 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2006
|
|
|
Fiscal Year 2005
|
|
|
|
|
|
|
|
|
|
% to
|
|
|
|
|
|
% to
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Net Sales
|
|
|
% Inc. (Dec.)
|
|
|
|
(Amounts in thousands, except percentages)
|
|
|
Net sales
|
|
$
|
172,458
|
|
|
|
100.0
|
|
|
$
|
206,788
|
|
|
|
100.0
|
|
|
|
(16.6
|
)
|
Cost of sales
|
|
|
168,701
|
|
|
|
97.8
|
|
|
|
204,219
|
|
|
|
98.8
|
|
|
|
(17.4
|
)
|
Selling, general and
administrative expenses
|
|
|
8,763
|
|
|
|
5.1
|
|
|
|
11,920
|
|
|
|
5.8
|
|
|
|
(26.5
|
)
|
Restructuring charges (recovery)
|
|
|
(787
|
)
|
|
|
(0.4
|
)
|
|
|
(129
|
)
|
|
|
(0.1
|
)
|
|
|
510.1
|
|
Write down of long-lived assets
|
|
|
2,315
|
|
|
|
1.3
|
|
|
|
603
|
|
|
|
0.3
|
|
|
|
283.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
$
|
(6,534
|
)
|
|
|
(3.8
|
)
|
|
$
|
(9,825
|
)
|
|
|
(4.8
|
)
|
|
|
(33.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2006 nylon net sales decreased $34.3 million,
or 16.6% compared to fiscal year 2005. Unit volumes for fiscal
year 2006 decreased 23.4% while the average selling price
increased 6.9%. Weighted-average selling prices increased in
fiscal year 2006 due to a greater percentage of higher priced
products being sold and to sales price increases instituted
during the third quarter.
Gross profit increased $1.2 million, or 46.2% in fiscal
year 2006 and gross margin increased from 1.2% in fiscal year
2005 to 2.2% in fiscal year 2006. This was primarily
attributable to higher per unit sales prices, cost savings
associated with closing a central distribution center, and
closing two nylon manufacturing facilities. Fiber costs
decreased from 64.5% of net sales in fiscal year 2005 to 60.1%
of net sales in fiscal year 2006 due to the incremental change
in product mix driven by the Companys supply agreement
with Sara Lee Branded Apparel and the continued price increases.
Fixed and variable manufacturing costs increased as a percentage
of sales from 30.6% in fiscal year 2005 to 35.5% in fiscal year
2006.
Selling, general and administrative expenses for the nylon
segment decreased $3.1 million in fiscal year 2006. This
decrease as a percentage of net sales is primarily due to a
reduced allocation percentage of selling, general and
administrative expenses to the nylon segment due to additional
business from the polyester Kinston manufacturing operation.
The nylon segment net sales, gross profit and selling, general
and administrative expenses as a percentage of total
consolidated amounts were 26.1%, 8.3% and 28.2% for fiscal year
2005 compared to 23.3%, 8.8% and 21.1% for fiscal year 2006,
respectively.
Restructuring recoveries of $0.8 million in fiscal year
2006 were related to adjustments for severance, retiree reserves
and recoveries of 2001 reserves related to the nylon segment of
Unifi Latin America.
See Corporate Restructurings above for a
discussion of the Companys restructurings of its nylon
facilities in North Carolina.
37
Review of
Fiscal Year 2005 Results of Operations (52 Weeks) Compared to
Fiscal Year 2004 (52 Weeks)
The following table sets forth the loss from continuing
operations components for each of the Companys business
segments for fiscal year 2005 and fiscal year 2004. The table
also sets forth each of the segments net sales as a
percent to total net sales, the net income components as a
percent to total net sales and the percentage increase or
decrease of such components over the prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2005
|
|
|
Fiscal Year 2004
|
|
|
|
|
|
|
|
|
|
% to
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
to Total
|
|
|
% Inc. (Dec.)
|
|
|
|
(Amounts in thousands, except percentages)
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
$
|
587,008
|
|
|
|
73.9
|
|
|
$
|
481,847
|
|
|
|
72.3
|
|
|
|
21.8
|
|
Nylon
|
|
|
206,788
|
|
|
|
26.1
|
|
|
|
184,536
|
|
|
|
27.7
|
|
|
|
12.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
793,796
|
|
|
|
100.0
|
|
|
$
|
666,383
|
|
|
|
100.0
|
|
|
|
19.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% to
|
|
|
|
|
|
% to
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
$
|
558,498
|
|
|
|
70.4
|
|
|
$
|
449,121
|
|
|
|
67.4
|
|
|
|
24.4
|
|
Nylon
|
|
|
204,219
|
|
|
|
25.7
|
|
|
|
176,862
|
|
|
|
26.5
|
|
|
|
15.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
762,717
|
|
|
|
96.1
|
|
|
|
625,983
|
|
|
|
93.9
|
|
|
|
21.8
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
|
30,291
|
|
|
|
3.8
|
|
|
|
34,835
|
|
|
|
5.2
|
|
|
|
(13.0
|
)
|
Nylon
|
|
|
11,920
|
|
|
|
1.5
|
|
|
|
11,128
|
|
|
|
1.7
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
42,211
|
|
|
|
5.3
|
|
|
|
45,963
|
|
|
|
6.9
|
|
|
|
(8.2
|
)
|
Restructuring charges (recovery)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
|
(212
|
)
|
|
|
|
|
|
|
7,591
|
|
|
|
1.1
|
|
|
|
|
|
Nylon
|
|
|
(129
|
)
|
|
|
|
|
|
|
638
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(341
|
)
|
|
|
|
|
|
|
8,229
|
|
|
|
1.2
|
|
|
|
|
|
Arbitration costs and expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
Alliance plant closure costs
(recovery)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
|
|
|
|
|
|
|
|
|
(206
|
)
|
|
|
|
|
|
|
|
|
Write down of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
|
|
|
|
|
|
|
|
|
25,241
|
|
|
|
3.8
|
|
|
|
|
|
Nylon
|
|
|
603
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
603
|
|
|
|
0.1
|
|
|
|
25,241
|
|
|
|
3.8
|
|
|
|
(97.6
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
|
|
|
|
|
|
|
|
|
13,461
|
|
|
|
2.0
|
|
|
|
|
|
Other (income) expenses
|
|
|
21,827
|
|
|
|
2.7
|
|
|
|
16,792
|
|
|
|
2.5
|
|
|
|
30.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(33,221
|
)
|
|
|
(4.2
|
)
|
|
|
(69,292
|
)
|
|
|
(10.4
|
)
|
|
|
(52.0
|
)
|
Benefit for income taxes
|
|
|
(13,483
|
)
|
|
|
(1.7
|
)
|
|
|
(25,113
|
)
|
|
|
(3.8
|
)
|
|
|
(46.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(19,738
|
)
|
|
|
(2.5
|
)
|
|
|
(44,149
|
)
|
|
|
(6.6
|
)
|
|
|
(55.3
|
)
|
Loss from discontinued operations,
net of tax
|
|
|
(22,644
|
)
|
|
|
(2.9
|
)
|
|
|
(25,644
|
)
|
|
|
(3.8
|
)
|
|
|
(11.7
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
1,157
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(41,225
|
)
|
|
|
(5.2
|
)
|
|
$
|
(69,793
|
)
|
|
|
(10.5
|
)
|
|
|
(40.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
For fiscal year 2005, the Company recognized a
$33.2 million loss from continuing operations before income
taxes, which was a $36.0 million improvement from fiscal
year 2004. The improvement in continuing operations was
primarily attributable to $38.7 million in charges for
asset write downs and goodwill impairment included in fiscal
year 2004 that did not occur in 2005, consisted of a
$25.2 million impairment of fixed assets in its domestic
polyester segment and the writedown of $13.5 million of
goodwill related to UTP. During fiscal year 2005, raw material
prices declined slightly and selling prices increased slightly
due in part to efforts to improve gross margin.
Consolidated net sales from continuing operations increased from
$666.4 million to $793.8 million, or 19.1%, for fiscal
year 2005. Included in fiscal year 2005 net sales amounts
are $117.7 million related to revenue generated from the
Kinston acquisition. Unit volume from continuing operations
increased 19.6% for the year, while average net selling prices
decreased by 0.4%. The primary driver of the increase in unit
volumes is the Kinston acquisition. The increase in net selling
price was reduced by 10.5% due to the Kinston operation which
sold lower priced commodity products. See the polyester segment
discussion below for further analysis on the effects of the
Kinston acquisition on fiscal year 2005.
At the segment level, polyester dollar net sales accounted for
73.9% of consolidated net sales in fiscal year 2005 compared to
72.3% in fiscal year 2004. Nylon accounted for 26.1% of
consolidated net sales for fiscal year 2005 compared to 27.7%
for fiscal year 2004.
Gross profit from continuing operations decreased
$9.3 million to $31.1 million for fiscal year 2005.
This decrease is primarily attributable to higher volumes and
lower average selling prices for the nylon segment resulting
from a change in product mix from high-volume to premium
value-added products and the polyester segment resulting from
the Kinston acquisition and a delay in passing increased fiber
prices to customers during the first half of fiscal year 2005.
The Company also recognized, as a reduction of cost of sales,
cost savings and other benefits from its alliance with DuPont at
the Kinston facility of $8.4 million in fiscal year 2005
compared to $38.2 million in fiscal year 2004. In addition,
the Company sold off inventory during the fourth quarter of
fiscal year 2005 that was slow moving at below cost in order to
reduce its inventories and improve its working capital position,
which resulted in a $3.1 million loss in fiscal year 2005.
Selling, general, and administrative expenses decreased by 8.2%
or $3.8 million for fiscal year 2005. The decrease in
selling, general, and administrative expenses was due to the
downsizing of the Companys corporate departments and
reducing its related costs. During fiscal year 2005, the Company
incurred approximately $1.1 million in professional fees
associated with its efforts in becoming compliant with the
Sarbanes-Oxley.
For fiscal year 2005, the Company recorded a $13.2 million
provision for bad debts, compared to $2.4 million recorded
in fiscal year 2004. The increase relates to its domestic
operations and is primarily due to the write off of debts of one
customer who filed for bankruptcy in May 2005, resulting in
$8.2 million in additional bad debt expense. Fiscal year
2005 continued to be a challenging year for the
U.S. textile industry, particularly in the apparel sector.
The financial viability of certain customers continued to
require close management scrutiny. Management believes that the
reserve for uncollectible accounts receivable is adequate.
Interest expense increased from $18.7 million in fiscal
year 2004 to $20.6 million in fiscal year 2005. The
increase in interest expense was primarily due to the interest
payable on the notes the Company issued to the seller in the
Kinston acquisition. The Company had no outstanding borrowings
on its old credit facility at June 26, 2005 and
June 27, 2004, and had no borrowings on this facility since
October 3, 2002. The weighted average interest rate of its
debt outstanding at June 26, 2005 and June 27, 2004
was 6.7% and 6.4%, respectively. Interest income remained at
$2.2 million in fiscal year 2004 and $2.2 million in
fiscal year 2005.
Other (income) expense decreased from $2.6 million of
income in fiscal year 2004 to $2.3 million of income in
fiscal year 2005. Fiscal year 2004 income included net gains
from the sale of property and equipment of $3.2 million,
offset by other expenses of $0.7 million. Fiscal year 2005
income includes net gains from the sale of property and
equipment of $1.8 million and net unrealized gains on
hedging contracts of $1.7 million, offset by charges
relating to currency translations and other expenses of
$0.9 million.
Equity in the net income of the Companys equity
affiliates, PAL, USTF and UNF, totaled $6.9 million in
fiscal year 2005 compared to equity in net loss of
$6.9 million in fiscal year 2004. The Companys share
of PALs earnings improved from a $6.9 million loss in
fiscal year 2004 to $6.4 million of income in fiscal year
2005. The increase in
39
earnings is primarily attributable to PALs higher
operating profit due primarily to lower cotton prices and
realized net gains on cotton futures contracts. PAL realized
gains on future contracts of $1.4 million in fiscal year
2005 compared to net losses of $4.7 million on future
contracts for cotton purchases in fiscal year 2004. PAL reported
net income of $8.2 million in calendar year 2005 as
compared to a net loss of $9.8 million in calendar year
2004. As a result of this financial improvement, the Company
expects to continue to receive cash distributions from PAL.
The Company recorded minority interest income of
$0.5 million for fiscal year 2005 compared to minority
interest income of $6.4 million in fiscal year 2004.
Minority interest recorded in its consolidated statements of
operations primarily relates to the minority owners share
of the earnings of UTP. See Joint Ventures and
Other Equity Investments.
In the fourth quarter of fiscal year 2005, the nylon segment
recorded a $0.6 million charge to write down to fair value
less cost to sell 166 textile machines that are held for sale.
The Company has established a valuation allowance against its
deferred tax assets relating primarily to North Carolina income
tax credits. The valuation allowance decreased $2.2 million
in fiscal year 2005 compared to an increase of $2.6 million
in fiscal year 2004. The gross decrease of $3.0 million in
fiscal year 2005 consisted of the expiration of unused North
Carolina income tax credits of $2.2 million and the
expiration of a long-term capital loss carry forward of
$0.8 million. Due to lower estimates of future state
taxable income, the portion of the valuation allowance that
relates to North Carolina income tax credits increased
$0.8 million and $2.6 million in fiscal years 2005 and
2004, respectively. In fiscal year 2004, the increase to the
reserve also included $0.8 million that related to a
long-term capital loss carry forward that the Company did not
expect to utilize before it was scheduled to expire in fiscal
year 2005. The net impact of changes in the valuation allowance
to the effective tax rate reconciliation for fiscal years 2005
and 2004 were 2.5% and 5.7%, respectively. The percentage
decrease from fiscal year 2005 to fiscal year 2004 is primarily
attributable to the stabilization of forecasted state taxable
income.
The Company recognized an income tax benefit in fiscal year 2005
at a 40.6% effective tax rate compared to an income tax benefit
at a 36.3% effective tax rate in fiscal year 2004. Fiscal year
2005 effective rate was positively impacted by a reduction in
the change to the valuation allowance, an increase in the
utilization of state tax losses and a change in the tax status
of a subsidiary. Fiscal year 2005 effective rate was also
positively impacted by the recording of a deferred tax asset for
a foreign subsidiary that should have been previously
recognized. The Company recorded this deferred tax asset of
$1.2 million in the fourth quarter of fiscal year 2005. The
Company evaluated the effect of the adjustment and determined
that the differences were not material for any of the periods
presented in its consolidated financial statements. Fiscal year
2005 effective tax rate was negatively impacted by the accrual
required by managements decision to repatriate
approximately $15.0 million from controlled foreign
corporations under the provisions of the AJCA.
The following summarizes the results of the above and the prior
year after restatements:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2005
|
|
|
Fiscal Year 2004
|
|
|
Loss from continuing operations
before extraordinary item
|
|
$
|
(19,738
|
)
|
|
$
|
(44,149
|
)
|
Loss from discontinued operations,
net of tax
|
|
|
(22,644
|
)
|
|
|
(25,644
|
)
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary item
|
|
|
(42,382
|
)
|
|
|
(69,793
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(41,225
|
)
|
|
$
|
(69,793
|
)
|
|
|
|
|
|
|
|
|
|
Income (losses) per common share
(basic and diluted):
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before extraordinary item
|
|
$
|
(.38
|
)
|
|
$
|
(.85
|
)
|
Loss from discontinued operations,
net of tax
|
|
|
(.43
|
)
|
|
|
(.49
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(.79
|
)
|
|
$
|
(1.34
|
)
|
|
|
|
|
|
|
|
|
|
40
Polyester
Operations
The following table sets forth the segment operating loss
components for the polyester segment for fiscal year 2005 and
fiscal year 2004. The table also sets forth the percent to net
sales and the percentage increase or decrease over the prior
year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2005
|
|
|
Fiscal Year 2004
|
|
|
|
|
|
|
|
|
|
% to
|
|
|
|
|
|
% to
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Net Sales
|
|
|
% Inc. (Dec.)
|
|
|
|
(Amounts in thousands, except percentages)
|
|
|
Net sales
|
|
$
|
587,008
|
|
|
|
100.0
|
|
|
$
|
481,847
|
|
|
|
100.0
|
|
|
|
21.8
|
|
Cost of sales
|
|
|
558,498
|
|
|
|
95.1
|
|
|
|
449,121
|
|
|
|
93.2
|
|
|
|
24.4
|
|
Selling, general and administrative
|
|
|
30,291
|
|
|
|
5.2
|
|
|
|
34,835
|
|
|
|
7.2
|
|
|
|
(13.0
|
)
|
Restructuring charges (recovery)
|
|
|
(212
|
)
|
|
|
|
|
|
|
7,591
|
|
|
|
1.6
|
|
|
|
(102.8
|
)
|
Arbitration costs and expenses
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
Alliance plant closure costs
(recovery)
|
|
|
|
|
|
|
|
|
|
|
(206
|
)
|
|
|
|
|
|
|
|
|
Write down of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
25,241
|
|
|
|
5.2
|
|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
13,461
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
$
|
(1,569
|
)
|
|
|
(0.3
|
)
|
|
$
|
(48,378
|
)
|
|
|
(10.0
|
)
|
|
|
(96.8
|
)
|
|
|
|
|
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Fiscal year 2005 polyester net sales increased
$105.2 million, or 21.8%, compared to fiscal year 2004. The
polyester segment sales volumes and average unit prices
increased approximately 21.3% and 0.5%, respectively. The
increase was due mainly to the Kinston acquisition on
September 30, 2004, which contributed $77.9 million of
net sales that were realized in the second half of fiscal year
2005.
Domestically, polyester sales volumes increased 28.3% while
average unit prices declined approximately 4.5%. Sales from the
Companys Brazilian texturing operation, on a local
currency basis, increased 3.7% over fiscal year 2004 due
primarily to sales price adjustments for changes in the
inflation index which were significant during fiscal year 2005.
The impact on net sales from this operation on a
U.S. dollar basis as a result of the change in currency
exchange rate was an increase of $6.1 million.
Gross profit on sales for the polyester operations decreased
$4.2 million, or 12.9%, over fiscal year 2004, while gross
margin (gross profit as a percentage of net sales) declined from
6.8% in fiscal year 2004 to 4.9% in fiscal year 2005. These
decreases were primarily attributable to an increase in fixed
and variable manufacturing costs which were 38.4% of net sales
in fiscal year 2005 compared to 37.5% of net sales in fiscal
year 2004. In addition, fiber cost increased as a percent of net
sales from 52.6% in fiscal year 2004 to 54.8% in fiscal year
2005. The Company also recognized, as a reduction of cost of
sales, cost savings and other benefits from the alliance with
DuPont of $8.4 million and $38.2 million for fiscal
years 2005 and 2004, respectively. Following the Kinston
acquisition, the benefits to the Company from its alliance with
DuPont ended.
Selling, general and administrative expenses for this segment
decreased $4.5 million from fiscal year 2004 to fiscal year
2005. While the methodology to allocate domestic selling,
general and administrative costs remains consistent between
fiscal year 2004 and fiscal year 2005, the percentage of such
costs allocated to each segment is determined at the beginning
of every year based on specific cost drivers. The polyester
segments share of these costs for fiscal year 2005 was
lower compared to fiscal year 2004 due to increases in the nylon
segments share of these cost drivers.
The polyester segment net sales, gross profit and selling,
general and administrative expenses for fiscal year 2005 were
73.9%, 91.7% and 71.8%, respectively, of consolidated amounts
compared to 72.3%, 81.0% and 75.8%, respectively, for fiscal
year 2004.
Restructuring charges of $7.6 million in fiscal year 2004
were primarily caused by relocation of the air jet texturing
business from Altamahaw, North Carolina, to Yadkinville, North
Carolina, which resulted in an accrual for future lease
obligations. During the third quarter of fiscal year 2004,
management performed impairment testing for the domestic
textured polyester business due to the continued challenging
business conditions and reduction in
41
volume and gross profit in the preceding quarter. As a result,
management determined that its plant, property and equipment
were impaired, and the Company recorded a $25.2 million
write down of the assets. As a result of the testing, the
Company also recorded a goodwill impairment charge of
$13.5 million in the third quarter of fiscal year 2004 to
eliminate the polyester segments goodwill.
The Companys international polyester pre-tax results of
operations for the polyester segments Brazilian location
declined $4.6 million in fiscal year 2005 over fiscal year
2004. This decline is primarily due to a 4.8% increase in the
cost of fiber, a 4.5% decrease in volume and a $0.5 million
increase in selling, general and administrative costs.
Nylon
Operations
The following table sets forth the segment operating loss
components for the nylon segment for fiscal year 2005 and fiscal
year 2004. The table also sets forth the percent to net sales
and the percentage increase or decrease over the prior year:
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Fiscal Year 2005
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Fiscal Year 2004
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% to
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% to
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Net sales
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Net sales
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% Inc. (Dec.)
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(Amounts in thousands, except percentages)
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Net sales
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$
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206,788
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100.0
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$
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184,536
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100.0
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12.1
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Cost of sales
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204,219
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98.8
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176,862
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95.8
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15.5
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Selling, general and administrative
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11,920
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5.8
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11,128
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6.0
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7.1
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Restructuring charges (recovery)
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(129
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)
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(0.1
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)
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638
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0.4
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(120.2
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)
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Write down of long-lived assets
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603
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0.3
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Segment operating loss
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$
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(9,825
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)
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(4.8
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)
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$
|
(4,092
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)
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(2.2
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)
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140.1
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Fiscal year 2005 nylon net sales increased $22.3 million,
or 12.1%, compared to fiscal year 2004. Unit volumes for fiscal
year 2005 increased 5.9% while the average selling price
increased 6.2%. The Company acquired the Sara Lee hosiery yarn
business for $2.6 million and completed the integration of
its operations and sales volume during 2004. The Company entered
in to a five-year branded apparel supply agreement with Sara Lee
in April 2004. The increase in sales volume and price is
primarily attributable to higher sales at retail resulting from
the Sara Lee agreement. These incremental sales were offset by
erosion in its U.S. customer base due primarily to an
increase in the importation of socks into the domestic market
and a decline in domestic demand for sheer hosiery products.
Gross profit for the nylon operations decreased
$5.1 million, or 66.5%, over fiscal year 2004 while gross
margin decreased from 4.2% in fiscal year 2004 to 1.2% in fiscal
year 2005. These decreases are primarily attributable to
reductions in per unit sales prices in excess of reduced unit
costs for raw materials. Fiber costs increased from 62.0% of net
sales in fiscal year 2004 to 64.5% of net sales in fiscal year
2005 due to the incremental change in product mix driven by the
Sara Lee agreement. Fixed and variable manufacturing costs
decreased as a percentage of sales from 30.9% in fiscal year
2004 to 30.6% in fiscal year 2005.
Selling, general and administrative expense for the nylon
segment increased $0.8 million in fiscal year 2005. This
increase is due to a significantly larger allocation of selling,
general and administrative expenses based on cost drivers which
were affected by increased sales volumes directly related to the
Sara Lee agreement. The increase in volumes attributable to the
Sara Lee agreement more than offset the overall reduction of
selling, general and administrative expense that the Company
realized.
The nylon segment net sales, gross profit and selling, general
and administrative expenses for fiscal year 2005 were 26.1%,
8.3% and 28.2%, respectively, of consolidated amounts compared
to 27.7%, 19.0% and 24.2%, respectively, for fiscal year 2004.
Restructuring expenses of $0.6 million in fiscal year 2004
were related to severance. In June 2005, the Company entered
into a contract to sell 166 machines held by the nylon segment.
As a result, a $0.6 million impairment of long-lived assets
was recorded to write the assets down to their fair value less
cost to sell.
42
Liquidity
and Capital Resources
Cash
Provided by Continuing Operations
While the Company had a net loss in fiscal year 2006, the
Company generated $30.1 million of cash from continuing
operations in fiscal year 2006 primarily due to depreciation and
amortization of $49.9 million, a decrease in accounts
receivables of $10.6 million, an impairment charge of
$2.4 million, loss from unconsolidated equity affiliates of
$1.9 million, non-cash charges for the early extinguishment
of debt of $1.8 million, a provision for bad debt of
$1.3 million, other amounts of $1.8 million, and
income taxes of $0.6 million, as compared to
$28.8 million for fiscal year 2005. Cash uses from
continuing operations included net loss from continuing
operations of $14.4 million, reductions in accounts payable
and accrued expenses of $8.5 million, decreases in deferred
taxes of $7.7 million, higher inventories of
$5.8 million, gains from the sale of capital assets of
$1.8 million, increases in other current assets of
$1.3 million, income from discontinued operations of
$0.4 million and recoveries of restructuring charges of
$0.3 million. The primary items affecting deferred taxes
were depreciation in excess of federal tax depreciation,
decreases in investments in equity affiliates, decreases in
reserves for accounts receivable and severance, and increases in
net operating losses which reduced the deferred tax obligation
by $10.8 million, $3.6 million, $4.0 million and
$2.7 million, respectively.
While the Company had a net loss in fiscal year 2005, it
generated $28.8 million of cash from continuing operations
in fiscal year 2005 primarily due to depreciation and
amortization of $52.9 million, lower inventories of
$20.6 million, a provision for bad debt of
$13.2 million that was increased by the write-off of
Collins & Aikman receivables, asset impairment charges
of $0.6 million and income taxes of $0.2 million, as
compared to $11.4 million for fiscal year 2004. Cash uses
from continuing operations included net loss from continuing
operations of $41.2 million, decreases in deferred taxes of
$19.1 million, reductions in accounts payable and accrued
expenses of $10.9 million, income from unconsolidated
equity affiliates of $2.3 million, other amounts of
$2.1 million, gains from the sale of capital assets of
$1.8 million, increases in accounts receivable of
$1.5 million and recoveries of restructuring charges of
$0.3 million. The primary items affecting deferred taxes
were depreciation in excess of federal tax depreciation,
increases in reserves for accounts receivable and severance and
increases in net operating losses which reduced the deferred tax
obligation by $10.0 million, $3.6 million and
$4.1 million, respectively. The decrease in inventories was
primarily the result of our inventory reduction program in the
fourth quarter of fiscal year 2005.
Cash provided by continuing operations was $11.4 million
for fiscal year 2004 based on a net loss of $69.8 million.
Non-cash components of the net loss were depreciation and
amortization of $57.6 million, write-downs of long-lived
assets of $25.2 million, goodwill impairment charges of
$13.5 million, losses of unconsolidated equity affiliates
of $8.7 million, non-cash restructuring charges of
$7.2 million and the provision for bad debt of
$2.4 million. Cash uses from continuing operations included
a reduction of deferred taxes of $28.2 million, decreases
in accounts payable and accrued expenses of $13.5 million,
increases in accounts receivable of $9.0 million, other
items of $3.8 million, gain on sales of assets
$3.2 million, decreased inventories of $0.8 million
and decreases in other current assets of $0.7 million. The
accounts payable decrease includes $25.0 million
representing a delayed billing payment resulting from a
vendors inability to invoice us for an extended period of
time due to technical issues associated with the vendors
software system. The decrease in deferred taxes primarily
relates to a goodwill impairment write-down of
$13.5 million, long-lived asset write-downs totaling
$25.2 million and book depreciation in excess of federal
tax depreciation of $30.5 million.
Working capital changes have been adjusted to exclude the
effects of acquisitions and currency translation for all years
presented, where applicable. Net working capital at
June 25, 2006 was $179.5 million.
Cash
Used in Investing Activities
The Company utilized $29.2 million for net investing
activities and $90.2 million in net financing activities
during fiscal year 2006. For fiscal year 2005, the Company
utilized $4.7 million for net investing activities and
provided $0.1 million for net financing activities. The
primary cash expenditures during fiscal year 2006 included
$248.7 million for payment of the 2008 notes,
$30.6 million for its investment in YUFI,
$24.4 million for early payment of notes payable,
$12.0 million for capital expenditures and
$8.0 million for issuance and debt refinancing costs,
offset by $190.0 million in proceeds from the issuance of
the 2014 notes, proceeds from the sale of capital
43
assets of $10.1 million, decreased restricted cash of
$2.7 million, other financing activities of
$1.0 million, and other investing activities of
$0.5 million.
The Company utilized net cash of $4.7 million for investing
activities in fiscal year 2005, which included $9.4 million
for capital expenditures, $2.7 million for a deposit of
restricted cash, and $1.4 million for acquisition related
costs. These amounts were offset by $6.1 million for return
of capital on investments from equity affiliates,
$2.3 million of proceeds from sales of capital assets and
$0.4 million, net of other investing activities. Net cash
provided by financing activities increased by $0.1 million
in fiscal year 2005 due to the issuance of common stock pursuant
to the exercise of stock options.
The Company utilized $5.8 million for net investing
activities and $8.5 million for net financing activities
during fiscal year 2004. Significant expenditures during this
period included $11.1 million for capital expenditures
which included the $2.6 million purchase of the Sara Lee
assets, and $3.6 million in capitalized software costs.
Additionally, $8.4 million was expended for repurchasing
the Companys stock.
Long-Term
Debt
On May 26, 2006, the Company issued $190.0 million in
aggregate principal amount of its 2014 notes and entered into
the amended revolving credit facility. The Company used the net
proceeds of the issuance of the 2014 notes, borrowings under its
amended revolving credit facility and cash on hand to pay the
consideration for the 2008 notes tendered in its tender offer
for the 2008 notes.
Tender Offer for the 2008 Notes. On
April 28, 2006, the Company commenced a tender offer for
all of its then outstanding $250 million in aggregate
principal amount of 2008 notes, simultaneously with a consent
solicitation from the holders of the 2008 notes to remove
substantially all of the restrictive covenants and certain
events of default under the indenture governing the 2008 notes.
The tender offer expired on May 25, 2006, and
$248.7 million in aggregate principal amount of 2008 notes
were tendered in the tender offer, representing 99.5% of the
then outstanding aggregate principal amount of 2008 notes. The
$1.3 million in aggregate principal amount of 2008 notes
that were not tendered and purchased in the tender offer remain
outstanding in accordance with their amended terms. The Company
funded the purchase price in the tender offer with available
cash, borrowings under its amended revolving credit facility and
proceeds from the initial notes offering. As a result of the
tender offer and the 2014 notes offering, the Company expects
that its interest expense will increase approximately
$5.6 million.
2014 Notes. On May 26, 2006 the Company
issued $190 million in aggregate principal amount of 2014
notes. Interest is payable on the notes on May 15 and November
15 of each year, beginning on November 15, 2006. The 2014
notes are unconditionally guaranteed on a senior, secured basis
by each of the Companys existing and future restricted
domestic subsidiaries. The 2014 notes and guarantees are secured
by first-priority liens, subject to permitted liens, on
substantially all of the Companys and the Companys
subsidiary guarantors assets (other than the assets
securing the Companys obligations under its amended
revolving credit facility on a first-priority basis, which
consist primarily of accounts receivable and inventory),
including, but not limited to, property, plant and equipment,
the capital stock of the Companys domestic subsidiaries
and certain of the Companys joint ventures and up to 65%
of the voting stock of the Companys first-tier foreign
subsidiaries, whether now owned or hereafter acquired, except
for certain excluded assets. The 2014 notes and guarantees are
secured by second-priority liens, subject to permitted liens, on
the Company and its subsidiary guarantors assets that
secure amended revolving credit facility on a first-priority
basis. The Company may redeem some or all of the 2014 notes on
or after May 15, 2010. In addition, prior to May 15,
2009, the Company may redeem up to 35% of the principal amount
of the 2014 notes with the proceeds of certain equity offerings.
In connection with the issuance, the Company incurred
$6.8 million in professional fees and other expenses which
will be amortized to expense over the life of the 2014 notes.
The estimated fair value of the 2014 notes, based on quoted
market prices, at June 25, 2006 was approximately
$182.4 million.
The indenture for the 2014 notes, among other things, restricts
the Companys ability and the ability of its restricted
subsidiaries to make investments, incur additional indebtedness
and issue disqualified stock, pay dividends or make
distributions on capital stock or redeem or repurchase capital
stock, create liens, incur dividend or other payment
restrictions affecting subsidiaries, sell assets, merge or
consolidated with other entities and enter into transactions
with affiliates.
44
Amended Revolving Credit
Facility. Concurrently with the closing of
issuance of the 2014 notes, the Company amended its old credit
facility to extend its maturity to 2011, permit the initial
notes, give it the ability to request that the borrowing
capacity be increased up to $150 million under certain
circumstances and revise some of its other terms and covenants.
The amended revolving credit facility matures in 2011. The
borrowings under the amended revolving credit facility are
collateralized by first-priority liens, subject to permitted
liens, in among other things, the Companys inventory,
accounts receivable, general intangibles (other than uncertified
capital stock of subsidiaries and other persons), investment
property (other than capital stock of subsidiaries and other
persons), chattel paper, documents, instruments, letter of
credit rights, deposit accounts and other related personal
property and all proceeds relating to any of the above and by
second-priority liens, subject to permitted liens, on the
Companys and its subsidiary guarantors assets that
secure the 2014 notes and guarantees on a first-priority basis,
in each case, other than certain excluded assets. The
Companys ability to borrow under its amended revolving
credit facility is limited to a borrowing base equal to
specified percentages of eligible accounts receivable and
inventory and is subject to other conditions and limitations. As
of June 25, 2006, no amounts were outstanding under that
facility.
The amended revolving credit facility contains affirmative and
negative customary covenants for asset-based loans that restrict
future borrowings and capital spending. The covenants under the
amended revolving credit facility are more restrictive than
those in the indenture for the 2014 notes. Such covenants
include, without limitation, restrictions and limitations on
(i) sales of assets, consolidation, merger, dissolution and
the issuance of the Companys capital stock, each
subsidiary guarantor and any domestic subsidiary thereof,
(ii) permitted encumbrances on the Companys property,
each subsidiary guarantor and any domestic subsidiary thereof,
(iii) the incurrence of indebtedness by the Company, any
subsidiary guarantor or any domestic subsidiary thereof,
(iv) the making of loans or investments by the Company, any
subsidiary guarantor or any domestic subsidiary thereof,
(v) the declaration of dividends and redemptions by the
Company or any subsidiary guarantor, (vi) transactions with
affiliates by the Company or any subsidiary guarantor and
(vii) the repurchase by the Company of the 2014 notes.
Under the amended revolving credit facility, if borrowing
capacity is less than $25 million at any time during the
quarter, covenants also include a required minimum fixed charge
coverage ratio of 1.1 to 1.0. In addition, maximum capital
expenditures are limited to $30 million per fiscal year
(subject to pro forma availability greater than
$25 million) with a 75% one-year unused carry forward. The
amended revolving credit facility also permits the Company to
make distributions, subject to standard criteria, as long as pro
forma excess availability is greater than $25 million both
before and after giving effect to such distributions, subject to
certain exceptions. Under the amended revolving credit facility,
acquisitions by the Company are subject to pro forma covenant
compliance. In addition, under the amended revolving credit
facility, receivables are subject to cash dominion if excess
availability is below $25 million.
Liquidity
Assessment
In addition to its normal operating cash and working capital
requirements and service of its indebtedness, the Company will
also require cash to fund capital expenditures and enable cost
reductions through restructuring projects as follows:
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Capital Expenditures. The Company has no
current commitment to make any significant capital expenditures
which relate to fiscal year 2006, but the Company estimates its
fiscal year 2007 capital expenditures will be within a range of
$12.0 million to $15.0 million. Its capital
expenditures primarily relate to maintenance of existing assets
and equipment and technology upgrades. Management continuously
evaluates opportunities to further reduce production costs, and
the Company may incur additional capital expenditures from time
to time as it pursues new opportunities for further cost
reductions.
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Restructuring/Cost Reductions. On
April 20, 2006, the Company reorganized its domestic
business operations, and as a result, recorded a restructuring
charge for severance of approximately $0.8 million in the
fourth quarter of fiscal year 2006. Approximately 45 management
level salaried employees were affected by the plan of
reorganization. In connection with its acquisition strategy, the
Company may incur additional restructuring charges, including
severance payments and other related expenses.
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45
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Joint Venture Investments. The Company may
from time to time increase its interest in its joint ventures,
sell its interest in its joint ventures, invest in new joint
ventures or transfer idle equipment to its joint ventures.
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The Company believes that, based on current levels of operations
and anticipated growth, cash flow from operations, together with
other available sources of funds, including borrowings under its
amended revolving credit facility, will be adequate to fund
anticipated capital and other expenditures and to satisfy its
working capital requirements for at least the next
12 months.
The Companys ability to meet its debt service obligations
and reduce its total debt will depend upon its ability to
generate cash in the future which, in turn, will be subject to
general economic, financial, business, competitive, legislative,
regulatory and other conditions, many of which are beyond its
control. The Company may not be able to generate sufficient cash
flow from operations and future borrowings may not be available
to the Company under its amended revolving credit facility in an
amount sufficient to enable it to repay its debt or to fund its
other liquidity needs. If its future cash flow from operations
and other capital resources are insufficient to pay its
obligations as they mature or to fund its liquidity needs, the
Company may be forced to reduce or delay its business activities
and capital expenditures, sell assets, obtain additional debt or
equity capital or restructure or refinance all or a portion of
its debt on or before maturity. The Company may not be able to
accomplish any of these alternatives on a timely basis or on
satisfactory terms, if at all. In addition, the terms of its
existing and future indebtedness, including the 2014 notes and
its amended revolving credit facility, may limit its ability to
pursue any of these alternatives. See
Item 1A Risk Factors The
Company will require a significant amount of cash to service its
indebtedness, and its ability to generate cash depends on many
factors beyond its control. Some risks that could
adversely affect its ability to meet its debt service
obligations include, but are not limited to, intense domestic
and foreign competition in its industry, general domestic and
international economic conditions, changes in currency exchange
rates, interest and inflation rates, the financial condition or
its customers and the operating performance of joint ventures,
alliances and other equity investments.
Other
Factors Affecting Liquidity
Stock Repurchase Program. Effective
July 26, 2000, the Board of Directors increased the
remaining authorization to repurchase up to 10.0 million
shares of its common stock. The Company purchased
1.4 million shares in fiscal year 2001 for a total of
$16.6 million. There were no significant stock repurchases
in fiscal year 2002. Effective April 24, 2003, the Board of
Directors re-instituted the stock repurchase program.
Accordingly, the Company purchased 0.5 million shares in
fiscal year 2003 and 1.3 million shares in fiscal year
2004. At June 25, 2006, the Company had remaining authority
to repurchase approximately 6.8 million shares of its
common stock under the repurchase plan. The repurchase program
was suspended in November 2003, and the Company has no immediate
plans to reinstitute the program.
Acquisitions. On September 30, 2004, the
Company completed the Kinston acquisition, including
inventories, for a purchase price of approximately
$24.4 million which was financed with a seller note. The
acquisition resulted in the termination of the Companys
alliance agreement with INVISTA. As part of the Kinston
acquisition and upon finalizing the quantities and value of the
acquired inventory, Unifi Kinston, LLC, a subsidiary of the
Company, entered into a $24.4 million five-year loan
agreement. The loan, which calls for interest only payments for
the first two years, bore interest at 10% per annum and was
payable in arrears each quarter commencing December 31,
2004 until paid in full. Quarterly principal payments of
approximately $2.0 million were due beginning
December 31, 2006 with the final payment due
September 30, 2009. The loan agreement contained customary
covenants for asset based loans including a required minimum
collateral value ratio of 1.0 to 1.0 and a pre-defined maximum
leverage ratio. The loan was secured by all of the business
assets held by Unifi Kinston, LLC. On July 25, 2005, the
Company made a $24.4 million pre-payment, plus accrued
interest, paying off the loan in full.
Environmental Liabilities. The land associated
with the Kinston acquisition is leased pursuant to a
99 year Ground Lease with DuPont. Since 1993, DuPont has
been investigating and cleaning up the Kinston Site under the
supervision of the EPA and the North Carolina Department of
Environment and Natural Resources pursuant to the Resource
Conservation and Recovery Act Corrective Action Program. The
Corrective Action Program requires DuPont to identify all solid
waste management units or areas of concern, assess the extent of
contamination at the
46
identified areas and clean them up to applicable regulatory
standards. Under the terms of the Ground Lease, upon completion
by DuPont of required remedial action, ownership of the Kinston
Site will pass to the Company. Thereafter, the Company will have
responsibility for future remediation requirements, if any, at
the solid waste management units and areas of concern previously
addressed by DuPont and at any other areas at the plant. At this
time, the Company has no basis to determine if and when it will
have any responsibility or obligation with respect to the solid
waste management units and areas of concern or the extent of any
potential liability for the same. Accordingly, the possibility
that the Company could face material
clean-up
costs in the future relating to the Kinston facility cannot be
eliminated. In addition, the Company is evaluating several
options with respect to the upgrade of its industrial boilers at
the Kinston Site. The estimated investment ranges from $0 to
$2.0 million. No determination has been made with respect
to which alternative to pursue, if any.
Joint Ventures. The Company has invested
$30.6 million in cash in its Chinese joint venture, YUFI,
for its 50% equity interest which the Company paid using the
proceeds of capital asset sales relating to the closure of its
European manufacturing operations.
Contractual
Obligations
The Companys significant long-term obligations as of
June 25, 2006 are as follows:
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Cash Payments Due by Period
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Less Than
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More Than
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Description of Commitment
|
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Total
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1 Year
|
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1-3 years
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3-5 Years
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|
5 Years
|
|
|
|
(Amounts in thousands)
|
|
|
2014 notes(1)
|
|
$
|
190,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
190,000
|
|
2008 notes(2)
|
|
|
1,273
|
|
|
|
|
|
|
|
1,273
|
|
|
|
|
|
|
|
|
|
Interest on long-term debt(3)
|
|
|
175,704
|
|
|
|
22,554
|
|
|
|
44,795
|
|
|
|
44,598
|
|
|
|
63,757
|
|
Other long-term debt
|
|
|
19,028
|
|
|
|
10,766
|
|
|
|
7,148
|
|
|
|
785
|
|
|
|
329
|
|
Purchase obligations Nylon yarn
procurement U.S. (4)
|
|
|
41,070
|
|
|
|
20,535
|
|
|
|
20,535
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
9,795
|
|
|
|
3,460
|
|
|
|
6,019
|
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
436,870
|
|
|
$
|
57,315
|
|
|
$
|
79,770
|
|
|
$
|
45,699
|
|
|
$
|
254,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The notes will mature in 2014. |
|
(2) |
|
On April 28, 2006, the Company commenced a tender offer for
all of its then outstanding $250 million in aggregate
principal amount of 2008 notes, simultaneously with a consent
solicitation from the holders of the 2008 notes to remove
substantially all of the restrictive covenants and certain
events of default under the indenture governing the 2008 notes.
The tender offer expired on May 25, 2006, and
$248.7 million in aggregate principal amount of 2008 notes
were tendered in the tender offer, representing 99.5% of the
then outstanding aggregate principal amount of 2008 notes. The
$1.3 million in aggregate principal amount of 2008 notes
that were not tendered and purchased in the tender offer remain
outstanding in accordance with their amended terms. |
|
(3) |
|
Consists of interest on the 2014 notes, the 2008 notes and the
amended revolving credit facility and interest on other
long-term debt. |
|
(4) |
|
The nylon segment has a supply agreement with UNF which expires
in April 2008. The Company is obligated to purchase certain to
be agreed upon quantities of yarn production from UNF. The
agreement does not provide for a fixed or minimum amount of yarn
purchases, therefore there is a degree of uncertainty associated
with the obligation. Accordingly, the Company has estimated its
obligation under the agreement based on past history and
internal projections. |
Recent
Accounting Pronouncements
In March 2005, the FASB issued FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligations (FIN 47). This is an
interpretation of SFAS No. 143, Accounting for
Asset Retirement Obligations
47
(SFAS No. 143) which applies to all
entities and addresses the legal obligations with the retirement
of tangible long-lived assets that result from the acquisition,
construction, development or normal operation of a long-lived
asset. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of
fair value can be made. FIN 47 further clarifies that
conditional asset retirement obligation, means with
respect to recording the asset retirement obligation discussed
in SFAS No. 143. The effective date is for fiscal
years ending after December 15, 2005. During the fourth
quarter of fiscal 2006, the Company performed a formal review of
its asset retirement obligations in accordance with FIN 47.
With respect to assets in which the retirement was measurable
the impact on the Companys financial position and results
of operations was immaterial. The fair value of the assets
retirement obligations relating to the Companys Kinston
facility (see Note 19, Contingencies) could not
be reasonable estimated.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48) which is an interpretation of
SFAS No. 109. The pronouncement creates a single model
to address accounting for uncertainty in tax positions.
FIN 48 clarifies the accounting for income taxes, by
prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15,
2006. The Company will adopt FIN 48 as of the first day of
fiscal year 2008 and it does not expect that the adoption of
this interpretation will have a significant impact on its
financial position and results of operations.
Off
Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements
that have, or are reasonably likely to have, a current or future
material effect on the Companys financial condition,
revenues, expenses, results of operations, liquidity, capital
expenditures or capital resources.
Critical
Accounting Policies
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. The SEC has defined a companys most
critical accounting policies as those involving accounting
estimates that require management to make assumptions about
matters that are highly uncertain at the time and where
different reasonable estimates or changes in the accounting
estimate from quarter to quarter could materially impact the
presentation of the financial statements. The following
discussion provides further information about accounting
policies critical to the Company and should be read in
conjunction with Note 1, Significant Accounting
Policies and Financial Statement Information of its
audited historical consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K.
Allowance for Doubtful Accounts. An allowance
for losses is provided for known and potential losses arising
from yarn quality claims and for amounts owed by customers.
Reserves for yarn quality claims are based on historical claim
experience and known pending claims. The collectability of
accounts receivable is based on a combination of factors
including the aging of accounts receivable, historical write-off
experience, present economic conditions such as chapter 11
bankruptcy filings within the industry and the financial health
of specific customers and market sectors. Since losses depend to
a large degree on future economic conditions, and the health of
the textile industry, a significant level of judgment is
required to arrive at the allowance for doubtful accounts.
Accounts are written off when they are no longer deemed to be
collectible. The reserve for bad debts is established based on
certain percentages applied to accounts receivable aged for
certain periods of time and are supplemented by specific
reserves for certain customer accounts where collection is no
longer certain. The Companys exposure to losses as of
June 25, 2006 on accounts receivable was $98.4 million
against which an allowance for losses of $5.1 million was
provided. Establishing reserves for yarn claims and bad debts
requires management judgment and estimates, which may impact the
ending accounts receivable valuation, gross margins (for yarn
claims) and the provision for bad debts.
Inventory Reserves. The Company maintains
reserves for inventories valued utilizing the
first-in,
first-out (FIFO) method and may provide for
additional reserves over and above the LIFO reserve for
inventories valued at
48
LIFO. Such reserves for both FIFO and LIFO valued inventories
can be specific to certain inventory or general based on
judgments about the overall condition of the inventory. Reserves
are established based on percentage markdowns applied to
inventories aged for certain time periods. Specific reserves are
established based on a determination of the obsolescence of the
inventory and whether the inventory value exceeds amounts to be
recovered through expected sales prices, less selling costs;
and, for inventory subject to LIFO (raw materials only), the
amount of existing LIFO reserves. The LIFO reserve has increased
$3.8 million for fiscal year 2006 primarily due to
increases in raw material prices and higher inventory levels.
The balance of the LIFO reserve was $7.6 million as of
June 25, 2006. Estimating sales prices, establishing
markdown percentages and evaluating the condition of the
inventories require judgments and estimates, which may impact
the ending inventory valuation and gross margins.
Impairment of Long-Lived Assets. Long-lived
assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. For assets held and used, an impairment may occur
if projected undiscounted cash flows are not adequate to cover
the carrying value of the assets. In such cases, additional
analysis is conducted to determine the amount of loss to be
recognized. The impairment loss is determined by the difference
between the carrying amount of the asset and the fair value
measured by future discounted cash flows. The analysis requires
estimates of the amount and timing of projected cash flows and,
where applicable, judgments associated with, among other
factors, the appropriate discount rate. Such estimates are
critical in determining whether any impairment charge should be
recorded and the amount of such charge if an impairment loss is
deemed to be necessary. During the third quarter of fiscal year
2004, the Company performed impairment testing on its domestic
polyester texturing segments long-lived assets and
determined that a write down was required. Based on the
historical financial performance of the segment and the
uncertainty of the moderate forecasted cash flows, the Company
estimated the fair value of assets using a market value of
$73.7 million. Management determined that the assets were
impaired because the carrying value was $98.9 million. This
resulted in the segment recording an impairment charge of
$25.2 million. The Company also tested for impairment the
entire domestic polyester segment and domestic nylon segment,
both of which passed the tests. Future events impacting cash
flows for existing assets could render a write down necessary
that previously required no such write down.
For assets held for disposal, an impairment charge is recognized
if the carrying value of the assets exceeds the fair value less
costs to sell. Estimates are required of fair value, disposal
costs and the time period to dispose of the assets. Such
estimates are critical in determining whether any impairment
charge should be recorded and the amount of such charge if an
impairment loss is deemed to be necessary. Actual cash flows
received or paid could differ from those used in estimating the
impairment loss, which would impact the impairment charge
ultimately recognized and the Companys cash flows.
Accruals for Costs Related to Severance of Employees and
Related Health Care Costs. From time to time, the
Company establishes accruals associated with employee severance
or other cost reduction initiatives. Such accruals require that
estimates be made about the future payout of various costs,
including, for example, health care claims. The Company uses
historical claims data and other available information about
expected future health care costs to estimate its projected
liability. Such costs are subject to change due to a number of
factors, including the incidence rate for health care claims,
prevailing health care costs and the nature of the claims
submitted, among others. Consequently, actual expenses could
differ from those expected at the time the provision was
estimated, which may impact the valuation of accrued liabilities
and results of operations. The Companys estimates have
been materially accurate in the past; and accordingly, at this
time management expects to continue to utilize the present
estimation processes.
Valuation Allowance for Deferred Tax
Assets. The Company established a valuation
allowance against its deferred tax assets in accordance with
SFAS No. 109, Accounting for Income Taxes.
The specifically identified deferred tax assets which may not be
recoverable are primarily state income tax credits. The
Companys realization of some of its deferred tax assets is
based on future taxable income within a certain time period and
is therefore uncertain. On a quarterly basis, the Company
reviews its estimates for future taxable income over a period of
years to assess if the need for a valuation allowance exists. To
forecast future taxable income, the Company uses historical
profit before tax amounts which may be adjusted upward or
downward depending on various factors, including perceived
trends, and then applies the expected change in rates to
deferred tax assets and liabilities based on when they reverse
in the future. At June 25, 2006, the Company had a gross
deferred tax liability of approximately
49
$10.8 million relating specifically to depreciation. The
reversal of this deferred tax liability is the primary item
generating future taxable income. Actual future taxable income
may vary significantly from managements projections due to
the many complex judgments and significant estimations involved,
which may result in adjustments to the valuation allowance which
may impact the net deferred tax liability and provision for
income taxes.
Management and the Companys audit committee discussed the
development, selection and disclosure of all of the critical
accounting estimates described above.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
The Company is exposed to market risks associated with changes
in interest rates and currency fluctuation rates, which may
adversely affect its financial position, results of operations
and cash flows. In addition, the Company is also exposed to
other risks in the operation of its business.
Interest Rate Risk: The Company is exposed to
interest rate risk through its borrowing activities, which are
further described in Note 2, Long Term Debt and Other
Liabilities. The majority of the Companys borrowings
are in long-term fixed rate bonds. Therefore, the market rate
risk associated with a 100 basis point change in interest
rates would not be material to the Companys results of
operation at the present time.
Currency Exchange Rate Risk: The Company
conducts its business in various foreign currencies. As a
result, it is subject to the transaction exposure that arises
from foreign exchange rate movements between the dates that
foreign currency transactions are recorded (export sales and
purchases commitments) and the dates they are consummated (cash
receipts and cash disbursements in foreign currencies). The
Company utilizes some natural hedging to mitigate these
transaction exposures. The Company also enters into foreign
currency forward contracts for the purchase and sale of European
and North American currencies to hedge balance sheet and income
statement currency exposures. These contracts are principally
entered into for the purchase of inventory and equipment and the
sale of Company products into export markets. Counter parties
for these instruments are major financial institutions. If the
derivative is a hedge, changes in the fair value of derivatives
are either offset against the change in fair value of the hedged
assets, liabilities or firm commitments through earnings. The
Company does not enter into derivative financial instruments for
trading purposes nor is it a party to any leveraged financial
instruments.
Currency forward contracts are used to hedge exposure for sales
in foreign currencies based on specific sales orders with
customers or for anticipated sales activity for a future time
period. Generally, 60-80% of the sales value of these orders is
covered by forward contracts. Maturity dates of the forward
contracts are intended to match anticipated receivable
collections. The Company marks the outstanding accounts
receivable and forward contracts to market at month end and any
realized and unrealized gains or losses are recorded as other
income and expense. The Company also enters currency forward
contracts for committed or anticipated equipment and inventory
purchases. Generally 50-75% of the asset cost is covered by
forward contracts, although 100% of the asset cost may be
covered by contracts in certain instances. Effective
February 14, 2005, the Company entered into a contract to
sell the European facility in Ireland and received a
$2.8 million non-refundable deposit from the purchaser. In
addition to the deposit, the contract called for a partial
payment of 16.0 million Euros on June 30, 2005 and a
final payment of 2.1 million Euros on September 30,
2005. On February 22, 2005, the Company entered into a
forward exchange contract for 15.0 million Euros. The
Company was required by the financial institution to deposit
$2.8 million in an interest bearing collateral account to
secure the financial institutions maximum exposure on the
hedge contract. This cash deposit has been reclassified as
Restricted cash and is included on the
Companys balance sheet under current assets. On
July 15, 2005, the Company settled the forward exchange
contract for 15.0 million Euros. Forward contracts are
matched with the anticipated date of delivery of the assets and
gains and losses are recorded as a component of the asset cost
for purchase transactions for which the Company is firmly
committed. The latest maturity for all outstanding purchase and
sales foreign currency forward contracts is July 2006 and
October 2006, respectively.
50
The dollar equivalent of these forward currency contracts and
their related fair values are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Foreign currency purchase
contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
526
|
|
|
$
|
168
|
|
|
$
|
3,660
|
|
Fair value
|
|
|
535
|
|
|
|
159
|
|
|
|
3,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (gain) loss
|
|
$
|
(9
|
)
|
|
$
|
9
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
832
|
|
|
$
|
24,414
|
|
|
$
|
18,833
|
|
Fair value
|
|
|
878
|
|
|
|
22,687
|
|
|
|
19,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (gain) loss
|
|
$
|
45
|
|
|
$
|
(1,727
|
)
|
|
$
|
556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair values of the foreign exchange forward contracts at the
respective year-end dates are based on discounted year-end
forward currency rates. The total impact of foreign currency
related items that are reported on the line item Other
(income) expense, net in the Consolidated Statements of
Operations, including transactions that were hedged and those
that were not hedged, was a pre-tax loss of $0.7 million
for the fiscal year ended June 25, 2006, a pre-tax gain of
$1.1 million for the fiscal year ended June 26, 2005,
and a pre-tax loss of $0.5 million for the fiscal year
ended June 27, 2004.
Inflation and Other Risks: The inflation rate
in most countries the Company conducts business has been low in
recent years and the impact on the Companys cost structure
has not been significant. The Company is also exposed to
political risk, including changing laws and regulations
governing international trade such as quotas and tariffs and tax
laws. The degree of impact and the frequency of these events
cannot be predicted.
51
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Unifi, Inc.
We have audited the accompanying consolidated balance sheets of
Unifi, Inc. as of June 25, 2006, and June 26, 2005,
and the related consolidated statements of operations, changes
in shareholders equity and comprehensive income (loss),
and cash flows for each of the three years in the period ended
June 25, 2006. Our audits also include the Valuation and
Qualifying Accounts financial statement schedule in the index at
Item 15(a). These financial statements and schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Unifi, Inc. at June 25, 2006 and
June 26, 2005 and the consolidated results of its
operations and its cash flows for each of the three years in the
period ended June 25, 2006, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Unifi, Inc.s internal control over
financial reporting as of June 25, 2006, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated August 30, 2006, expressed
an unqualified opinion thereon.
Greensboro, North Carolina
August 30, 2006
52
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands,
|
|
|
|
except per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
35,317
|
|
|
$
|
105,621
|
|
Receivables, net
|
|
|
93,236
|
|
|
|
106,437
|
|
Inventories
|
|
|
116,018
|
|
|
|
110,827
|
|
Deferred income taxes
|
|
|
11,739
|
|
|
|
14,578
|
|
Assets held for sale
|
|
|
15,419
|
|
|
|
32,536
|
|
Restricted cash
|
|
|
|
|
|
|
2,766
|
|
Other current assets
|
|
|
9,229
|
|
|
|
15,590
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
280,958
|
|
|
|
388,355
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
3,628
|
|
|
|
3,979
|
|
Buildings and improvements
|
|
|
170,377
|
|
|
|
166,504
|
|
Machinery and equipment
|
|
|
642,192
|
|
|
|
664,228
|
|
Other
|
|
|
100,140
|
|
|
|
120,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
916,337
|
|
|
|
955,459
|
|
Less accumulated depreciation
|
|
|
(676,641
|
)
|
|
|
(675,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
239,696
|
|
|
|
279,732
|
|
Investments in unconsolidated
affiliates
|
|
|
190,217
|
|
|
|
160,675
|
|
Other noncurrent assets
|
|
|
21,766
|
|
|
|
16,613
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
732,637
|
|
|
$
|
845,375
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
68,593
|
|
|
$
|
62,666
|
|
Accrued expenses
|
|
|
23,869
|
|
|
|
45,618
|
|
Deferred gain
|
|
|
323
|
|
|
|
|
|
Income taxes payable
|
|
|
2,303
|
|
|
|
2,292
|
|
Current maturities of long-term
debt and other current liabilities
|
|
|
6,330
|
|
|
|
35,339
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
101,418
|
|
|
|
145,915
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and other
liabilities
|
|
|
202,110
|
|
|
|
259,790
|
|
Deferred gain
|
|
|
295
|
|
|
|
|
|
Deferred income taxes
|
|
|
45,861
|
|
|
|
55,913
|
|
Minority interests
|
|
|
|
|
|
|
182
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.10 par
(500,000 shares authorized, 52,208 and 52,145 shares
outstanding)
|
|
|
5,220
|
|
|
|
5,215
|
|
Capital in excess of par value
|
|
|
929
|
|
|
|
208
|
|
Retained earnings
|
|
|
382,082
|
|
|
|
396,448
|
|
Unearned compensation
|
|
|
|
|
|
|
(128
|
)
|
Accumulated other comprehensive
loss
|
|
|
(5,278
|
)
|
|
|
(18,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
382,953
|
|
|
|
383,575
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
732,637
|
|
|
$
|
845,375
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
53
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands,
|
|
|
|
except per share data)
|
|
|
Summary of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
738,825
|
|
|
$
|
793,796
|
|
|
$
|
666,383
|
|
Cost of sales
|
|
|
696,055
|
|
|
|
762,717
|
|
|
|
625,983
|
|
Selling, general and
administrative expenses
|
|
|
41,534
|
|
|
|
42,211
|
|
|
|
45,963
|
|
Provision for bad debts
|
|
|
1,256
|
|
|
|
13,172
|
|
|
|
2,389
|
|
Interest expense
|
|
|
19,247
|
|
|
|
20,575
|
|
|
|
18,698
|
|
Interest income
|
|
|
(4,489
|
)
|
|
|
(2,152
|
)
|
|
|
(2,152
|
)
|
Other (income) expense, net
|
|
|
(3,118
|
)
|
|
|
(2,300
|
)
|
|
|
(2,590
|
)
|
Equity in (earnings) losses of
unconsolidated affiliates
|
|
|
(825
|
)
|
|
|
(6,938
|
)
|
|
|
6,877
|
|
Minority interest income
|
|
|
|
|
|
|
(530
|
)
|
|
|
(6,430
|
)
|
Restructuring charges (recovery)
|
|
|
(254
|
)
|
|
|
(341
|
)
|
|
|
8,229
|
|
Arbitration costs and expenses
|
|
|
|
|
|
|
|
|
|
|
182
|
|
Alliance plant closure recovery
|
|
|
|
|
|
|
|
|
|
|
(206
|
)
|
Write down of long-lived assets
|
|
|
2,366
|
|
|
|
603
|
|
|
|
25,241
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
13,461
|
|
Loss from early extinguishment of
debt
|
|
|
2,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes and extraordinary item
|
|
|
(15,896
|
)
|
|
|
(33,221
|
)
|
|
|
(69,262
|
)
|
Benefit for income taxes
|
|
|
(1,170
|
)
|
|
|
(13,483
|
)
|
|
|
(25,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before extraordinary item
|
|
|
(14,726
|
)
|
|
|
(19,738
|
)
|
|
|
(44,149
|
)
|
Income (loss) from discontinued
operations, net of tax
|
|
|
360
|
|
|
|
(22,644
|
)
|
|
|
(25,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary item
|
|
|
(14,366
|
)
|
|
|
(42,382
|
)
|
|
|
(69,793
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,366
|
)
|
|
$
|
(41,225
|
)
|
|
$
|
(69,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (losses) per common share
(basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before extraordinary item
|
|
$
|
(.28
|
)
|
|
$
|
(.38
|
)
|
|
$
|
(.85
|
)
|
Income (loss) from discontinued
operations, net of tax
|
|
|
|
|
|
|
(.43
|
)
|
|
|
(.49
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
|
|
|
|
.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(.28
|
)
|
|
$
|
(.79
|
)
|
|
$
|
(1.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
54
CONSOLIDATED
STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Common
|
|
|
Excess of
|
|
|
Retained
|
|
|
Unearned
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
Income (Loss)
|
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Par Value
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
Note 1
|
|
|
|
(Amounts in thousands)
|
|
|
Balance June 29, 2003
|
|
|
53,399
|
|
|
$
|
5,340
|
|
|
$
|
|
|
|
$
|
515,572
|
|
|
$
|
(302
|
)
|
|
$
|
(40,862
|
)
|
|
$
|
479,748
|
|
|
|
|
|
Purchase of stock
|
|
|
(1,304
|
)
|
|
|
(131
|
)
|
|
|
(7
|
)
|
|
|
(8,242
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,380
|
)
|
|
|
|
|
Cancellation of unvested restricted
stock
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock
|
|
|
22
|
|
|
|
2
|
|
|
|
134
|
|
|
|
|
|
|
|
(136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192
|
|
|
|
|
|
|
|
192
|
|
|
|
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
|
|
134
|
|
|
$
|
134
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,793
|
)
|
|
|
|
|
|
|
|
|
|
|
(69,793
|
)
|
|
|
(69,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 27, 2004
|
|
|
52,115
|
|
|
|
5,211
|
|
|
|
127
|
|
|
|
437,519
|
|
|
|
(228
|
)
|
|
|
(40,728
|
)
|
|
|
401,901
|
|
|
$
|
(69,659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of stock
|
|
|
(1
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Options exercised
|
|
|
33
|
|
|
|
4
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
|
|
Cancellation of unvested restricted
stock
|
|
|
(2
|
)
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,580
|
|
|
|
19,580
|
|
|
$
|
19,580
|
|
Liquidation of foreign subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154
|
|
|
|
|
|
|
|
2,980
|
|
|
|
3,134
|
|
|
|
2,980
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,225
|
)
|
|
|
|
|
|
|
|
|
|
|
(41,225
|
)
|
|
|
(41,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 26, 2005
|
|
|
52,145
|
|
|
|
5,215
|
|
|
|
208
|
|
|
|
396,448
|
|
|
|
(128
|
)
|
|
|
(18,168
|
)
|
|
|
383,575
|
|
|
$
|
(18,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification upon adoption of
SFAS 123R
|
|
|
|
|
|
|
(1
|
)
|
|
|
27
|
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
154
|
|
|
|
|
|
Options exercised
|
|
|
63
|
|
|
|
6
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174
|
|
|
|
|
|
Stock option tax benefit
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
394
|
|
|
|
|
|
Cancellation of unvested restricted
stock
|
|
|
|
|
|
|
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
|
|
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,550
|
|
|
|
5,550
|
|
|
$
|
5,550
|
|
Liquidation of foreign subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,340
|
|
|
|
7,340
|
|
|
|
7,340
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,366
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,366
|
)
|
|
|
(14,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 25, 2006
|
|
|
52,208
|
|
|
$
|
5,220
|
|
|
$
|
929
|
|
|
$
|
382,082
|
|
|
$
|
|
|
|
$
|
(5,278
|
)
|
|
$
|
382,953
|
|
|
$
|
(1,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
55
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Cash and cash equivalents at
beginning of year
|
|
$
|
105,621
|
|
|
$
|
65,221
|
|
|
$
|
76,801
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(14,366
|
)
|
|
|
(41,225
|
)
|
|
|
(69,793
|
)
|
Adjustments to reconcile net loss
to net cash provided by continuing operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary gain
|
|
|
|
|
|
|
(1,157
|
)
|
|
|
|
|
(Income) loss from discontinued
operations
|
|
|
(360
|
)
|
|
|
22,644
|
|
|
|
25,644
|
|
Net (income) loss of unconsolidated
equity affiliates, net of distributions
|
|
|
1,945
|
|
|
|
(2,302
|
)
|
|
|
8,695
|
|
Depreciation
|
|
|
48,669
|
|
|
|
51,542
|
|
|
|
56,226
|
|
Amortization
|
|
|
1,276
|
|
|
|
1,350
|
|
|
|
1,377
|
|
Net (gain) loss on asset sales
|
|
|
(1,755
|
)
|
|
|
(1,770
|
)
|
|
|
(3,227
|
)
|
Non-cash portion of loss on
extinguishment of debt
|
|
|
1,793
|
|
|
|
|
|
|
|
|
|
Non-cash portion of restructuring
charges (recovery)
|
|
|
(254
|
)
|
|
|
(341
|
)
|
|
|
7,155
|
|
Non-cash write down of long-lived
assets
|
|
|
2,366
|
|
|
|
603
|
|
|
|
25,241
|
|
Non-cash effect of goodwill
impairment
|
|
|
|
|
|
|
|
|
|
|
13,461
|
|
Deferred income taxes
|
|
|
(7,776
|
)
|
|
|
(19,057
|
)
|
|
|
(28,201
|
)
|
Provision for bad debts
|
|
|
1,256
|
|
|
|
13,172
|
|
|
|
2,389
|
|
Change in cash surrender value of
life insurance
|
|
|
1,643
|
|
|
|
(1,077
|
)
|
|
|
3,107
|
|
Minority interest
|
|
|
|
|
|
|
(551
|
)
|
|
|
(6,148
|
)
|
Other
|
|
|
148
|
|
|
|
(461
|
)
|
|
|
(731
|
)
|
Changes in assets and liabilities,
excluding effects of acquisitions and foreign currency
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
10,592
|
|
|
|
(1,504
|
)
|
|
|
(8,954
|
)
|
Inventories
|
|
|
(5,844
|
)
|
|
|
20,574
|
|
|
|
(813
|
)
|
Other current assets
|
|
|
(1,278
|
)
|
|
|
(901
|
)
|
|
|
(668
|
)
|
Accounts payable and accrued
expenses
|
|
|
(8,504
|
)
|
|
|
(10,933
|
)
|
|
|
(13,539
|
)
|
Income taxes
|
|
|
542
|
|
|
|
179
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing
operating activities
|
|
|
30,093
|
|
|
|
28,785
|
|
|
|
11,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(11,988
|
)
|
|
|
(9,422
|
)
|
|
|
(11,124
|
)
|
Acquisition
|
|
|
(30,634
|
)
|
|
|
(1,358
|
)
|
|
|
(83
|
)
|
Return of capital from equity
affiliates
|
|
|
|
|
|
|
6,138
|
|
|
|
1,665
|
|
Investment of foreign restricted
assets
|
|
|
171
|
|
|
|
388
|
|
|
|
(323
|
)
|
Collection of notes receivable
|
|
|
404
|
|
|
|
520
|
|
|
|
581
|
|
Increase in notes receivable
|
|
|
|
|
|
|
(139
|
)
|
|
|
(711
|
)
|
Proceeds from sale of capital assets
|
|
|
10,093
|
|
|
|
2,290
|
|
|
|
4,242
|
|
Restricted cash
|
|
|
2,766
|
|
|
|
(2,766
|
)
|
|
|
|
|
Other
|
|
|
(42
|
)
|
|
|
(342
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(29,230
|
)
|
|
|
(4,691
|
)
|
|
|
(5,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of long term debt
|
|
|
(273,134
|
)
|
|
|
|
|
|
|
|
|
Borrowing of long term debt
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
(8,041
|
)
|
|
|
|
|
|
|
|
|
Issuance of Company stock
|
|
|
176
|
|
|
|
104
|
|
|
|
|
|
Purchase and retirement of Company
stock
|
|
|
|
|
|
|
(2
|
)
|
|
|
(8,390
|
)
|
Other
|
|
|
825
|
|
|
|
(20
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(90,174
|
)
|
|
|
82
|
|
|
|
(8,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows of discontinued
operations (Revised See Note 18)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flow
|
|
|
(3,342
|
)
|
|
|
(6,273
|
)
|
|
|
(8,358
|
)
|
Investing cash flow
|
|
|
22,028
|
|
|
|
13,902
|
|
|
|
(427
|
)
|
Financing cash flow
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
discontinued operations
|
|
|
18,686
|
|
|
|
7,629
|
|
|
|
(8,775
|
)
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
321
|
|
|
|
8,595
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
(70,304
|
)
|
|
|
40,400
|
|
|
|
(11,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
35,317
|
|
|
$
|
105,621
|
|
|
$
|
65,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
56
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Significant
Accounting Policies and Financial Statement
Information
|
Principles of Consolidation. The Consolidated
Financial Statements include the accounts of the Company and all
majority-owned subsidiaries. The portion of the income
applicable to non-controlling interests in the majority-owned
operations is reflected as minority interests in the
Consolidated Statements of Operations. The accounts of all
foreign subsidiaries have been included on the basis of fiscal
periods ended three months or less prior to the dates of the
Consolidated Balance Sheets. All significant intercompany
accounts and transactions have been eliminated. Investments in
20% to 50% owned companies and partnerships where the Company is
able to exercise significant influence, but not control, are
accounted for by the equity method and, accordingly,
consolidated income includes the Companys share of the
investees income or losses.
Fiscal Year. The Companys fiscal year is
the 52 or 53 weeks ending in the last Sunday in June.
Fiscal years 2006, 2005 and 2004 were comprised of 52 weeks.
Reclassification. The Company has reclassified
the presentation of certain prior year information to conform
with the current year presentation.
Restatements. In July 2004, the Company
announced the closing of its European manufacturing operations
and associated sales offices. Unifi ceased operating its dyed
facility in Manchester, England, in June 2004 and ceased its
manufacturing operations in Ireland in October 2004. The Company
ceased all other European operations by June 2005 and sold the
real property, plant and equipment of its European division in
fiscal years 2005 and 2006. In July 2005, the Company announced
that it had decided to exit the sourcing business and, as of the
end of the third quarter of fiscal year 2006, it had
substantially liquidated the business. Accordingly, the
consolidated financial statements have been restated to present
these results as discontinued operations for all periods
presented.
Revenue Recognition. Revenues from sales are
recognized at the time shipments are made and include amounts
billed to customers for shipping and handling. Costs associated
with shipping and handling are included in cost of sales in the
Consolidated Statements of Operations. Freight paid by customers
is included in net sales in the Consolidated Statements of
Operations.
Foreign Currency Translation. Assets and
liabilities of foreign subsidiaries are translated at year-end
rates of exchange and revenues and expenses are translated at
the average rates of exchange for the year. Gains and losses
resulting from translation are accumulated in a separate
component of shareholders equity and included in
comprehensive income (loss). Gains and losses resulting from
foreign currency transactions (transactions denominated in a
currency other than the subsidiarys functional currency)
are included in other income or expense in the Consolidated
Statements of Operations.
Cash and Cash Equivalents. Cash equivalents
are defined as short-term investments having an original
maturity of three months or less.
Restricted Cash. Cash deposits held for a
specific purpose or held as security for contractual obligations
are classified as restricted cash.
Receivables. The Company extends unsecured
credit to its customers as part of its normal business
practices. An allowance for losses is provided for known and
potential losses arising from yarn quality claims and for
amounts owed by customers. Reserves for yarn quality claims are
based on historical experience and known pending claims. The
ability to collect accounts receivable is based on a combination
of factors including the aging of accounts receivable, write-off
experience and the financial condition of specific customers.
Accounts are written off when they are no longer deemed to be
collectible. General reserves are established based on the
percentages applied to accounts receivables aged for certain
periods of time and are supplemented by specific reserves for
certain customer accounts where collection is no longer certain.
Establishing reserves for yarn claims and bad debts requires
management judgment and estimates, which may impact the ending
accounts receivable valuation, gross margins (for yarn claims)
and the provision for bad debts. The reserve for such losses was
$5.1 million at June 25, 2006 and $14.0 million
at June 26, 2005.
57
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories. The Company utilizes the
last-in,
first-out (LIFO) method for valuing certain
inventories representing 38.2% and 40.2% of all inventories at
June 25, 2006, and June 26, 2005, respectively, and
the
first-in,
first-out (FIFO) method for all other inventories.
Inventories are valued at lower of cost or market including a
provision for slow moving and obsolete items. Market is
considered net realizable value. Inventories valued at current
or replacement cost would have been approximately
$7.3 million and $3.5 million in excess of the LIFO
valuation at June 25, 2006, and June 26, 2005,
respectively. The Company did not have LIFO liquidations during
fiscal year 2006 but experienced LIFO liquidations of
$0.3 million pre-tax loss during fiscal year 2005. The
Company maintains reserves for inventories valued utilizing the
FIFO method and may provide for additional reserves over and
above the LIFO reserve for inventories valued at LIFO. Such
reserves for both FIFO and LIFO valued inventories can be
specific to certain inventory or general based on judgments
about the overall condition of the inventory. General reserves
are established based on percentage markdowns applied to
inventories aged for certain time periods. Specific reserves are
established based on a determination of the obsolescence of the
inventory and whether the inventory value exceeds amounts to be
recovered through expected sales prices, less selling costs;
and, for inventory subject to LIFO, the amount of existing LIFO
reserves. Estimating sales prices, establishing markdown
percentages and evaluating the condition of the inventories
require judgments and estimates, which may impact the ending
inventory valuation and gross margins. The total inventory
reserves on the Companys books, including LIFO reserves,
at June 25, 2006 and June 26, 2005 were
$10.7 million and $7.9 million, respectively. The
following table reflects the composition of the Companys
inventory as of June 25, 2006 and June 26, 2005:
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Raw materials and supplies
|
|
$
|
48,594
|
|
|
$
|
47,441
|
|
Work in process
|
|
|
10,144
|
|
|
|
8,497
|
|
Finished goods
|
|
|
57,280
|
|
|
|
54,889
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
116,018
|
|
|
$
|
110,827
|
|
|
|
|
|
|
|
|
|
|
Other Current Assets. Other current assets
consist of government tax deposits ($4.3 million and
$8.9 million), prepaid insurance ($2.5 million and
$2.8 million), unrealized gains on hedging contracts
($0.0 million and $1.6 million), prepaid VAT taxes
($1.4 million and $1.0 million), deposits of
($0.7 million and $0.7 million) and other assets
($0.3 million and $0.6 million) as of June 25,
2006 and June 26, 2005, respectively.
Property, Plant and Equipment. Property, plant
and equipment are stated at cost. Depreciation is computed for
asset groups primarily utilizing the straight-line method for
financial reporting and accelerated methods for tax reporting.
For financial reporting purposes, asset lives have been assigned
to asset categories over periods ranging between three and forty
years. Amortization of assets recorded under capital leases is
included with depreciation expense.
Goodwill and Other Intangible Assets. The
Company accounts for goodwill and other intangibles under the
provisions of Statements of Financial Accounting Standard
No. 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 requires that these
assets be reviewed for impairment annually, unless specific
circumstances indicate that a more timely review is warranted.
This impairment test involves estimates and judgments that are
critical in determining whether any impairment charge should be
recorded and the amount of such charge if an impairment loss is
deemed to be necessary. In addition, future events impacting
cash flows for existing assets could render a writedown
necessary that previously required no such writedown.
Other Noncurrent Assets. Other noncurrent
assets at June 25, 2006, and June 26, 2005, consist
primarily of the cash surrender value of key executive life
insurance policies ($4.6 million and $6.1 million),
unamortized bond issue costs and debt origination fees
($7.9 million and $2.5 million), restricted cash
investments in Brazil ($6.2 million and $4.1 million),
strategic investment assets ($1.0 million and
$1.4 million), other miscellaneous assets
($1.8 million and $0.7 million), and various notes
receivable due from both affiliated and non-affiliated parties
($0.3 million and $1.8 million), respectively. On
April 28, 2006 the Company commenced a tender offer to
purchase the outstanding $250 million of 2008 senior,
unsecured debt securities (the 2008 notes). The
offer
58
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expired on May 25, 2006. On May 26, 2006, the Company
issued $190 million in senior, secured notes (the
2014 notes) that expire in 2014, incurring
$6.8 million in related issuance costs. As a result,
$1.3 million of the remaining 2008 note issue costs were
expensed. The Company simultaneously on May 26, 2006
amended its Revolving Credit Facility (amended revolving
credit facility) to extend its maturity from 2006 to 2011
and increase its borrowing capacity. The Company incurred
$1.2 million in origination fees related to the new
facility. The debt origination fees relating to the old facility
of $0.2 million were expensed in the fourth quarter fiscal
2006. All debt related origination costs have been amortized on
the straight-line method over the life of the corresponding
debt, which approximates the effective interest method.
Accumulated amortization at June 25, 2006 for unamortized
debt origination costs attributable to the 2014 notes and 2011
amended credit facility was $0.1 million. Accumulated
amortization at June 26, 2005 attributable to the 2008
notes and 2006 Revolving Credit Facility was $7.3 million.
Long-Lived Assets. Long-lived assets are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. For assets held and used, impairment may occur if
projected undiscounted cash flows are not adequate to cover the
carrying value of the assets. In such cases, additional analysis
is conducted to determine the amount of loss to be recognized.
The impairment loss is determined by the difference between the
carrying amount of the asset and the fair value measured by
future discounted cash flows. The analysis requires estimates of
the amount and timing of projected cash flows and, where
applicable, judgments associated with, among other factors, the
appropriate discount rate. Such estimates are critical in
determining whether any impairment charge should be recorded and
the amount of such charge if an impairment loss is deemed to be
necessary. In addition, future events impacting cash flows for
existing assets could render a writedown necessary that
previously required no such writedown.
For assets held for disposal, an impairment charge is recognized
if the carrying value of the assets exceeds the fair value less
costs to sell. Estimates are required of fair value, disposal
costs and the time period to dispose of the assets. Such
estimates are critical in determining whether any impairment
charge should be recorded and the amount of such charge if an
impairment loss is deemed to be necessary. Actual cash flows
received or paid could differ from those used in estimating the
impairment loss, which would impact the impairment charge
ultimately recognized and the Companys cash flows.
Accrued Expenses. The following table reflects
the composition of the Companys accrued expenses as of
June 25, 2006 and June 26, 2005:
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Payroll and fringe benefits
|
|
$
|
11,112
|
|
|
$
|
14,309
|
|
Severance
|
|
|
576
|
|
|
|
5,252
|
|
Interest
|
|
|
1,984
|
|
|
|
7,325
|
|
Pension
|
|
|
|
|
|
|
6,141
|
|
Other
|
|
|
10,197
|
|
|
|
12,591
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,869
|
|
|
$
|
45,618
|
|
|
|
|
|
|
|
|
|
|
Income Taxes. The Company and its domestic
subsidiaries file a consolidated federal income tax return.
Income tax expense is computed on the basis of transactions
entering into pre-tax operating results. Deferred income taxes
have been provided for the tax effect of temporary differences
between financial statement carrying amounts and the tax basis
of existing assets and liabilities. Otherwise, income taxes have
not been provided for the undistributed earnings of certain
foreign subsidiaries as such earnings are deemed to be
permanently invested.
59
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Losses Per Share. The following table details
the computation of basic and diluted losses per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before discontinued operations
|
|
$
|
(14,726
|
)
|
|
$
|
(19,738
|
)
|
|
$
|
(44,149
|
)
|
Income (loss) from discontinued
operations, net of tax
|
|
|
360
|
|
|
|
(22,644
|
)
|
|
|
(25,644
|
)
|
Extraordinary gain, net of taxes
of $0
|
|
|
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,366
|
)
|
|
$
|
(41,225
|
)
|
|
$
|
(69,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic losses per
share weighted average shares
|
|
|
52,155
|
|
|
|
52,106
|
|
|
|
52,249
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted potential common shares
denominator for diluted losses per share adjusted
weighted average shares and assumed conversions
|
|
|
52,155
|
|
|
|
52,106
|
|
|
|
52,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal years 2006, 2005, and 2004, options and unvested
restricted stock awards had the potential effect of diluting
basic earnings per share, and if the Company had net earnings in
these years, diluted weighted average shares would have been
higher than basic weighted average shares by
232,986 shares, 199,207 shares, and 1,507 shares,
respectively.
Stock-Based Compensation. With the adoption of
SFAS 123, the Company elected for fiscal years 2005 and
2004 to continue to measure compensation expense for its
stock-based employee compensation plans using the intrinsic
value method prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees. Had the
fair value-based method under SFAS 148 been applied,
compensation expense would have been recorded for the options
outstanding in fiscal years 2005 and 2004 based on their
respective vesting schedules.
Net loss in fiscal years 2005 and 2004 on a pro forma basis
assuming SFAS 123 had been applied would have been as
follows:
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands, except per share amounts)
|
|
|
Net loss as reported
|
|
$
|
(41,225
|
)
|
|
$
|
(69,793
|
)
|
Adjustment: Impact of stock
options, net of tax
|
|
|
(3,321
|
)
|
|
|
(1,656
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted net loss
|
|
$
|
(44,546
|
)
|
|
$
|
(71,449
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(.79
|
)
|
|
$
|
(1.34
|
)
|
Adjusted for stock option expense
|
|
|
(.85
|
)
|
|
|
(1.37
|
)
|
60
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock options were granted during fiscal years 2006, 2005, and
2004. The fair value and related compensation expense of fiscal
years 2006, 2005, and 2004 options were calculated as of the
issuance date using the Black-Scholes model with the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Granted
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Expected term (years)
|
|
|
6.1
|
|
|
|
7.0
|
|
|
|
7.0
|
|
Interest rate
|
|
|
4.9
|
%
|
|
|
4.4
|
%
|
|
|
2.5
|
%
|
Volatility
|
|
|
57.2
|
%
|
|
|
57.0
|
%
|
|
|
51.0
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 16, 2004, the Financial Accounting Standards
Board (FASB) finalized Statement of Financial
Accounting Standards (SFAS) No. 123(R)
Shared-Based Payment
(SFAS No. 123R) which, after the
Securities and Exchange Commission (SEC) amended the
compliance dates on April 15, 2005, was effective for the
Companys fiscal year beginning June 27, 2005. The new
standard required the Company to record compensation expense for
stock options using a fair value method. On March 29, 2005,
the SEC issued Staff Accounting Bulletin No. 107
(SAB No. 107), which provides the
Staffs views regarding interactions between
SFAS No. 123R and certain SEC rules and regulations
and provides interpretation of the valuation of share-based
payments for public companies.
Effective June 27, 2005, the Company adopted SFAS 123R
and elected the Modified Prospective Transition
Method whereby compensation cost is recognized for share-based
payments based on the grant date fair value from the beginning
of the fiscal period in which the recognition provisions are
first applied (see Note 4, Common Stock, Stock Option
Plan and Restricted Stock Plan).
Comprehensive Income. Comprehensive income
includes net income and other changes in net assets of a
business during a period from non-owner sources, which are not
included in net income. Such non-owner changes may include, for
example,
available-for-sale
securities and foreign currency translation adjustments. Other
than net income, foreign currency translation adjustments
presently represent the only component of comprehensive income
for the Company. The Company does not provide income taxes on
the impact of currency translations as earnings from foreign
subsidiaries are deemed to be permanently invested.
Recent Accounting Pronouncements. In March
2005, the FASB issued FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligations (FIN 47). This is an
interpretation of SFAS No. 143, Accounting for
Asset Retirement Obligations
(SFAS No. 143) which applies to all
entities and addresses accounting and reporting for legal
obligations associated with the retirement of tangible
long-lived assets that result from the acquisition,
construction, development or normal operation of a long-lived
asset. The SFAS requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can
be made. FIN 47 further clarifies what conditional
asset retirement obligation means with respect to
recording the asset retirement obligation discussed in
SFAS No. 143. The effective date is for fiscal years
ending after December 15, 2005. During fiscal year 2006,
the Company performed a formal review of its asset retirement
obligations in accordance with FIN 47. With respect to
assets for which the retirement obligation was measurable, the
impact on the Companys financial position and results of
operations was immaterial.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48) which is an interpretation of
SFAS No. 109. The pronouncement creates a single model
to address accounting for uncertainty in tax positions.
FIN 48 clarifies the accounting for income taxes, by
prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15,
2006. The Company will adopt FIN 48 as of the first day of
fiscal year 2008 and it does not expect that the adoption of
this interpretation will have a significant impact on its
financial position and results of operations.
61
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Use of Estimates. The preparation of financial
statements in conformity with U.S. Generally Accepted
Accounting Principles requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from those estimates.
|
|
2.
|
Long-Term
Debt and Other Liabilities
|
A summary of long-term debt and other liabilities follows:
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Senior secured notes
due 2014
|
|
$
|
190,000
|
|
|
$
|
|
|
Senior unsecured
notes due 2008
|
|
|
1,273
|
|
|
|
249,473
|
|
Note payable
|
|
|
|
|
|
|
24,407
|
|
Brazilian government loans
|
|
|
10,499
|
|
|
|
12,912
|
|
Other obligations
|
|
|
6,668
|
|
|
|
8,337
|
|
|
|
|
|
|
|
|
|
|
Total debt and other obligations
|
|
|
208,440
|
|
|
|
295,129
|
|
Current maturities
|
|
|
(6,330
|
)
|
|
|
(35,339
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt and other
liabilities
|
|
$
|
202,110
|
|
|
$
|
259,790
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
On February 5, 1998, the Company issued $250 million
of senior, unsecured debt securities which bore a coupon rate of
6.5% and were scheduled to mature in February 2008. On
April 28, 2006, the Company commenced a tender offer for
all of its outstanding 2008 notes. As of June 25, 2006
$1.3 million in aggregate principal amount of 2008 notes
had not been tendered and remain outstanding in accordance with
their amended terms. As a result of the tender offer, the
Company incurred $1.1 million in related fees and wrote off
the remaining $1.3 million of unamortized issuance costs
and $0.3 million of unamortized bond discounts as expense.
The estimated fair value of the 2008 notes, based on quoted
market prices as of June 25, 2006, and June 26, 2005,
was approximately $1.3 million and $210.0 million,
respectively.
On May 26, 2006 the Company issued $190 million of
11.5% senior secured notes due May 15, 2014. Interest
is payable on the notes on May 15 and November 15 of each year,
beginning on November 15, 2006. The 2014 notes and
guarantees are secured by first-priority liens, subject to
permitted liens, on substantially all of the Companys and
the Companys subsidiary guarantors assets (other
than the assets securing the Companys obligations under
the Companys amended revolving credit facility on a
first-priority basis, which consist primarily of accounts
receivable and inventory), including, but not limited to,
property, plant and equipment, the capital stock of the
Companys domestic subsidiaries and certain of the
Companys joint ventures and up to 65% of the voting stock
of the Companys first-tier foreign subsidiaries, whether
now owned or hereafter acquired, except for certain excluded
assets. The 2014 notes are unconditionally guaranteed on a
senior, secured basis by each of the Companys existing and
future restricted domestic subsidiaries. The 2014 notes and
guarantees are secured by second-priority liens, subject to
permitted liens, on the Company and its subsidiary
guarantors assets that will secure the notes and
guarantees on a first-priority basis. The Company may redeem
some or all of the 2014 notes on or after May 15, 2010. In
addition, prior to May 15, 2009, the Company may redeem up
to 35% of the principal amount of the 2014 notes with the
proceeds of certain equity offerings. In connection with the
issuance, the Company incurred $6.8 million in professional
fees and other expenses which will be amortized to expense over
the life of the 2014 notes. The estimated fair value of the 2014
notes, based on quoted market prices, at June 25, 2006 was
approximately $182.4 million.
Concurrently with the closing of this offering, the Company
amended its senior secured asset-based revolving credit facility
to provide a $100 million revolving borrowing base (with an
option to increase borrowing capacity up to $150 million),
to extend its maturity to 2011, and revise some of its other
terms and covenants. The amended
62
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
revolving credit facility is secured by first-priority liens on
the Companys and its subsidiary guarantors
inventory, accounts receivable, general intangibles (other than
uncertificated capital stock of subsidiaries and other persons),
investment property (other than capital stock of subsidiaries
and other persons), chattel paper, documents, instruments,
supporting obligations, letter of credit rights, deposit
accounts and other related personal property and all proceeds
relating to any of the above, and by second-priority liens,
subject to permitted liens, on the Companys and its
subsidiary guarantors assets securing the notes and
guarantees on a first-priority basis, in each case other than
certain excluded assets. The Companys ability to borrow
under the Companys amended revolving credit facility is
limited to a borrowing base equal to specified percentages of
eligible accounts receivable and inventory and is subject to
other conditions and limitations.
Borrowings under the amended revolving credit facility bear
interest at rates of LIBOR plus 1.50% to 2.25%
and/or prime
plus 0.00% to 0.50%. The interest rate matrix is based on the
Companys excess availability under the amended revolving
credit facility. The amended revolving credit facility also
includes a 0.25% LIBOR margin pricing reduction if the
Companys fixed charge coverage ratio is greater than 1.5
to 1.0. The unused line fee under the amended revolving credit
facility is 0.25% to 0.35% of the borrowing base. In connection
with the refinancing, the Company incurred fees and expenses
aggregating $1.2 million, which are being amortized over
the term of the amended revolving credit facility. As of
June 25, 2006, the Company had no outstanding borrowings
and availability of $94.2 million under the terms of the
amended credit facility.
The amended credit facility replaces the December 7, 2001
$100 million revolving bank credit facility (the
Credit Agreement), as amended, which would have
terminated on December 7, 2006. The Credit Agreement was
secured by substantially all U.S. assets excluding
manufacturing facilities and manufacturing equipment. Borrowing
availability was based on eligible domestic accounts receivable
and inventory. Borrowings under the Credit Agreement bore
interest at rates selected periodically by the Company of LIBOR
plus 1.75% to 3.00%
and/or prime
plus 0.25% to 1.50%. The interest rate matrix was based on the
Companys leverage ratio of funded debt to EBITDA, as
defined by the Credit Agreement. Under the Credit Agreement, the
Company paid unused line fees ranging from 0.25% to
0.50% per annum on the unused portion of the commitment
which is included in interest expense. In connection with the
refinancing, the Company incurred fees and expenses aggregating
$2.0 million, which were being amortized over the term of
the Credit Agreement with the balance of $0.2 million
expensed upon the May 26, 2006 refinancing.
The amended revolving credit facility contains affirmative and
negative customary covenants for asset based loans that restrict
future borrowings and capital spending. The covenants under the
amended revolving credit facility are more restrictive than
those in the indenture. Such covenants include, without
limitation, restrictions and limitations on (i) sales of
assets, consolidation, merger, dissolution and the issuance of
our capital stock, each subsidiary guarantor and any domestic
subsidiary thereof, (ii) permitted encumbrances on our
property, each subsidiary guarantor and any domestic subsidiary
thereof, (iii) the incurrence of indebtedness by the
Company, any subsidiary guarantor or any domestic subsidiary
thereof, (iv) the making of loans or investments by the
Company, any subsidiary guarantor or any domestic subsidiary
thereof, (v) the declaration of dividends and redemptions
by the Company or any subsidiary guarantor and
(vi) transactions with affiliates by the Company or any
subsidiary guarantor.
Under the amended revolving credit facility, if borrowing
capacity is less than $25 million at any time during the
quarter, covenants will include a required minimum fixed charge
coverage ratio of 1.1 to 1.0. In addition, the maximum capital
expenditures are limited to $30 million per fiscal year
(subject to pro forma availability greater than
$25 million) with a 75% one-year unused carry forward. The
amended revolving credit facility permits the Company to make
distributions, subject to standard criteria, as long as pro
forma excess availability is greater than $25 million both
before and after giving effect to such distributions, subject to
certain exceptions. Under the amended revolving credit facility,
acquisitions by the Company are subject to pro forma covenant
compliance. In addition, the amended revolving credit facility
receivables are subject to cash dominion if excess availability
is below $25 million.
63
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On September 30, 2004, the Company completed its
acquisition of the polyester filament manufacturing assets
located in Kinston, North Carolina from INVISTA S.a.r.l.
(INVISTA), a subsidiary of Koch Industries, Inc.
(Koch). As part of the acquisition of the Kinston
facility from INVISTA and upon finalizing the quantities and
value of the acquired inventory, the Company entered into a
$24.4 million five-year Loan Agreement. The note, which
called for interest only payments for the first two years, bore
interest at 10% per annum. The note was secured by all of
the business assets held by Unifi Kinston, LLC. On July 25,
2005 the Company paid off the $24.4 million note payable
and the related accrued interest.
Unifi do Brasil, receives loans from the government of the State
of Minas Gerais to finance 70% of the value added taxes due by
Unifi do Brasil to the State of Minas Gerais. These loans were
granted as part of a 24 month tax incentive to build a
manufacturing facility in the State of Minas Gerais. The loans
have a 2.5% origination fee and bear an effective interest rate
equal to 50% of the Brazilian inflation rate, which currently is
significantly lower than the Brazilian prime interest rate. The
loans are collateralized by a performance bond letter issued by
a Brazilian bank, which secures the performance by Unifi do
Brasil of its obligations under the loans. In return for this
performance bond letter, Unifi do Brasil makes certain cash
deposits with the Brazilian bank. The deposits made by Unifi do
Brasil earn interest at a rate equal to approximately 100% of
the Brazilian prime interest rate. These tax incentives will end
in September 2008.
The following summarizes the maturities of the Companys
long-term debt on a fiscal year basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Debt Maturities
|
Description of Commitment
|
|
Total
|
|
2007
|
|
2008
|
|
2009-2011
|
|
Thereafter
|
|
|
(Amounts in thousands)
|
|
Long-term debt
|
|
$
|
201,772
|
|
|
$
|
4,335
|
|
|
$
|
7,437
|
|
|
$
|
|
|
|
$
|
190,000
|
|
Other
Obligations
On May 20, 1997, the Company entered into a sale-leaseback
agreement with a financial institution whereby land, buildings
and associated real and personal property improvements of
certain manufacturing facilities were sold to the financial
institution and will be leased by the Company over a
sixteen-year period. This transaction has been recorded as a
direct financing arrangement. As of June 25, 2006 the
balance of the note was $2.3 million and the net book value
of the related assets was $6.6 million. Payments for the
remaining balance of the sale-leaseback agreement are due
semi-annually and are in varying amounts, in accordance with the
agreement. Average annual principal payments over the next six
years are approximately $0.3 million. The interest rate
implicit in the agreement is 7.84%.
Other obligations also includes operating lease accruals
associated with the Altamahaw, North Carolina plant closure in
the amount of $2.7 million and $1.7 million of
liquidation accruals associated with the closure of a dye
operation in England in June 2004.
Income from continuing operations before income taxes is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Income (loss) from continuing
operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(15,256
|
)
|
|
$
|
(40,838
|
)
|
|
$
|
(80,399
|
)
|
Foreign
|
|
|
(640
|
)
|
|
|
7,617
|
|
|
|
11,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(15,896
|
)
|
|
$
|
(33,221
|
)
|
|
$
|
(69,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for (benefit from) income taxes applicable to
continuing operations for fiscal years 2006, 2005, and 2004
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Currently payable (recoverable):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(29
|
)
|
|
$
|
2,729
|
|
|
$
|
669
|
|
Repatriation of foreign earnings
|
|
|
2,125
|
|
|
|
|
|
|
|
|
|
State
|
|
|
21
|
|
|
|
203
|
|
|
|
(675
|
)
|
Foreign
|
|
|
2,221
|
|
|
|
2,073
|
|
|
|
2,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
4,338
|
|
|
|
5,005
|
|
|
|
2,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(4,956
|
)
|
|
|
(18,096
|
)
|
|
|
(28,637
|
)
|
Repatriation of foreign earnings
|
|
|
(1,122
|
)
|
|
|
1,122
|
|
|
|
|
|
State
|
|
|
290
|
|
|
|
(908
|
)
|
|
|
433
|
|
Foreign
|
|
|
280
|
|
|
|
(606
|
)
|
|
|
363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(5,508
|
)
|
|
|
(18,488
|
)
|
|
|
(27,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefits
|
|
$
|
(1,170
|
)
|
|
$
|
(13,483
|
)
|
|
$
|
(25,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefits were 7.4%, 40.6%, and 36.3% of pre-tax
losses in fiscal 2006, 2005, and 2004, respectively. A
reconciliation of the provision for income tax benefits with the
amounts obtained by applying the federal statutory tax rate is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Federal statutory tax rate
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
State income taxes net of federal
tax benefit
|
|
|
(10.4
|
)
|
|
|
(4.2
|
)
|
|
|
(4.4
|
)
|
Foreign taxes less than domestic
rate
|
|
|
17.3
|
|
|
|
(0.7
|
)
|
|
|
(1.1
|
)
|
Foreign tax adjustment
|
|
|
|
|
|
|
(3.0
|
)
|
|
|
|
|
Repatriation of foreign earnings
|
|
|
6.3
|
|
|
|
3.4
|
|
|
|
|
|
Change in valuation allowance
|
|
|
11.9
|
|
|
|
2.5
|
|
|
|
5.7
|
|
Change in tax status of subsidiary
|
|
|
|
|
|
|
(3.9
|
)
|
|
|
|
|
Nondeductible expenses and other
|
|
|
2.5
|
|
|
|
0.3
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(7.4
|
)%
|
|
|
(40.6
|
)%
|
|
|
(36.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal year 2006, the Company repatriated approximately
$31.0 million of dividends from foreign subsidiaries which
qualified for the temporary dividends-received-deduction
available under the American Jobs Creation Act. The associated
net tax cost of approximately $1.1 million was not fully
provided for in fiscal year 2005 due to managements
decision during fiscal year 2006 to increase the original
repatriation plan from $15.0 million to $40.0 million.
During fiscal year 2005, the Company determined that it had not
properly recorded deferred tax assets of a foreign subsidiary
that should have been previously recognized. The Company
recorded a deferred tax asset of $1.2 million in the fourth
quarter of fiscal year 2005. The Company evaluated the effect of
the adjustment and determined that the differences were not
material for any of the periods presented in the Consolidated
Financial Statements.
65
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The deferred income taxes reflect the net tax effects of
temporary differences between the basis of assets and
liabilities for financial reporting purposes and their basis for
income tax purposes. Significant components of the
Companys deferred tax liabilities and assets as of
June 25, 2006 and June 26, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
50,044
|
|
|
$
|
60,859
|
|
Investments in equity affiliates
|
|
|
11,251
|
|
|
|
14,821
|
|
Unremitted foreign earnings
|
|
|
|
|
|
|
1,122
|
|
Other
|
|
|
42
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
61,337
|
|
|
|
76,804
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
State tax credits
|
|
|
10,597
|
|
|
|
13,085
|
|
Accrued liabilities and valuation
reserves
|
|
|
11,783
|
|
|
|
15,748
|
|
Net operating loss carryforwards
|
|
|
7,799
|
|
|
|
10,529
|
|
Intangible assets
|
|
|
4,278
|
|
|
|
4,914
|
|
Charitable contributions
|
|
|
876
|
|
|
|
1,022
|
|
Other items
|
|
|
1,114
|
|
|
|
1,101
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
36,447
|
|
|
|
46,399
|
|
Valuation allowance
|
|
|
(9,232
|
)
|
|
|
(10,930
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
27,215
|
|
|
|
35,469
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
34,122
|
|
|
$
|
41,335
|
|
|
|
|
|
|
|
|
|
|
As of June 25, 2006, the Company has available for income
tax purposes approximately $21.0 million in federal net
operating loss carryforwards that may be used to offset future
taxable income. The carryforwards expire as set forth in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2023
|
|
2024
|
|
2025
|
|
|
(Amounts in thousands)
|
|
Expiration amount
|
|
$
|
1,373
|
|
|
$
|
11,989
|
|
|
$
|
7,618
|
|
The Company also has available for state income tax purposes
approximately $16.3 million in North Carolina investment
tax credits, for which the Company has established a valuation
allowance in the amount of $9.2 million. The credits expire
as set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
|
(Amounts in thousands)
|
|
Expiration amount
|
|
$
|
3,861
|
|
|
$
|
3,760
|
|
|
$
|
3,689
|
|
|
$
|
3,204
|
|
|
$
|
1,229
|
|
|
$
|
562
|
|
The Company also has charitable contribution carryforwards of
$2.5 million expiring in fiscal year 2007 through fiscal
year 2010 that also may be used to offset future taxable income.
For the years ended June 25, 2006 and June 26, 2005,
the valuation allowance decreased $1.7 million and
$2.2 million, respectively. In assessing the realization of
deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal
of deferred tax liabilities, available taxes in the carryback
periods, projected future taxable income and tax planning
strategies in making this assessment.
66
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
4. Common
Stock, Stock Option Plans and Restricted Stock Plan
Common shares authorized were 500 million in 2006 and 2005.
Common shares outstanding at June 25, 2006 and
June 26, 2005 were 52,208,467 and 52,145,434, respectively.
At its meeting on April 24, 2003, the Companys Board
of Directors reinstituted the Companys previously
authorized stock repurchase plan. During fiscal year 2004, the
Company repurchased approximately 1.3 million shares. At
June 25, 2006, there was remaining authority for the
Company to repurchase approximately 6.8 million shares of
its common stock under the repurchase plan. The repurchase
program was suspended in November 2003 and the Company has no
immediate plans to reinstitute the program.
In December 2004, the FASB issued SFAS No. 123R as a
replacement to SFAS No. 123 Accounting for
Stock-Based Compensation. SFAS No. 123R
supersedes APB No. 25 which allowed companies to use the
intrinsic method of valuing share-based payment transactions.
SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the financial statements based on the fair-value
method as defined in SFAS No. 123. On March 29,
2005, the SEC issued SAB No. 107 to provide guidance
regarding the adoption of SFAS No. 123R and
disclosures in Managements Discussion and Analysis. The
effective date of SFAS No. 123R was modified by
SAB No. 107 to begin with the first annual reporting
period of the registrants first fiscal year beginning on
or after June 15, 2005. Accordingly, the Company
implemented SFAS No. 123R effective June 27, 2005.
Previously the Company measured compensation expense for its
stock-based employee compensation plans using the intrinsic
value method prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees as
permitted by SFAS No. 123 and SFAS No. 148
Accounting for Stock-Based Compensation
Transition and Disclosure. Had the fair value-based method
under SFAS No. 123 been applied, compensation expense
would have been recorded for the options outstanding based on
their respective vesting schedules.
The Company currently has only one share-based compensation plan
which had unvested stock options as of June 25, 2006. The
compensation cost that was charged against income for this plan
was $0.7 million and $0 for the fiscal years ended
June 25, 2006 and June 26, 2005, respectively. The
total income tax benefit recognized for share-based compensation
in the Consolidated Statements of Operations was not material
for the fiscal years 2006, 2005 and 2004.
During the fourth quarter of fiscal year 2006, the Board
authorized the issuance of 150 thousand options from the 1999
Long-Term Incentive Plan to two newly promoted officers of the
Company. During the first half of fiscal year 2005, the Board
authorized the issuance of approximately 2.1 million stock
options from the 1999 Long-Term Incentive Plan to certain key
employees. The stock options granted in fiscal years 2006 and
2005 vest in three equal installments: the first one-third at
the time of grant, the next one-third on the first anniversary
of the grant and the final one-third on the second anniversary
of the grant.
On April 20, 2005, the Board of Directors approved a
resolution to vest all stock options, in which the exercise
price exceeded the closing price of the Companys common
stock on April 20, 2005, granted prior to June 26,
2005. The Board decided to fully vest these specific underwater
options, as there was no perceived value in these options to the
employee, little retention ramifications, and to minimize the
expense to the Companys consolidated financial statements
upon adoption of SFAS No. 123R. No other modifications
were made to the stock option plan except for the accelerated
vesting. This acceleration of the original vesting schedules
affected 0.3 million unvested stock options.
SFAS No. 123R requires the Company to record
compensation expense for stock options using the fair value
method. The Company decided to adopt SFAS No. 123R
using the Modified Prospective Transition Method in
which compensation cost is recognized for share-based payments
based on the grant date fair value from the beginning of the
fiscal period in which the recognition provisions are first
applied. The effect of the change from applying the intrinsic
method of accounting for stock options under APB 25,
previously permitted by SFAS No. 123 as an alternative
to the fair value recognition method, to the fair value
recognition provisions of SFAS No. 123 on income from
continuing operations before income taxes, income from
continuing operations and net income for the
67
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fiscal year 2006 was $0.7 million, $0.7 million and
$0.7 million, respectively. There was no material change
from applying the original provisions of SFAS No. 123
on cash flow from continuing operations, cash flow from
financing activities, and basic and diluted earnings per share.
The fair value of each option award is estimated on the date of
grant using the Black-Scholes model. The Company uses historical
data to estimate the expected life, volatility, and estimated
forfeitures of an option. The risk-free interest rate is based
on the U.S. Treasury yield curve in effect at the time of
grant.
On October 21, 1999, the shareholders of the Company
approved the 1999 Unifi, Inc. Long-Term Incentive Plan
(1999 Long-Term Incentive Plan). The plan authorized
the issuance of up to 6,000,000 shares of Common Stock
pursuant to the grant or exercise of stock options, including
Incentive Stock Options (ISO), Non-Qualified Stock
Options (NQSO) and restricted stock, but not more
than 3,000,000 shares may be issued as restricted stock.
Option awards are granted with an exercise price equal to the
market price of the Companys stock at the date of grant.
Stock options granted under the plan have vesting periods of
three to five years based on continuous service by the employee.
All stock options have a 10 year contractual term. In
addition to the 3,672,174 common shares reserved for the options
that remain outstanding under grants from the 1999 Long-Term
Incentive Plan, the Company has previous ISO plans with 57,500
common shares reserved and previous NQSO plans with 216,667
common shares reserved at June 25, 2006. No additional
options will be issued under any previous ISO or NQSO plan. The
stock option activity for fiscal years 2006, 2005 and 2004 of
all three plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISO
|
|
|
NQSO
|
|
|
|
Options
|
|
|
Weighted
|
|
|
Options
|
|
|
Weighted
|
|
|
|
Outstanding
|
|
|
Avg. $/Share
|
|
|
Outstanding
|
|
|
Avg. $/Share
|
|
|
Fiscal year 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option
beginning of year
|
|
|
3,880,772
|
|
|
$
|
10.81
|
|
|
|
583,175
|
|
|
$
|
24.67
|
|
Granted
|
|
|
20,000
|
|
|
|
6.85
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(294,252
|
)
|
|
|
12.89
|
|
|
|
(50,000
|
)
|
|
|
26.66
|
|
Forfeited
|
|
|
(71,693
|
)
|
|
|
8.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option
end of year
|
|
|
3,534,827
|
|
|
|
10.66
|
|
|
|
533,175
|
|
|
|
24.48
|
|
Fiscal year 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,101,788
|
|
|
|
2.84
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(33,330
|
)
|
|
|
2.76
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,227,591
|
)
|
|
|
12.76
|
|
|
|
(191,508
|
)
|
|
|
25.82
|
|
Forfeited
|
|
|
(102,691
|
)
|
|
|
4.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option
end of year
|
|
|
4,273,003
|
|
|
|
6.41
|
|
|
|
341,667
|
|
|
|
23.72
|
|
Fiscal year 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
150,000
|
|
|
|
3.40
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(63,333
|
)
|
|
|
2.76
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(581,667
|
)
|
|
|
9.32
|
|
|
|
(125,000
|
)
|
|
|
26.00
|
|
Forfeited
|
|
|
(48,329
|
)
|
|
|
2.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option
end of year
|
|
|
3,729,674
|
|
|
|
5.94
|
|
|
|
216,667
|
|
|
|
22.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the exercise prices, the number
of options outstanding and exercisable and the remaining
contractual lives of the Companys stock options as of
June 25, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Options Exercisable
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
Contractual Life
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
Options
|
|
|
Average
|
|
|
Remaining
|
|
|
Options
|
|
|
Average
|
|
Exercise Price
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
(Years)
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$2.76 - $3.78
|
|
|
1,910,001
|
|
|
$
|
2.82
|
|
|
|
8.2
|
|
|
|
1,226,735
|
|
|
$
|
2.79
|
|
5.29 - 7.64
|
|
|
959,949
|
|
|
|
7.28
|
|
|
|
5.5
|
|
|
|
959,949
|
|
|
|
7.28
|
|
8.10 - 11.99
|
|
|
604,626
|
|
|
|
10.54
|
|
|
|
3.9
|
|
|
|
604,626
|
|
|
|
10.54
|
|
12.53 - 16.31
|
|
|
340,098
|
|
|
|
14.16
|
|
|
|
2.9
|
|
|
|
340,098
|
|
|
|
14.16
|
|
18.75 - 31.00
|
|
|
131,667
|
|
|
|
26.35
|
|
|
|
1.5
|
|
|
|
131,667
|
|
|
|
26.35
|
|
The total intrinsic value of options exercised was $22 thousand
in fiscal year 2006 and $2 thousand in fiscal year 2005. The
amount of cash received from exercise of options was $174
thousand in fiscal year 2006 and $92 thousand in fiscal year
2005.
The following table sets forth certain required stock option
information for the ISO and NQSO plans as of and for the year
ended June 25, 2006:
|
|
|
|
|
|
|
|
|
|
|
ISO
|
|
|
NQSO
|
|
|
Number of options expected to vest
|
|
|
3,720,674
|
|
|
|
216,667
|
|
Weighted-average price of options
expected to vest
|
|
$
|
5.95
|
|
|
$
|
22.41
|
|
Intrinsic value of options
expected to vest
|
|
$
|
332,500
|
|
|
$
|
|
|
Weighted-average remaining
contractual term of options expected to vest
|
|
|
6.50
|
|
|
|
1.82
|
|
Number of options exercisable as
of June 25, 2006
|
|
|
3,046,408
|
|
|
|
216,667
|
|
Option price range
|
|
$
|
2.76-$16.31
|
|
|
$
|
16.31-$31.00
|
|
Weighted-average exercise price
for options currently exercisable
|
|
$
|
6.64
|
|
|
$
|
22.41
|
|
Intrinsic value of options
currently exercisable
|
|
$
|
332,500
|
|
|
$
|
|
|
Weighted-average remaining
contractual term of options currently exercisable
|
|
|
6.44
|
|
|
|
1.82
|
|
Weighted-average fair value of
options granted
|
|
$
|
1.98
|
|
|
|
N/A
|
|
The Company has a policy of issuing new shares to satisfy share
option exercises. The Company has elected an accounting policy
of accelerated attribution for graded vesting.
As of June 25, 2006, unrecognized compensation costs
related to unvested share based compensation arrangements
granted under the 1999 Long-Term Incentive Plan was
$0.2 million. The costs are estimated to be recognized over
a period of 2.0 years.
69
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The restricted stock activity for fiscal years 2006, 2005 and
2004 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Grant-Date Fair Value
|
|
|
Fiscal year 2004:
|
|
|
|
|
|
|
|
|
Unvested shares
beginning of year
|
|
|
20,900
|
|
|
$
|
8.90
|
|
Granted
|
|
|
21,500
|
|
|
|
6.36
|
|
Vested
|
|
|
(9,100
|
)
|
|
|
7.80
|
|
Forfeited
|
|
|
(2,100
|
)
|
|
|
9.03
|
|
|
|
|
|
|
|
|
|
|
Unvested shares end of
year
|
|
|
31,200
|
|
|
|
7.46
|
|
Fiscal year 2005:
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(10,400
|
)
|
|
|
7.98
|
|
Forfeited
|
|
|
(1,500
|
)
|
|
|
7.89
|
|
|
|
|
|
|
|
|
|
|
Unvested shares end of
year
|
|
|
19,300
|
|
|
|
7.15
|
|
Fiscal year 2006:
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(8,600
|
)
|
|
|
7.67
|
|
Forfeited
|
|
|
(300
|
)
|
|
|
9.95
|
|
|
|
|
|
|
|
|
|
|
Unvested shares end of
year
|
|
|
10,400
|
|
|
|
6.63
|
|
|
|
|
|
|
|
|
|
|
Defined Contribution Plan. The Company matches
employee contributions made to the Unifi, Inc. Retirement
Savings Plan (the DC Plan), an existing 401(k)
defined contribution plan, which covers eligible salaried and
hourly employees. Under the terms of the Plan, the Company
matches 100% of the first three percent of eligible employee
contributions and 50% of the next two percent of eligible
contributions. For fiscal years ended June 25, 2006,
June 26, 2005 and June 27, 2004, the Company incurred
$2.4 million, $2.5 million and $2.5 million,
respectively, of expense for its obligations under the matching
provisions of the DC Plan.
Defined Benefit Plan. The Companys
subsidiary in Ireland maintained a defined benefit plan
(DB Plan) that covered substantially all of its
employees and was funded by both employer and employee
contributions. The plan provided defined retirement benefits
based on years of service and the highest three year average of
earnings over the ten year period preceding retirement. During
the first quarter of fiscal year 2005, the Company announced
plans to close its European Division, and as a result,
recognized the previously unrecognized net actuarial loss of
$9.4 million. As of June 26, 2005, the subsidiary had
terminated substantially all of its employees.
During fiscal year 2006 the Companys Irish subsidiary made
its final contribution of $6.1 million and the remaining
accumulated benefit obligation of $32.5 million was paid in
full through the purchase of annuity contracts for all
participants in the DB Plan. In fiscal years 2005 and 2004, the
Company recorded pension (income) expense of $11.1 million
and $(2.4) million, respectively, which was recorded on the
Loss from discontinued operations, net of tax line
item of the Consolidated Statements of Operations.
70
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Obligations and funded status related to the DB Plan is
presented below:
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in
|
|
|
|
thousands)
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of
year
|
|
$
|
32,511
|
|
|
$
|
30,937
|
|
Service cost
|
|
|
|
|
|
|
255
|
|
Interest cost
|
|
|
852
|
|
|
|
1,783
|
|
Plan participants
contributions
|
|
|
|
|
|
|
127
|
|
Actuarial gain
|
|
|
|
|
|
|
(891
|
)
|
Benefits paid
|
|
|
(33,736
|
)
|
|
|
(509
|
)
|
Curtailments
|
|
|
|
|
|
|
509
|
|
Translation adjustment
|
|
|
373
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
|
|
|
$
|
32,511
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
$
|
26,370
|
|
|
$
|
25,620
|
|
Actual return on plan assets
|
|
|
852
|
|
|
|
1,019
|
|
Employer contributions
|
|
|
6,212
|
|
|
|
255
|
|
Plan participants
contributions
|
|
|
|
|
|
|
127
|
|
Benefits paid
|
|
|
(33,736
|
)
|
|
|
(509
|
)
|
Translation adjustment
|
|
|
302
|
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of year
|
|
|
|
|
|
|
26,370
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
|
|
(6,141
|
)
|
Unrecognized net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
|
|
|
$
|
(6,141
|
)
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation was $0 million at
June 25, 2006 and $32.5 million at June 26, 2005.
Amount recognized in the Consolidated Balance Sheet consists of:
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amount in thousands)
|
|
|
Accrued benefit cost
|
|
$
|
|
|
|
$
|
6,141
|
|
|
|
|
|
|
|
|
|
|
71
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components of Net Periodic Benefit Cost/(Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
382
|
|
|
$
|
1,074
|
|
Interest cost
|
|
|
853
|
|
|
|
1,783
|
|
|
|
1,789
|
|
Expected return on plan assets
|
|
|
(853
|
)
|
|
|
(1,910
|
)
|
|
|
(1,670
|
)
|
Amortization of net loss
|
|
|
|
|
|
|
9,935
|
|
|
|
477
|
|
Cost of termination events
|
|
|
|
|
|
|
1,019
|
|
|
|
477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
|
|
|
|
|
11,209
|
|
|
|
2,147
|
|
Less plan participants
contributions
|
|
|
|
|
|
|
(127
|
)
|
|
|
(477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
|
|
|
|
11,082
|
|
|
|
1,670
|
|
Correction of error
|
|
|
|
|
|
|
|
|
|
|
(4,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys net periodic
benefit cost (income)
|
|
$
|
|
|
|
$
|
11,082
|
|
|
$
|
(2,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fourth quarter of fiscal year 2004, the Company
determined that it had not properly recorded or disclosed the DB
Plan and a pension asset should have been previously recognized.
The Company corrected the error in the fourth quarter of fiscal
year 2004 by recording a pension asset of $4.1 million.
Assumptions:
Weighted-average assumption used to determine benefit
obligations as of:
|
|
|
|
|
|
|
|
|
June 25,
|
|
June 26,
|
|
June 27,
|
|
|
2006
|
|
2005
|
|
2004
|
|
Discount rate...
|
|
N/A
|
|
N/A
|
|
5.60%
|
Rate of compensation increase
|
|
N/A
|
|
N/A
|
|
3.75%
|
Weighted-average assumption used to determine net periodic
benefit cost for fiscal years ended:
|
|
|
|
|
|
|
|
|
June 25,
|
|
June 26,
|
|
June 27,
|
|
|
2006
|
|
2005
|
|
2004
|
|
Discount rate
|
|
N/A
|
|
N/A
|
|
5.60%
|
Expected long-term return on plan
assets
|
|
N/A
|
|
N/A
|
|
6.93%
|
Rate of compensation increase
|
|
N/A
|
|
N/A
|
|
3.75%
|
Plan Assets:
The DB Plans weighted-average asset allocations at
June 26, 2005, by asset category was as follows:
|
|
|
|
|
|
|
June 26, 2005
|
|
|
Equity securities
|
|
|
|
|
Debt securities
|
|
|
100.0
|
%
|
Real estate
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
6.
|
Leases
and Commitments
|
In addition to the direct financing sale-leaseback obligation
described in Note 2, Long-Term Debt and Other
Liabilities, the Company is obligated under operating
leases relating primarily to real estate and equipment. Future
obligations for minimum rentals under the leases during fiscal
years after June 25, 2006 are $3.6 million in 2007,
$4.9 million in 2008, $1.3 million in 2009,
$0.4 million in 2010, and $0.0 million in aggregate
thereafter. Rental
72
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expense was $3.6 million, $6.8 million, and
$7.8 million for the fiscal years 2006, 2005, and 2004,
respectively. The Company had no significant binding commitments
for capital expenditures at June 25, 2006.
The Companys nylon segment has a supply agreement with UNF
which expires in April 2008. The Company is obligated to
purchase certain to be agreed upon quantities of yarn production
from UNF. The actual purchases under this agreement for fiscal
years 2006, 2005, and 2004 were $24.3 million,
$30.2 million and $29.3 million. The agreement does
not provide for a fixed or minimum amount of yarn purchases,
therefore there is a degree of uncertainty associated with the
obligation.
7. Business
Segments, Foreign Operations and Concentrations of Credit
Risk
The Company and its subsidiaries are engaged predominantly in
the processing of yarns by texturing of synthetic filament
polyester and nylon fiber with sales domestically and
internationally, mostly to knitters and weavers for the apparel,
industrial, hosiery, home furnishing, automotive upholstery and
other end-use markets. The Company also maintains investments in
several minority-owned and jointly owned affiliates.
In accordance with Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise
and Related Information, segmented financial information
of the polyester, nylon and sourcing operating segments, as
regularly reported to management for the purpose of assessing
performance and allocating resources, is detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
|
Nylon
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
|
Fiscal year 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
566,367
|
|
|
$
|
172,458
|
|
|
$
|
738,825
|
|
Inter-segment net sales
|
|
|
5,525
|
|
|
|
6,022
|
|
|
|
11,547
|
|
Depreciation and amortization
|
|
|
30,412
|
|
|
|
14,576
|
|
|
|
44,988
|
|
Restructuring charges (recovery)
|
|
|
533
|
|
|
|
(787
|
)
|
|
|
(254
|
)
|
Write down of long-lived assets
|
|
|
51
|
|
|
|
2,315
|
|
|
|
2,366
|
|
Segment operating profit (loss)
|
|
|
5,658
|
|
|
|
(6,534
|
)
|
|
|
(876
|
)
|
Total assets
|
|
|
361,206
|
|
|
|
128,165
|
|
|
|
489,371
|
|
Fiscal year 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
587,008
|
|
|
$
|
206,788
|
|
|
$
|
793,796
|
|
Inter-segment net sales
|
|
|
5,858
|
|
|
|
5,758
|
|
|
|
11,616
|
|
Depreciation and amortization
|
|
|
32,714
|
|
|
|
14,870
|
|
|
|
47,584
|
|
Restructuring charges (recoveries)
|
|
|
(212
|
)
|
|
|
(129
|
)
|
|
|
(341
|
)
|
Write down of long-lived assets
|
|
|
|
|
|
|
603
|
|
|
|
603
|
|
Segment operating loss
|
|
|
(1,569
|
)
|
|
|
(9,825
|
)
|
|
|
(11,394
|
)
|
Total assets
|
|
|
432,231
|
|
|
|
156,936
|
|
|
|
589,167
|
|
Fiscal year 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
481,847
|
|
|
$
|
184,536
|
|
|
$
|
666,383
|
|
Inter-segment net sales
|
|
|
4,567
|
|
|
|
6,721
|
|
|
|
11,288
|
|
Depreciation and amortization
|
|
|
35,768
|
|
|
|
15,654
|
|
|
|
51,422
|
|
Restructuring charges
|
|
|
7,591
|
|
|
|
638
|
|
|
|
8,229
|
|
Arbitration costs and expenses
|
|
|
182
|
|
|
|
|
|
|
|
182
|
|
Alliance plant closure costs
(recovery)
|
|
|
(206
|
)
|
|
|
|
|
|
|
(206
|
)
|
Write downs of long-lived assets
|
|
|
25,241
|
|
|
|
|
|
|
|
25,241
|
|
Goodwill impairment
|
|
|
13,461
|
|
|
|
|
|
|
|
13,461
|
|
Segment operating loss
|
|
|
(48,378
|
)
|
|
|
(4,092
|
)
|
|
|
(52,470
|
)
|
Total assets
|
|
|
459,724
|
|
|
|
182,108
|
|
|
|
641,832
|
|
73
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For purposes of internal management reporting, segment operating
income (loss) represents net sales less cost of sales and
allocated selling, general and administrative expenses. Certain
indirect manufacturing and selling, general and administrative
costs are allocated to the operating segments on activity
drivers relevant to the respective costs. Intersegment sales of
the Companys polyester POY business are recorded at market
whereas all other intersegment sales are recorded at cost.
Domestic operating divisions fiber costs are valued on a
standard cost basis, which approximates
first-in,
first-out
accounting. For those components of inventory valued utilizing
the last-in,
first-out method (see Note 1, Significant Accounting
Polices and Financial Statement Information), an
adjustment is made at the segment level to record the difference
between standard cost and LIFO. Segment operating income (loss)
excludes the provision for bad debts of $1.3 million,
$13.2 million, and $2.4 million for fiscal years 2006,
2005, and 2004, respectively. For significant capital projects,
capitalization is delayed for management segment reporting until
the facility is substantially complete. However, for
consolidated financial reporting, assets are capitalized into
construction in progress as costs are incurred or carried as
unallocated corporate fixed assets if they have been placed in
service but have not as yet been moved for management segment
reporting.
The net decrease of $71.0 million in the polyester segment
total assets between fiscal year end 2005 and 2006 primarily
reflects decreases in cash of $34.3 million, fixed assets
of $21.0 million, assets held for sale of
$14.3 million, accounts receivable of $13.2 million,
other current assets of $3.4 million, and deferred taxes of
$0.9 million offset by an increase in inventory of
$13.2 million and other assets of $2.9 million. The
fixed asset reduction is primarily associated with current year
depreciation. The net decrease of $28.8 million in the
nylon segment total assets between fiscal year end 2005 and 2006
is primarily a result of a decrease in fixed assets of
$16.2 million, inventories of $5.6 million, accounts
receivable of $4.3 million, assets held for sale of
$2.9 million, cash of $2.0 million and other assets of
$0.2 million, offset by an increase in deferred taxes of
$2.4 million. The reduction in property and equipment is
primarily associated with current year depreciation and an
impairment charge of $2.3 million.
The following tables present reconciliations from segment data
to consolidated reporting data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of
specific reportable segment assets
|
|
$
|
44,988
|
|
|
$
|
47,584
|
|
|
$
|
51,422
|
|
Depreciation of allocated assets
|
|
|
3,682
|
|
|
|
3,958
|
|
|
|
4,804
|
|
Amortization of allocated assets
|
|
|
1,275
|
|
|
|
1,350
|
|
|
|
1,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation and
amortization
|
|
$
|
49,945
|
|
|
$
|
52,892
|
|
|
$
|
57,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable segments loss
|
|
$
|
(876
|
)
|
|
$
|
(11,394
|
)
|
|
$
|
(52,470
|
)
|
Provision for bad debts
|
|
|
1,256
|
|
|
|
13,172
|
|
|
|
2,389
|
|
Interest expense
|
|
|
19,247
|
|
|
|
20,575
|
|
|
|
18,698
|
|
Interest income
|
|
|
(4,489
|
)
|
|
|
(2,152
|
)
|
|
|
(2,152
|
)
|
Other (income) expense, net
|
|
|
(3,118
|
)
|
|
|
(2,300
|
)
|
|
|
(2,590
|
)
|
Equity in losses (earnings) of
unconsolidated affiliates
|
|
|
(825
|
)
|
|
|
(6,938
|
)
|
|
|
6,877
|
|
Loss on early extinguishment of
debt
|
|
|
2,949
|
|
|
|
|
|
|
|
|
|
Minority interests (income) expense
|
|
|
|
|
|
|
(530
|
)
|
|
|
(6,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes and extraordinary item
|
|
$
|
(15,896
|
)
|
|
$
|
(33,221
|
)
|
|
$
|
(69,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable segments total assets
|
|
$
|
489,371
|
|
|
$
|
589,167
|
|
|
$
|
641,832
|
|
Sourcing segment total assets
|
|
|
21
|
|
|
|
4,365
|
|
|
|
1,369
|
|
Corporate current assets
|
|
|
24,828
|
|
|
|
60,764
|
|
|
|
34,092
|
|
Unallocated corporate fixed assets
|
|
|
15,976
|
|
|
|
18,931
|
|
|
|
22,586
|
|
Other non-current corporate assets
|
|
|
13,616
|
|
|
|
12,797
|
|
|
|
9,609
|
|
Investments in unconsolidated
affiliates
|
|
|
190,217
|
|
|
|
160,675
|
|
|
|
164,286
|
|
Intersegment eliminations
|
|
|
(1,392
|
)
|
|
|
(1,324
|
)
|
|
|
(1,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated assets
|
|
$
|
732,637
|
|
|
$
|
845,375
|
|
|
$
|
872,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for long-lived assets totaled
$12.0 million of which $8.4 million related to the
Companys polyester segment and $2.8 million related
to the Companys nylon segment.
The Companys domestic operations serve customers
principally located in the United States as well as
international customers located primarily in Canada, Mexico and
Israel and various countries in Europe, Central America, South
America and South Africa. Export sales from its
U.S. operations aggregated $78.9 million in 2006,
$94.7 million in 2005, and $112.4 million in 2004. In
fiscal year 2006, the Company had nylon segment net sales to one
customer of $76.4 million which is in excess of 10% of
consolidated net sales, whereas in fiscal years 2005 and 2004,
the Company did not have sales to any one customer in excess of
10% of consolidated revenues. The concentration of credit risk
for the Company with respect to trade receivables is mitigated
due to the large number of customers and dispersion across
different end-uses and geographic regions.
The Companys foreign operations primarily consist of
manufacturing operations in Brazil and Colombia. On
March 2, 2004, the Company announced its plan to close its
dyed facility in Manchester, England. The facility ceased all
operations in early June 2004. During the first quarter of
fiscal year 2005, the Company announced a plan to close its
entire European Division which included a manufacturing facility
in Letterkenny, Ireland and the associated European sales
offices. The facilitys manufacturing operations ceased in
October 2004. On July 28, 2005, the Company announced that
management had decided to discontinue the operations of the
Companys external sourcing business, Unimatrix Americas.
Managements exit plan was completed as of the end of the
third quarter fiscal 2006, and accordingly, the segments
results of operations have been accounted for as a discontinued
operation in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. Net sales and total assets of the Companys
continuing foreign and domestic operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Foreign operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
105,311
|
|
|
$
|
93,420
|
|
|
$
|
82,977
|
|
Total assets
|
|
|
123,179
|
|
|
|
151,447
|
|
|
|
150,013
|
|
Domestic operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
633,514
|
|
|
$
|
700,376
|
|
|
$
|
583,406
|
|
Total assets
|
|
|
609,458
|
|
|
|
693,928
|
|
|
|
722,522
|
|
|
|
8.
|
Derivative
Financial Instruments and Fair Value of Financial
Instruments
|
The Company accounts for derivative contracts and hedging
activities under Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities which requires all derivatives to be
recorded on the balance sheet at fair value. If the derivative
is a hedge, depending on the nature
75
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of the hedge, changes in the fair value of derivatives are
either offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or are
recorded in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a
derivatives change in fair value is immediately recognized
in earnings. The Company does not enter into derivative
financial instruments for trading purposes nor is it a party to
any leveraged financial instruments.
The Company conducts its business in various foreign currencies.
As a result, it is subject to the transaction exposure that
arises from foreign exchange rate movements between the dates
that foreign currency transactions are recorded (export sales
and purchases commitments) and the dates they are consummated
(cash receipts and cash disbursements in foreign currencies).
The Company utilizes some natural hedging to mitigate these
transaction exposures. The Company also enters into foreign
currency forward contracts for the purchase and sale of European
and North American currencies to hedge balance sheet and income
statement currency exposures. These contracts are principally
entered into for the purchase of inventory and equipment and the
sale of Company products into export markets. Counter-parties
for these instruments are major financial institutions.
Currency forward contracts are used to hedge exposure for sales
in foreign currencies based on specific sales orders with
customers or for anticipated sales activity for a future time
period. Generally, 60-80% of the sales value of these orders is
covered by forward contracts. Maturity dates of the forward
contracts are intended to match anticipated receivable
collections. The Company marks the outstanding accounts
receivable and forward contracts to market at month end and any
realized and unrealized gains or losses are recorded as other
income and expense. The Company also enters currency forward
contracts for committed or anticipated equipment and inventory
purchases. Generally 50-75% of the asset cost is covered by
forward contracts although 100% of the asset cost may be covered
by contracts in certain instances. Effective February 14,
2005, the Company entered into a contract to sell the European
facility in Ireland and received a $2.8 million
non-refundable deposit from the purchaser. In addition to the
deposit, the contract called for a partial payment of
16.0 million Euros on June 30, 2005 and a final
payment of 2.1 million Euros on September 30, 2005. On
February 22, 2005, the Company entered into a forward
exchange contract for 15.0 million Euros. The Company was
required by the financial institution to deposit
$2.8 million in an interest bearing collateral account to
secure the financial institutions exposure on the hedge
contract. This cash deposit is classified as Restricted
cash and is included in current assets on the fiscal year
2005 balance sheet. On July 15, 2005, the Company settled
the forward exchange contract for 15.0 million Euros.
Forward contracts are matched with the anticipated date of
delivery of the assets and gains and losses are recorded as a
component of the asset cost for purchase transactions when the
Company is firmly committed. The latest maturity for all
outstanding purchase and sales foreign currency forward
contracts are July 2006 and October 2006, respectively.
The dollar equivalent of these forward currency contracts and
their related fair values are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Foreign currency purchase
contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
526
|
|
|
$
|
168
|
|
|
$
|
3,660
|
|
Fair value
|
|
|
535
|
|
|
|
159
|
|
|
|
3,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (gain) loss
|
|
$
|
(9
|
)
|
|
$
|
9
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
833
|
|
|
$
|
24,414
|
|
|
$
|
18,833
|
|
Fair value
|
|
|
878
|
|
|
|
22,687
|
|
|
|
19,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (gain) loss
|
|
$
|
45
|
|
|
$
|
(1,727
|
)
|
|
$
|
556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair values of the foreign exchange forward contracts at the
respective year-end dates are based on discounted year-end
forward currency rates. The total impact of foreign currency
related items that are reported on
76
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the line item other (income) expense, net in the Consolidated
Statements of Operations, including transactions that were
hedged and those that were not hedged, was a pre-tax loss of
$0.7 million for the fiscal year ended June 25, 2006,
a pre-tax loss of $0.5 million for the fiscal year ended
June 27, 2004, and a pre-tax gain of $1.1 million for
the fiscal year ended June 26, 2005.
The Company uses the following methods in estimating its fair
value disclosures for financial instruments:
Cash and cash equivalents, trade receivables and trade
payables. The carrying amounts approximate fair
value because of the short maturity of these instruments.
Long-term debt. The fair value of the
Companys borrowings is estimated based on the quoted
market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining
maturities (see Note 2, Long-Term Debt and Other
Liabilities).
Foreign currency contracts. The fair value is
based on quotes obtained from brokers or reference to publicly
available market information.
|
|
9.
|
Investments
in Unconsolidated Affiliates
|
The Company and SANS Fibres of South Africa formed a 50/50 joint
venture (UNIFI-SANS Technical Fibers, LLC or USTF)
to produce low-shrinkage high tenacity nylon 6.6 light denier
industrial (LDI) yarns in North Carolina. The business is
operated in a plant in Stoneville, North Carolina which is owned
by the Company. The Company receives annual rental income of
$0.3 million from USTF for the use of the facility. The
Company also received from USTF during fiscal 2006 payments
totaling $1.7 million which consisted of reimbursements for
rendering general and administrative services and purchasing
various manufacturing related items for the operations. Unifi
manages the
day-to-day
production and shipping of the LDI produced in North Carolina
and SANS Fibres handles technical support and sales. Sales from
this entity are primarily to customers in the Americas.
Unifi and Nilit Ltd., located in Israel, formed a 50/50 joint
venture named U.N.F. Industries Ltd. (UNF). The
joint venture produces nylon POY at Nilits manufacturing
facility in Migdal Ha Emek, Israel. The nylon POY is
utilized in the Companys nylon texturing and covering
operations. The nylon segment has a supply agreement with UNF
which expires in April 2008. Unifi is obligated to purchase
certain to be agreed upon quantities of yarn production from
UNF. The agreement does not provide for a fixed or minimum
amount of yarn purchases, therefore there is a degree of
uncertainty associated with the obligation. Accordingly, the
Company has estimated its obligation under the agreement based
on past history and internal projections.
The Company and Parkdale Mills, Inc. entered into a contribution
agreement whereby both companies contributed all of the assets
of their spun cotton yarn operations utilizing open-end and air
jet spinning technologies to create Parkdale America, LLC
(PAL). In exchange for its contributions, the
Company received a 34% ownership interest in the joint venture.
PAL is a producer of cotton and synthetic yarns for sale to the
textile and apparel industries primarily within North America.
PAL has 14 manufacturing facilities primarily located in central
and western North Carolina.
The Companys investment in PAL at June 25, 2006 was
$140.9 million and the underlying equity in the net assets
of PAL at June 25, 2006 is $130.3 million or a
difference of $10.6 million, which is accounted for as
goodwill and is included in the Companys investment in PAL
disclosures. The Companys view is that the entire carrying
value of the investment in PAL is recoverable from its share of
future cash distributions from the venture plus a terminal exit
value.
On October 21, 2004, the Company announced that Unifi and
Sinopec Yizheng Chemical Fiber Co., Ltd. (YCFC)
signed a non-binding letter of intent to form a joint venture to
manufacture, process and market polyester filament yarn in
YCFCs facilities in Yizheng, Jiangsu Province, Peoples
Republic of China. On June 10, 2005, Unifi and YCFC entered
into an Equity Joint Venture Contract (the JV
Contract), to form Yihua Unifi Fibre Company Limited
(YUFI). Under the terms of the JV Contract, each
company owns a 50% equity interest in the joint venture. The
joint venture transaction closed on August 3, 2005, and
accordingly, the Company contributed to
77
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YUFI its initial capital contribution of $15.0 million in
cash on August 4, 2005. YCFCs facilities were already
producing product at a steady state. On October 12, 2005,
the Company transferred an additional $15.0 million to YUFI
to complete the capitalization of the joint venture. The Company
records revenues from the joint venture under a licensing
agreement for certain proprietary information including
technical knowledge, manufacturing processes, trade secrets,
commercial information and other information relating to the
design, manufacture, application testing, maintenance and sale
of products. During fiscal year 2006, payments received under
this agreement were $2.0 million.
Condensed balance sheet information as of June 25, 2006 and
June 26, 2005, and income statement information for fiscal
years 2006, 2005 and 2004, of combined unconsolidated equity
affiliates were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Current assets
|
|
$
|
149,278
|
|
|
$
|
127,188
|
|
Noncurrent assets
|
|
|
217,955
|
|
|
|
176,265
|
|
Current liabilities
|
|
|
48,334
|
|
|
|
28,235
|
|
Noncurrent liabilities
|
|
|
44,460
|
|
|
|
18,840
|
|
Shareholders equity and
capital accounts
|
|
|
274,439
|
|
|
|
256,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Net sales
|
|
$
|
567,223
|
|
|
$
|
471,786
|
|
|
$
|
469,512
|
|
Gross profit
|
|
|
31,853
|
|
|
|
40,312
|
|
|
|
7,880
|
|
Income (loss) from operations
|
|
|
8,435
|
|
|
|
16,991
|
|
|
|
(15,928
|
)
|
Net income (loss)
|
|
|
6,279
|
|
|
|
14,003
|
|
|
|
(20,183
|
)
|
USTF and PAL are organized as partnerships for U.S. tax
purposes. Taxable income and losses are passed through USTF and
PAL to the members in accordance with the Operating Agreements
of USTF and PAL. For the fiscal years ended June 25, 2006,
June 26, 2005, and June 27, 2004, distributions
received by the Company from its equity affiliates amounted to
$2.8 million, $11.1 million, and $3.1 million,
respectively. The total undistributed earnings of unconsolidated
equity affiliates were $1.8 million as of June 26,
2006. Included in the above net sales amounts for the 2006,
2005, and 2004 fiscal years are sales to Unifi of approximately
$24.0 million, $29.6 million, and $27.5 million,
respectively. These amounts represent sales of nylon POY from
UNF for use in the production of textured nylon yarn in the
ordinary course of business.
|
|
10.
|
Supplemental
Cash Flow Information
|
Supplemental cash flow information is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
18,153
|
|
|
$
|
16,536
|
|
|
$
|
16,842
|
|
Income taxes, net of refunds
|
|
|
3,164
|
|
|
|
5,012
|
|
|
|
2,437
|
|
78
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effective May 29, 1998, the Company formed Unifi Textured
Polyester, LLC (UTP) with Burlington Industries,
LLC, now known as International Textile Group, LLC
(ITG), to manufacture and market natural textured
polyester yarns. The Company had an 85.42% interest in UTP and
ITG had 14.58%. For the first five years, ITG was entitled to
the first $9.4 million of annual net earnings and the first
$12.0 million of UTPs cash flows on an annual basis,
less the amount of UTP net earnings. Subsequent to this
five-year period, earnings and cash flows were allocated based
on ownership percentages. UTPs assets, liabilities and
earnings are consolidated with those of the Company and
ITGs interest in the UTP is included in the Companys
financial statements as minority interest (income) expense. In
April 2005, the Company purchased ITGs ownership interest
of 14.58% for $0.9 million in cash which resulted in a net
write-down of UTPs assets of $2.9 million, as a
result of applying purchase accounting to the acquisition of
minority interest. Minority interest (income) expense for
ITGs share of UTP in fiscal years 2006, 2005, and 2004 was
$0.0 million, $(0.5) million, and $(6.5) million,
respectively.
|
|
12.
|
Fiscal
Year 1999 Early Retirement and Termination Charge
|
During the third quarter of fiscal 1999, the Company recognized
a $14.8 million charge associated with the early retirement
and termination of 114 salaried employees. As of June 25,
2006, the remaining financial obligation is to provide health
and dental coverage to each early retiree until they reach
65 years of age. An adjustment to the reserve was recorded
in fiscal years 2006, 2005 and 2004 to replenish the reserve for
the difference between the actual cash payments and the present
value of the liability originally recorded, which represented
interest expense. At June 25, 2006, a reserve of
$2.0 million remained on the Consolidated Balance Sheet
that is expected to equal the present value of future cash
payments for remaining medical and dental expenses associated
with these terminated employees. The table below summarizes the
activity associated with this charge for fiscal years 2006,
2005, and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Balance at beginning of fiscal year
|
|
$
|
2,931
|
|
|
$
|
3,418
|
|
|
$
|
3,860
|
|
Change in estimate for original
charges
|
|
|
(673
|
)
|
|
|
(308
|
)
|
|
|
314
|
|
Present value adjustment
|
|
|
217
|
|
|
|
243
|
|
|
|
327
|
|
Cash payments
|
|
|
(444
|
)
|
|
|
(422
|
)
|
|
|
(1,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of fiscal year
|
|
$
|
2,031
|
|
|
$
|
2,931
|
|
|
$
|
3,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Severance
and Restructuring Charges
|
In fiscal year 2004, the Company recorded restructuring charges
of $27.7 million, which consisted of $12.1 million of
fixed asset write-downs associated with the closure of a dye
facility in Manchester, England and the consolidation of the
Companys polyester operations in Ireland,
$7.8 million of employee severance for approximately 280
management and production level employees, $5.7 million in
lease related costs associated with the closure of the facility
in Altamahaw, NC and other restructuring costs of
$2.1 million primarily related to the various plant
closures. Of the $27.7 million recorded in fiscal year 2004
as a restructuring charge to continuing operations,
$19.6 million has been reclassified to the line item
Loss from discontinued operations, net of tax in the
Consolidated Statements of Operations. Severance payments were
made in accordance with various plan terms and were completed by
July 2005. The lease obligation consists of rental payments of
$1.0 million in fiscal year 2007 and $3.0 million in
fiscal year 2008.
On October 19, 2004, the Company announced that it planned
to curtail two production lines and downsize its recently
acquired facility in Kinston, North Carolina. During the second
quarter of fiscal year 2005, the Company recorded a severance
reserve of $10.7 million for approximately 500 production
level employees and a restructuring reserve of $0.4 million
for the cancellation of certain warehouse leases. The entire
restructuring reserve was recorded as assumed liabilities in
purchase accounting; and accordingly, was not recorded as a
restructuring
79
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expense in the Consolidated Statements of Operations. During the
third quarter of fiscal year 2005, management completed the
curtailment of both production lines as scheduled which resulted
in an actual reduction of 388 production level employees and a
reduction to the initial restructuring reserve. Since no
long-term assets or intangible assets were recorded in purchase
accounting, the net reduction of $1.2 million was recorded
as an extraordinary gain in the accompanying Consolidated
Statements of Operations in fiscal year 2005.
On April 20, 2006, the Company re-organized its domestic
business operations, and as a result, recorded a restructuring
charge for severance of approximately $0.8 million in the
fourth quarter of fiscal year 2006. Approximately 45 management
level salaried employees were affected by the plan of
reorganization.
The table below summarizes changes to the accrued severance and
accrued restructuring accounts for the fiscal years ended
June 26, 2005 and June 25, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
June 26,
|
|
|
Additional
|
|
|
|
|
|
Amount
|
|
|
June 25,
|
|
|
|
2005
|
|
|
Charges
|
|
|
Adjustments
|
|
|
Used
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
Accrued severance
|
|
$
|
5,252
|
|
|
$
|
812
|
|
|
$
|
44
|
|
|
$
|
(5,532
|
)
|
|
$
|
576
|
|
Accrued restructuring
|
|
|
5,053
|
|
|
|
|
|
|
|
(195
|
)
|
|
|
(1,308
|
)
|
|
|
3,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
June 27,
|
|
|
Additional
|
|
|
|
|
|
Amount
|
|
|
June 26,
|
|
|
|
2004
|
|
|
Charges
|
|
|
Adjustments
|
|
|
Used
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Accrued severance
|
|
$
|
2,949
|
|
|
$
|
10,701
|
|
|
$
|
(834
|
)
|
|
$
|
(7,564
|
)
|
|
$
|
5,252
|
|
Accrued restructuring
|
|
|
6,654
|
|
|
|
391
|
|
|
|
(695
|
)
|
|
|
(1,297
|
)
|
|
|
5,053
|
|
During the third quarter of fiscal year 2004, management
performed impairment testing for the domestic textured polyester
business due to the continued challenging business conditions
and reduction in volume and gross profit in the preceding
quarter. As a result, management determined the fair value of
the plant, property and equipment at $73.7 million using
market prices of the assets. Management determined that the
assets were in fact impaired because the carrying value was
$98.9 million. This resulted in a $25.2 million write
down of the assets, which is included in the Write down of
long-lived assets line item in the Consolidated Statements
of Operations. Subsequent to performing the impairment test for
the property, plant and equipment, the entire domestic polyester
segment was tested for impairment as of February 29, 2004.
As a result of the testing, the Company recorded a goodwill
impairment charge of $13.5 million in the third quarter of
fiscal year 2004 to reduce the segments goodwill to $0.
The Company used the income approach and market approach to
determine the fair value.
In June 2005 the Company entered into a contract to sell 166
machines held by the nylon division. As a result, a
$0.6 million charge was recorded to write the assets down
from a net book value of $1.5 million to their fair value
less cost to sell. This charge is recorded on the Write
down of long-lived assets line item in the Consolidated
Statements of Operations.
On August 29, 2005, the Company announced an initiative to
improve the efficiency of its nylon business unit which included
the closing of Plant one in Mayodan, North Carolina and moving
its operations and offices to Plant three in nearby Madison,
North Carolina which is the Nylon divisions largest
facility with over one million square feet of production space.
In connection with this initiative, the Company decided to offer
for sale a plant, a warehouse and a central distribution center
(CDC), all of which are located in Mayodan, North
Carolina. Based on appraisals received in September 2005, the
Company determined that the warehouse was impaired and recorded
an impairment charge of $1.5 million, which included
$0.2 million in estimated selling costs. On March 13,
2006, the Company entered into a contract to sell the CDC and
related land located in Mayodan, North Carolina. The terms of
the contract call for a sale price of $2.7 million, which
was approximately $0.7 million below the propertys
carrying value. In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
80
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assets, (SFAS No. 144) the Company
recorded an impairment charge of approximately $0.8 million
during the third quarter of fiscal year 2006 which included
selling costs of $0.1 million. The sale of the CDC closed
in the fourth quarter of fiscal year 2006 with no further
expense to the Company.
On July 28, 2004, the Company announced its decision to
close its European Division and associated sales offices
throughout Europe. The manufacturing facilities in Ireland
ceased operations on October 31, 2004. On February 24,
2005, the Company announced that it had entered into three
separate contracts to sell the property, plant and equipment of
the European Division for approximately $38.0 million. The
European Divisions assets held for sale were separately
stated in the June 26, 2005 Consolidated Balance Sheet and
were reported in the Companys polyester segment.
The Company announced in the first quarter of fiscal year 2006
that the nylon division decided to consolidate its operating
facilities in Mayodan and Madison, North Carolina. As a result,
Plant 1, Plant 5, Plant 7, and the CDC were
completely vacated as of March 2006 and listed for sale. In
addition, unrelated to the Nylon restructuring plan, the Company
decided to market other properties in Yadkinville, North
Carolina and Staunton, Virginia as well as related idle
machinery and equipment. The listing contract for real property
was signed in December 2005. The sale of the CDC and the
Staunton, Virginia properties were closed in the fourth quarter
of fiscal year 2006.
The following table summarizes by category assets held for sale:
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Land
|
|
$
|
612
|
|
|
$
|
1,588
|
|
Building
|
|
|
10,052
|
|
|
|
24,831
|
|
Machinery and equipment
|
|
|
4,238
|
|
|
|
5,985
|
|
Leasehold improvements
|
|
|
517
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,419
|
|
|
$
|
32,536
|
|
|
|
|
|
|
|
|
|
|
Effective June 1, 2000, the Company and E.I. DuPont De
Nemours and Company (DuPont) initiated a
manufacturing alliance (the Alliance). The intent of
the Alliance was to optimize the Companys and
DuPonts POY manufacturing facilities by increasing
manufacturing efficiency and improving product quality. Under
the terms of the Alliance, DuPont and the Company ran their
polyester POY manufacturing facilities as a single operating
unit. The companies split equally the costs to complete the
necessary plant consolidation and the benefits gained through
asset optimization.
DuPonts subsidiary, Invista, Inc., held DuPonts
textiles and interiors assets and businesses which included the
Alliance assets. Such assets and businesses were subsequently
sold to subsidiaries of Koch. INVISTA continued to operate the
DuPont site through September 29, 2004.
Effective September 30, 2004, the Company completed the
acquisition of the INVISTA polyester POY manufacturing assets
from INVISTA. See Note 17, Asset Acquisition.
The Company recognized, as a reduction of cost of sales, cost
savings and other benefits from the Alliance of $0,
$8.4 million and $38.2 million for fiscal years 2006,
2005 and 2004, respectively.
As discussed in Note 16, Alliance, the Company
completed its acquisition of the INVISTA polyester POY
manufacturing assets located in Kinston, North Carolina,
including inventories, valued at $24.4 million which was
81
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
seller financed. See Note 2, Long-Term Debt and Other
Liabilities for details of the financing agreement. On
October 19, 2004, the Company announced its plans to
curtail two production lines and downsize the workforce at its
newly acquired manufacturing facility in Kinston, North
Carolina. At that time the Company recorded a reserve of
$10.7 million in related severance costs and
$0.4 million in restructuring costs which were recorded as
assumed liabilities in purchase accounting; and therefore, had
no impact on the Consolidated Statements of Operations. As of
March 27, 2005, both lines were successfully shut down
which resulted in a reduction in the original restructuring
estimate for severance. As a result of the reduction to the
restructuring reserve, a $1.2 million extraordinary gain,
net of tax, was recorded in fiscal year 2005.
|
|
18.
|
Discontinued
Operations
|
On July 28, 2005, the Company announced that it would
discontinue the operations of the Companys external
sourcing business, Unimatrix Americas. As of March 26,
2006, managements plan to exit the business was
successfully completed resulting in the reclassification of the
segments losses as discontinued operations for all periods
presented. See Note 20, Quarterly Results
(Unaudited) for restatements of the fiscal 2006 first and
second quarters and fiscal 2005 quarters.
On July 28, 2004, the Company announced its decision to
close its European manufacturing operations and associated sales
offices throughout Europe (the European Division).
The manufacturing facilities in Ireland ceased operations on
October 31, 2004. On February 24, 2005, the Company
announced that it had entered into three separate contracts to
sell the property, plant and equipment of the European Division
for approximately $37.0 million. As of June 26, 2005,
the Company has received approximately $9.9 million in
proceeds from the sales contracts and recognized a gain of
$10.4 million on the sales of capital assets. The Company
received the remaining proceeds of $28.1 million during the
first quarter fiscal year 2006 which resulted in a net gain of
$4.6 million. The gains on the sales of capital assets are
included in the line item Income (loss) from discontinued
operations net of tax in the Consolidated
Statements of Operations.
The Companys dyed facility in Manchester, England was
closed in June 2004 and the physical assets were abandoned in
June 2005. In accordance with SFAS No. 144, the
complete abandonment of the business which occurred in June 2005
required the Company to include the operating results for this
facility as discontinued operations for all periods presented.
Beginning with the third quarter of fiscal year 2006, the
Company separately disclosed the operating, investing and
financing portions of the cash flows attributable to all
discontinued operations in the Consolidated Statements of Cash
Flows. All prior periods have been restated to conform with the
current presentation.
Results of operations for the sourcing segment, European
Division and the dyed facility in England for fiscal years 2006,
2005, and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 25,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Net sales
|
|
$
|
3,967
|
|
|
$
|
30,261
|
|
|
$
|
80,087
|
|
Restructuring charges
|
|
|
|
|
|
|
14,873
|
|
|
|
19,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
before income taxes
|
|
$
|
(784
|
)
|
|
$
|
(22,073
|
)
|
|
$
|
(25,867
|
)
|
Income tax (benefit) expense
|
|
|
(1,144
|
)
|
|
|
571
|
|
|
|
(223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) loss from
discontinued operations net of taxes
|
|
$
|
360
|
|
|
$
|
(22,644
|
)
|
|
$
|
(25,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The land with the Kinston Site is leased pursuant to a
99 year ground lease (Ground Lease) with
Dupont. Since 1993, Dupont has been investigating and cleaning
up the Kinston Site under the supervision of the United
82
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
States Environmental Protection Agency (EPA) and the
North Carolina Department of Environment and Natural Resources
pursuant to the Resource Conservation and Recovery Act
Corrective Action program. The Corrective Action Program
requires Dupont to identify all potential areas of environmental
concern (AOCs), assess the extent of contamination
at the identified AOCs and clean them up to applicable
regulatory standards. Under the terms of the Ground Lease, upon
completion by DuPont of required remedial action, ownership of
the Kinston Site will pass to the Company. Thereafter, the
Company will have responsibility for future remediation
requirements, if any, at the AOCs previously addressed by
DuPont. At this time the Company has no basis to determine if
and when it will have any responsibility or obligation with
respect to the AOCs or the extent of any potential liability for
the same.
|
|
20.
|
Quarterly
Results (Unaudited)
|
Quarterly financial data for the fiscal years ended
June 26, 2005 and June 25, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
(13 Weeks)
|
|
|
(13 Weeks)
|
|
|
(13 Weeks)
|
|
|
(13 Weeks)
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales(a)
|
|
$
|
183,102
|
|
|
$
|
191,117
|
|
|
$
|
181,398
|
|
|
$
|
183,208
|
|
Gross profit(a)(b)
|
|
|
8,403
|
|
|
|
9,370
|
|
|
|
13,137
|
|
|
|
11,860
|
|
Income (loss) from discontinued
operations, net of tax
|
|
|
1,929
|
|
|
|
(583
|
)
|
|
|
(790
|
)
|
|
|
(196
|
)
|
Loss before extraordinary item
|
|
|
(2,878
|
)
|
|
|
(3,976
|
)
|
|
|
(2,117
|
)
|
|
|
(5,395
|
)
|
Extraordinary gain
(loss) net of tax of $0(c)
|
|
|
(208
|
)
|
|
|
208
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,086
|
)
|
|
|
(3,768
|
)
|
|
|
(2,117
|
)
|
|
|
(5,395
|
)
|
Per Share of Common Stock (basic
and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before extraordinary item
|
|
$
|
(.06
|
)
|
|
$
|
(.07
|
)
|
|
$
|
(.04
|
)
|
|
$
|
(.10
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(.06
|
)
|
|
$
|
(.07
|
)
|
|
$
|
(.04
|
)
|
|
$
|
(.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales(a)
|
|
$
|
178,993
|
|
|
$
|
206,687
|
|
|
$
|
207,688
|
|
|
$
|
200,428
|
|
Gross profit(a)(b)
|
|
|
10,840
|
|
|
|
9,817
|
|
|
|
9,332
|
|
|
|
1,090
|
|
Income (loss) from discontinued
operations, net of tax
|
|
|
(21,650
|
)
|
|
|
(2,941
|
)
|
|
|
(1,659
|
)
|
|
|
3,606
|
|
Loss before extraordinary item
|
|
|
(22,555
|
)
|
|
|
(7,746
|
)
|
|
|
(3,272
|
)
|
|
|
(8,809
|
)
|
Extraordinary gain
(loss) net of tax of $0(c)
|
|
|
|
|
|
|
|
|
|
|
1,342
|
|
|
|
(185
|
)
|
Net loss
|
|
|
(22,555
|
)
|
|
|
(7,746
|
)
|
|
|
(1,930
|
)
|
|
|
(8,994
|
)
|
Per Share of Common Stock (basic
and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before extraordinary item
|
|
$
|
(.43
|
)
|
|
$
|
(.15
|
)
|
|
$
|
(.06
|
)
|
|
$
|
(.17
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
|
|
|
|
|
|
|
|
.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(.43
|
)
|
|
$
|
(.15
|
)
|
|
$
|
(.04
|
)
|
|
$
|
(.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
As discussed further in Note 18, Discontinued
Operations the Company decided to close its dye operation
in England in June 2004 and the closure was substantially
completed in June 2005, which required the Company to include
the operating results for this facility as discontinued
operations. As a result, net sales, gross profit |
83
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
and income (loss) from discontinued operations for the first
three quarters of fiscal year 2005 have been restated. In July
2005, the Company announced its decision to exit the sourcing
business and managements plan to exit the business was
successfully completed on March 26, 2006, resulting in the
reclassification of the segments losses as discontinued
operations. As a result, net sales, gross profit and income
(loss) from discontinued operations for the first and second
quarters of the fiscal year 2006 and in each of the quarters in
fiscal year 2005 have been restated. There was no effect on
previously reported net income. Below is a reconciliation of the
net sales, gross profit and income (loss) from discontinued
operations amounts as previously reported in the Companys
quarterly reports on Form
10-Q to the
restated amounts reported above: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
|
First
|
|
|
Second
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(13 Weeks)
|
|
|
(13 Weeks)
|
|
|
(13 Weeks)
|
|
|
(13 Weeks)
|
|
|
(13 Weeks)
|
|
|
(13 Weeks)
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
Net sales as previously reported
|
|
$
|
185,441
|
|
|
$
|
192,300
|
|
|
$
|
180,155
|
|
|
$
|
208,473
|
|
|
$
|
208,318
|
|
|
$
|
203,151
|
|
Less sales of discontinued
operations
|
|
|
2,339
|
|
|
|
1,183
|
|
|
|
1,162
|
|
|
|
1,786
|
|
|
|
630
|
|
|
|
2,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales as restated
|
|
$
|
183,102
|
|
|
$
|
191,117
|
|
|
$
|
178,993
|
|
|
$
|
206,687
|
|
|
$
|
207,688
|
|
|
$
|
200,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as previously reported
|
|
$
|
7,522
|
|
|
$
|
9,093
|
|
|
$
|
10,560
|
|
|
$
|
9,686
|
|
|
$
|
9,107
|
|
|
$
|
1,189
|
|
Less gross profit (loss) of
discontinued operations
|
|
|
(881
|
)
|
|
|
(277
|
)
|
|
|
(280
|
)
|
|
|
(131
|
)
|
|
|
(225
|
)
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as restated
|
|
$
|
8,403
|
|
|
$
|
9,370
|
|
|
$
|
10,840
|
|
|
$
|
9,817
|
|
|
$
|
9,332
|
|
|
$
|
1,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations as previously reported
|
|
$
|
2,781
|
|
|
$
|
(270
|
)
|
|
$
|
(21,299
|
)
|
|
$
|
(3,051
|
)
|
|
$
|
(1,429
|
)
|
|
$
|
3,681
|
|
Plus income (loss) of discontinued
operations
|
|
|
(852
|
)
|
|
|
(313
|
)
|
|
|
(351
|
)
|
|
|
110
|
|
|
|
(230
|
)
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations as restated
|
|
$
|
1,929
|
|
|
$
|
(583
|
)
|
|
$
|
(21,650
|
)
|
|
$
|
(2,941
|
)
|
|
$
|
(1,659
|
)
|
|
$
|
3,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
The lower gross profit amount for the fourth quarter of fiscal
year 2005 is primarily attributable to the Company selling off
aged inventory in order to improve its working capital position. |
|
(c) |
|
As discussed further in Note 17, Asset
Acquisition the Company acquired a manufacturing facility
at the beginning of its fiscal year 2005 second quarter and, as
a result of purchase accounting, was required to record an
extraordinary gain. |
84
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
21.
|
Condensed
Consolidating Financial Statements
|
The guarantor subsidiaries presented below represent the
Companys subsidiaries that are subject to the terms and
conditions outlined in the indenture governing the
Companys issuance of senior secured notes and guarantees
the notes, jointly and severally, on a senior unsecured basis.
The non-guarantor subsidiaries presented below represent the
foreign subsidiaries which do not guarantee the notes. Each
subsidiary guarantor is 100% owned by Unifi, Inc. and all
guarantees are full and unconditional.
Supplemental financial information for the Company and its
guarantor subsidiaries and non-guarantor subsidiaries for the
notes is presented below.
Balance Sheet Information as of June 25, 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
22,992
|
|
|
$
|
1,392
|
|
|
$
|
10,933
|
|
|
$
|
|
|
|
$
|
35,317
|
|
Receivables, net
|
|
|
1
|
|
|
|
72,332
|
|
|
|
20,903
|
|
|
|
|
|
|
|
93,236
|
|
Inventories
|
|
|
|
|
|
|
91,840
|
|
|
|
24,178
|
|
|
|
|
|
|
|
116,018
|
|
Deferred income taxes
|
|
|
|
|
|
|
10,473
|
|
|
|
1,266
|
|
|
|
|
|
|
|
11,739
|
|
Assets held for sale
|
|
|
|
|
|
|
15,419
|
|
|
|
|
|
|
|
|
|
|
|
15,419
|
|
Other current assets
|
|
|
|
|
|
|
2,558
|
|
|
|
6,671
|
|
|
|
|
|
|
|
9,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
22,993
|
|
|
|
194,014
|
|
|
|
63,951
|
|
|
|
|
|
|
|
280,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
11,806
|
|
|
|
848,068
|
|
|
|
56,463
|
|
|
|
|
|
|
|
916,337
|
|
Less accumulated depreciation
|
|
|
(1,553
|
)
|
|
|
(637,487
|
)
|
|
|
(37,601
|
)
|
|
|
|
|
|
|
(676,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,253
|
|
|
|
210,581
|
|
|
|
18,862
|
|
|
|
|
|
|
|
239,696
|
|
Investments in unconsolidated
affiliates
|
|
|
|
|
|
|
157,741
|
|
|
|
32,476
|
|
|
|
|
|
|
|
190,217
|
|
Investments in consolidated
subsidiaries
|
|
|
450,655
|
|
|
|
|
|
|
|
|
|
|
|
(450,655
|
)
|
|
|
|
|
Other noncurrent assets
|
|
|
65,713
|
|
|
|
8,116
|
|
|
|
8,223
|
|
|
|
(60,286
|
)
|
|
|
21,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
549,614
|
|
|
$
|
570,452
|
|
|
$
|
123,512
|
|
|
$
|
(510,941
|
)
|
|
$
|
732,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other
|
|
$
|
1,698
|
|
|
$
|
57,315
|
|
|
$
|
9,903
|
|
|
$
|
|
|
|
$
|
68,916
|
|
Accrued expenses
|
|
|
2,202
|
|
|
|
18,011
|
|
|
|
3,656
|
|
|
|
|
|
|
|
23,869
|
|
Income taxes payable (receivable)
|
|
|
(10,046
|
)
|
|
|
11,004
|
|
|
|
1,345
|
|
|
|
|
|
|
|
2,303
|
|
Current maturities of long-term
debt and other current liabilities
|
|
|
|
|
|
|
290
|
|
|
|
6,040
|
|
|
|
|
|
|
|
6,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
(6,146
|
)
|
|
|
86,620
|
|
|
|
20,944
|
|
|
|
|
|
|
|
101,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and other
liabilities
|
|
|
191,273
|
|
|
|
57,557
|
|
|
|
13,861
|
|
|
|
(60,286
|
)
|
|
|
202,405
|
|
Deferred income taxes
|
|
|
(18,466
|
)
|
|
|
63,380
|
|
|
|
947
|
|
|
|
|
|
|
|
45,861
|
|
Shareholders/invested equity
|
|
|
382,953
|
|
|
|
362,895
|
|
|
|
87,760
|
|
|
|
(450,655
|
)
|
|
|
382,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
549,614
|
|
|
$
|
570,452
|
|
|
$
|
123,512
|
|
|
$
|
(510,941
|
)
|
|
$
|
732,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Balance Sheet Information as of June 26, 2005 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
35,868
|
|
|
$
|
25,272
|
|
|
$
|
44,481
|
|
|
$
|
|
|
|
$
|
105,621
|
|
Receivables, net
|
|
|
|
|
|
|
85,073
|
|
|
|
21,364
|
|
|
|
|
|
|
|
106,437
|
|
Inventories
|
|
|
|
|
|
|
86,039
|
|
|
|
24,788
|
|
|
|
|
|
|
|
110,827
|
|
Deferred income taxes
|
|
|
(1,122
|
)
|
|
|
14,527
|
|
|
|
1,173
|
|
|
|
|
|
|
|
14,578
|
|
Assets held for sale
|
|
|
|
|
|
|
21,843
|
|
|
|
10,693
|
|
|
|
|
|
|
|
32,536
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
2,766
|
|
|
|
|
|
|
|
2,766
|
|
Other current assets
|
|
|
|
|
|
|
3,344
|
|
|
|
12,246
|
|
|
|
|
|
|
|
15,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
34,746
|
|
|
|
236,098
|
|
|
|
117,511
|
|
|
|
|
|
|
|
388,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
11,805
|
|
|
|
890,488
|
|
|
|
53,166
|
|
|
|
|
|
|
|
955,459
|
|
Less accumulated depreciation
|
|
|
(1,265
|
)
|
|
|
(642,538
|
)
|
|
|
(31,924
|
)
|
|
|
|
|
|
|
(675,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,540
|
|
|
|
247,950
|
|
|
|
21,242
|
|
|
|
|
|
|
|
279,732
|
|
Investments in unconsolidated
affiliates
|
|
|
|
|
|
|
152,918
|
|
|
|
7,757
|
|
|
|
|
|
|
|
160,675
|
|
Investments in consolidated
subsidiaries
|
|
|
481,888
|
|
|
|
|
|
|
|
|
|
|
|
(481,888
|
)
|
|
|
|
|
Other noncurrent assets
|
|
|
86,441
|
|
|
|
13,456
|
|
|
|
5,163
|
|
|
|
(88,447
|
)
|
|
|
16,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
613,615
|
|
|
$
|
650,422
|
|
|
$
|
151,673
|
|
|
$
|
(570,335
|
)
|
|
$
|
845,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,417
|
|
|
$
|
49,719
|
|
|
$
|
11,530
|
|
|
$
|
|
|
|
$
|
62,666
|
|
Accrued expenses
|
|
|
7,201
|
|
|
|
27,592
|
|
|
|
10,825
|
|
|
|
|
|
|
|
45,618
|
|
Income taxes payable (receivable)
|
|
|
(7,481
|
)
|
|
|
8,715
|
|
|
|
1,058
|
|
|
|
|
|
|
|
2,292
|
|
Current maturities of long-term
debt and other current Liabilities
|
|
|
|
|
|
|
30,950
|
|
|
|
15,573
|
|
|
|
(11,184
|
)
|
|
|
35,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,137
|
|
|
|
116,976
|
|
|
|
38,986
|
|
|
|
(11,184
|
)
|
|
|
145,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and other
liabilities
|
|
|
249,473
|
|
|
|
5,884
|
|
|
|
4,685
|
|
|
|
(252
|
)
|
|
|
259,790
|
|
Deferred income taxes
|
|
|
(20,570
|
)
|
|
|
75,348
|
|
|
|
1,135
|
|
|
|
|
|
|
|
55,913
|
|
Other non-current liabilities
|
|
|
|
|
|
|
77,011
|
|
|
|
|
|
|
|
(77,011
|
)
|
|
|
|
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
182
|
|
Shareholders/invested equity
|
|
|
383,575
|
|
|
|
375,203
|
|
|
|
106,685
|
|
|
|
(481,888
|
)
|
|
|
383,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
613,615
|
|
|
$
|
650,422
|
|
|
$
|
151,673
|
|
|
$
|
(570,335
|
)
|
|
$
|
845,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Statement of Operations Information for the Fiscal Year Ended
June 25, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Summary of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
633,514
|
|
|
$
|
108,584
|
|
|
$
|
(3,273
|
)
|
|
$
|
738,825
|
|
Cost of sales
|
|
|
|
|
|
|
597,807
|
|
|
|
101,267
|
|
|
|
(3,019
|
)
|
|
|
696,055
|
|
Selling, general and
administrative expenses
|
|
|
146
|
|
|
|
35,654
|
|
|
|
6,138
|
|
|
|
(404
|
)
|
|
|
41,534
|
|
Provision for bad debts
|
|
|
|
|
|
|
1,004
|
|
|
|
252
|
|
|
|
|
|
|
|
1,256
|
|
Interest expense
|
|
|
18,558
|
|
|
|
558
|
|
|
|
131
|
|
|
|
|
|
|
|
19,247
|
|
Interest income
|
|
|
(1,888
|
)
|
|
|
(129
|
)
|
|
|
(2,472
|
)
|
|
|
|
|
|
|
(4,489
|
)
|
Other (income) expense, net
|
|
|
(17,413
|
)
|
|
|
14,650
|
|
|
|
(355
|
)
|
|
|
|
|
|
|
(3,118
|
)
|
Equity in (earnings) losses of
unconsolidated affiliates
|
|
|
|
|
|
|
(5,216
|
)
|
|
|
4,643
|
|
|
|
(252
|
)
|
|
|
(825
|
)
|
Equity in subsidiaries
|
|
|
12,969
|
|
|
|
|
|
|
|
(402
|
)
|
|
|
(12,567
|
)
|
|
|
|
|
Restructuring charges (recovery)
|
|
|
|
|
|
|
(226
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
(254
|
)
|
Write down of long-lived assets
|
|
|
|
|
|
|
2,315
|
|
|
|
51
|
|
|
|
|
|
|
|
2,366
|
|
Loss from early extinguishment of
debt
|
|
|
2,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
(15,321
|
)
|
|
|
(12,903
|
)
|
|
|
(641
|
)
|
|
|
12,969
|
|
|
|
(15,896
|
)
|
Provision (benefit) for income
taxes
|
|
|
(955
|
)
|
|
|
(2,717
|
)
|
|
|
2,502
|
|
|
|
|
|
|
|
(1,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(14,366
|
)
|
|
|
(10,186
|
)
|
|
|
(3,143
|
)
|
|
|
12,969
|
|
|
|
(14,726
|
)
|
Income (loss) from discontinued
operations, net of tax
|
|
|
|
|
|
|
(2,123
|
)
|
|
|
2,483
|
|
|
|
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(14,366
|
)
|
|
$
|
(12,309
|
)
|
|
$
|
(660
|
)
|
|
$
|
12,969
|
|
|
$
|
(14,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Statement of Operations Information for the Fiscal Year Ended
June 26, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Summary of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
700,374
|
|
|
$
|
98,462
|
|
|
$
|
(5,040
|
)
|
|
$
|
793,796
|
|
Cost of sales
|
|
|
|
|
|
|
678,808
|
|
|
|
88,298
|
|
|
|
(4,389
|
)
|
|
|
762,717
|
|
Selling, general and
administrative expenses
|
|
|
201
|
|
|
|
36,964
|
|
|
|
5,982
|
|
|
|
(936
|
)
|
|
|
42,211
|
|
Provision for bad debts
|
|
|
|
|
|
|
12,886
|
|
|
|
467
|
|
|
|
(181
|
)
|
|
|
13,172
|
|
Interest expense
|
|
|
18,167
|
|
|
|
2,408
|
|
|
|
|
|
|
|
|
|
|
|
20,575
|
|
Interest income
|
|
|
(518
|
)
|
|
|
(116
|
)
|
|
|
(1,518
|
)
|
|
|
|
|
|
|
(2,152
|
)
|
Other (income) expense, net
|
|
|
(17,802
|
)
|
|
|
16,934
|
|
|
|
(1,581
|
)
|
|
|
149
|
|
|
|
(2,300
|
)
|
Equity in (earnings) losses of
unconsolidated affiliates
|
|
|
|
|
|
|
(6,410
|
)
|
|
|
(749
|
)
|
|
|
221
|
|
|
|
(6,938
|
)
|
Equity in subsidiaries
|
|
|
43,847
|
|
|
|
|
|
|
|
|
|
|
|
(43,847
|
)
|
|
|
|
|
Minority interest (income) expense
|
|
|
|
|
|
|
(539
|
)
|
|
|
9
|
|
|
|
|
|
|
|
(530
|
)
|
Restructuring charges (recovery)
|
|
|
|
|
|
|
(374
|
)
|
|
|
33
|
|
|
|
|
|
|
|
(341
|
)
|
Write down of long-lived assets
|
|
|
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes and extraordinary item
|
|
|
(43,895
|
)
|
|
|
(40,790
|
)
|
|
|
7,521
|
|
|
|
43,943
|
|
|
|
(33,221
|
)
|
Provision (benefit) for income
taxes
|
|
|
(2,670
|
)
|
|
|
(12,225
|
)
|
|
|
1,412
|
|
|
|
|
|
|
|
(13,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before extraordinary item
|
|
|
(41,225
|
)
|
|
|
(28,565
|
)
|
|
|
6,109
|
|
|
|
43,943
|
|
|
|
(19,738
|
)
|
Loss from discontinued operations,
net of tax
|
|
|
|
|
|
|
(1,012
|
)
|
|
|
(20,364
|
)
|
|
|
(1,268
|
)
|
|
|
(22,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before
extraordinary item
|
|
|
(41,225
|
)
|
|
|
(29,577
|
)
|
|
|
(14,255
|
)
|
|
|
42,675
|
|
|
|
(42,382
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(41,225
|
)
|
|
$
|
(28,420
|
)
|
|
$
|
(14,255
|
)
|
|
$
|
42,675
|
|
|
$
|
(41,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Statement of Operations Information for the Fiscal Year Ended
June 27, 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Summary of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
583,405
|
|
|
$
|
89,381
|
|
|
$
|
(6,403
|
)
|
|
$
|
666,383
|
|
Cost of sales
|
|
|
|
|
|
|
555,500
|
|
|
|
75,266
|
|
|
|
(4,783
|
)
|
|
|
625,983
|
|
Selling, general and
administrative expenses
|
|
|
|
|
|
|
42,223
|
|
|
|
5,382
|
|
|
|
(1,642
|
)
|
|
|
45,963
|
|
Provision for bad debts
|
|
|
|
|
|
|
2,399
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
2,389
|
|
Interest expense
|
|
|
18,141
|
|
|
|
520
|
|
|
|
37
|
|
|
|
|
|
|
|
18,698
|
|
Interest income
|
|
|
(294
|
)
|
|
|
(219
|
)
|
|
|
(1,639
|
)
|
|
|
|
|
|
|
(2,152
|
)
|
Other (income) expense, net
|
|
|
(20,161
|
)
|
|
|
17,352
|
|
|
|
(171
|
)
|
|
|
390
|
|
|
|
(2,590
|
)
|
Equity in (earnings) losses of
unconsolidated affiliates
|
|
|
|
|
|
|
7,956
|
|
|
|
(1,079
|
)
|
|
|
|
|
|
|
6,877
|
|
Equity in subsidiaries
|
|
|
71,392
|
|
|
|
|
|
|
|
|
|
|
|
(71,392
|
)
|
|
|
|
|
Minority interest (income) expense
|
|
|
|
|
|
|
(6,521
|
)
|
|
|
91
|
|
|
|
|
|
|
|
(6,430
|
)
|
Restructuring charges
|
|
|
|
|
|
|
8,229
|
|
|
|
|
|
|
|
|
|
|
|
8,229
|
|
Arbitration costs and expenses
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
Alliance plant closure
costs(recovery)
|
|
|
|
|
|
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
|
(206
|
)
|
Write down of long-lived assets
|
|
|
|
|
|
|
25,241
|
|
|
|
|
|
|
|
|
|
|
|
25,241
|
|
Goodwill impairment
|
|
|
13,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
(82,539
|
)
|
|
|
(69,251
|
)
|
|
|
11,504
|
|
|
|
71,024
|
|
|
|
(69,262
|
)
|
Provision (benefit) for income
taxes
|
|
|
(12,746
|
)
|
|
|
(15,466
|
)
|
|
|
3,099
|
|
|
|
|
|
|
|
(25,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(69,793
|
)
|
|
|
(53,785
|
)
|
|
|
8,405
|
|
|
|
71,024
|
|
|
|
(44,149
|
)
|
Loss from discontinued operations,
net of tax
|
|
|
|
|
|
|
(512
|
)
|
|
|
(25,116
|
)
|
|
|
(16
|
)
|
|
|
(25,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(69,793
|
)
|
|
$
|
(54,297
|
)
|
|
$
|
(16,711
|
)
|
|
$
|
71,008
|
|
|
$
|
(69,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Statements of Cash Flows Information for the Fiscal Year Ended
June 25, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing
operating activities
|
|
$
|
22,061
|
|
|
$
|
(1,740
|
)
|
|
$
|
9,622
|
|
|
$
|
150
|
|
|
$
|
30,093
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(10,400
|
)
|
|
|
(1,588
|
)
|
|
|
|
|
|
|
(11,988
|
)
|
Acquisition
|
|
|
|
|
|
|
(634
|
)
|
|
|
(30,000
|
)
|
|
|
|
|
|
|
(30,634
|
)
|
Investment of foreign restricted
assets
|
|
|
|
|
|
|
|
|
|
|
171
|
|
|
|
|
|
|
|
171
|
|
Collection of notes receivable
|
|
|
564
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
404
|
|
Proceeds from sale of capital
assets
|
|
|
|
|
|
|
10,026
|
|
|
|
67
|
|
|
|
|
|
|
|
10,093
|
|
Increase in restricted cash
|
|
|
|
|
|
|
|
|
|
|
2,766
|
|
|
|
|
|
|
|
2,766
|
|
Other
|
|
|
|
|
|
|
32
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
564
|
|
|
|
(1,136
|
)
|
|
|
(28,658
|
)
|
|
|
|
|
|
|
(29,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of long term debt
|
|
|
(248,727
|
)
|
|
|
(24,407
|
)
|
|
|
|
|
|
|
|
|
|
|
(273,134
|
)
|
Borrowing of long term debt
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190,000
|
|
Debt issuance costs
|
|
|
(8,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,041
|
)
|
Issuance of Company stock
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
Cash dividend paid
|
|
|
31,091
|
|
|
|
|
|
|
|
(31,091
|
)
|
|
|
|
|
|
|
|
|
Purchase and retirement of Company
stock
|
|
|
|
|
|
|
358
|
|
|
|
467
|
|
|
|
|
|
|
|
825
|
|
Other
|
|
|
|
|
|
|
(10
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(35,501
|
)
|
|
|
(24,059
|
)
|
|
|
(30,614
|
)
|
|
|
|
|
|
|
(90,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows of discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flow
|
|
|
|
|
|
|
4,025
|
|
|
|
(7,367
|
)
|
|
|
|
|
|
|
(3,342
|
)
|
Investing cash flow
|
|
|
|
|
|
|
(970
|
)
|
|
|
22,998
|
|
|
|
|
|
|
|
22,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
discontinued operations
|
|
|
|
|
|
|
3,055
|
|
|
|
15,631
|
|
|
|
|
|
|
|
18,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
471
|
|
|
|
(150
|
)
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
(12,876
|
)
|
|
|
(23,880
|
)
|
|
|
(33,548
|
)
|
|
|
|
|
|
|
(70,304
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
35,868
|
|
|
|
25,272
|
|
|
|
44,481
|
|
|
|
|
|
|
|
105,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
22,992
|
|
|
$
|
1,392
|
|
|
$
|
10,933
|
|
|
$
|
|
|
|
$
|
35,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Statements of Cash Flows Information for the Fiscal Year Ended
June 26, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
continuing operating activities
|
|
$
|
4,222
|
|
|
$
|
23,518
|
|
|
$
|
(3,827
|
)
|
|
$
|
4,872
|
|
|
$
|
28,785
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(5,548
|
)
|
|
|
(4,498
|
)
|
|
|
624
|
|
|
|
(9,422
|
)
|
Acquisition
|
|
|
|
|
|
|
(1,358
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,358
|
)
|
Return of capital from equity
affiliates
|
|
|
|
|
|
|
6,138
|
|
|
|
|
|
|
|
|
|
|
|
6,138
|
|
Investment of foreign restricted
assets
|
|
|
|
|
|
|
|
|
|
|
388
|
|
|
|
|
|
|
|
388
|
|
Collection of notes receivable
|
|
|
543
|
|
|
|
(206
|
)
|
|
|
252
|
|
|
|
(69
|
)
|
|
|
520
|
|
Increase in notes receivable
|
|
|
|
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
(139
|
)
|
Proceeds from sale of capital
assets
|
|
|
|
|
|
|
2,259
|
|
|
|
492
|
|
|
|
(461
|
)
|
|
|
2,290
|
|
Increase in restricted cash
|
|
|
|
|
|
|
(2,766
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,766
|
)
|
Other
|
|
|
|
|
|
|
(884
|
)
|
|
|
(206
|
)
|
|
|
748
|
|
|
|
(342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
543
|
|
|
|
(2,504
|
)
|
|
|
(3,572
|
)
|
|
|
842
|
|
|
|
(4,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Company stock
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
Purchase and retirement of Company
stock
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Other
|
|
|
|
|
|
|
(530
|
)
|
|
|
510
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
102
|
|
|
|
(530
|
)
|
|
|
510
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows of discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flow
|
|
|
|
|
|
|
12
|
|
|
|
(3,045
|
)
|
|
|
(3,240
|
)
|
|
|
(6,273
|
)
|
Investing cash flow
|
|
|
|
|
|
|
|
|
|
|
13,902
|
|
|
|
|
|
|
|
13,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
discontinued operations
|
|
|
|
|
|
|
12
|
|
|
|
10,857
|
|
|
|
(3,240
|
)
|
|
|
7,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
11,069
|
|
|
|
(2,474
|
)
|
|
|
8,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
4,867
|
|
|
|
20,496
|
|
|
|
15,037
|
|
|
|
|
|
|
|
40,400
|
|
Cash and cash equivalents at
beginning of year
|
|
|
31,001
|
|
|
|
4,776
|
|
|
|
29,444
|
|
|
|
|
|
|
|
65,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
35,868
|
|
|
$
|
25,272
|
|
|
$
|
44,481
|
|
|
$
|
|
|
|
$
|
105,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Statements of Cash Flows Information for the Fiscal Year Ended
June 27, 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
continuing operating activities
|
|
$
|
(8,361
|
)
|
|
$
|
6,106
|
|
|
$
|
11,589
|
|
|
$
|
2,046
|
|
|
$
|
11,380
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(378
|
)
|
|
|
(10,310
|
)
|
|
|
(821
|
)
|
|
|
385
|
|
|
|
(11,124
|
)
|
Acquisition
|
|
|
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
(83
|
)
|
Return of capital from equity
affiliates
|
|
|
|
|
|
|
1,665
|
|
|
|
|
|
|
|
|
|
|
|
1,665
|
|
Investment of foreign restricted
assets
|
|
|
|
|
|
|
(202
|
)
|
|
|
(323
|
)
|
|
|
202
|
|
|
|
(323
|
)
|
Change in notes receivable
|
|
|
1,905
|
|
|
|
(702
|
)
|
|
|
(1,333
|
)
|
|
|
|
|
|
|
(130
|
)
|
Proceeds from sale of capital
assets
|
|
|
4,048
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
4,242
|
|
Other
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
5,575
|
|
|
|
(9,462
|
)
|
|
|
(2,477
|
)
|
|
|
587
|
|
|
|
(5,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Company stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase and retirement of Company
stock
|
|
|
(8,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,390
|
)
|
Other
|
|
|
|
|
|
|
(186
|
)
|
|
|
109
|
|
|
|
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(8,390
|
)
|
|
|
(186
|
)
|
|
|
109
|
|
|
|
|
|
|
|
(8,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows of discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flow
|
|
|
|
|
|
|
(10
|
)
|
|
|
(6,765
|
)
|
|
|
(1,583
|
)
|
|
|
(8,358
|
)
|
Investing cash flow
|
|
|
|
|
|
|
|
|
|
|
(427
|
)
|
|
|
|
|
|
|
(427
|
)
|
Financing cash flow
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
(7,192
|
)
|
|
|
(1,583
|
)
|
|
|
(8,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
1,109
|
|
|
|
(1,050
|
)
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
(11,176
|
)
|
|
|
(3,542
|
)
|
|
|
3,138
|
|
|
|
|
|
|
|
(11,580
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
42,177
|
|
|
|
8,318
|
|
|
|
26,306
|
|
|
|
|
|
|
|
76,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
31,001
|
|
|
$
|
4,776
|
|
|
$
|
29,444
|
|
|
$
|
|
|
|
$
|
65,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
The Company has not changed accountants nor are there any
disagreements with its accountants, Ernst & Young LLP,
on accounting and financial disclosure that are required to be
reported pursuant to Item 304 of
Regulation S-K.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed
in the Companys reports filed or submitted pursuant to the
Securities Exchange Act of 1934, as amended (the Exchange
Act) is recorded, processed, summarized and reported in a
timely manner, and that such information is accumulated and
communicated to the Companys management, specifically
including its Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosure.
The Company carries out a variety of on-going procedures, under
the supervision and with the participation of the Companys
management, including the Chief Executive Officer and the Chief
Financial Officer, to evaluate the effectiveness of the
Companys disclosure controls and procedures. Based on the
foregoing, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure
controls and procedures were effective as of June 25, 2006.
Assessment
of Internal Control over Financial Reporting
Managements
Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rule 13a-15(f).
Under the supervision and with the participation of its Chief
Executive Officer and Chief Financial Officer, management
conducted an evaluation of the effectiveness of its internal
control over financial reporting based upon the criteria set
forth in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on that
evaluation, management believes that the Companys internal
control over financial reporting was effective as of
June 25, 2006.
Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence
and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there
is a risk that material misstatements may not be prevented or
detected on a timely basis by internal controls over financial
reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though
not eliminate, this risk.
Ernst and Young LLP, the Companys independent registered
public accounting firm, has issued an attestation report on the
assessment performed by the Companys management with
respect to the Companys internal control over financial
reporting, which begins on page 94 of this Annual Report on
Form 10-K.
93
Attestation
Report of Ernst & Young LLP
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Unifi, Inc.,
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that Unifi, Inc. maintained effective
internal control over financial reporting as of June 25,
2006, based on criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the
COSO Criteria). Unifi, Inc.s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Unifi, Inc.
maintained effective internal control over financial reporting
as of June 25, 2006, is fairly stated, in all material
respects, based on the COSO Criteria. Also, in our opinion,
Unifi, Inc. maintained, in all material respects, effective
internal control over financial reporting as of June 25,
2006, based on the COSO Criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Unifi, Inc. as of June 25,
2006 and June 26, 2005, and the related consolidated
statements of operations, shareholders equity and
comprehensive income (loss), and cash flows for each of the
three years in the period ended June 25, 2006 of Unifi,
Inc. and our report dated August 30, 2006, expressed an
unqualified opinion thereon.
Greensboro, North Carolina
August 30, 2006
94
Changes
in Internal Control over Financial Reporting
There has been no change in the Companys internal control
over financial reporting during the Companys most recent
fiscal quarter that has materially affected, or is reasonable
likely to materially affect, the Companys internal control
over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
95
PART III
|
|
Item 10.
|
Directors
and Executive Officers of Registrant
|
The information required by this item with respect to executive
officers is set forth above in Part I. The information
required by this item with respect to directors will be set
forth in the Companys definitive proxy statement for its
2006 Annual Meeting of Shareholders to be filed within
120 days after June 25, 2006 (the Proxy
Statement) under the headings Election of
Directors, Nominees for Election as Directors,
and Section 16(a) Beneficial Ownership Reporting and
Compliance and is incorporated herein by reference.
Code of
Business Conduct and Ethics; Ethical Business Conduct Policy
Statement
The Company has adopted a written Code of Business Conduct and
Ethics applicable to members of the Board of Directors and
Executive Officers (the Code of Business Conduct and
Ethics). The Company has also adopted the Ethical Business
Conduct Policy Statement (the Policy Statement) that
applies to all employees. The Code of Business Conduct and
Ethics and the Policy Statement are available on the
Companys website at www.unifi.com, under the
Investor Relations section and print copies are
available without charge to any shareholder that requests a
copy. Any amendments to or waiver of the Code of Business
Conduct and Ethics applicable to the Companys chief
executive officer and chief financial officer will be disclosed
on the Companys website promptly following the date of
such amendment or waiver.
NYSE
Certification
The Annual Certification of the Companys Chief Executive
Officer required to be furnished to the New York Stock Exchange
pursuant to section 303A.12(a) of the NYSE Listed Company
Manual was previously filed at the New York Stock Exchange on
November 14, 2005.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item will be set forth in the
Proxy Statement under the headings Executive Officers and
their Compensation, Directors
Compensation, Employment and Termination
Agreements, Compensation Committee InterLocks and
Insider Participation in Compensation Decisions,
Insider Transactions, Report of the
Compensation Committee on Executive Compensation and
Performance Graph Shareholder Return on Common
Stock, and is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item with respect to security
ownership of certain beneficial owners and management will be
set forth in the Proxy Statement under the headings
Information Relating to Principal Security Holders
and Beneficial Ownership of Common Stock By Directors and
Executive Officers and is incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required by this item will be set forth in the
Proxy Statement under the headings Compensation Committee
InterLocks and Insider Participation in Compensation
Decisions and Insider Transactions and is
incorporated herein by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item will be set forth in the
Proxy Statement under the heading Audit Committee
Report and is incorporated herein by reference.
96
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) 1. Financial Statements
The following financial statements of the Registrant and reports
of independent registered public accounting firm are filed as a
part of this Report.
|
|
|
|
|
|
|
Pages
|
|
Managements Report on
Internal Control over Financial Reporting
|
|
|
93
|
|
Reports of Independent Registered
Public Accounting Firm
|
|
|
52 & 94
|
|
Consolidated Balance Sheets at
June 25, 2006 and June 26, 2005
|
|
|
53
|
|
Consolidated Statements of
Operations for the Years Ended June 25, 2006, June 26,
2005, and June 27, 2004
|
|
|
54
|
|
Consolidated Statements of Changes
in Shareholders Equity and Comprehensive Income (Loss) for
the Years Ended June 25, 2006, June 26 2005, and
June 27, 2004
|
|
|
55
|
|
Consolidated Statements of Cash
Flows for the Years Ended June 25, 2006, June 26,
2005, and June 27, 2004
|
|
|
56
|
|
Notes to Consolidated Financial
Statements
|
|
|
57
|
|
2. Financial Statement Schedules
|
|
|
|
|
II Valuation and
Qualifying Accounts
|
|
|
102
|
|
Parkdale America, LLC Financial
Statements as of December 31, 2005, January 1, 2005
and January 3, 2004 and for the years then ended
|
|
|
103
|
|
Yihua Unifi Fibre Industry Company
Limited Financial Statements as of May 30, 2006, and for
the period from the date of inception August 4, 2005 to
May 30, 2006
|
|
|
121
|
|
Schedules other than those above are omitted because they are
not required, are not applicable, or the required information is
given in the consolidated financial statements or notes thereto.
With the exception of the information herein expressly
incorporated by reference, the Proxy Statement is not deemed
filed as a part of this Annual Report on
Form 10-K.
97
3. Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1(i) (a)
|
|
Restated Certificate of
Incorporation of Unifi, Inc., as amended (incorporated by
reference from Exhibit 3a to the Companys Annual
Report on
Form 10-K
for the fiscal year ended June 27, 2004 (Reg. No.
001-10542) filed on September 17, 2004).
|
|
3
|
.1(i) (b)
|
|
Certificate of Change to the
Certificate of Incorporation of Unifi, Inc. (incorporated by
reference from Exhibit 3.1 to the Companys Current
Report on
Form 8-K
(Reg. No. 001-10542) dated July 25, 2006).
|
|
3
|
.1(ii)
|
|
Restated By-laws of Unifi, Inc.,
effective October 22, 2003 (incorporated by reference from
Exhibit 3b to the Companys Annual Report on
Form 10-K
for the fiscal year ended June 27, 2004 (Reg. No.
001-10542) filed on September 17, 2004).
|
|
4
|
.1
|
|
Indenture dated May 26, 2006,
among Unifi, Inc., the guarantors party thereto and
U.S. Bank National Association, as trustee.
|
|
4
|
.2
|
|
Form of Exchange Note (included as
Exhibit A of Exhibit 4.1 of this Registration
Statement).
|
|
4
|
.3
|
|
Registration Rights Agreement,
dated May 26, 2006, among Unifi, Inc., the guarantors party
thereto and Lehman Brothers Inc. and Banc of America Securities
LLC, as the initial purchasers.
|
|
4
|
.4
|
|
Security Agreement, dated as of
May 26, 2006, among Unifi, Inc., the guarantors party
thereto and U.S. Bank National Association.
|
|
4
|
.5
|
|
Pledge Agreement, dated as of
May 26, 2006, among Unifi, Inc., the guarantors party
thereto and U.S. Bank National Association.
|
|
4
|
.6
|
|
Grant of Security Interest in
Patent Rights, dated as of May 26, 2006, by Unifi, Inc. in
favor of U.S. Bank National Association.
|
|
4
|
.7
|
|
Grant of Security Interest in
Trademark Rights, dated as of May 26, 2006, by Unifi, Inc.
in favor of U.S. Bank National Association.
|
|
4
|
.8
|
|
Intercreditor Agreement, dated as
of May 26, 2006, among Unifi, Inc., the subsidiaries party
thereto, Bank of America N.A. and U.S. Bank National
Association.
|
|
4
|
.9
|
|
Amended and Restated Credit
Agreement, dated as of May 26, 2006, among Unifi, Inc., the
subsidiaries party thereto and Bank of America N.A.
|
|
4
|
.10
|
|
Amended and Restated Security
Agreement, dated May 26, 2006, among Unifi, Inc., the
subsidiaries party thereto and Bank of America N.A.
|
|
4
|
.11
|
|
Pledge Agreement, dated
May 26, 2006, among Unifi, Inc., the subsidiaries party
thereto and Bank of America N.A.
|
|
4
|
.12
|
|
Grant of Security Interest in
Patent Rights, dated as of May 26, 2006, by Unifi, Inc. in
favor of Bank of America N.A.
|
|
4
|
.13
|
|
Grant of Security Interest in
Trademark Rights, dated as of May 26, 2006, by Unifi, Inc.
in favor of Bank of America N.A.
|
|
10
|
.1
|
|
Deposit Account Control
Agreement, dated as of May 26, 2006, between Unifi
Manufacturing, Inc. and Bank of America, N.A.
|
|
10
|
.2
|
|
Deposit Account Control
Agreement, dated as of May 26, 2006, between Unifi Kinston,
LLC and Bank of America, N.A.
|
|
10
|
.3
|
|
*Unifi, Inc. 1992 Incentive Stock
Option Plan, effective July 16, 1992 (incorporated by
reference from Exhibit 10c to the Companys Annual
Report on
Form 10-K
for the fiscal year ended June 27, 1993 (Reg. No.
001-10542) filed on September 21, 1993, and included as
Exhibit 99.2 to the Companys Registration Statement
on
Form S-8
(Reg. No.
033-53799)
filed on May 25, 1994).
|
|
10
|
.4
|
|
*Unifi, Inc.s 1996 Incentive
Stock Option Plan (incorporated by reference from
Exhibit 10f to the Companys Annual Report on
Form 10-K
for the fiscal year ended June 30, 1996 (Reg. No.
001-10542) filed on September 27, 1996).
|
|
10
|
.5
|
|
*Unifi, Inc.s 1996
Non-Qualified Stock Option Plan (incorporated by reference from
Exhibit 10g to the Companys Annual Report on
Form 10-K
for the fiscal year ended June 30, 1996 (Reg. No.
001-10542) filed on September 27, 1996).
|
98
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.6
|
|
*1999 Unifi, Inc. Long-Term
Incentive Plan (incorporated by reference from Exhibit 99.1
to the Companys Registration Statement on
Form S-8
(Reg.
No. 333-43158)
filed on August 7, 2000).
|
|
10
|
.7
|
|
*Form of Option Agreement for
Incentive Stock Options granted under the 1999 Unifi, Inc.
Long-Term Incentive Plan (incorporated by reference from
Exhibit 10.4 to the Companys Current Report on
Form 8-K
(Reg. No. 001-10542) dated July 25, 2006).
|
|
10
|
.8
|
|
*Unifi, Inc. Supplemental Key
Employee Retirement Plan, effective July 26, 2006
(incorporated by reference from Exhibit 10.4 to the
Companys Current Report on
Form 8-K
(Reg. No. 001-10542) dated July 25, 2006).
|
|
10
|
.9
|
|
*Employment Agreement between
Unifi, Inc. and Brian R. Parke, dated January 23, 2002
(incorporated by reference from Exhibit 10g to the
Companys Annual Report on
Form 10-K
for the fiscal year ended June 30, 2002 (Reg. No.
001-10542) filed on September 23, 2002).
|
|
10
|
.10
|
|
*Employment Agreement between
Unifi, Inc. and William M. Lowe, Jr., effective
July 25, 2006 (incorporated by reference from
Exhibit 10.3 to the Companys Current Report on
Form 8-K
(Reg. No. 001-10542) dated July 25, 2006).
|
|
10
|
.11
|
|
*Change of Control Agreement
between Unifi, Inc. and Thomas H. Caudle, Jr., effective
November 1, 2005 (incorporated by reference from Exhibit
10.1 to the Companys Current Report on
Form 8-K
(Reg. No. 001-10542) dated November 1, 2005).
|
|
10
|
.12
|
|
*Change of Control Agreement
between Unifi, Inc. and Benny Holder, effective November 1,
2005 (incorporated by reference from Exhibit 10.2 to the
Companys Current Report on
Form 8-K
(Reg. No. 001-10542) dated November 1, 2005).
|
|
10
|
.13
|
|
*Change of Control Agreement
between Unifi, Inc. and Charles F, McCoy, effective
November 1, 2005 (incorporated by reference from
Exhibit 10.2 to the Companys Current Report on
Form 8-K
(Reg. No. 001-10542) dated November 1, 2005).
|
|
10
|
.14
|
|
*Change of Control Agreement
between Unifi, Inc. and William M. Lowe, Jr., effective
November 1, 2005 (incorporated by reference from
Exhibit 10.2 to the Companys Current Report on
Form 8-K
(Reg. No. 001-10542) dated November 1, 2005).
|
|
10
|
.15
|
|
*Change of Control Agreement
between Unifi, Inc. and R. Roger Berrier, Jr., effective
July 25, 2006 (incorporated by reference from
Exhibit 10.1 to the Companys Current Report on
Form 8-K
(Reg. No. 001-10542) dated July 25, 2006).
|
|
10
|
.16
|
|
*Change of Control Agreement
between Unifi, Inc. and William L. Jasper, effective
July 25, 2006 (incorporated by reference from
Exhibit 10.2 to the Companys Current Report on
Form 8-K
(Reg. No. 001-10542) dated July 25, 2006).
|
|
10
|
.17
|
|
Chip Supply Agreement, dated
March 18, 2005, by and between Unifi Manufacturing, Inc.
and Nan Ya Plastics Corp., America (incorporated by reference
from Exhibit 10.1 to the Companys Current Report on
Form 8-K
(Reg. No. 001-10542) dated March 18, 2005) (portions of
this exhibit have been redacted and filed separately with the
Securities and Exchange Commission pursuant to a request for
confidential treatment).
|
|
10
|
.18
|
|
Equity Joint Venture Contract,
dated June 10, 2005, between Sinopec Yizheng Chemical Fibre
Company Limited and Unifi Asia Holdings, SRL for the
establishment of Yihua Unifi Fibre Industry Company Limited
(incorporated by reference from Exhibit 10.1 to the
Companys Current Report on
Form 8-K
(Reg. No. 001-10542) dated June 10, 2005).
|
|
14
|
.1
|
|
Unifi, Inc. Ethical Business
Conduct Policy Statement as amended July 22, 2004, filed as
Exhibit (14a) with the Companys
Form 10-K
for the fiscal year ended June 27, 2004, which is
incorporated herein by reference.
|
|
14
|
.2
|
|
Unifi, Inc. Code of Business
Conduct & Ethics adopted on July 22, 2004, filed
as Exhibit (14b) with the Companys
Form 10-K
for the fiscal year ended June 27, 2004, which is
incorporated herein by reference.
|
99
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
21
|
.1
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of Ernst & Young
LLP, Independent Registered Public Accounting Firm
|
|
23
|
.2
|
|
Consent of Ernst & Young
Hua Ming, Independent Registered Public Accounting Firm
|
|
23
|
.3
|
|
Consent of Grant Thornton LLP,
Independent Certified Public Accounting Firm
|
|
31
|
.1
|
|
Chief Executive Officers
certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31
|
.2
|
|
Chief Financial Officers
certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
.1
|
|
Chief Executive Officers
certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
.2
|
|
Chief Financial Officers
certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
* NOTE: |
|
These Exhibits are management contracts or compensatory plans or
arrangements required to be filed as an exhibit to this
Form 10-K
pursuant to Item 15(b) of this report. |
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized on September 8, 2006.
UNIFI, Inc.
Brian R. Parke
Chairman of the Board,
President and
Chief Executive Officer
|
|
|
|
By:
|
/s/ William
M. Lowe, Jr.
|
William M. Lowe, Jr.
Vice President,
Chief Operating Officer and
Chief Financial 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:
|
|
|
|
|
|
|
/s/ Brian
R. Parke
Brian
R. Parke
|
|
Chairman of the Board, President
and Chief Executive Officer
|
|
September 8, 2006
|
|
|
|
|
|
/s/ William
J. Armfield,
IV
William
J. Armfield, IV
|
|
Director
|
|
September 8, 2006
|
|
|
|
|
|
/s/ R.
Wiley
Bourne, Jr.
R.
Wiley Bourne, Jr.
|
|
Director
|
|
September 8, 2006
|
|
|
|
|
|
/s/ Charles
R. Carter
Charles
R. Carter
|
|
Director
|
|
September 8, 2006
|
|
|
|
|
|
/s/ Sue
W. Cole
Sue
W. Cole
|
|
Director
|
|
September 8, 2006
|
|
|
|
|
|
/s/ J.B.
Davis
J.B.
Davis
|
|
Director
|
|
September 8, 2006
|
|
|
|
|
|
/s/ Kenneth
G. Langone
Kenneth
G. Langone
|
|
Director
|
|
September 8, 2006
|
|
|
|
|
|
/s/ Donald
F. Orr
Donald
F. Orr
|
|
Director
|
|
September 8, 2006
|
101
(27) Schedule II
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to Other
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Accounts
|
|
|
Deductions
|
|
|
End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Describe (b)
|
|
|
Describe (c)
|
|
|
Period
|
|
|
|
(Amounts in thousands)
|
|
|
Allowance for uncollectible
accounts(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 25, 2006
|
|
$
|
13,967
|
|
|
$
|
1,256
|
|
|
$
|
(1,107
|
)
|
|
$
|
(8,987
|
)
|
|
$
|
5,129
|
|
Year ended June 26, 2005
|
|
|
10,721
|
|
|
|
14,028
|
|
|
|
(324
|
)
|
|
|
(10,458
|
)
|
|
|
13,967
|
|
Year ended June 27, 2004
|
|
|
12,268
|
|
|
|
2,297
|
|
|
|
447
|
|
|
|
(4,291
|
)
|
|
|
10,721
|
|
Valuation allowance for
deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 25, 2006
|
|
$
|
10,930
|
|
|
$
|
1,886
|
|
|
$
|
|
|
|
$
|
(3,584
|
)
|
|
$
|
9,232
|
|
Year ended June 26, 2005
|
|
|
13,137
|
|
|
|
830
|
|
|
|
|
|
|
|
(3,037
|
)
|
|
|
10,930
|
|
Year ended June 27, 2004
|
|
|
10,500
|
|
|
|
3,927
|
|
|
|
|
|
|
|
(1,290
|
)
|
|
|
13,137
|
|
Notes
|
|
|
(a) |
|
The allowance for doubtful accounts includes amounts estimated
not to be collectible for product quality claims, specific
customer credit issues and a general provision for bad debts. |
|
(b) |
|
The allowance for doubtful accounts includes acquisition related
adjustments
and/or
effects of currency translation from restating activity of its
foreign affiliates from their respective local currencies to the
U.S. dollar. |
|
(c) |
|
Deductions from the allowance for doubtful accounts represent
accounts written off which were deemed not to be collectible and
the customer claims paid, net of certain recoveries. |
|
|
|
In fiscal year 2005, deductions from the valuation allowance for
deferred tax assets include state tax credit write-offs due to
the expiration of the credits and capital loss carryforwards. In
fiscal year 2006, deductions from the valuation allowance for
deferred tax assets include state tax credit write-offs due to
the expiration of the credits. |
102
Financial
Statements and Report of
Independent Certified Public Accountants
Parkdale America, LLC
(a
limited liability company)
As
of December 31, 2005, January 1, 2005, and
January 3, 2004
103
Parkdale
America, LLC
Table of
Contents
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105
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Financial Statements:
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106
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107
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108
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109
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110-120
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104
REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Members of
Parkdale America, LLC:
We have audited the accompanying balance sheet of Parkdale
America, LLC as of December 31, 2005, and the related
statements of operations, members equity and cash flows
for the year then ended. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of
Parkdale America, LLC as of and for the years ended
January 1, 2005, and January 3, 2004, were audited by
other auditors. Those auditors expressed an unqualified opinion
on those financial statements in their report dated
March 4, 2005.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America as
established by the American Institute of Certified Public
Accountants. 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 consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 2005 financial statements referred to above
present fairly, in all material respects, the financial position
of Parkdale America, LLC as of December 31, 2005, and the
results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Grant Thornton LLP
Charlotte, North Carolina
March 17, 2006
105
Parkdale
America, LLC
December 31, 2005, January 1, 2005, and
January 3, 2004
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2005
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2004
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2003
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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11,610,000
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$
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59,116,000
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$
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73,567,000
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Available-for-sale
securities
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10,000,000
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0
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0
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Accounts receivable, less
allowance of $2,000,000, $3,000,000 and $3,740,000, respectively
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57,255,000
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57,714,000
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61,529,000
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Inventories
|
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36,665,000
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36,287,000
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61,149,000
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Prepaid expenses and other assets
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2,300,000
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1,129,000
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1,039,000
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Notes receivable
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84,000
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87,000
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90,000
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Notes receivable from joint
venture, current
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1,023,000
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0
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0
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Total current assets
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118,937,000
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154,333,000
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197,374,000
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Property, plant and equipment,
net
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117,267,000
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111,229,000
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108,826,000
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Assets held for sale
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6,805,000
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1,339,000
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1,167,000
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Investment in joint
venture
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10,888,000
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9,754,000
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8,755,000
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Intangible assets,
net
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625,000
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1,250,000
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1,875,000
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Derivative instruments,
net
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837,000
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3,800,000
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10,876,000
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Notes receivable from joint
venture
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0
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3,609,000
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4,777,000
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Deferred financing
costs
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532,000
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155,000
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511,000
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$
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255,891,000
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$
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285,469,000
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$
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334,161,000
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LIABILITIES AND MEMBERS
EQUITY
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Current liabilities:
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Cash overdraft
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$
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2,410,000
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$
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0
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$
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0
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Trade accounts payable
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11,498,000
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13,660,000
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13,748,000
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Accrued expenses
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5,623,000
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6,147,000
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7,380,000
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Deferred revenue
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347,000
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0
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0
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Due to affiliates, net
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2,304,000
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1,991,000
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461,000
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Current portion of capital lease
obligations
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1,775,000
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1,754,000
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1,640,000
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Current portion of long-term debt
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0
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32,000,000
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8,000,000
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Total current liabilities
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23,957,000
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55,552,000
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31,229,000
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Capital lease
obligations
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12,587,000
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15,198,000
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16,952,000
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Long-term debt
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0
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0
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32,000,000
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Total liabilities
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36,544,000
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70,750,000
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80,181,000
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Commitments and
contingencies
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Members equity
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219,347,000
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214,719,000
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253,980,000
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$
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255,891,000
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$
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285,469,000
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$
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334,161,000
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The accompanying notes are an integral part of these financial
statements.
106
Parkdale
America, LLC
For the Years Ended December 31, 2005,
January 1, 2005, and January 3, 2004
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2005
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2004
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2003
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Net sales
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$
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409,136,000
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$
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436,874,000
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$
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403,600,000
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Cost of goods sold
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(370,631,000
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)
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(411,998,000
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)
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(380,722,000
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)
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Gross margin
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38,505,000
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24,876,000
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22,878,000
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General and administrative
expenses
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(16,582,000
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)
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(19,037,000
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)
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(19,439,000
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)
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Income from operations
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21,923,000
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5,839,000
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3,439,000
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Interest expense
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(1,840,000
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)
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(3,670,000
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)
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(4,384,000
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)
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Interest income
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857,000
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1,214,000
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1,276,000
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(Loss) gain on derivative
instruments
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(1,118,000
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)
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(15,904,000
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)
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11,251,000
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Earnings from income of joint
venture
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1,134,000
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1,000,000
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607,000
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(Loss) gain on foreign currency
translation
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(624,000
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)
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1,010,000
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0
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Loss on settlement of
anti-competitive practices litigation
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(7,800,000
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)
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0
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|
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0
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Loss on extinguishment of
debt
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(2,111,000
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)
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0
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0
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Other (expense) income,
net
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(2,209,000
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)
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(830,000
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)
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843,000
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Income (loss) before cumulative
effect of change in accounting principle
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8,212,000
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(11,341,000
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)
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13,032,000
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Cumulative effect on prior
years (to January 3, 2004) of changing to different
method of valuing certain inventories
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0
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1,562,000
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0
|
|
|
|
|
|
|
|
|
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|
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Net income (loss)
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$
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8,212,000
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|
$
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(9,779,000
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)
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$
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13,032,000
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The accompanying notes are an integral part of these financial
statements.
107
Parkdale
America, LLC
For the Years Ended December 31, 2005,
January 1, 2005, and January 3, 2004
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Balance, December 28,
2002
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|
$
|
271,990,000
|
|
Net income
|
|
|
13,032,000
|
|
Dividends paid
|
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|
(31,510,000
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)
|
Capital contribution by Parkdale
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468,000
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|
|
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|
Balance, January 3,
2004
|
|
|
253,980,000
|
|
Net loss
|
|
|
(9,779,000
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)
|
Dividends paid
|
|
|
(29,489,000
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)
|
Capital contributions
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|
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7,000
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|
|
|
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|
|
Balance, January 1,
2005
|
|
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214,719,000
|
|
|
|
|
|
|
Comprehensive income:
|
|
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|
|
Net income
|
|
|
8,212,000
|
|
Changes in other comprehensive
income
|
|
|
3,051,000
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
11,263,000
|
|
|
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Dividends paid
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|
|
(6,635,000
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)
|
|
|
|
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Balance, December 31,
2005
|
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$
|
219,347,000
|
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The accompanying notes are an integral part of these financial
statements.
108
Parkdale
America, LLC
For the Years Ended December 31, 2005,
January 1, 2005, and January 3, 2004
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2005
|
|
|
2004
|
|
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2003
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,212,000
|
|
|
$
|
(9,779,000
|
)
|
|
$
|
13,032,000
|
|
Adjustments to reconcile net
income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
26,454,000
|
|
|
|
22,066,000
|
|
|
|
29,671,000
|
|
Loss (gain) on disposals of
property, plant and equipment
|
|
|
647,000
|
|
|
|
221,000
|
|
|
|
(38,000
|
)
|
Loss on write down of property,
plant and equipment
|
|
|
7,127,000
|
|
|
|
0
|
|
|
|
0
|
|
Loss (gain) on derivative
instruments
|
|
|
6,014,000
|
|
|
|
7,076,000
|
|
|
|
(9,142,000
|
)
|
Earnings from income of joint
venture
|
|
|
(1,134,000
|
)
|
|
|
(1,000,000
|
)
|
|
|
(607,000
|
)
|
Losses on write-downs of
inventories
|
|
|
0
|
|
|
|
293,000
|
|
|
|
5,107,000
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
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Accounts receivable, net
|
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|
459,000
|
|
|
|
3,815,000
|
|
|
|
(11,353,000
|
)
|
Notes receivable
|
|
|
0
|
|
|
|
1,171,000
|
|
|
|
(6,000
|
)
|
Due to affiliates, net
|
|
|
313,000
|
|
|
|
1,536,000
|
|
|
|
1,557,000
|
|
Inventories
|
|
|
910,000
|
|
|
|
24,569,000
|
|
|
|
(23,463,000
|
)
|
Prepaid expenses and other assets
|
|
|
(1,171,000
|
)
|
|
|
(90,000
|
)
|
|
|
421,000
|
|
Trade accounts payable
|
|
|
(2,162,000
|
)
|
|
|
(564,000
|
)
|
|
|
3,241,000
|
|
Accrued expenses
|
|
|
(524,000
|
)
|
|
|
(1,233,000
|
)
|
|
|
23,000
|
|
Deferred revenue
|
|
|
347,000
|
|
|
|
0
|
|
|
|
(75,000
|
)
|
Cash overdraft
|
|
|
2,410,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
47,902,000
|
|
|
|
48,081,000
|
|
|
|
8,368,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(40,180,000
|
)
|
|
|
(24,955,000
|
)
|
|
|
(2,663,000
|
)
|
Purchases of
available-for-sale
securities
|
|
|
(10,000,000
|
)
|
|
|
0
|
|
|
|
0
|
|
Acquisition of certain assets of
Delta Apparel, Inc.
|
|
|
(11,288,000
|
)
|
|
|
0
|
|
|
|
0
|
|
Proceeds from disposals of
property, plant and equipment
|
|
|
5,462,000
|
|
|
|
1,552,000
|
|
|
|
375,000
|
|
Proceeds from notes receivable
from affiliates
|
|
|
2,586,000
|
|
|
|
0
|
|
|
|
450,000
|
|
Proceeds from notes receivable
|
|
|
3,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(53,417,000
|
)
|
|
|
(23,403,000
|
)
|
|
|
(1,838,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(32,000,000
|
)
|
|
|
(8,000,000
|
)
|
|
|
0
|
|
Payments of deferred financing
costs
|
|
|
(766,000
|
)
|
|
|
0
|
|
|
|
0
|
|
Dividends paid
|
|
|
(6,635,000
|
)
|
|
|
(29,489,000
|
)
|
|
|
(31,510,000
|
)
|
Principal payments on capital
lease obligations
|
|
|
(2,590,000
|
)
|
|
|
(1,640,000
|
)
|
|
|
(1,426,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(41,991,000
|
)
|
|
|
(39,129,000
|
)
|
|
|
(32,936,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
(47,506,000
|
)
|
|
|
(14,451,000
|
)
|
|
|
(26,406,000
|
)
|
Cash and cash equivalents,
beginning of year
|
|
|
59,116,000
|
|
|
|
73,567,000
|
|
|
|
99,973,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end
of year
|
|
$
|
11,610,000
|
|
|
$
|
59,116,000
|
|
|
$
|
73,567,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information Cash paid during the year for
interest
|
|
$
|
3,971,000
|
|
|
$
|
3,488,000
|
|
|
$
|
4,398,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of
noncash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized items included in
accounts payable
|
|
$
|
220,000
|
|
|
$
|
476,000
|
|
|
$
|
187,000
|
|
Capital contribution
|
|
|
0
|
|
|
|
7,000
|
|
|
|
468,000
|
|
Fixed asset transfers to
affiliate, net
|
|
|
0
|
|
|
|
0
|
|
|
|
59,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
109
Parkdale
America, LLC
December 31,
2005, January 1, 2005, and January 3, 2004
Note A
Nature of Business and Summary of Significant Accounting
Policies
Organization
On June 30, 1997, Parkdale Mills, Inc. (Parkdale) and
Unifi, Inc. (Unifi) entered into a Contribution Agreement (the
Agreement) that set forth the terms and conditions by which the
two companies contributed all of the assets of their spun cotton
yarn operations utilizing open-end and airjet spinning
technologies to create Parkdale America, LLC (the Company). In
exchange for their respective contributions, Parkdale and Unifi
received a 66% and 34% ownership interest in the Company,
respectively.
Operations
The Company is a producer of cotton and synthetic yarns for sale
to the textile and apparel industries, both foreign and
domestic. The Company has 15 manufacturing facilities primarily
located in central and western North Carolina.
Fiscal
Year
The Companys fiscal year ends the Saturday nearest to
December 31. The Companys fiscal years ended
December 31, 2005, January 1, 2005, and
January 3, 2004, contained 52 weeks, 52 weeks and
53 weeks, respectively.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue
Recognition
The Company recognizes revenue when goods are shipped and the
title and risk of loss is transferred to the customer.
Cash
and Cash Equivalents
The Company considers all highly-liquid investments with a
maturity of three months or less to be cash and cash
equivalents. The Company maintains cash deposits with major
banks which may exceed federally insured limits. The Company
periodically assesses the financial condition of the
institutions and believes the risk of loss to be remote.
Available-for-sale
Securities
In fiscal 2005, the Company purchased
available-for-sale
securities, which consist of auction-rate bonds with variable
interest rates. The securities have
35-day
auction periods and were designed to maintain a price of 100% of
par. Therefore, current carrying values approximate fair value
at December 31, 2005. Interest earned on the bonds was
$72,000 for the year ended December 31, 2005.
Concentration
of Credit Risk
Substantially all of the Companys accounts receivable are
due from companies in the textile and apparel markets located
primarily throughout North America. The Company generally does
not require collateral for its
110
Parkdale
America, LLC
Notes to
Financial Statements (Continued)
accounts receivable. The Company performs ongoing credit
evaluations of its customers financial condition and
establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers,
historical trends and other information. In the event of cash
recoveries, the Company replaces the previously reserved amounts
in the allowance for doubtful accounts. Total write-offs of
accounts receivable, net of recoveries, totaled $231,000,
$2,451,000 and $1,703,000 for the years ended December 31,
2005, January 1, 2005, and January 3, 2004,
respectively. Sales to one customer accounted for approximately
12% of total sales in fiscal 2005 and sales to two customers
accounted for approximately 27% and 20% of total sales in fiscal
2004 and fiscal 2003, respectively. As of December 31,
2005, accounts receivable for one customer comprises 13% of
total gross accounts receivable outstanding. As of
January 1, 2005, and January 3, 2004, accounts
receivable for two customers comprised 30% and 24%,
respectively, of total gross accounts receivable outstanding.
Fair
Value of Financial Instruments
The book values of cash and cash equivalents,
available-for-sale
securities, accounts receivable, accounts payable and other
financial instruments approximate their fair values principally
because of the short-term maturities of these instruments.
Property,
Plant and Equipment
Assets contributed from Parkdale were transferred to the Company
at Parkdales historical net book value. Assets contributed
from Unifi were recorded at fair value which company management
has represented approximated net book value at June 30,
1997. All subsequent additions to property, plant and equipment
are recorded at cost. Provisions for repairs and maintenance,
which do not extend the life of the applicable assets, are
expensed. Provisions for depreciation are determined principally
by an accelerated method over the estimated useful lives of the
assets or the remaining capital lease term, whichever is
shorter. The following is a summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
|
|
|
|
|
|
|
|
|
Lives in
|
|
|
|
|
|
|
|
|
|
|
|
Years
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Land and land improvements
|
|
15
|
|
$
|
5,157,000
|
|
|
$
|
4,630,000
|
|
|
$
|
4,630,000
|
|
Buildings
|
|
15 to 39
|
|
|
89,994,000
|
|
|
|
104,698,000
|
|
|
|
105,033,000
|
|
Machinery and equipment
|
|
5 to 9
|
|
|
462,317,000
|
|
|
|
445,698,000
|
|
|
|
458,887,000
|
|
Office furniture and fixtures
|
|
5 to 7
|
|
|
7,110,000
|
|
|
|
7,268,000
|
|
|
|
8,160,000
|
|
Construction-in-progress
|
|
|
|
|
6,523,000
|
|
|
|
17,606,000
|
|
|
|
666,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
571,101,000
|
|
|
|
579,900,000
|
|
|
|
577,376,000
|
|
Less Accumulated
depreciation
|
|
|
|
|
(453,834,000
|
)
|
|
|
(468,671,000
|
)
|
|
|
(468,550,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
$
|
117,267,000
|
|
|
$
|
111,229,000
|
|
|
$
|
108,826,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2005,
January 1, 2005, and January 3, 2004, was $25,440,000,
$21,084,000 and $28,623,000, respectively.
Impairment
of Long-lived Assets
The Company evaluates long-lived assets to determine impairment
based on estimated future undiscounted cash flows attributable
to the assets. In the event such cash flows are not expected to
be sufficient to recover the carrying value of the assets, the
assets are written down to their estimated fair values.
In fiscal 2005, the Company made the decision to terminate the
portion of its capital lease (Note K) related to its
Eden, North Carolina, manufacturing facility. The leased assets
and associated leasehold improvements had a total net book value
of $8,093,000 before impairment charges. As a result of this
decision, the Company evaluated the related assets for
impairment. For the year ended December 31, 2005, the
Company recognized a net impairment
111
Parkdale
America, LLC
Notes to
Financial Statements (Continued)
loss of $5,823,000 on the disposal of the leased assets and
leasehold improvements. In fiscal 2006, the Company completed
the transaction and effectively transferred the lease and the
associated leasehold improvements to a third-party. For purposes
of the impairment write-down, the fair value of the facilities
and equipment was based on the total proceeds from the
transaction, which included $2,000,000 in cash and a one year
rent-free period granted by the new lessee of the facility
(valued at $1,155,000), net of losses on the early termination
of the lease of $885,000. The impairment loss is reported in
other (expense) income in the statements of operations. These
assets are included in assets held for sale on the balance sheet.
Cotton
Rebate Program
The Company receives a rebate from the U.S. Government for
consuming cotton grown in the United States. The rebate is based
on the pounds of cotton consumed and the difference between U.S.
and foreign cotton prices. Rebate income, included as a
reduction to cost of goods sold in the accompanying statements
of operations, amounted to $18,720,000, $10,357,000 and
$17,654,000, respectively, for the years ended December 31,
2005, January 1, 2005, and January 3, 2004. The
receivable associated with this rebate amounted to $1,553,000,
$1,380,000 and $241,000 as of December 31, 2005,
January 1, 2005, and January 3, 2004, respectively,
and was included in accounts receivable in the accompanying
balance sheets.
Intangible
Assets
The Company reviews intangible assets for impairment annually,
unless specific circumstances indicate that a more timely review
is warranted. Intangible assets subject to amortization
consisted primarily of customer lists acquired and are being
amortized over the useful life of the asset, principally five
years.
Shipping
Costs
The costs to ship products to customers of approximately
$3,656,000, $3,078,000 and $2,905,000 during the years ended
December 31, 2005, January 1, 2005, and
January 3, 2004, respectively, are included as a component
of cost of goods sold in the accompanying consolidated
statements of operations.
Deferred
Revenue
The Company has recorded deferred revenue related to advance
deposit payments from a foreign customer. The Company records
revenue related to these deposits upon shipment of goods to the
customer. As of December 1, 2005, the balance of the
customer deposits is $347,000. There were no customer deposits
as of January 1, 2005, and January 3, 2004.
Recent
Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 46(R)
(FIN 46(R)), Consolidation of Variable Interest
Entities, an interpretation of Accounting Research
Bulletin (ARB) No. 51. FIN 46(R) provides criteria for
determining whether the financial statement issuer must
consolidate other entities in its financial statements. The
provisions of FIN 46(R) are effective for entities created
before December 31, 2003, and for financial statements for
fiscal years beginning after December 15, 2004. For
entities created after December 31, 2003, the provisions of
FIN 46(R) will be effective as of the date they first
become involved with the certain entity. The Company adopted
FIN 46(R) in 2005, and there was no significant impact on
the Companys financial position, results of operations or
cash flows upon the adoption of FIN 46(R).
In November 2004, FASB issued SFAS No. 151,
Inventory Costs, which clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling
costs and wasted material. SFAS No. 151 will be
effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company is in the
112
Parkdale
America, LLC
Notes to
Financial Statements (Continued)
process of evaluating the effect, if any, that the adoption of
SFAS No. 151 will have on its financial position and
results of operations.
Note B
Business Combinations
On January 5, 2005, the Company purchased certain assets of
the Edgefield plant of Delta Apparel, Inc. for $11,288,000. The
transaction was accounted for under the provisions of
SFAS No. 141, Business Combinations.
Accordingly, the Company recorded the acquired assets at their
estimated fair values.
A summary of the purchase price allocation to the acquired
assets of the Edgefield plant of Delta Apparel, Inc. is as
follows:
|
|
|
|
|
Land and buildings
|
|
$
|
6,000,000
|
|
Machinery and equipment
|
|
|
4,000,000
|
|
Inventories
|
|
|
1,288,000
|
|
|
|
|
|
|
|
|
$
|
11,288,000
|
|
|
|
|
|
|
Note C
Inventories
Inventories are stated at lower of cost or market. During fiscal
2005 and fiscal 2004, cost was determined using the specific
identification method for raw materials,
yarn-in-process
and finished yarn inventories. During fiscal 2003, cost was
determined using the specific identification method for raw
material inventories and the moving-average method for
yarn-in-process
and finished yarn inventories. The new method of valuing
inventory results from the Companys ability to
specifically track labor and overhead for finished yarn
products. The effect of the change resulted in an increase to
net income in fiscal 2004 of approximately $1,562,000. The
Company performs periodic assessments to determine the existence
of obsolete, slow-moving and nonsalable inventories and records
necessary provisions to reduce such inventories to net
realizable value. Inventories consist of the following as of
December 31, 2005, January 1, 2005, and
January 3, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Cotton and synthetics
|
|
$
|
10,507,000
|
|
|
$
|
18,120,000
|
|
|
$
|
41,582,000
|
|
Yarn in process
|
|
|
4,717,000
|
|
|
|
3,773,000
|
|
|
|
5,015,000
|
|
Finished yarn
|
|
|
20,101,000
|
|
|
|
13,226,000
|
|
|
|
13,749,000
|
|
Supplies
|
|
|
1,340,000
|
|
|
|
1,168,000
|
|
|
|
803,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,665,000
|
|
|
$
|
36,287,000
|
|
|
$
|
61,149,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory at January 3, 2004, has been reduced by a reserve
of $5,100,000 related to a reduction in the value of cotton on
hand. There was no such reduction in the cotton value at
December 31, 2005, and January 1, 2005.
Note D
Income Taxes
The Company is a Limited Liability Company treated as a
partnership for federal and state income tax reporting purposes.
As a result, the Companys results of operations are
included in the income tax returns of its individual members.
Accordingly, no provision for federal or state income taxes has
been recorded in the accompanying financial statements.
Note E
Deferred Financing Costs
On February 1, 2005, the Company entered into a new
revolving credit facility, which replaced the revolving credit
facility in place at January 1, 2005 (Note F).
Financing costs consist primarily of commitment fees, legal fees
and other direct costs incurred to obtain the Companys
revolving line of credit. These costs are amortized over the
113
Parkdale
America, LLC
Notes to
Financial Statements (Continued)
term of the debt agreement, which matures on February 1,
2008. Total deferred financing costs capitalized were
approximately $766,000. Amortization expense and accumulated
amortization approximate $234,000 for the year ended
December 31, 2005. The Company also wrote off approximately
$155,000 related to the original revolving line of credit.
Expected future amortization of these deferred financing costs
at December 31, 2005, is as follows:
|
|
|
|
|
2006
|
|
$
|
255,000
|
|
2007
|
|
|
255,000
|
|
2008
|
|
|
22,000
|
|
|
|
|
|
|
|
|
$
|
532,000
|
|
|
|
|
|
|
Note F
Debt
On October 31, 2001, the Company authorized the issuance
and sale of $40,000,000 Senior Secured Notes (the Notes) due
October 31, 2008, at a fixed interest rate of 6.82% to four
insurance and finance companies. Interest payments were due on a
semi-annual basis, beginning April 30, 2002. Beginning
October 31, 2004, the Company was required to pay principal
amounts of $8,000,000 annually until the maturity date for the
Notes. The Note Purchase Agreement contained certain
penalties for prepayment of the Notes. On January 26, 2005,
the Company extinguished the Notes through utilization of
working capital and recognized a loss on extinguishment of debt
of $2,111,000. Associated with the Notes extinguishment, the
Company terminated all outstanding interest rate swaps
throughout the course of fiscal 2005 (Note G). The
principal amount of the Notes at December 31, 2005,
January 1, 2005, and January 3, 2004, totals $0,
$32,000,000 and $40,000,000, respectively.
The Notes had an estimated fair value of $33,146,000 at
January 1, 2005. The carrying value of the Notes
approximated their fair value as of January 3, 2004. The
Companys debt agreements contained restrictive covenants
which, among other things, required the maintenance of minimum
levels of cash flow coverage and net worth, restricted payments
of dividends and limited unsecured borrowings. For the year
ended January 1, 2005, the Company was not in compliance
with certain of the debt covenants. The Notes totaling
$32,000,000 were classified as short-term liabilities at
January 1, 2005.
Lines
of Credit
In connection with the issuance of the Notes on October 31,
2001, the Company entered into an agreement for a line of credit
with a group of banks, which provided for borrowings up to
$90,000,000. Borrowings under this agreement bore interest at
either the prime rate, plus an applicable margin, or a LIBOR
rate, plus an applicable margin, as chosen by the Company. The
line of credit was originally scheduled to terminate
October 31, 2004; however, it was amended during fiscal
2004 to reduce the line to $50,000,000 and to change the
termination date to February 15, 2005. The line of credit
was terminated on February 1, 2005.
On February 1, 2005, the Company entered into a new
revolving credit facility with maximum borrowings of
$90,000,000, subject to a $20,000,000 sub-limit for letters of
credit. The revolving credit facility was subsequently amended
to reduce the maximum borrowings to $75,000,000. The new debt
facility matures on February 1, 2008, and bears interest at
either the LIBOR rate or the base rate plus the applicable
margin. If liquidity falls below agreed-upon requirements, the
most restrictive covenants will require the Company to maintain
minimum fixed charge coverage ratio and maximum funded
debt-to-EBITDA
ratio. As of December 31, 2005, there are no outstanding
borrowings under the revolving credit facility.
Note G
Derivative Instruments
The Company accounts for derivative instruments and hedging
activities according to the provisions of
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.
SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments and for hedging
activities. All derivatives,
114
Parkdale
America, LLC
Notes to
Financial Statements (Continued)
whether designated in hedging relationships or not, are required
to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair-value hedge, the changes in
the fair value of the derivative and the hedged item are
recognized in earnings. If the derivative is designated as a
cash flow hedge, the effective portions of changes in the fair
value of the derivative are recorded in other comprehensive
income or loss and are recognized in earnings when the hedged
item affects earnings. Any material ineffective portions of
changes in the fair value of cash flow hedges are recognized in
earnings as they occur.
The Company is subject to price risk related to anticipated,
fixed-price yarn sales. In the normal course of business, under
procedures and controls established by the Companys
financial risk management framework, the Company enters into
cotton futures to manage changes in raw materials prices in
order to protect the gross margin of fixed-price yarn sales. As
of December 31, 2005, January 1, 2005, and
January 3, 2004, the Company has recorded these instruments
at fair value of $837,000, $3,462,000 and $10,230,000 in the
accompanying balance sheets.
The Company designates certain futures contracts as cash flow
hedges. As of December 31, 2005, the Company had unrealized
gains on futures contracts designated as cash flow hedges of
$3,051,000, recorded in other comprehensive income. For
contracts which were not designated as hedges, or for the
ineffective portions of contracts designated as hedges, the
Company recorded a charge to earnings of approximately
$1,168,000 for the year ended December 31, 2005.
In 2004 and 2003, the Company did not apply hedge accounting for
these contracts and recorded a charge to earnings of
approximately $15,595,000 for the year ended January 1,
2005. The Company recorded a credit to earnings of approximately
$10,989,000 for the year ended January 3, 2004.
In addition, the Company enters into forward contracts for
cotton purchases, which qualify as derivative instruments under
SFAS No. 133. However, these contracts meet the
applicable criteria to qualify for the normal purchases or
normal sales exemption. Therefore, the provisions of
SFAS No. 133 are not applicable to these contracts.
The Company uses interest rate swap agreements to manage the
risk that changes in interest rates will affect the amount of
future interest payments. The differential paid or received
under these agreements is recognized as an adjustment to
interest expense. These agreements are required to be recognized
at their fair value in the accompanying balance sheets. In
fiscal 2005, in conjunction with the payoff of the Notes
(Note F), the Company terminated the interest rate swap
agreements. At termination, the Company received cash of
$388,000.
As of January 1, 2005, and January 3, 2004, the
Company was a party to the following interest rate swap
agreements with a bank:
|
|
|
|
|
|
|
Fixed rate amount
|
|
$18,000,000
|
|
$30,000,000
|
|
$40,000,000
|
Payment rate
|
|
4.9%
|
|
5% fixed
|
|
4.24%
|
Receipt rate
|
|
1-month
LIBOR
|
|
1-month
LIBOR
|
|
1-month
LIBOR
|
Inception date
|
|
January 1, 2005
|
|
March 7, 2001
|
|
November 21, 2001
|
Expiration date
|
|
January 2, 2008
|
|
March 12, 2004
|
|
October 12, 2008
|
Estimated fair value as of
January 3, 2004 asset (liability)
|
|
0
|
|
(293,000)
|
|
939,000
|
Estimated fair value as of
January 1, 2005 asset (liability)
|
|
101,000
|
|
0
|
|
237,000
|
The fair values of the agreements are the estimated amounts that
the Company would pay or receive to terminate these agreements
at the reporting date, taking into account current interest
rates. The estimated fair values do not necessarily reflect the
potential income or loss that would be realized on an actual
settlement of the agreements. The Company did not apply hedge
accounting treatment and has recorded the unrealized gains and
losses in the accompanying statements of operations. As of
December 31, 2005, January 1, 2005, and
January 3,
115
Parkdale
America, LLC
Notes to
Financial Statements (Continued)
2004, the Company reported a gain (loss) on interest rate swap
derivative instruments of $50,000, ($307,000) and $262,000,
respectively.
Note H
Investment in Summit Yarn Joint Venture
On June 4, 1998, Parkdale and Burlington Industries, Inc.
(Burlington) entered into a Joint Venture and Contribution
Agreement (the Agreement) whereby Parkdale and Burlington agreed
to contribute certain assets and cash for the purpose of
constructing, operating and managing a yarn manufacturing
facility (the Joint Venture), which qualifies under the
Maquiladora program in accordance with applicable Mexican law,
and for the marketing and sale of yarn manufactured by the Joint
Venture, Summit Yarn, LLC (Summit). In exchange for their
respective contributions, Parkdale and Burlington each received
a 50% ownership interest in Summit. Concurrent with the
formation of Summit, Parkdale and Burlington formed Summit Yarn
Holding I, which serves as the holding company for
Parkdales and Burlingtons investment in various
Mexican corporations, related to the Joint Venture. Parkdale and
Burlington each received a 50% ownership interest in Summit Yarn
Holding I. Effective January 15, 2002, Parkdale transferred
its ownership in Summit to the Company. The investment was
transferred at Parkdales historical basis of $14,257,000,
which included notes receivable from Summit totaling $5,227,000.
The Agreement expires in 2018 and has stated renewal options.
The Company accounts for its investment in Summit and Summit
Yarn Holding I based on the equity method of accounting.
On November 15, 2001, Burlington declared Chapter 11
bankruptcy. On November 9, 2003, the purchase of Burlington
by W.L. Ross & Co. was completed and Burlington emerged
from bankruptcy. During March 2004, W.L. Ross & Co.
completed the integration of Burlington and Cone Mills into the
newly formed International Textile Group. As part of the new
structure, Cone Mills assumed responsibility of
Burlingtons Burlmex denim plant in Mexico. Cone Mills and
Burlington operate under separate business units of the
International Textile Group.
Effective August 2, 2004, Burlington transferred its
ownership in Summit to Cone Denim LLC.
Summarized financial information of Summit as of and for the
years ended October 1, 2005, October 2, 2004, and
September 27, 2003, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Current assets
|
|
$
|
13,271,000
|
|
|
$
|
12,870,000
|
|
|
$
|
10,817,000
|
|
Total assets
|
|
|
30,022,000
|
|
|
|
31,662,000
|
|
|
|
32,141,000
|
|
Current liabilities
|
|
|
4,675,000
|
|
|
|
4,266,000
|
|
|
|
2,968,000
|
|
Total liabilities
|
|
|
8,290,000
|
|
|
|
12,850,000
|
|
|
|
14,251,000
|
|
Equity
|
|
|
21,732,000
|
|
|
|
18,772,000
|
|
|
|
17,890,000
|
|
Total liabilities and equity
|
|
|
30,022,000
|
|
|
|
31,622,000
|
|
|
|
32,141,000
|
|
Revenue
|
|
|
40,274,000
|
|
|
|
55,496,000
|
|
|
|
40,791,000
|
|
Expenses
|
|
|
37,314,000
|
|
|
|
54,614,000
|
|
|
|
39,667,000
|
|
Net income
|
|
|
2,960,000
|
|
|
|
882,000
|
|
|
|
1,124,000
|
|
Note I
Defined Contribution Plan
The Company maintains a defined contribution retirement plan
available to substantially all employees. The Companys
contributions are based on a formula for matching employee
contributions. The Company incurred costs for this plan of
$391,000, $427,000 and $486,000 and during the years ended
December 31, 2005, January 1, 2005, and
January 3, 2004, respectively.
116
Parkdale
America, LLC
Notes to
Financial Statements (Continued)
Note J
Related-party Transactions
Cotton
Purchases and Commitments
During fiscal years 2005, 2004 and 2003, the Company sold cotton
at cost to Parkdale amounting to $713,000, $9,952,000 and
$1,204,000, respectively. During fiscal years 2005, 2004 and
2003, Parkdale sold cotton at cost to the Company amounting to
$301,000, $1,073,000 and $1,908,000, respectively.
The cost of cotton transferred between the Company and Parkdale
is determined on a specific identification basis for each cotton
bale sold or purchased.
The Company purchased cotton through a related entity of which
Parkdale owns 50% totaling $22,288,000, $44,806,000 and
$65,051,000 for the years ended December 31, 2005,
January 1, 2005, and January 3, 2004, respectively.
The accounts payable due the related entity was $619,000,
$1,404,000 and $3,563,000 as of December 31, 2005,
January 1, 2005, and January 3, 2004, respectively,
and was included in trade accounts payable in the accompanying
balance sheets.
Shared
Expenses Allocation
The Company and Parkdale share certain accounting and
administrative expenses. Parkdale and Unifi have agreed to
allocate these accounting and administrative expenses based upon
a weighted average of certain key indicators, including, but not
limited to, pounds of yarn sold and net sales. Amounts charged
to the Company were approximately $16,022,000, $13,925,000 and
$16,759,000 for the fiscal years ended December 31, 2005,
January 1, 2005, and January 3, 2004, respectively.
Due To
and From Affiliates
Due to and from affiliates consists of the following as of
December 31, 2005, January 1, 2005, and
January 3, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Due from Summit
|
|
$
|
46,000
|
|
|
$
|
50,000
|
|
|
$
|
579,000
|
|
Due to Parkdale
|
|
|
(2,343,000
|
)
|
|
|
(2,033,000
|
)
|
|
|
(1,097,000
|
)
|
Due to Alliance Real
Estate III
|
|
|
(7,000
|
)
|
|
|
(8,000
|
)
|
|
|
57,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,304,000
|
)
|
|
$
|
(1,991,000
|
)
|
|
$
|
(461,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The due to and from amounts result from intercompany charges
related to inventory purchases, accounts receivable collections
and the administrative expense allocation.
Notes Receivable
from Joint Venture
In connection with the transfer of Parkdales interest in
Summit to the Company, the Company assumed notes receivable from
Summit in the amount of $3,550,000 and $1,677,000, which bear
interest at 5.5% and 5.7%, respectively. During 2005, the note
receivable of $1,677,000 was paid in full by Summit. At
December 31, 2005, January 1, 2005, and
January 3, 2004, there was $1,023,000, $3,609,000 and
$4,777,000 outstanding on the notes receivable, respectively.
The maturity date of the notes is December 1, 2006.
Interest income earned on balances due from Summit amounted to
$128,000, $254,000 and $283,000 for the years ended
December 31, 2005, January 1, 2005, and
January 3, 2004, respectively.
117
Parkdale
America, LLC
Notes to
Financial Statements (Continued)
Intangible
Assets
In September 1998, the Company purchased certain assets of the
air jet operations of a related party. The total net book value
of intangible assets associated with the Air Jet Acquisition was
$625,000, $1,250,000 and $1,875,000 at December 31, 2005,
January 1, 2005, and January 3, 2004, respectively.
Amortization expense for the years ended December 31, 2005,
January 1, 2005, and January 3, 2004, was $625,000,
$625,000 and $641,000, respectively. Expected amortization
during 2006 totals $625,000.
Fixed
Asset Transfers and Sales
During the years ended January 1, 2005, and January 3,
2004, Parkdale transferred, at net book value, fixed assets of
$54,000 and $67,000, respectively, to the Company, which was
settled by cash payment during the year. No such transfers
occurred during the year ended December 31, 2005. During
the years ended December 31, 2005, January 1, 2005,
and January 3, 2004, the Company transferred, at net book
value, fixed assets of $1,438,000, $154,000 and $8,000,
respectively, to Parkdale. No gain or loss was recognized on
these transfers.
During the year ended January 1, 2005, the Company sold
fixed assets having a net book value of $33,500 to Parkdale for
$40,000. As this transaction occurred between entities under
common control, the difference between net book value and
selling price was considered a capital contribution by Parkdale
of $7,000.
Other
The Company sells waste fibers to Henry Fibers, a company owned
by a stockholder of Parkdale. Total sales amounted to $250,000,
$357,000 and $215,000 for the years ended December 31,
2005, January 1, 2005, and January 3, 2004,
respectively.
Note K
Commitments and Contingencies
Capital
Leases
The Company maintains a lease agreement with a bank. The lease
agreement, covering certain real property of the Company
assigned from Unifi, is accounted for as a financing lease in
accordance with SFAS No. 98, Accounting for
Leases. The lease term ends in January 2013, with an
option to purchase the assets in fiscal 2006 for 69.55% of the
aggregate acquisition cost.
Future minimum lease payments under this financing lease at
December 31, 2005, are as follows:
|
|
|
|
|
2006
|
|
$
|
2,730,000
|
|
2007
|
|
|
2,730,000
|
|
2008
|
|
|
2,730,000
|
|
2009
|
|
|
2,730,000
|
|
2010
|
|
|
2,730,000
|
|
Thereafter
|
|
|
4,541,000
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
18,191,000
|
|
Less Amounts
representing interest
|
|
|
3,829,000
|
|
|
|
|
|
|
Present value of net minimum lease
payments
|
|
|
14,362,000
|
|
Less Current portion
|
|
|
1,775,000
|
|
|
|
|
|
|
|
|
$
|
12,587,000
|
|
|
|
|
|
|
Lease interest expense for the years ended December 31,
2005, January 1, 2005, and January 3, 2004, was
$1,016,000, $1,188,000 and $1,296,000, respectively. The net
book value of the assets covered under this capital
118
Parkdale
America, LLC
Notes to
Financial Statements (Continued)
lease amounted to $9,928,000, $12,895,000 and $14,507,000 as of
December 31, 2005, January 1, 2005, and
January 3, 2004, respectively. The fair value of the
Companys capital lease obligations approximates carrying
value because the interest rate for the obligations is
comparable to the Companys estimated long-term borrowing
rate.
Operating
Leases
The Company has entered into operating leases for various
vehicles and office equipment. At December 31, 2005, future
minimum lease payments during the remaining noncancelable lease
terms are as follows:
|
|
|
|
|
2006
|
|
$
|
487,000
|
|
2007
|
|
|
388,000
|
|
2008
|
|
|
170,000
|
|
2009
|
|
|
1,000
|
|
2010
|
|
|
0
|
|
|
|
|
|
|
|
|
$
|
1,046,000
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2005,
January 1, 2005, and January 3, 2004, was $694,000,
$650,000 and $569,000, respectively.
Purchase
and Sales Commitments
The Company had unfulfilled cotton purchase commitments at
December 31, 2005, for approximately 224,287,000 pounds of
cotton to be used in the production process at varying prices.
The Company had unfulfilled yarn sales contracts with various
customers at varying prices at December 31, 2005,
January 1, 2005, and January 3, 2004.
Contingencies
During fiscal 2003, the Company disclosed to the
U.S. Department of Justice (DOJ) that it participated in
certain anticompetitive activities that may have resulted in
violation of antitrust laws. Subject to the Companys
cooperation, the DOJ agreed to provide protection for the
Company and the Companys officers, directors and employees
from criminal prosecution related to the reported
anticompetitive activities. As a result of the Companys
disclosure to the DOJ, several class action claims were filed
against the Company, alleging that it attempted to fix and
stabilize prices of open-end and airjet poly/cotton yarn in the
United States.
In mid-2005, the Company proposed a cash settlement in the
amount of $7.8 million. On November 1, 2005, the Court
granted preliminary approval of the Companys proposed
settlement. Final approval of the settlement was granted on
February 14, 2006. The expense related to this settlement
was distributed entirely to Parkdale, in accordance with the
first amendment to the Agreement.
One member of the settlement class requested and was granted
exclusion from the settlement. The Company is currently unable
to determine or estimate the potential liability or range of
liability that may be incurred upon resolution of this matter.
The Company is also involved in various legal actions and claims
arising in the normal course of business. Management believes
that the resolution of such matters will not have a material
effect on the financial condition or the results of operations
of the Company.
119
Parkdale
America, LLC
Notes to
Financial Statements (Continued)
Note L
Other (Expense) Income, Net
The components of other (expense) income, net for the years
ended December 31, 2005, January 1, 2005, and
January 3, 2004, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Impairment of leasehold
improvements
|
|
$
|
(5,823,000
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
Gain on settlement of price fixing
matters
|
|
|
4,356,000
|
|
|
|
0
|
|
|
|
0
|
|
(Loss) gain on disposals of
property, plant and equipment
|
|
|
(647,000
|
)
|
|
|
(221,000
|
)
|
|
|
38,000
|
|
Amortization of intangible asset
|
|
|
(625,000
|
)
|
|
|
(625,000
|
)
|
|
|
(641,000
|
)
|
Other income
|
|
|
530,000
|
|
|
|
16,000
|
|
|
|
1,446,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,209,000
|
)
|
|
$
|
(830,000
|
)
|
|
$
|
843,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2005, the Company was party to a suit alleging price
fixing against certain of its polyester vendors. The lawsuit was
settled in 2005, and the Company received net proceeds of
$4,356,000, which is included in other (expense) income, net in
the 2005 statement of operations.
120
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
(a
limited liability company under the Laws of the Peoples
Republic of China)
Financial
Statements
For
the Period From the Date of Inception August 4, 2005 to
May 30, 2006
121
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
Financial Statements
For the Period From the Date of Inception August 4, 2005
to May 30, 2006
Table of Contents
|
|
|
|
|
|
|
|
123
|
|
Financial Statements:
|
|
|
|
|
|
|
|
124
|
|
|
|
|
125
|
|
|
|
|
126
|
|
|
|
|
127
|
|
|
|
|
128-135
|
|
122
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Yihua Unifi Fibre
Industry Company Limited,
We have audited the accompanying balance sheet of Yihua Unifi
Fibre Industry Company Limited (the Company) as of
May 30, 2006, and the related statements of operations,
changes in shareholders equity and comprehensive income
(loss), and cash flows for the period from the date of inception
August 4, 2005 to May 30, 2006. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal controls over financial
reporting. Our audit included consideration of internal controls
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal controls over financial reporting.
Accordingly, we express no such opinion. An audit also 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 audit
provides 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 Yihua Unifi Fibre Industry Company Limited as at May 30,
2006, and the results of its operations and its cash flows for
the period from the date of inception August 4, 2005 to
May 30, 2006, in conformity with U.S. generally
accepted accounting principles.
/s/ Ernst & Young Hua Ming
Ernst & Young Hua Ming, Shanghai Branch
Shanghai, The Peoples Republic of China
July 31, 2006
123
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
|
|
|
|
|
|
|
As of May 30, 2006
|
|
|
|
(In thousands, USD)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,308
|
|
Accounts receivable
|
|
|
323
|
|
Related party accounts receivable
|
|
|
810
|
|
Notes receivable
|
|
|
1,380
|
|
Inventories
|
|
|
9,155
|
|
Related-party prepaid technology
fee
|
|
|
750
|
|
Other current assets
|
|
|
798
|
|
|
|
|
|
|
Total current assets
|
|
|
14,524
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
Buildings and improvements
|
|
|
18,419
|
|
Machinery and equipment
|
|
|
43,538
|
|
Other
|
|
|
689
|
|
|
|
|
|
|
|
|
|
62,646
|
|
Less accumulated depreciation
|
|
|
(4,029
|
)
|
|
|
|
|
|
|
|
|
58,617
|
|
Intangible asset, net
|
|
|
525
|
|
|
|
|
|
|
Total assets
|
|
$
|
73,666
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
637
|
|
Related party accounts payable
|
|
|
25,777
|
|
Accrued expenses
|
|
|
1,729
|
|
Related-party debt
|
|
|
15,000
|
|
Bank debt
|
|
|
6,228
|
|
Other current liabilities
|
|
|
1,600
|
|
|
|
|
|
|
Total current liabilities
|
|
|
50,971
|
|
|
|
|
|
|
Registered capital
|
|
|
30,000
|
|
Additional paid-in capital
|
|
|
389
|
|
Accumulated loss
|
|
|
(8,073
|
)
|
Accumulated comprehensive loss
|
|
|
379
|
|
|
|
|
|
|
Shareholders equity
|
|
|
22,695
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
73,666
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
124
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
|
|
|
|
|
|
|
Period Ended
|
|
|
|
May 30, 2006
|
|
|
|
(In thousands, USD)
|
|
|
Net sales
|
|
|
|
|
Related-party net sales
|
|
$
|
21,116
|
|
Other
|
|
|
80,692
|
|
|
|
|
|
|
|
|
|
101,808
|
|
Cost of sales
|
|
|
|
|
Related-party raw material
purchases
|
|
|
85,641
|
|
Related-party utility purchases
|
|
|
8,114
|
|
Other purchases
|
|
|
12,184
|
|
|
|
|
|
|
|
|
|
105,939
|
|
|
|
|
|
|
Related-party technology license
fee
|
|
|
1,250
|
|
Selling, general and
administrative expenses
|
|
|
2,305
|
|
Other (income) expense, net
|
|
|
96
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,782
|
)
|
Interest expense
|
|
|
316
|
|
Interest income
|
|
|
(25
|
)
|
|
|
|
|
|
Net loss
|
|
$
|
(8,073
|
)
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
125
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Registered
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Shareholders
|
|
|
Comprehensive
|
|
|
|
Capital
|
|
|
Capital
|
|
|
Loss
|
|
|
Equity
|
|
|
Loss
|
|
|
|
(In thousands, USD)
|
|
|
Balance, August 4, 2005
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Capital contributions
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
Capital contributions (non-cash)
|
|
|
|
|
|
|
389
|
|
|
|
|
|
|
|
389
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(8,073
|
)
|
|
|
(8,073
|
)
|
|
|
(8,073
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
379
|
|
|
|
379
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 30, 2006
|
|
$
|
30,000
|
|
|
$
|
389
|
|
|
$
|
(7,694
|
)
|
|
$
|
22,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
126
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
|
|
|
|
|
|
|
Period Ended
|
|
|
|
May 30, 2006
|
|
|
|
(In thousands, USD)
|
|
|
Operating activities:
|
|
|
|
|
Net loss
|
|
$
|
(8,073
|
)
|
Depreciation
|
|
|
4,018
|
|
Amortization
|
|
|
105
|
|
Senior management costs paid by
shareholders
|
|
|
389
|
|
Other
|
|
|
7
|
|
Changes in assets and liabilities:
|
|
|
|
|
Accounts receivable
|
|
|
(323
|
)
|
Related party accounts
receivable
|
|
|
(810
|
)
|
Notes receivable
|
|
|
(1,380
|
)
|
Inventories
|
|
|
(9,155
|
)
|
Other current assets
|
|
|
(1,548
|
)
|
Related-party accounts payable
|
|
|
10,915
|
|
Accounts payable and accrued
expenses
|
|
|
2,366
|
|
Other current liabilities
|
|
|
1,600
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(1,889
|
)
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
Capital expenditures
|
|
|
(32,986
|
)
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(32,986
|
)
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
Issuance of equity interest
|
|
|
15,000
|
|
Net borrowings under line of credit
|
|
|
6,228
|
|
Related-party borrowings
|
|
|
15,000
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
36,228
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
(45
|
)
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
1,308
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
1,308
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
information Cash paid during the period for
interest was $0.3 million.
The accompanying notes are an integral part of the financial
statements.
127
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
|
|
1.
|
Organization
and Activities
|
On June 10, 2005, Sinopec Yizheng Chemical Fibre Company
Limited (YCFC), a company limited by shares and
incorporated in the Peoples Republic of China
(PRC) and Unifi Asia Holding, SRL (Unifi
Asia), a limited liability company incorporated in
Barbados, entered into an Equity Joint Venture Contract (the
JV Contract) for the formation and operation of
Yihua Unifi Fibre Industry Company Limited (the
Company), a PRC limited liability company to
manufacture, process and market high value-added differentiated
polyester textile filament products in Yizheng, China. On
July 28, 2005, the Company obtained a business license to
operate for forty years.
In accordance with the JV Contract and the Asset Contribution
and Purchase Contract (the Contribution Agreement),
on August 4, 2005, Unifi Asia made a $15.0 million
cash capital contribution to the Company and YCFC made a
$15.0 million capital contribution of property, plant and
equipment to the Company. In exchange for their contributions,
each member received a 50% ownership interest in the Company.
The Contribution Agreement also provided for the purchase of
$45.5 million of property, plant and equipment from YCFC.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis of Presentation: The financial
statements have been prepared in accordance with generally
accepted accounting principles in the United States (US
GAAP) and are presented in U.S. Dollars. The
Companys functional currency is the Chinese Renminbi
(RMB). Monetary assets and liabilities denominated
in currencies other than the RMB are translated at year-end
rates of exchange, and revenues and expenses are translated at
the average rates of exchange for the period into RMB.
Non-monetary assets and liabilities denominated in foreign
currencies are translated into Renminbi at the foreign exchange
rates at the date of measurement. Foreign exchange (gain/loss)
is included in Other (income) expense, net in the Statement of
Operations. On translation to U.S. dollars for presentation
purposes, gains and losses resulting from translation are
accumulated in a separate component of shareholders equity.
The Company is a joint venture between YCFC and Unifi Asia and
the Companys operations are dependent on the continued
financial support of YCFC and Unifi Asia. YCFC and Unifi Asia
have committed to providing enough working capital, either by
advancing funds themselves or postponing the due dates of debt
due to them from the Company, to allow the Company to operate
for, at a minimum, one year.
Year End: The Company has elected to present
US GAAP financial statements for the fiscal years ending
May 30. These financial statements represent the first
fiscal period which included ten months of operations from
August 4, 2005 to May 30, 2006.
Use of Estimates: The preparation of financial
statements in conformity with US GAAP requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Revenue Recognition: Revenues from sales are
recognized when title passes and the risks and rewards of
ownership are transferred to the customer. Freight charges
invoiced to customers are included in net sales in the Statement
of Operations.
Sales Rebate Program: The Company has entered
into sales incentive agreements with certain distributors and
customers. Rebates are paid upon achieving specified sales
targets by the end of the calendar year. The rebates are paid
out in the first quarter of the succeeding year. Sales rebates
are accrued monthly and included in net sales.
Cash and Cash Equivalents: Cash equivalents
are defined as highly-liquid investments with original
maturities of three months or less. As of May 30, 2006,
cash and cash equivalents consisted of RMB 10.5 million
which are subject to local foreign exchange controls.
128
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
2. Summary
of Significant Accounting Policies (continued)
Notes Receivable: Notes receivable are
short-term bank promissory notes paid by customers with a
maturity of six months or less.
Receivables and Credit Risk: Except for credit
granted to a related company (see Note 6 for further
discussion), the Company primarily receives cash in advance or
bank promissory notes from its customers and distributors.
The Companys operations serve customers and distributors
principally located in China as well as international customers
located primarily in Hong Kong and Pakistan. During the period
ended May 30, 2006, export sales aggregated to
$1.1 million. Approximately 21% of the Companys
revenue was generated from a related party who is the largest
distributor of the Company. As of May 30, 2006, the net
receivable from the related party was $0.8 million.
Inventories: The Company values its
inventories at the lower of cost or market using the moving
weighted average method. In addition to the purchase cost of raw
materials, work in progress and finished goods include direct
labor costs and allocated manufacturing related costs. The
Company periodically performs assessments to determine the
existence of obsolete or slow-moving inventories and records any
necessary provisions to reduce those inventories to net
realizable value. The total inventory reserve at May 30,
2006 was $0.2 million. The following table reflects the
composition of the Companys inventories as of May 30,
2006:
|
|
|
|
|
|
|
As of May 30, 2006
|
|
|
|
(Amounts in thousands, USD)
|
|
|
Raw materials and supplies
|
|
$
|
2,858
|
|
Work in process
|
|
|
688
|
|
Finished goods
|
|
|
5,781
|
|
|
|
|
|
|
Gross inventories
|
|
|
9,327
|
|
Lower of cost or market reserves
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
$
|
9,155
|
|
|
|
|
|
|
Other Current Assets: Other current assets
consists of the following:
|
|
|
|
|
|
|
As of May 30, 2006
|
|
|
|
(Amounts in thousands, USD)
|
|
|
Prepayment on purchases
|
|
$
|
414
|
|
Value added tax receivable
|
|
|
295
|
|
Other
|
|
|
89
|
|
|
|
|
|
|
|
|
$
|
798
|
|
|
|
|
|
|
Effective August 3, 2005, the Company entered into a
Technology License and Support Contract (the Technology
Agreement) with Unifi Manufacturing, Inc. which is a
related entity of Unifi Asia. The Technology Agreement calls for
Unifi Manufacturing, Inc. to provide qualified technical
personnel to render technical support to the manufacture and
sale of certain products for up to four years. The Company, as
the licensee, has agreed to pay Unifi Manufacturing, Inc. for
the transfer of this technical knowledge. The total fees payable
over the four year term are $6.0 million and are expensed
on a straight line basis over forty-eight months. The license
fee paid during the period ended May 30, 2006 was
$2.0 million of which $1.3 million was expensed during
the period. See Note 7 for further discussion.
Property, Plant and Equipment: On
August 3, 2005, YCFC, through the Contribution Agreement
executed between YCFC, Unifi Asia and the Company, contributed
fixed assets of $15.0 million for a 50% equity interest in
129
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
2. Summary
of Significant Accounting Policies (continued)
the Company. Pursuant to the same agreement, the Company
purchased fixed assets for $45.5 million from YCFC. The
purchase price of the fixed assets acquired by the Company was
based upon their fair market value, as determined by an
independent valuation firm in its certified appraisal report.
All subsequent additions to property, plant and equipment are
recorded at cost. Repair and maintenance costs, which do not
extend the life of the applicable assets, are expensed as
incurred. The Company elected the straight line method of
depreciation for all fixed asset categories. Building and
improvements are depreciated using no residual value, machinery,
equipment and other fixed assets have a residual value of three
percent of the acquisition cost. Depreciation expense for the
period ended May 30, 2006 was $4.0 million. The
following table summarizes the estimated useful lives by asset
category:
|
|
|
|
|
|
|
Useful Lives
|
|
|
Building and improvements
|
|
|
8 - 40 years
|
|
Machinery and equipment
|
|
|
5 - 14 years
|
|
Other
|
|
|
4 - 10 years
|
|
Customer-related Intangible: The Company
accounts for other intangibles under the provisions of
Statements of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). In accordance with the JV Contract
and the related Contribution Agreement, the Company acquired a
customer list from YCFC which was valued at $0.7 million.
The customer-related intangible was subject to straight-line
amortization over the useful life of the asset, which is
estimated to be five years. Accumulated amortization as of
May 30, 2006 was $0.1 million. The estimated annual
aggregate amortization expense is $126 thousand for fiscal years
ending May 2007 through May 2010 and $21 thousand in the fiscal
year ending May 2011. The Company reviews intangible assets for
impairment annually, unless specific circumstances indicate that
an earlier review is necessary.
Impairment of Long-lived Assets: In accordance
with Statement of Financial Accounting Standard
(SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful lives of
its intangible assets, excluding goodwill, and other long-lived
assets may warrant revision or that the remaining balance of
such assets may not be recoverable. The Company uses an estimate
of the related undiscounted cash flows from use in operation and
subsequent disposal over the remaining life of the asset in
measuring whether the asset is recoverable. During the period
ended May 30, 2006, the Company tested its property, plant
and equipment and intangible asset balances for impairment and
no adjustments were recorded as a result of those reviews.
Income Taxes: Current tax is the expected tax
payable on the taxable income for the year, using tax rates
enacted or substantially enacted at the balance sheet date, and
any adjustment to tax payable in respect of the previous years.
Deferred taxes are provided for temporary differences between
the carrying amount of assets and liabilities for financial
reporting and income tax purposes. The amount of deferred tax
provided is based on the expected manner of realization or
settlement of the carrying amount of assets and liabilities,
using tax rates enacted or substantively enacted at the balance
sheet date. A deferred tax asset is recognized to the extent
that it is probable that future taxable profit will be available
against which the temporary differences can be utilized. The
Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized.
Comprehensive Income: Comprehensive income
includes net income and other changes in net assets of a
business during a period from non-owner sources, which are not
included in net income. Such non-owner changes may include, for
example,
available-for-sale
securities and foreign currency translation adjustments. Other
than net income, foreign currency translation adjustments
presently represent the only component of comprehensive income
for the Company. The Company does not provide income taxes on
the impact of currency translations.
130
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
2. Summary
of Significant Accounting Policies (continued)
Recent Accounting Pronouncements: In November
2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 151, Inventory
Costs, an amendment of Accounting Research
Bulletin No. 43, Chapter 4.
SFAS No. 151 clarifies that abnormal inventory costs
such as costs of idle facilities, excess freight and handling
costs, and wasted materials (spoilage) are required to be
recognized as current period charges. The provisions of
SFAS No. 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005.
At inception, the Company has accounted for its inventories in
accordance with this provision.
In December 2004, the FASB issued SFAS No. 153,
Exchange of Nonmonetary Assets which eliminates the
exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance.
SFAS No. 153 will be effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after
June 15, 2005. The Company did not enter into any
transactions that would be accounted for in accordance with
SFAS No. 153.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48) which is an interpretation of
SFAS No. 109. The pronouncement clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements. The Interpretation
prescribes a recognition threshold and measurement attribute for
the recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 is effective
for fiscal years beginning after December 15, 2006.
The Company does not expect that the adoption of this
interpretation will have a material impact on its financial
position and results of operations.
The Company is a manufacturing concern that would generally be
subject to a 33% combined tax rate (30% state enterprise income
tax and 3% local income tax). However, the Company qualifies as
a foreign investment enterprise that is subject to a 27%
combined corporate income tax rate (24% state enterprise income
tax and 3% local income tax). In addition to this reduced tax
rate, the Company is eligible for a five-year tax holiday,
commencing in the year the Company has cumulative taxable
income, (that is, after the Company utilizes any net operating
loss carry forwards generated before the tax holiday period
begins). Under the terms of the tax holiday, the Company has an
income tax exemption for the first two years of the holiday
period and a combined rate of 15% for the following three years
of the holiday period.
There was no income tax benefit recorded for the fiscal period.
A reconciliation of the provision for income tax benefits with
the amounts obtained by applying the federal statutory tax rate
is as follows:
|
|
|
|
|
|
|
Period Ended
|
|
|
|
May 30, 2006
|
|
|
Statutory tax rate
|
|
|
33.0
|
%
|
Preferential tax rate reduction
|
|
|
(6.0
|
)
|
Tax holiday rate reduction
|
|
|
(27.0
|
)
|
Change in valuation allowance
|
|
|
4.8
|
|
Future tax in excess of book
depreciation after tax holiday
|
|
|
(4.8
|
)
|
|
|
|
|
|
Effective tax rate
|
|
|
|
%
|
|
|
|
|
|
131
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
3. Income
Taxes (continued)
The deferred income taxes reflect the net tax effects of
temporary differences between the basis of assets and
liabilities for financial reporting purposes and their basis for
income tax purposes. Significant components of the
Companys deferred tax liabilities and assets as of
May 30, 2006 are as follows:
|
|
|
|
|
|
|
As of May 30, 2006
|
|
|
|
(Amounts in thousands, USD)
|
|
|
Deferred tax assets:
|
|
|
|
|
Property, plant and equipment
|
|
$
|
263
|
|
License fees
|
|
|
115
|
|
Customer list
|
|
|
8
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
386
|
|
Valuation allowance
|
|
|
(386
|
)
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
|
|
|
|
|
|
|
As of May 30, 2006, the Company had available for income
tax purposes approximately $4.3 million in net operating
loss carryforwards that may be used to offset future taxable
income. The net operating loss may be carried forward for five
years under applicable current tax law. The net operating loss
must be utilized to offset future taxable income, prior to the
commencement of the Companys tax holiday. As such, no
deferred tax asset is recorded for these net operating losses.
In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion
or all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in
making this assessment. For the period ended May 30, 2006,
management recorded a $0.4 million valuation allowance
which reduced the gross deferred tax asset to $0.
|
|
4.
|
Employee
Retirement Plan
|
The Company elected to participate in a defined contribution
retirement plan for the benefit of its employees. The retirement
plan is administered by a local government organization. The
Company makes contributions to the plan based on employee
compensation. Contributions made by the Company under the plan
were $1.0 million for the period ended May 30, 2006.
The Company maintains unsecured lines of credit up to
$31.0 million with various financial institutions. As of
May 30, 2006, the total amount of outstanding loans was
$6.2 million, maturing on November 14, 2006 and
bearing interest rate of 5.4% per annum. There are no
covenant calculations or other financial reporting requirements
associated with this debt. The loan availability is reviewed and
renewed on an annual basis.
|
|
6.
|
Fair
Value of Financial Instruments
|
The Companys financial instruments consist primarily of
cash and cash equivalents, accounts receivable, accounts
payable, and debt instruments. The book values of these
financial instruments (except for debt) are considered to be
representative of their respective fair values. None of the
Companys debt instruments that are outstanding at
May 30, 2006, have readily ascertainable market values;
however, the carrying values are considered to approximate their
respective fair values. See Notes 5 and 7 for the terms and
carrying values of the Companys various debt instruments.
132
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
7.
|
Related
Party Transactions
|
In accordance with the JV Contract, the Company and YCFC entered
into a Comprehensive Services Contract (Services
Contract), a Utilities Contract, a Land Use Right Lease
Contract (the Land Lease Contract), and Raw
Materials Supply Contract (the RMS Contract). All of
the contracts, except the Land Lease Contract, have payment
schedules that are variable in nature. The Services Contract
states that YCFC will provide the Company with the following
types of services: communication to and security for employees,
information technology licenses and related support, public
services for the manufacturing facility and employee residential
site. The initial term of the contract is forty years and may be
extended if mutually agreed by both parties. The Utilities
Contract calls for YCFC to provide the Company with all of its
utility requirements. Both parties are to jointly review the
pricing on an annual basis. The Land Lease Contract has an
initial lease term of twenty years and is renewable for an
additional twenty years. The lease payment is approximately
$65.0 thousand and due semi-annually. The RMS Contract calls for
YCFC to supply to the Company and for the Company to purchase
from YCFC all raw materials. If YCFC is unable to fulfill the
Companys raw material requirements, the Company has the
right to obtain additional quantities of such raw material as
necessary from any other source within or outside China. The
initial term of the contract is for forty years.
Unifi Manufacturing, Inc. (UMI), an affiliate of
Unifi Asia, entered into the Technology Agreement with the
Company which calls for payments over a four year period
totaling $6.0 million. The Technology Agreement calls for
UMI to provide the services of approximately six qualified
technical employees to provide technical support relating to the
manufacture and sale of certain value-added products and to
support the operation and production of the manufacturing
facility. This agreement also grants the Company an exclusive
and non-transferable license to use the licensed technology for
the manufacture and sale of the Companys products.
All of the payments associated with the aforementioned contracts
with the Company, excluding the RMS Contract, are expensed as
incurred or as services are rendered. Upon the inception of the
Company, Unifi Asia entered into a Loan Contract (the
Loan Contract) to assist the Company in
purchasing a portion of the property, plant and equipment from
YCFC. The $15.0 million loan was interest-free and was due
in full one year after the closing date. Prior to the maturity
date of the loan, Unifi Asia was granted the option of electing
to convert the loan amount into the registered capital of the
Company. The required related-party disclosures for the first
fiscal period are as follows:
(a) Related parties with controlling relationships:
|
|
|
|
|
Relationship with the Company
|
|
YCFC
|
|
Investor (50% ownership interest)
|
Unifi Asia
|
|
Investor (50% ownership interest)
|
(b) Relationship between the Company and related parties
without controlling relationships:
|
|
|
|
|
Relationship with the Company
|
|
Unifi Manufacturing, Inc.
|
|
Affiliate of Unifi Asia
|
Shaoxing Yihua Kangqi Chemical
Fibre Co., Ltd. (Shaoxing)
|
|
Affiliate of YCFC
|
133
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
7. Related
Party Transactions (continued)
(c) The amount of the Companys related party
transactions during the period and its balances with related
parties at the end of period are summarized as follows:
(i) The material related party transactions of the Company
are summarized as follows:
|
|
|
|
|
|
|
Period Ended
|
|
|
|
May 30, 2006
|
|
|
|
(Amounts in thousands, USD)
|
|
|
YCFC
|
|
|
|
|
Purchases of raw materials
|
|
$
|
94,796
|
|
Purchase of property, plant and
equipment
|
|
|
45,785
|
|
Utility fees paid
|
|
|
8,114
|
|
Comprehensive services fees
expensed
|
|
|
341
|
|
Land lease expensed
|
|
|
110
|
|
|
|
|
|
|
|
|
$
|
149,146
|
|
|
|
|
|
|
Sales of goods
|
|
$
|
386
|
|
|
|
|
|
|
Unifi Asia
|
|
|
|
|
Cash loan to the Company
|
|
$
|
15,000
|
|
|
|
|
|
|
Unifi Manufacturing,
Inc.
|
|
|
|
|
Technology license and support
contract fees expensed
|
|
$
|
1,250
|
|
Purchases of goods
|
|
|
34
|
|
|
|
|
|
|
|
|
$
|
1,284
|
|
|
|
|
|
|
Shaoxing
|
|
|
|
|
Sales of goods
|
|
$
|
20,730
|
|
|
|
|
|
|
Purchases of goods
|
|
$
|
1,500
|
|
|
|
|
|
|
(ii) The balances of related party receivables and payables
are summarized as follows:
|
|
|
|
|
|
|
As of May 30, 2006
|
|
|
|
(Amounts in thousands, USD)
|
|
|
YCFC
|
|
|
|
|
Related-party accounts payable
|
|
$
|
25,777
|
|
Related-party accounts receivable
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
$
|
25,649
|
|
|
|
|
|
|
Unifi Asia
|
|
|
|
|
Current maturity of long-term debt
|
|
$
|
15,000
|
|
|
|
|
|
|
Unifi Manufacturing,
Inc.
|
|
|
|
|
Advance to related-party
|
|
$
|
750
|
|
|
|
|
|
|
Shaoxing
|
|
|
|
|
Related-party account receivable
|
|
$
|
(682
|
)
|
|
|
|
|
|
134
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
YCFC and Unifi Asia are not permitted to sell, give, assign or
transfer or otherwise dispose of their equity interest in the
Company without written consent by the other shareholder.
However, in accordance with the JV Contract, YCFC granted Unifi
Asia an irrevocable option to sell all of its equity interest in
the Company directly to YCFC or YCFC shall cause another party
to acquire Unifi Asias entire equity interest. The put
option is exercisable between August 2009 and January 2010.
Both shareholders directed certain of their respective employees
to work for the Company for a substantial period of time with
the intention of maintaining or enhancing the value of their
investment in the Company. The associated costs and expenses of
these employees were included as an expense on the Statement of
Operations of the Company and recorded as a capital contribution.
|
|
9.
|
Commitments
and Contingencies
|
The Company is obligated under the Land Lease Contract with YCFC
to lease for a minimum of twenty years the land on which the
Companys plant is located. After the initial term, the
lease may be renewed for an additional twenty years. Future
obligations for minimum rentals under the initial lease term
during fiscal years ending after May 30, 2006 are $132
thousand for each year. Rental expense was $110 thousand for the
fiscal year ended May 30, 2006. The aggregate lease
obligation is $2.6 million over the initial term of twenty
years. The Company had no significant binding commitments for
capital expenditures at May 30, 2006.
As of May 30, 2006, the Company is not aware of any pending
claims, lawsuits or proceedings that will materially affect the
financial position of the Company.
Effective June 7, 2006, the Companys Board of
Directors approved the conversion of a $15.0 million loan
owed to Unifi Asia into registered capital and
$15.0 million of accounts payable owed to YCFC into
registered capital. Effective July 25, 2006, both of the
previously described liabilities were converted to registered
capital thereby increasing the registered capital by
$30.0 million.
135