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
24, 2007
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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 22, 2006, the aggregate market value of the
registrants voting common stock held by non-affiliates of
the registrant was $105,669,558. The Registrant has no
non-voting stock.
As of September 5, 2007, the number of shares of the
Registrants common stock outstanding was 60,541,800.
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 24, 2007, 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
Unifi, Inc., a New York corporation formed in 1969 (together
with its subsidiaries the Company or
Unifi), is primarily 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 fabric 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 2007 were $690.3 million
and $116.3 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 approximately 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 Trade
Partnership Act (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 the Peoples
Republic of China (China), Israel and the United
States.
On April 26, 2007, the Company announced its plans to move
all production from the recently acquired Dillon Yarn
Corporation (Dillon) facility in Dillon, South
Carolina to its facility in Yadkinville, North Carolina. The
closure of the Dillon facility is consistent with the
Companys strategy of making key acquisitions and then
eliminating redundant overhead costs and consolidating excess
capacity to lower its manufacturing costs. The Company completed
this transition in July 2007 with no interruption of service to
its customers.
On August 1, 2007, the Company announced that the Board of
Directors terminated Mr. Brian Parke as the Chairman,
President and Chief Executive Officer of the Company effective
immediately. Mr. Parke had been President of the Company
since 1999, Chief Executive Officer since 2000 and Chairman
since 2004. Mr. Parke has agreed to continue to serve on a
part-time consulting basis as the Vice Chairman of the
Companys Chinese joint venture. The Company also announced
that the Board of Directors appointed Mr. Stephen Wener as
the Companys new Chairman and acting Chief
Executive Officer. In addition, there were several changes to
its Board of Directors, including six directors
resignations, including Mr. Parke, and the appointment of
two new directors. The current Board of Directors and management
remain committed to both its domestic and China strategies.
On August 2, 2007, the Company announced that it will close
its Kinston, North Carolina facility. The Kinston facility
produces POY for both internal consumption and third party
sales. In the future, the Company will purchase most of its
commodity POY needs from external suppliers for conversion in
its texturing operations. The Company will continue to produce
POY at its Yadkinville, North Carolina facility for its
specialty and premium value yarns and certain commodity yarns.
The Company expects that it will take four to five months to
transition from producing POY at the Kinston location and
expects to complete the supply chain logistics required for a
complete
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shut-down by the end of the calendar year 2007. During the first
quarter of fiscal year 2008, the Company reorganized certain
corporate staff and manufacturing support functions to further
reduce costs. Approximately 310 employees including 110
salaried positions and 200 wage positions will be affected as a
result of these reorganization plans including the termination
of Benny L. Holder, the Companys Vice President and Chief
Information Officer. The Company will record severance expense
of approximately $4.9 million in the first half of fiscal
year 2008 which includes severance of $2.4 million in
connection with the termination of its former President and
Chief Executive Officer.
The textile and apparel industry 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 33%,
the industrial and consumer markets account for 31%, and the
home textiles market accounts for the remaining 11%.
According to the National Council of Textile Organizations, the
U.S. textile markets total shipments were
$68.6 billion for the twelve month period ended November
2006. Over the past ten years, the U.S. industry has
invested more than $30 billion in new plants and equipment
making it one of the most modern and productive textile sectors
in the world. In calendar year 2006, the U.S. textile and
apparel market employed more than most 613,000 workers. The
U.S. textile industry remains the third largest textile
exporter in the world with $16.8 billion in sales for the
twelve month period ended November 2006.
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 2006, global polyester accounted for an estimated
40% of global fiber consumption and demand is projected to
increase by 6% to 7% annually through 2010. In the U.S., the
synthetic fiber sector is estimated to be approximately 58% of
the textile and apparel for the calendar year 2007.
The synthetic filament industry includes petrochemical and raw
material producers; fiber and yarn manufacturers (like the
Company), fabric and product producers; consumer brands and
retailers. 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 textile and apparel industry has contracted
since 1999, primarily as a result of intense foreign competition
in finished goods on the basis of price. This has resulted in
ongoing North American domestic overcapacity, forcing many
producers to move operations offshore and the closure of many
domestic textile and apparel plants. In addition, due to
consumer preferences, demand for certain sheer hosiery product
has also declined in recent years, negatively impacting nylon
manufacturers. As a result, the contraction in the North
American textile and apparel market continues. Industry experts
expect a similar rate of decline in calendar year 2007 as
compared to calendar year 2006. They also expect a lower rate of
decline after calendar year 2008 as regional manufacturers
continue to demand North American manufactured yarn due to the
duty-free advantage, quick response times, readily available
production capacity, and specialized products. North American
retailers are increasingly expressing their need for a balanced
procurement strategy with both global and regional producers.
There has also been growing emphasis regionally towards premium
value-added yarns as consumers, retailers and manufacturers
demand products with enhanced performance and
environment-friendly characteristics. This emphasis on
incorporating specialty synthetic yarn in finished goods has
greatly increased regional demand for value-added, synthetic
fibers.
In the Americas, regional free-trade agreements, such as NAFTA
and CAFTA, and U.S. unilateral duty 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
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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 and apparel finished
goods under the terms of these regional free-trade agreements
and duty preference programs typically represents a wholesale
cost advantage of 28% to 32% on these finished goods. As a
result of these cost advantages, it is expected that these
regions will continue to increase their supply of textiles to
the United States markets.
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 fabric for the apparel,
automotive 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 fabric 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 to
fabric and garments. The Company recently introduced a line of
products that are made from recycled materials which 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
approximately 20 premium value-added yarn products in its
portfolio. These 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 properties for 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 2007.
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 to develop specific fabric for those brands and
retailers utilizing the Companys value-added
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products. Based on the results of many commercial and branded
programs, this strategy has proven to be successful for the
Company. Examples include:
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Sorbtek®,
which is used in many well-known apparel brands and retailers,
including Wal-Mart, Asics, 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;
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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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aio®
has been very successful with retailers like Costco and brands
like Reebok; and
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Repreve®
has been Unifis most successful branded product in fiscal
year 2007. Through the Companys partnerships with
companies like Polartec, LLC and Valdese Contract Weavers,
Repreve can be found in well-known brands ranging from
Patagonia, LL Bean, and REI to Steelcase and Herman Miller.
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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 2007, the
Companys nylon segment had sales to Hanesbrands, Inc.
(formerly Sara Lee Branded Apparel) of $71.6 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, including
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.
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 for more information.
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 the Company announced that it
will close) and spinning (performed at the Companys
Yadkinville and Kinston facilities). The polymerization process
is the production of polymer by a chemical reaction involving
the combination of TPA and MEG. The spinning process involves a
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. As discussed in Recent
Developments above, the Company has announced it will be
closing its POY manufacturing facility in Kinston, North
Carolina and purchasing much of its commodity POY from external
suppliers. The Company will continue to produce POY at its
Yadkinville, North Carolina facility mostly for its specialty
and premium value yarns.
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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 use of
high-speed machines to draw, heat and false-twist the POY to
produce yarn having various physical characteristics, depending
on its ultimate end-use. Texturing of POY, which can be either
natural or solution-dyed raw polyester or natural nylon filament
fiber, gives the yarn greater bulk, strength, stretch,
consistent dye-ability and a softer feel, thereby making it
suitable for use in knitting and weaving of fabric.
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 to 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 primarily 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 while maintaining a softer feel.
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.
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 Company has
historically entered into long-term supply agreements with these
three suppliers. The chip, MEG and TPA supply agreements
typically provide for formula-driven pricing. The agreement with
Nanya will expire in October 2007 and is currently being
renegotiated. The agreement with DAK has no minimum off-take
requirements and can be terminated anytime upon two years prior
notice. On April 19, 2007 the Company provided DAK notice
of its intent to terminate the agreement. The original agreement
with DuPont was set to terminate on December 31, 2006,
however it was amended in the fourth quarter of fiscal year 2007
to extend the term to May 2008. The primary suppliers of nylon
POY to the nylon segment are U.N.F. Industries Ltd.
(UNF), HN Fibers, Ltd. (formerly SN Fibers, Ltd.),
Invista S.a.r.l., 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 agreement with UNF is
scheduled to terminate in 2008. The nylon POY production is
being utilized in the domestic nylon texturing operations.
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 for a further
discussion.
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.
The industry in which the Company currently operates is global
and 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
importers of textile and apparel products.
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The polyester segments major regional competitors are
AKRA, S.A. de C.V., OMara, Inc., Nanya, and Spectrum
Yarns, Inc. 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 producers from
these regions, including commodity yarn users, 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.
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, raw
materials and energy costs, capital 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 operating results to decline. 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 generates 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, increased overseas sourcing by
U.S. retailers, 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 Item 1.
Business Trade Regulation for a further
discussion.
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
just-in-time
delivery requirements. 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
foreign made automobiles, the U.S. automotive upholstery
industry is also affected by these 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. Recent trends toward form fitting apparel has helped
offset the sheer hosiery decline. The Company supplies the
largest domestic ladies hosiery producer, Hanesbrands, Inc.
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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 the North and Central
America regions. 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 for a further discussion.
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
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.
The Company has a limited number of patents and approximately 26
U.S. registered trademarks none of which are material to
any of the Companys reporting segments or its business
taken as a whole. The Company licenses certain trademarks,
including
Dacron®
and
Softectm
from INVISTA S.a.r.l. (INVISTA).
The Company employs approximately 2,900 employees of whom
approximately 2,880 are full-time and approximately 20 are
part-time employees. Approximately 2,200 employees are
employed in the polyester segment, approximately
580 employees are employed in the nylon segment and
approximately 120 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.
Increases in global capacity and imports of foreign-made textile
and apparel products are a significant source of competition for
the Company. Although imported apparel represents a significant
portion of the U.S. apparel market, recent regional trade
agreements containing yarn forward rules of origin have provided
opportunities to participate in the growing import market with
apparel products manufactured outside the United States. Imports
of certain textile products into the U.S. continue to
increase from Asia as a result of lower wages, lower raw
material and capital costs, unfair trade practices, and
favorable currency exchange rates against the U.S. dollar.
The extent of import protection afforded by the
U.S. government to domestic textile producers has been, and
is likely to remain, subject to considerable domestic political
deliberation and foreign considerations. In January 1995, a
multilateral trade organization, the World Trade Organization
(WTO), was formed by the members of the General
Agreement on Tariffs and Trade (GATT), to replace
GATT. At that time the WTO established a mechanism by which
world trade in textiles and clothing would 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. As of January 1, 2005, the remaining quotas,
9
(representing approximately one-half of the textile and apparel
imports) were removed. During 2005, textile and apparel imports
from China surged, primarily gaining share from other Asian
importing countries. To that end 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. Negotiations
continue within the WTO framework to extend the textile-specific
safeguards or implement new safeguards. In addition, the
industry is exploring all current trade remedy laws that will
address unfair trade practices that China failed to eliminate
under its WTO commitment.
NAFTA is a free trade agreement between the United States,
Canada and Mexico that became effective on January 1, 1994
and has created the worlds largest free-trade region. 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, amended by the Trade Act of 2002,
which allows apparel products manufactured in the Caribbean
region using yarns or fabric produced in the United States to be
imported into the United States duty and quota free. Also in
2000, the United States passed the African Growth and
Opportunity Act (AGOA), which was amended by the
Trade Act of 2002, which allows apparel products manufactured in
the sub-Saharan African region using yarns or fabric 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. At this time, Costa Rica is the only
CAFTA country that has not yet ratified the agreement and come
under its provisions.
The Andean Trade Promotion and Drug Eradication Act
(ATPDEA) passed on August 6, 2002, effectively
granting participating Andean countries the favorable trade
terms similar to those of the other regional free trade
agreements. Under the enhanced ATPDEA, apparel manufactured in
Bolivia, Colombia, Ecuador and Peru using yarns and fabric
produced in the United States, or in these four Andean
countries, could be imported into the United States duty
and quota free through December 31, 2006. A temporary
extension for the ATPDEA was granted to coincide with the
ongoing free trade agreement negotiations with several of these
Andean nations. Free trade agreements were recently completed
with Peru and Colombia which follow, for the most part, the same
yarn forward rules of origin as the ATPDEA. These agreements
require congressional action which is expected by the end of
calendar 2007. Also awaiting congressional action are the
recently negotiated free trade agreements with Panama and South
Korea. These agreements contain basic yarn forward rules of
origin for textile and apparel products similar to the NAFTA.
The Deficit Reduction Act of 2005, which was signed into law on
February 8, 2006, contained 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.
This measure, part of an agriculture budget reconciliation
process, eliminated the Step 2 program, which provided for
payments to U.S. cotton and textile producers. As of
August 1, 2006, payments made under the Step 2 program,
including those to Parkdale America, LLC (PAL), the
Companys joint venture with Parkdale Mills, Inc., were
eliminated. The industry has been involved in recommending WTO
compliant measures to ease this transition.
10
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 there under 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. 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 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.
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.
Recent
changes in the Companys senior management and on its Board
may cause uncertainty in, or be disruptive to, the
Companys business.
The Company has recently experienced significant changes in its
senior management and on the Board of Directors
(Board). On August 1, 2007, the Company
announced that the Board terminated Brian Parke as the
11
Chairman, President and Chief Executive Officer of the Company
effective immediately. Mr. Parke had been President of the
Company since 1999, Chief Executive Officer since 2000 and
Chairman since 2004. The Company also announced that the Board
appointed Stephen Wener as the Companys new Chairman and
acting Chief Executive Officer while the Company
searches for a permanent replacement. In addition, there have
been several recent changes to the Board, including the
resignation of six directors, including Mr. Parke, and the
appointment of two new directors. On August 22, 2007, the
Company announced an internal reorganization that involved the
termination of Benny L. Holder, the Companys Vice
President and Chief Information Officer. The Company currently
does not have any employment agreements with its senior
management team other than 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. These changes in
the Companys senior management and on the Board may be
disruptive to its business, and, during this current transition
period, there may be uncertainty among investors, vendors,
customers, rating agencies, employees and others concerning the
Companys future direction and performance. Moreover, the
Companys future success will depend to a significant
extent on its ability to identify and hire a new President and
Chief Executive Officer. If the Company is unable to identify
and retain effective permanent replacements for the
Companys former President and Chief Executive Officer, its
results of operations and financial condition may be adversely
affected.
The
Company is currently implementing various strategic business
initiatives, and the success of the Companys business will
depend on its ability to effectively develop and implement these
initiatives.
The Company is currently implementing various strategic business
initiatives. In connection with the development and
implementation of these initiatives, the Company has incurred,
and expects to continue to incur, additional expenses,
including, among others, expenses associated with discontinuing
underperforming operations and closing certain of its plants and
facilities and related severance costs. The development and
implementation of these initiatives also requires management to
divert a portion of its time from day-to-day operations. These
expenses and diversions could have a significant impact on the
Companys operations and profitability, particularly if the
initiatives included in any new initiative proves to be
unsuccessful. Moreover, if the Company is unable to implement an
initiative in a timely manner, or if those initiatives turn out
to be ineffective or are executed improperly, the Companys
business and operating results would be adversely affected.
The
Companys substantial level of indebtedness could adversely
affect its financial condition.
The Company has substantial indebtedness. As of June 24,
2007, the Company had a total of $243.3 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,
$36.0 million outstanding under the Companys amended
revolving credit facility, $14.3 million outstanding in
loans relating to a Brazilian government tax program, and
$1.7 million outstanding on a sale leaseback obligation.
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.
Despite
its current indebtedness levels, the Company may still be able
to incur substantially more debt. This could further exacerbate
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.
The Companys principal sources of liquidity are cash flows
generated from operations and borrowings under its amended
revolving credit facility. The Companys ability to make
payments on, 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 flows 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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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
AKRA, S.A. de C.V., OMara, Inc., Nanya, and Spectrum, 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 fabric 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 elimination of China safeguard measures 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.
14
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 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. Two examples of potentially adverse
consequences can be found in the recently signed CAFTA
agreement. An amendment to require US or regional pocketing yarn
and fabric to advantage duty free CAFTA treatment has been
signed by the participatory CAFTA countries, but not yet passed
through their legislative processes, which is required for the
measure to take effect. Additionally, a customs ruling has been
issued that allows the use of foreign singled textured sewing
thread in the CAFTA region. Failure to overturn this ruling or
correct this issue could have some material adverse effect on
this business segment. See Item 1
Business Trade Regulation for more information.
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 dependent on global
supply and demand dynamics including geo-political risks. 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. 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 any 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 POY, 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. With its recent
announcement regarding the closing of its Kinston facility,
sources of POY from NAFTA and CAFTA qualified suppliers 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. These POY
suppliers are also at risk with their raw material supply chain.
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. With
15
Hurricane Rita the supply of MEG was reduced, and prices
increased as well. Any 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, and 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 fabric
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 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 four 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 fabric 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 continues to be 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
16
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 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 See Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Review of Fiscal Year
2007 Results of Operations (52 Weeks) Compared to Fiscal Year
2006 (52 Weeks) for fiscal year 2007 losses directly
related to customer bankruptcies.
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
17
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 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 if it does not incur significant capital expenditures
for expansion purposes. 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 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 for a further discussion. 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.
18
The
Companys acquisition strategy may not be successful, which
could adversely affect its business.
The Company has expanded its business partly through
acquisitions and may 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 performs 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 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.
According to industry experts and trade associations illegal
transshipments of apparel products into the United States
continues to negatively impact the textile market. 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
19
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, and 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 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 2,900 employees,
approximately 2,500 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
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 Review of Fiscal Year 2007 Results of
Operations (52 Weeks) Compared to Fiscal Year 2006 (52
Weeks) for fiscal year 2007 impairment charges relating to
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.
20
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 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.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Following is a summary of principal properties owned or leased
by the Company as of June 24, 2007:
|
|
|
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
|
21
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 nine 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 2007, 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.
As of June 24, 2007, the Company has classified several
properties as assets held for sale. At the end of fiscal year
2007, assets held for sale included its facility in Dillon,
South Carolina, a warehouse in Reidsville, North Carolina
and its nylon Plants 5 and 7 in Madison, North Carolina. The
Plant 1 facility in Madison sold on June 19, 2007. The
assets held for sale are not included in the property listing
table above.
The Company also leases a manufacturing facility 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 of the fiscal year ended June 24, 2007.
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 Acting Chief Executive
Officer
STEPHEN WENER Age: 63
Mr. Wener, who lives in Franklin Lakes, New Jersey, has
served as the President and CEO of Dillon Yarn Corporation
(Dillon) since 1980. The Dillon polyester and nylon
texturing operations were purchased by the Company on
January 1, 2007. He has been the Executive Vice President
of American Drawtech Company, Inc. since 1992, a director of New
River Industries, Inc. since 1996, and a director of Titan
Textile Canada, Inc. since 1999. He was appointed a Director of
the Company by the Board of Directors on May 24, 2007.
For additional information about Dillon, see Item 1.
Business Recent Developments.
Vice
Presidents
WILLIAM M. LOWE, JR. Age: 54
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:
38 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
22
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:
55 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.
WILLIAM L. JASPER Age: 54
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:
43 Mr. McCoy has been an employee of
Unifi, Inc. (the Company) since January 2000, when
he joined the Company as Assistant Secretary and General
Counsel. In October 2000, Mr. McCoy was elected as Vice
President, Secretary and General Counsel of the Company.
With the exception of Mr. Wener, each of the executive
officers was elected by the Board of the Company at the Annual
Meeting of the Board held on October 25, 2006. Each
executive officer was elected to serve until the next Annual
Meeting of the Board 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.
23
|
|
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 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
|
|
Fiscal year 2007:
|
|
|
|
|
|
|
|
|
First quarter ended
September 24, 2006
|
|
$
|
3.24
|
|
|
$
|
2.26
|
|
Second quarter ended
December 24, 2006
|
|
|
3.00
|
|
|
|
1.69
|
|
Third quarter ended March 25,
2007
|
|
|
2.98
|
|
|
|
1.83
|
|
Fourth quarter ended June 24,
2007
|
|
|
3.07
|
|
|
|
2.48
|
|
As of September 5, 2007 there were approximately 484 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 5,200 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 24,
2007 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
|
|
|
4,473,186
|
|
|
$
|
5.53
|
|
|
|
1,599,947
|
|
Equity compensation plans not
approved by shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,473,186
|
|
|
$
|
5.53
|
|
|
|
1,599,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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.
24
Recent
Sales of Unregistered Securities
On January 1, 2007 the Company issued approximately
8.3 million shares of our common stock, in exchange for
specified assets purchased from Dillon by Unifi Manufacturing,
Inc. one of the Companys wholly owed subsidiaries. There
were no underwriters used in the transaction. The issuance of
these shares of common stock was made in reliance on the
exemptions from registration provided by Section 4(2) of
the Securities Act of 1933, as amended, as offers and sales not
involving a public offering. On February 9, 2007 the
Company filed
Form S-3
Registration statement under the Securities Act of 1933 to
register these shares.
On April 25, 2003, the Company announced that its Board 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. As of
June 24, 2007, 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.
25
PERFORMANCE
GRAPH SHAREHOLDER RETURN ON COMMON STOCK
Set forth below is a line graph comparing the cumulative total
Shareholder return on the Companys Common Stock with
(i) the New York Stock Exchange Composite Index, a broad
equity market index, and (ii) a peer group selected by the
Company in good faith (the Peer Group), assuming in
each case, the investment of $100 on June 30, 2002 and
reinvestment of dividends. Including the Company, the Peer Group
consists of fourteen publicly traded textile companies,
including Albany International Corp., Culp, Inc., Decorator
Industries, Inc., Delta Woodside Industries, Inc., Dixie Group,
Inc., Hallwood Group Inc., Hampshire Group, Limited, Innovo
Group Inc., Interface, Inc., JPS Industries, Inc., Lydall, Inc.,
Mohawk Industries, Inc., and Quaker Fabric Corporation.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Unifi, Inc., The NYSE Composite Index
And A Peer Group
* $100 invested on 6/30/02 in stock or index-including
reinvestment of dividends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 29,
|
|
|
June 27,
|
|
|
June 26,
|
|
|
June 25,
|
|
|
June 24,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
Unifi,
Inc.
|
|
|
|
100.00
|
|
|
|
|
55.05
|
|
|
|
|
24.40
|
|
|
|
|
36.33
|
|
|
|
|
27.06
|
|
|
|
|
25.60
|
|
NYSE Composite
|
|
|
|
100.00
|
|
|
|
|
99.27
|
|
|
|
|
120.58
|
|
|
|
|
135.22
|
|
|
|
|
151.26
|
|
|
|
|
193.99
|
|
Peer Group
|
|
|
|
100.00
|
|
|
|
|
84.76
|
|
|
|
|
106.15
|
|
|
|
|
116.16
|
|
|
|
|
108.17
|
|
|
|
|
144.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 24, 2007
|
|
|
June 25, 2006
|
|
|
June 26, 2005
|
|
|
June 27, 2004
|
|
|
June 29, 2003
|
|
|
|
(52 Weeks)
|
|
|
(52 Weeks)
|
|
|
(52 Weeks)
|
|
|
(52 Weeks)
|
|
|
(52 Weeks)
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
Summary of
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
690,308
|
|
|
$
|
738,665
|
|
|
$
|
792,774
|
|
|
$
|
666,114
|
|
|
$
|
747,674
|
|
Cost of sales
|
|
|
652,743
|
|
|
|
696,055
|
|
|
|
762,717
|
|
|
|
625,983
|
|
|
|
675,829
|
|
Selling, general and
administrative expenses
|
|
|
44,886
|
|
|
|
41,534
|
|
|
|
42,211
|
|
|
|
45,963
|
|
|
|
48,182
|
|
Provision for bad debts
|
|
|
7,174
|
|
|
|
1,256
|
|
|
|
13,172
|
|
|
|
2,389
|
|
|
|
3,812
|
|
Interest expense
|
|
|
25,518
|
|
|
|
19,266
|
|
|
|
20,594
|
|
|
|
18,706
|
|
|
|
19,739
|
|
Interest income
|
|
|
(3,187
|
)
|
|
|
(6,320
|
)
|
|
|
(3,173
|
)
|
|
|
(3,299
|
)
|
|
|
(1,906
|
)
|
Other (income) expense, net
|
|
|
(2,576
|
)
|
|
|
(1,466
|
)
|
|
|
(2,320
|
)
|
|
|
(1,720
|
)
|
|
|
361
|
|
Equity in (earnings) losses of
unconsolidated affiliates
|
|
|
4,292
|
|
|
|
(825
|
)
|
|
|
(6,938
|
)
|
|
|
6,877
|
|
|
|
(10,728
|
)
|
Minority interest (income) expense
|
|
|
|
|
|
|
|
|
|
|
(530
|
)
|
|
|
(6,430
|
)
|
|
|
4,769
|
|
Restructuring charges
(recoveries)(1)
|
|
|
(157
|
)
|
|
|
(254
|
)
|
|
|
(341
|
)
|
|
|
8,229
|
|
|
|
10,597
|
|
Arbitration costs and expenses(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
19,185
|
|
Alliance plant closure costs
recoveries(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(206
|
)
|
|
|
(3,486
|
)
|
Write down of long-lived assets(4)
|
|
|
16,731
|
|
|
|
2,366
|
|
|
|
603
|
|
|
|
25,241
|
|
|
|
|
|
Write down of investment in equity
affiliate(5)
|
|
|
84,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,461
|
|
|
|
|
|
Loss on early extinguishment of
debt(7)
|
|
|
|
|
|
|
2,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes and extraordinary item
|
|
|
(139,858
|
)
|
|
|
(15,896
|
)
|
|
|
(33,221
|
)
|
|
|
(69,262
|
)
|
|
|
(18,680
|
)
|
Benefit for income taxes
|
|
|
(22,088
|
)
|
|
|
(1,170
|
)
|
|
|
(13,483
|
)
|
|
|
(25,113
|
)
|
|
|
(2,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before extraordinary item
|
|
|
(117,770
|
)
|
|
|
(14,726
|
)
|
|
|
(19,738
|
)
|
|
|
(44,149
|
)
|
|
|
(16,090
|
)
|
Income (loss) from discontinued
operations, net of tax
|
|
|
1,465
|
|
|
|
360
|
|
|
|
(22,644
|
)
|
|
|
(25,644
|
)
|
|
|
(11,087
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary item and
cumulative effect of accounting change
|
|
|
(116,305
|
)
|
|
|
(14,366
|
)
|
|
|
(42,382
|
)
|
|
|
(69,793
|
)
|
|
|
(27,177
|
)
|
Extraordinary gain net
of taxes of $0(8)
|
|
|
|
|
|
|
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(116,305
|
)
|
|
$
|
(14,366
|
)
|
|
$
|
(41,225
|
)
|
|
$
|
(69,793
|
)
|
|
$
|
(27,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share of Common Stock: (basic
and diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(2.10
|
)
|
|
$
|
(.28
|
)
|
|
$
|
(.38
|
)
|
|
$
|
(.85
|
)
|
|
$
|
(.30
|
)
|
Income (loss) from discontinued
operations, net of tax
|
|
|
.03
|
|
|
|
|
|
|
|
(.43
|
)
|
|
|
(.49
|
)
|
|
|
(.21
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
|
|
|
|
|
|
|
|
.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2.07
|
)
|
|
$
|
(.28
|
)
|
|
$
|
(.79
|
)
|
|
$
|
(1.34
|
)
|
|
$
|
(.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
193,748
|
|
|
$
|
181,539
|
|
|
$
|
244,512
|
|
|
$
|
239,027
|
|
|
$
|
186,194
|
|
Gross property, plant and equipment
|
|
|
913,144
|
|
|
|
914,283
|
|
|
|
953,313
|
|
|
|
941,334
|
|
|
|
975,904
|
|
Total assets
|
|
|
660,930
|
|
|
|
732,637
|
|
|
|
845,375
|
|
|
|
872,535
|
|
|
|
1,002,201
|
|
Long-term debt and other
obligations
|
|
|
236,149
|
|
|
|
202,110
|
|
|
|
259,790
|
|
|
|
263,779
|
|
|
|
259,395
|
|
Shareholders equity
|
|
|
299,931
|
|
|
|
382,953
|
|
|
|
383,575
|
|
|
|
401,901
|
|
|
|
479,748
|
|
27
|
|
|
(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. In fiscal year 2007, the Company performed
impairment testing which resulted in the write down of polyester
and nylon plant, machinery and equipment of $16.7 million. |
|
(5) |
|
In fiscal year 2007, management determined that its investment
in PAL was impaired and that the impairment was considered other
than temporary. As a result, the Company recorded a non-cash
impairment charge of $84.7 million to reduce the carrying
value of its equity investment in PAL to $52.3 million. |
|
(6) |
|
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. |
|
(7) |
|
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. |
|
(8) |
|
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. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements
The following discussion contains certain forward-looking
statements about the Companys financial condition and
results of operations.
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;
|
28
|
|
|
|
|
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;
|
|
|
|
employee relations;
|
|
|
|
the continuity of the Companys leadership; and
|
|
|
|
the success of the Companys consolidation initiatives.
|
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.
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 fabric 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 fabric 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, and the United
States, which has the largest operations and number of
locations. For fiscal years 2007, 2006, and 2005, polyester
segment net sales were $530.1 million, $566.3 million,
and $586.3 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 fabric 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 2007, 2006, and 2005, nylon segment
net sales were $160.2 million, $172.4 million, and
$206.5 million, respectively.
The Companys fiscal year is the 52 or 53 weeks ending
in the last Sunday in June. Fiscal years 2007, 2006, and 2005
had 52 weeks.
29
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
expense with respect to manufacturing assets, fixed asset
depreciation, 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 and intangible 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, resulting in ongoing
U.S. domestic overcapacity, forcing the closure of many
domestic textile and apparel plants and many producers to
move their operations offshore. In addition, due to consumer
preferences, demand for sheer hosiery products has declined
significantly in recent years, which negatively impacts nylon
manufacturers. As a result, the contraction in the North
American textile and apparel market continues, and industry
experts expect a similar rate of decline in calendar year 2007
as compared to calendar year 2006, and a lower rate of decline
after calendar year 2008 as regional manufacturers continue to
demand North American manufactured yarn due to the duty-free
advantage, quick response times, readily available production
capacity, and specialized products and North American retailers
expressing their need for a balanced procurement strategy with
both global and regional producers. 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 by shifting 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 highly committed to its existing interest in
China where industry experts estimate that the production growth
rate for the polyester textile filament yarns will be at a 9 to
10% annual average rate between 2006 and 2010. As further
discussed below in Joint Ventures and Other Equity
Investments, the Company has invested in excess of
$30.0 million in a joint venture in China to manufacture,
process and market polyester filament yarn.
On January 1, 2007, the Company completed its acquisition
of certain assets from Dillon Yarn Corporation. The aggregate
consideration paid in connection with the Dillon acquisition was
$64.2 million consisting of a combination of
$42.2 million in cash and approximately 8.3 million
shares of the Companys common stock valued at
$22.0 million. These assets primarily relate to the
Companys polyester segment. The acquisition included
$10.7 million in inventories, $13.1 million in fixed
assets, and $26.0 million of intangible assets, offset by
$4.0 million in assumed liabilities. Intangible assets
subject to amortization consist of a customer list and non-
30
compete agreements. The customer list of $22.0 million is
being amortized using a declining balance method over thirteen
years and the non-compete agreement of $4.0 million is
being amortized using the straight-line method over seven years.
There are no residual values related to these intangible assets.
Accumulated amortization at June 24, 2007 for these
intangible assets was $2.1 million. The remaining
$18.4 million was attributable to goodwill. The operational
results of Dillon were included in the Companys
consolidated results for the period January 1, 2007 to
June 24, 2007. On April 26, 2007, the Company
announced its plans to move all production from Dillon, South
Carolina to its facility in Yadkinville, North Carolina.
On March 22, 2007, the Company announced that it was
closing its Plant 15 dye facility in Mayodan, North Carolina and
moving all production to its nearby Plant 4 dye facility in
Reidsville, North Carolina which was a result of reduced demand
for its package dyed product line. This move was a natural step
in the process of centralizing its production and maximizing the
efficiencies of its dyed operations into one location. The
Company had completed this transition by the end of the fiscal
year 2007.
On August 1, 2007, the Company announced that the Board had
terminated Brian R. Parke as the Chairman, President and Chief
Executive Officer of the Company effective immediately.
Mr. Parke had been President of the Company since 1999,
Chief Executive Officer since 2000 and Chairman since 2004.
Mr. Parke agreed to continue to serve on a part-time
consulting basis as the Vice Chairman of the Companys
Chinese joint venture. The Company also announced that the Board
appointed Mr. Stephen Wener as the Companys new
Chairman and acting Chief Executive Officer. In
addition, there were several changes to its Board, including six
director resignations, including Mr. Parke, and the
appointment of two new directors. The current Board and
management remain committed to both the Companys domestic
and China strategies.
On August 2, 2007, the Company announced that it will close
its Kinston, North Carolina facility. The Kinston facility
produces POY for internal consumption and third party sales. In
the future, the Company will purchase its commodity POY needs
from external suppliers for conversion in its texturing
operations. The Company will continue to produce POY at its
Yadkinville, North Carolina facility for its specialty and
premium value yarns and certain commodity yarns. The Company
expects that it will take four to five months to transition from
producing POY at the Kinston location and completing the supply
chain logistics enabling a complete shut-down by the end of the
calendar year 2007. During the first quarter of fiscal year
2008, the Company reorganized certain corporate staff and
manufacturing support functions to further reduce costs.
Approximately 310 employees including 110 salaried
positions and 200 wage positions will be affected as a result of
these reorganization plans including the termination of Benny L.
Holder, the Companys Vice President and Chief Information
Officer. The Company will record severance expense of
approximately $4.9 million in the first half of fiscal year
2008, which includes severance of $2.4 million in
connection with the termination of its former President and
Chief Executive Officer.
During fiscal year 2007, the Company continued with its strategy
to consolidate domestic operations through both acquiring other
businesses and closing existing facilities in order to eliminate
redundant overheads, maximize facility utilization rates, lower
manufacturing costs, and improve its product mix. The Dillon
asset purchase and the eventual closure of the Dillon location
along with the closing of its Kinston, North Carolina facility
will enable the Company to operate closer to capacity within its
remaining facilities. In addition, with the closing of its
Kinston location, the Company will be able to better compete
against cheaper imported textured yarns and will have more
flexibility during short term declines in the market. In the
future, the Company will purchase most of its commodity POY
needs from external suppliers for conversion in its texturing
operation. The Company will continue to produce POY at its
Yadkinville, North Carolina facility for its specialty and
premium value yarns and certain commodity yarns.
The Company continued to shift 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.
31
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:
|
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|
|
sales volume, which is an indicator of demand;
|
|
|
|
margins, which are an indicator of product mix and profitability;
|
|
|
|
net income or loss before interest, taxes, depreciation and
amortization and loss or income from discontinued operations
otherwise known as Earnings Before Interest, Taxes,
Depreciation, and Amortization (EBITDA), which is an
indicator of the Companys ability to pay debt; and
|
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working capital of each business unit as a percentage of sales,
which is an indicator of the Companys production
efficiency and ability to manage its inventory and receivables.
|
Corporate
Restructurings
Over the last four fiscal years, the Company has focused on
reducing costs throughout its operations and continuing to
improve working capital. In fiscal year 2004, the Company
recorded restructuring charges of $5.7 million in lease
related costs associated with the closure of the facility in
Altamahaw, North Carolina. The Company paid $1.0 million in
rental payments during fiscal year 2007 and the remaining lease
obligation consists of rental payments of $1.0 million for
the fiscal year 2008 and a residual payment of $2.0 million
owed by one of the Companys subsidiaries in May 2008.
On October 19, 2004, the Company announced plans to close
two production lines and downsize its facility in Kinston, North
Carolina, which was 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.
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 consolidated the operations of one of its plants
from Mayodan to Madison, North Carolina. In connection with this
initiative, the Company offered for 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
a non-cash 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 called 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 a
non-cash 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, 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 year 2006. Approximately 45 management
level salaried employees were affected by the plan of
reorganization. During fiscal year 2007, the Company recorded an
additional $0.3 million for severance relating to this
reorganization.
On April 26, 2007, the Company announced its plans to move
all production from its Dillon, South Carolina facility to its
facility in Yadkinville, North Carolina. As a result, the
Company recorded $1.0 million in severance reserves and
vacation pay for approximately 316 wage and salaried employees.
In addition, the Company recorded a
32
$2.9 million unfavorable contract reserve for a portion of
a sales and services agreement it entered into with Dillon for
continued support of the Dillon business for two years. All of
these reserves were recorded as assumed liabilities in purchase
accounting. The Company expects to complete this transition in
the first quarter of fiscal year 2008 with no interruption of
service to its customers.
On March 22, 2007, the Company announced that it was
closing its dyed operations at Plant 15 in Mayodan, North
Carolina and moving all production to its nearby Plant 4 dye
facility in Reidsville, North Carolina. Accordingly, in the
third quarter of fiscal year 2007, the Company recorded a
non-cash impairment charge of $4.4 million. Since
management is not confident that a sale will occur within twelve
months, the facility is not classified as part of the
Assets held for sale line item in the Consolidated
Balance Sheets.
The table below summarizes changes to the accrued severance and
accrued restructuring accounts for fiscal years 2007, 2006, and
2005 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Additional
|
|
|
|
|
|
Amounts
|
|
|
Balance at
|
|
|
|
June 25, 2006
|
|
|
Charges
|
|
|
Adjustments
|
|
|
Used
|
|
|
June 24, 2007
|
|
|
Accrued severance
|
|
$
|
576
|
|
|
$
|
191
|
|
|
$
|
714
|
|
|
$
|
(604
|
)
|
|
$
|
877
|
|
Accrued restructuring
|
|
|
3,550
|
|
|
|
|
|
|
|
233
|
|
|
|
(998
|
)
|
|
|
2,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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, (YCFC), to manufacture, process, and market
commodity and specialty polyester filament yarn in YCFCs
facilities in 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 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 currently imports a large portion 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 a shareholder loan to complete
the capitalization of the joint venture. Effective July 25,
2006, the shareholder loan was converted to registered capital
of the joint venture. The Company has granted YUFI an exclusive,
non-transferable license to certain of its branded product
technology (including
Mynx®,
Sorbtek®,
Reflexx®,
and dye springs ) in China for a license fee of
$6.0 million over a four year period, this years
portion of which is reflected in Other (income) expense and
equity affiliate results. During fiscal year 2007, the Company
recognized equity losses relating to YUFI of $5.8 million
which is reported net of technology and license fee income. The
Company expects that YUFI will continue to incur losses but at a
declining balance as the joint venture increases its capacity to
produce value-added products which have a higher gross margin.
During fiscal year 2006, the Company recognized equity losses
relating to YUFI of $3.2 million. In addition, the Company
recognized $3.8 million and $2.7 million in operating
expenses for fiscal years 2007 and 2006 respectively, 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.
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 12
manufacturing facilities primarily located in central and
western North Carolina. As part of its fiscal year 2007
financial close process, the Company reviewed the
33
carrying value of its investment in PAL, in accordance with APB
Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock. On July 9, 2007, the
Company determined that the $137.0 million carrying value
of the Companys investment in PAL exceeded its fair value
resulting in a non-cash impairment charge of $84.7 million.
The Company does not anticipate that the impairment charge will
result in any future cash expenditures. For the fiscal years
2007, 2006, and 2005, the Company reported equity income of
$2.5 million, $3.8 million, and $6.4 million,
respectively, from PAL. The Company received distributions of
$6.4 million, $1.8 million, and $9.6 million
during the fiscal years 2007, 2006, and 2005, respectively. The
Company is continuing to explore 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 2007 and 2005, the Company
reported equity losses of $0.2 million and
$0.1 million, respectively, and income of
$0.8 million, for the fiscal year 2006 from USTF. The
Company has a put right under the USTF operating 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 in cash to SANS Fibres. Under the
terms of the agreement, after December 31, 2006, the
Company must give one years prior written notice of its
election to exercise the put right. On January 2, 2007, the
Company notified SANS Fibres that it was exercising its put
right to sell its interest in the joint venture. Negotiations to
determine an agreeable price for the Companys interest in
the joint venture began during the third quarter of fiscal year
2007 with an anticipated transaction completion date in the
third quarter of fiscal year 2008.
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 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 24, 2007 was
$5.3 million. For the fiscal years 2007, 2006, and 2005,
the Company reported losses in equity affiliates of
$1.1 million, $0.8 million, and income of
$0.7 million, respectively, from UNF. In July 2007, the
Steering Committee of UNF agreed to a program to increase
volumes and the utilization of the extruders and thereby improve
the profitability of the joint venture going forward.
Condensed balance sheet information as of June 24, 2007 and
June 25, 2006, and income statement information for fiscal
years 2007, 2006 and 2005, of combined unconsolidated equity
affiliates were as follows:
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|
|
|
|
|
|
|
|
June 24, 2007
|
|
|
June 25, 2006
|
|
|
|
(Amounts in thousands)
|
|
|
Current assets
|
|
$
|
164,874
|
|
|
$
|
149,278
|
|
Noncurrent assets
|
|
|
185,313
|
|
|
|
217,955
|
|
Current liabilities
|
|
|
56,576
|
|
|
|
48,334
|
|
Noncurrent liabilities
|
|
|
11,220
|
|
|
|
44,460
|
|
Shareholders equity and
capital accounts
|
|
|
282,391
|
|
|
|
274,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24, 2007
|
|
|
June 25, 2006
|
|
|
June 26, 2005
|
|
|
Net sales
|
|
$
|
610,013
|
|
|
$
|
572,077
|
|
|
$
|
477,266
|
|
Gross profit
|
|
|
12,711
|
|
|
|
30,268
|
|
|
|
46,063
|
|
Income (loss) from continuing
operations
|
|
|
(9,283
|
)
|
|
|
3,539
|
|
|
|
23,715
|
|
Net income (loss)
|
|
|
(7,733
|
)
|
|
|
(4,298
|
)
|
|
|
20,601
|
|
34
Review of
Fiscal Year 2007 Results of Operations (52 Weeks) Compared to
Fiscal Year 2006 (52 Weeks)
The following table sets forth the loss from continuing
operations components for each of the Companys business
segments for fiscal year 2007 and fiscal year 2006. The table
also sets forth each of the segments net sales as a
percent to total net sales, the net income (loss) components as
a percent to total net sales and the percentage increase or
decrease of such components over the prior year:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007
|
|
|
Fiscal Year 2006
|
|
|
|
|
|
|
|
|
|
% to
|
|
|
|
|
|
% to
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
% Inc. (Dec.)
|
|
|
|
|
|
|
(Amounts in thousands, except percentages)
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
$
|
530,092
|
|
|
|
76.8
|
|
|
$
|
566,266
|
|
|
|
76.7
|
|
|
|
(6.4
|
)
|
Nylon
|
|
|
160,216
|
|
|
|
23.2
|
|
|
|
172,399
|
|
|
|
23.3
|
|
|
|
(7.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
690,308
|
|
|
|
100.0
|
|
|
$
|
738,665
|
|
|
|
100.0
|
|
|
|
(6.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% to
|
|
|
|
|
|
% to
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
$
|
499,929
|
|
|
|
72.4
|
|
|
$
|
527,354
|
|
|
|
71.4
|
|
|
|
(5.2
|
)
|
Nylon
|
|
|
152,814
|
|
|
|
22.2
|
|
|
|
168,701
|
|
|
|
22.8
|
|
|
|
(9.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
652,743
|
|
|
|
94.6
|
|
|
|
696,055
|
|
|
|
94.2
|
|
|
|
(6.2
|
)
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
|
35,704
|
|
|
|
5.2
|
|
|
|
32,771
|
|
|
|
4.4
|
|
|
|
8.9
|
|
Nylon
|
|
|
9,182
|
|
|
|
1.3
|
|
|
|
8,763
|
|
|
|
1.2
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
44,886
|
|
|
|
6.5
|
|
|
|
41,534
|
|
|
|
5.6
|
|
|
|
8.1
|
|
Restructuring charges (recovery)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
|
(103
|
)
|
|
|
|
|
|
|
533
|
|
|
|
0.1
|
|
|
|
|
|
Nylon
|
|
|
(54
|
)
|
|
|
|
|
|
|
(787
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(157
|
)
|
|
|
|
|
|
|
(254
|
)
|
|
|
0.0
|
|
|
|
|
|
Write down of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester
|
|
|
6,930
|
|
|
|
1.0
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
Nylon
|
|
|
8,601
|
|
|
|
1.2
|
|
|
|
2,315
|
|
|
|
0.3
|
|
|
|
271.5
|
|
Corporate
|
|
|
85,942
|
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
101,473
|
|
|
|
14.7
|
|
|
|
2,366
|
|
|
|
0.3
|
|
|
|
|
|
Other (income) expenses
|
|
|
31,221
|
|
|
|
4.5
|
|
|
|
14,860
|
|
|
|
2.0
|
|
|
|
110.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(139,858
|
)
|
|
|
(20.3
|
)
|
|
|
(15,896
|
)
|
|
|
(2.1
|
)
|
|
|
779.8
|
|
Benefit for income taxes
|
|
|
(22,088
|
)
|
|
|
(3.2
|
)
|
|
|
(1,170
|
)
|
|
|
(0.2
|
)
|
|
|
1,787.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(117,770
|
)
|
|
|
(17.1
|
)
|
|
|
(14,726
|
)
|
|
|
(1.9
|
)
|
|
|
699.7
|
|
Income from discontinued
operations, net of tax
|
|
|
1,465
|
|
|
|
0.2
|
|
|
|
360
|
|
|
|
|
|
|
|
306.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(116,305
|
)
|
|
|
(16.9
|
)
|
|
$
|
(14,366
|
)
|
|
|
(1.9
|
)
|
|
|
709.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year 2007, the Company recognized a
$139.9 million loss from continuing operations before
income taxes which was a $124.0 million decline from the
prior year. The decline in continuing operations was primarily
attributable to increased charges of $101.5 million for
asset impairments, decreased polyester and nylon gross profits,
and increased selling, general and administrative expenses
(SG&A). The
last-in,
first-out (LIFO) reserve increased $1.0 million
for fiscal year 2007 as compared to $3.9 million for the
prior fiscal year. During fiscal years 2007 and 2006, raw
material prices increased for polyester ingredients in POY.
35
Consolidated net sales from continuing operations decreased
$48.4 million, or 6.6%, for the current fiscal year. For
the fiscal year 2007, the weighted average price per pound for
the Companys products on a consolidated basis increased
3.7% compared to the prior year. Unit volume from continuing
operations decreased 10.3% for the fiscal year partially due to
managements decision to focus on profitable business as
well as market conditions.
At the segment level, polyester dollar net sales accounted for
76.8% in fiscal year 2007 compared to 76.7% in fiscal year 2006.
Nylon accounted for 23.2% of dollar net sales for fiscal year
2007 compared to 23.3% for the prior fiscal year.
Gross profit from continuing operations decreased
$5.0 million to $37.6 million for fiscal year 2007.
This decrease is primarily attributable to lower volumes in
polyester and nylon segments and to lower conversion margins for
the polyester segment.
Selling, general, and administrative expenses increased by 8.1%
or $3.4 million for fiscal year 2007. The increase in
SG&A expenses was due primarily to $2.1 million for
amortization expenses, $1.5 million for sales and service
fees related to the Dillon acquisition, and $3.2 million
for increased stock-based and deferred compensation which were
offset by lower fringe benefit expenses, depreciation charges,
and professional fees related to cost saving efforts. SG&A
related to the Companys foreign operations remained
consistent with the prior year amounts.
For the fiscal year 2007, the Company recorded a
$7.2 million provision for bad debts. This compares to
$1.3 million recorded in the prior fiscal year. The
increase relates to the Companys domestic operations and
is primarily due to the write off of two customers who filed
bankruptcy as discussed below.
On July 2, 2007, Quaker Fabric Corporation (Quaker
Fabric), a significant customer in the dyed business,
announced that it had not met the requirements for committed
borrowings under its existing lending facilities and that it
would commence an orderly liquidation of its business and a sale
of its assets. At the close of the Companys fiscal year
2007, the Company had net receivables of approximately
$3.2 million owed to it by Quaker Fabric. On July 3,
2007, based on its announcement and the Companys
discussions with Quaker Fabrics management, the Company
recorded a pre-tax bad debt charge of $3.2 million in the
fourth quarter of fiscal year 2007 which fully reserved this
customer. In addition, the Company wrote down $0.3 million
of certain inventory that was manufactured specifically for
Quaker Fabric that could not be sold to other customers. Quaker
Fabric formally filed bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code on August 16, 2007. The Company
does not expect this action to have a material impact on its
liquidity position.
On April 10, 2007, Joan Fabric Corporation (Joan
Fabric), another customer in the dyed business, announced
that it had filed a voluntary petition to reorganize under
Chapter 11. The Company recorded a pre-tax bad debt charge
of $2.8 million in the third quarter of fiscal year 2007,
which, along with the $2.0 million of pre-tax bad debt
charges previously incurred fully reserved this customer. In
addition, the Company wrote down $0.7 million of certain
inventory produced specially for Joan Fabric which the Company
considered obsolete.
Although the Company experienced significant improvements in its
collections during fiscal year 2007, 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 increased from $19.3 million in fiscal
year 2006 to $25.5 million in fiscal year 2007. The
increase in interest expense is primarily due to the increased
interest expense by the Company as a result of higher bond
interest rates relating to the 2014 bonds. The Company had
$36.0 million of outstanding borrowings under its amended
revolving credit facility as of June 24, 2007. The weighted
average interest rate of Company debt outstanding at
June 24, 2007 and June 25, 2006 was 10.8% and 6.9%,
respectively. Interest income decreased from $6.3 million
in fiscal year 2006 to $3.2 million in fiscal year 2007
which was due to the utilization of cash as a part of the tender
of the 2008 bonds in May 2006.
Other (income) expense increased from $1.5 million of
income in fiscal year 2006 to $2.6 million of income in
fiscal year 2007. For fiscal year 2007, other (income) expense
includes net gains from the sale of property and equipment of
$1.2 million, income from technology fees of
$1.2 million, and other income of $0.2 million. Fiscal
year 2006 other (income) expense includes net gains from the
sale of property and equipment of $1.0 million and
technology fees of $0.7 million offset by $0.2 million
of miscellaneous other expense.
36
Equity in the net loss of its equity affiliates, PAL, USTF, UNF,
and YUFI was $4.3 million in fiscal year 2007 compared to
equity in net income of $0.8 million in fiscal year 2006.
The decrease in earnings is primarily attributable to its
investment in PAL and YUFI as discussed above. The
Companys share of PALs earnings decreased from a
$3.8 million income in fiscal year 2006 to
$2.5 million of income in fiscal year 2007. Higher raw
material prices were the main reason for the lower income in
fiscal year 2007. PAL realized net losses on cotton futures
contracts of $1.4 million for fiscal year 2006 compared to
$0.1 million in realized net losses for fiscal year 2007.
The Company expects to continue to receive cash distributions
from PAL. The Companys share of YUFIs net losses
increased from $3.2 million in fiscal year 2006 to
$5.8 million in fiscal year 2007.
On October 26, 2006 the Company announced its intent to
sell a manufacturing facility in Reidsville, North Carolina that
the Company had leased to a tenant since 1999. The lease expired
in October 2006 and the Company decided to sell the property
upon expiration of the lease. Pursuant to this determination,
the Company received appraisals relating to the property and
performed an impairment review in accordance with
SFAS No. 144. The Company evaluated the recoverability
of the long-lived asset and determined that the carrying amount
of the property exceeded its fair value. Accordingly, the
Company recorded a non-cash impairment charge of
$1.2 million during the first quarter of fiscal year 2007,
which included $0.1 million in estimated selling costs that
will be paid from the proceeds of the sale when it occurs.
In November 2006, the Companys Brazilian operation
committed to a plan to modernize its facilities by replacing ten
of its older machines with newer machines purchased from the
domestic polyester division. These machine purchases will allow
the Brazilian facility to produce tailor made products at higher
speeds resulting in lower costs and increased competitiveness.
The Company recognized a $2.0 million impairment charge on
the older machines in the second quarter of fiscal year 2007
related to the book value of the machines and the related
dismantling and removal costs.
The Company operated two polyester dye facilities which are
located in Mayodan, North Carolina (the Mayodan
facility) and Reidsville, North Carolina (the
Reidsville facility). On March 22, 2007, the
Company committed to a plan to idle the Mayodan facility and
consolidate all of its dyed operations into the Reidsville
facility. The consolidation process was completed as of
June 24, 2007. The Company performed an impairment review
in accordance with SFAS No. 144, and received an
appraisal on the Mayodan facility which indicated that the
carrying amount of the Mayodan facility exceeded its fair value.
Accordingly, in the third quarter of fiscal year 2007, the
Company recorded a non-cash impairment charge of
$4.4 million. Since management is not confident that a sale
will occur within twelve months, the facility continues to be
classified as property, plant, and equipment and not classified
as part of the Assets held for sale line items in
the Consolidated Balance Sheets.
During the quarter ended September 25, 2005, management
decided to consolidate its domestic nylon operations to improve
overall operating efficiencies. This initiative included closing
Plant 1 in Mayodan, North Carolina and moving its operations and
offices to Plant 3 in Madison, North Carolina which is the Nylon
divisions largest facility with approximately one million
square feet of production space. As a part of the consolidation
plan, three nylon facilities (the Madison
facilities) were vacated and classified as held for
sale later in fiscal year 2006. The Company received appraisals
on the three properties, and after reviewing the reports,
determined that one of the facilities carrying value exceeded
its appraised value. As a result of this determination, the
Company recorded a non-cash impairment charge of
$1.5 million in the first quarter of fiscal year 2006 which
included $0.2 million of estimated selling costs. During
fiscal year 2007, the Company reviewed the Madison facilities as
the facilities have been classified as Assets Held for
Sale for a one year period and have not been sold. The
Company completed its SFAS 144 review relating to the
Madison facilities and recorded an additional non-cash
impairment charge of $3.0 million which included
$0.3 million in estimated selling expenses. As a result,
the Company has reduced its offering price for the Madison
facilities. In addition, the Madison facilities stored idle
equipment relating to their operations. This equipment has also
been classified as Assets Held for Sale for the past
year and the Company has determined that a sale is not possible.
The Company completed its SFAS 144 review and recorded a
non-cash impairment charge of $5.6 million relating to the
idle equipment and $0.5 million relating to the facilities.
The sale of Plant 1 was completed on June 19, 2007 and
Plant 5 on June 25, 2007 with no further impairment charges
incurred.
37
As a part of its fiscal year 2007 financial statement closing
process, the Company initiated a review of the carrying value of
its investment in PAL, in accordance with APB Opinion
No. 18, The Equity Method of Accounting for
Investments in Common Stock. As a result, the Company
determined that the current $137.0 million carrying value
of the Companys investment in PAL exceeds its fair value.
The Company recorded a non-cash impairment charge of
$84.7 million in the fourth quarter of the Companys
fiscal year 2007. The Companys investment in PAL as of
June 24, 2007 was $52.3 million.
The Company established a valuation allowance against its
deferred tax assets primarily attributable to North Carolina
income tax credits, investments and real property. The
Companys realization of other deferred tax assets is based
on future taxable income within a certain time period and is
therefore uncertain. Although the Company has reported losses
for both financial and U.S. tax reporting purposes over the
last several years, it has determined that deferred tax assets
not offset by the valuation allowance are more likely than not
to be realized primarily based on expected future reversals of
deferred tax liabilities, particularly those related to
property, plant and equipment, the accumulated depreciation for
which is expected to reverse $7.4 million,
$5.2 million and $4.2 million in fiscal years 2008,
2009 and 2010, respectively. 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.
The valuation allowance increased $22.6 million in fiscal
year 2007 compared to decreases of $1.7 million in fiscal
year 2006. The net increase in fiscal year 2007 consisted of a
$22.9 million increase for investment and real property
impairment charges that could result in nondeductible capital
losses, a $2.0 million increase for lower expected
utilization of certain federal and state carryforwards, offset
by a $2.3 million decrease for expiration of North Carolina
income tax credits. The net decrease in fiscal year 2006
consisted of a $3.6 million decrease for expiration of
North Carolina income tax credits and a $1.9 million
increase for lower expected utilization of North Carolina income
tax credits. The net impact of changes in the valuation
allowance to the effective tax rate reconciliation for fiscal
years 2007 and 2006 were 17.8% and 11.9%, respectively. The
percentage increase from fiscal year 2006 to fiscal year 2007
was primarily attributable to investment and real property
impairment charges.
The Company recognized an income tax benefit in fiscal year 2007
at a 15.8% effective tax rate compared to a benefit of 7.4% in
fiscal year 2006. The fiscal year 2007 effective rate was
negatively impacted by the change in the deferred tax valuation
allowance. 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 2007, the Company recognized a
state income tax benefit, net of federal income tax of 3.3%
compared to 10.4% in fiscal year 2006. 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.
In late July 2007, the Company began repatriating dividends of
approximately $9.2 million from its Brazilian manufacturing
operation. These dividends do not qualify for the special AJCA
deduction. Federal income tax on the dividends was accrued
during fiscal year 2007 since the previously unrepatriated
foreign earnings were no longer deemed to be indefinitely
reinvested outside the U.S.
38
Polyester
Operations
The following table sets forth the segment operating gain (loss)
components for the polyester segment for fiscal year 2007 and
fiscal year 2006. The table also sets forth the percent to net
sales and the percentage increase or decrease over the prior
year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007
|
|
|
Fiscal Year 2006
|
|
|
|
|
|
|
|
|
|
% to
|
|
|
|
|
|
% to
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Net Sales
|
|
|
% Inc. (Dec.)
|
|
|
|
(Amounts in thousands, except percentages)
|
|
|
Net sales
|
|
$
|
530,092
|
|
|
|
100.0
|
|
|
$
|
566,266
|
|
|
|
100.0
|
|
|
|
(6.4
|
)
|
Cost of sales
|
|
|
499,929
|
|
|
|
94.3
|
|
|
|
527,354
|
|
|
|
93.1
|
|
|
|
(5.2
|
)
|
Selling, general and
administrative expenses
|
|
|
35,704
|
|
|
|
6.7
|
|
|
|
32,771
|
|
|
|
5.8
|
|
|
|
8.9
|
|
Restructuring charges (recovery)
|
|
|
(103
|
)
|
|
|
|
|
|
|
533
|
|
|
|
0.1
|
|
|
|
(119.3
|
)
|
Write down of long-lived assets
|
|
|
6,930
|
|
|
|
1.3
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
$
|
(12,368
|
)
|
|
|
(2.3
|
)
|
|
$
|
5,557
|
|
|
|
1.0
|
|
|
|
(322.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2007 polyester net sales decreased
$36.2 million, or 6.4% compared to fiscal year 2006.
Notwithstanding the positive impact that the Dillon acquisition
had on sales, the Companys polyester segment sales volumes
decreased approximately 10.4% while the weighted-average unit
prices increased approximately 4.0%.
Domestically, polyester sales volumes decreased 12.2% while
average unit prices increased approximately 2.9%. Sales from the
Companys Brazilian texturing operation, on a local
currency basis, increased 4.8% over fiscal year 2006 due
primarily to the increase in valuation 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 $6.8 million in fiscal
year 2007. The Companys international polyester pre-tax
results of operations for the polyester segments Brazilian
location increased $0.4 million in fiscal year 2007 over
fiscal year 2006.
Gross profit on sales for the polyester operations decreased
$8.7 million, or 22.5%, over fiscal year 2006, and gross
margin (gross profit as a percentage of net sales) decreased
from 6.9% in fiscal year 2006 to 5.7% in fiscal year 2007. The
decrease from the prior year is primarily attributable to
increased converting costs on a per pound basis in the POY
business. In addition, fiber cost increased as a percent of net
sales from 52.4% in fiscal year 2006 to 53.2% in fiscal year
2007. Fixed and variable manufacturing costs increased as a
percentage of net sales from 38.9% in fiscal year 2006 to 39.4%
in fiscal year 2007.
Selling, general and administrative expenses for the polyester
segment increased $2.9 million from fiscal years 2006 to
2007. While the methodology to allocate domestic selling,
general and administrative costs remained consistent between
fiscal year 2006 and fiscal year 2007, the percentage of such
costs allocated to each segment are determined at the beginning
of every year based on specific cost drivers. The increase in
SG&A expenses for the polyester segment relates to the
additional expenses and sales service expenses both related to
the Dillon acquisition as well as stock-based and deferred
compensation offset by reductions in overall expenses related to
cost saving efforts as discussed above in the consolidate
section.
The polyester segment net sales, gross profit and selling,
general and administrative expenses as a percentage of total
consolidated amounts were 76.7%, 91.3% and 78.9% for fiscal year
2006 compared to 76.8%, 80.3% and 79.5% for fiscal year 2007,
respectively.
Restructuring recoveries of $0.1 million in fiscal year
2007 were related to adjustments for retiree reserves. The
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.
See Corporate Restructurings above for
a discussion of the Companys restructurings of its
polyester facilities.
39
Nylon
Operations
The following table sets forth the segment operating loss
components for the nylon segment for fiscal year 2007 and fiscal
year 2006. The table also sets forth the percent to net sales
and the percentage increase or decrease over fiscal year 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007
|
|
|
Fiscal Year 2006
|
|
|
|
|
|
|
|
|
|
% to
|
|
|
|
|
|
% to
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Net Sales
|
|
|
% Inc. (Dec.)
|
|
|
|
(Amounts in thousands, except percentages)
|
|
|
Net sales
|
|
$
|
160,216
|
|
|
|
100.0
|
|
|
$
|
172,399
|
|
|
|
100.0
|
|
|
|
(7.1
|
)
|
Cost of sales
|
|
|
152,814
|
|
|
|
95.4
|
|
|
|
168,701
|
|
|
|
97.9
|
|
|
|
(9.4
|
)
|
Selling, general and
administrative expenses
|
|
|
9,182
|
|
|
|
5.7
|
|
|
|
8,763
|
|
|
|
5.1
|
|
|
|
4.8
|
|
Restructuring recoveries
|
|
|
(54
|
)
|
|
|
|
|
|
|
(787
|
)
|
|
|
(0.5
|
)
|
|
|
(93.1
|
)
|
Write down of long-lived assets
|
|
|
8,601
|
|
|
|
5.4
|
|
|
|
2,315
|
|
|
|
1.3
|
|
|
|
271.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
$
|
(10,327
|
)
|
|
|
(6.4
|
)
|
|
$
|
(6,593
|
)
|
|
|
(3.8
|
)
|
|
|
(56.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2007 nylon net sales decreased $12.2 million,
or 7.1% compared to fiscal year 2006. Unit volumes for fiscal
year 2007 decreased 8.8% while the average selling price
increased 1.7%.
Gross profit increased $3.7 million, or 100.2% in fiscal
year 2007 and gross margin increased from 2.1% in fiscal year
2006 to 4.6% in fiscal year 2007. This was primarily
attributable to higher conversion margins, cost savings
associated with closing a central distribution center, and the
closing of two nylon manufacturing facilities in fiscal year
2006. Fiber costs increased from 60.1% of net sales in fiscal
year 2006 to 60.4% of net sales in fiscal year 2007. Fixed and
variable manufacturing costs decreased as a percentage of sales
from 35.5% in fiscal year 2006 to 33.0% in fiscal year 2007.
Selling, general and administrative expenses for the nylon
segment increased $0.4 million in fiscal year 2007. The
increase in SG&A expenses for the nylon segment relates to
additional stock-based and deferred compensation offset by
reductions in overall expenses related to cost saving efforts as
discussed above in the consolidated section.
The nylon segment net sales, gross profit and selling, general
and administrative expenses as a percentage of total
consolidated amounts were 23.3%, 8.7% and 21.1% for fiscal year
2006 compared to 23.2%, 19.7% and 20.5% for fiscal year 2007,
respectively.
The restructuring recovery of $0.1 million in fiscal year
2007 related to adjustments for retiree reserves. The
restructuring recovery 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.
40
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
|
|
$
|
566,266
|
|
|
|
76.7
|
|
|
$
|
586,338
|
|
|
|
74.0
|
|
|
|
(3.4
|
)
|
Nylon
|
|
|
172,399
|
|
|
|
23.3
|
|
|
|
206,436
|
|
|
|
26.0
|
|
|
|
(16.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
738,665
|
|
|
|
100.0
|
|
|
$
|
792,774
|
|
|
|
100.0
|
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% 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
|
|
|
|
25.8
|
|
|
|
(17.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
696,055
|
|
|
|
94.2
|
|
|
|
762,717
|
|
|
|
96.2
|
|
|
|
(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
|
|
|
14,860
|
|
|
|
2.0
|
|
|
|
20,805
|
|
|
|
2.6
|
|
|
|
(28.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, and
reduced charges of $11.9 million for bad debt expenses
offset by asset impairment charges and debt extinguishment
expenses. The 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
41
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
$792.8 million to $738.7 million, or 6.8%, 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 6.2% 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 74.0% in fiscal year 2005.
Nylon accounted for 23.3% of dollar net sales for fiscal year
2006 compared to 26.0% for the prior fiscal year.
Gross profit from continuing operations increased
$12.6 million to $42.6 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 $19.3 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 $3.2 million
in fiscal year 2005 to $6.3 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 decreased from $2.3 million of
income in fiscal year 2005 to $1.5 million of income in
fiscal year 2006. Fiscal year 2006 other (income) expense
includes net gains from the sale of property and equipment of
$1.0 million and technology fees of $0.7 million. In
fiscal year 2005, other (income) expense includes net gains from
the sale of property and equipment of $0.7 million and
gains on currency translations of $1.1 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
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
Unifi Textured Polyester, LLC (UTP). The Company had
an 85.4% ownership interest and International Textile Group, LLC
(ITG), had a 14.6% interest in UTP. In April 2005,
the Company acquired ITGs ownership interest for
$0.9 million in cash.
42
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 established a valuation allowance against its
deferred tax assets primarily attributable to North Carolina
income tax credits. The Companys realization of other
deferred tax assets is based on future taxable income within a
certain time period and is therefore uncertain. Although the
Company has reported losses for both financial and U.S. tax
reporting purposes over the last several years, it has
determined that deferred tax assets not offset by the valuation
allowance are more likely than not to be realized primarily
based on expected future reversals of deferred tax liabilities,
particularly those related to property, plant and equipment the
accumulated depreciation for which reversed $9.3 million in
fiscal year 2007 and is expected to reverse $7.4 million
and $5.2 million in fiscal years 2008 and 2009,
respectively. 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.
The valuation allowance decreased $1.7 million in fiscal
year 2006 compared to a decrease of $2.2 million in fiscal
year 2005. The net decrease in fiscal year 2006 consisted of a
$3.6 million decrease for expiration of North Carolina
income tax credits offset by a $1.9 million increase for
lower expected utilization of North Carolina income tax credits.
The net decrease in fiscal year 2005 consisted of a
$3.0 million decrease for expiration of capital loss
carryforwards and North Carolina income tax credits offset by a
$0.8 million increase for lower expected utilization of
North Carolina income tax credits. 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 2005 to
fiscal year 2006 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 a benefit of 40.6% 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. The fiscal year 2005 effective
rate was positively impacted by foreign earnings taxed at lower
rates. In fiscal year 2006, the Company recognized a state
income tax benefit net of federal income tax of 10.4% 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.
43
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
|
|
$
|
566,266
|
|
|
|
100.0
|
|
|
$
|
586,338
|
|
|
|
100.0
|
|
|
|
(3.4
|
)
|
Cost of sales
|
|
|
527,354
|
|
|
|
93.1
|
|
|
|
558,498
|
|
|
|
95.2
|
|
|
|
(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)
|
|
$
|
5,557
|
|
|
|
1.0
|
|
|
$
|
(2,239
|
)
|
|
|
(0.4
|
)
|
|
|
(348.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2006 polyester net sales decreased
$20.1 million, or 3.4% compared to fiscal year 2005. The
Companys polyester segment sales volumes decreased
approximately 11.8% while the weighted-average unit prices
increased approximately 8.4%.
Domestically, polyester sales volumes decreased 15.2% while
average unit prices increased approximately 8.8%. 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. 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.
Gross profit on sales for the polyester operations increased
$11.1 million, or 1.9%, over fiscal year 2005, and gross
margin (gross profit as a percentage of net sales) increased
from 4.7% 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 54.9% 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.
The polyester segment net sales, gross profit and selling,
general and administrative expenses as a percentage of total
consolidated amounts were 74.0%, 92.6% 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.
44
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
|
|
$
|
172,399
|
|
|
|
100.0
|
|
|
$
|
206,436
|
|
|
|
100.0
|
|
|
|
(16.5
|
)
|
Cost of sales
|
|
|
168,701
|
|
|
|
97.9
|
|
|
|
204,219
|
|
|
|
98.9
|
|
|
|
(17.4
|
)
|
Selling, general and
administrative expenses
|
|
|
8,763
|
|
|
|
5.1
|
|
|
|
11,920
|
|
|
|
5.8
|
|
|
|
(26.5
|
)
|
Restructuring charges (recovery)
|
|
|
(787
|
)
|
|
|
(0.5
|
)
|
|
|
(129
|
)
|
|
|
(0.1
|
)
|
|
|
510.1
|
|
Write down of long-lived assets
|
|
|
2,315
|
|
|
|
1.3
|
|
|
|
603
|
|
|
|
0.3
|
|
|
|
283.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
$
|
(6,593
|
)
|
|
|
(3.8
|
)
|
|
$
|
(10,177
|
)
|
|
|
(4.9
|
)
|
|
|
(35.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2006 nylon net sales decreased $34.0 million,
or 16.5% compared to fiscal year 2005. Unit volumes for fiscal
year 2006 decreased 23.4% while the average selling price
increased 7.0%. 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 $1.5 million, or 0.7% in fiscal year
2006 and gross margin increased from 1.1% in fiscal year 2005 to
2.1% 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 64.6% 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
30.7% 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 26.0%, 7.4% and 28.2% for fiscal year
2005 compared to 23.3%, 8.7% 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.
Liquidity
and Capital Resources
Liquidity
Assessment
The Companys primary capital requirements are for working
capital, capital expenditures and service of indebtedness.
Historically the Company has met its working capital and capital
maintenance requirements from its operations. Asset acquisitions
and joint venture investments have been financed by cash
reserves and borrowing under its financing agreements discussed
below.
45
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:
|
|
|
|
|
Capital Expenditures. The Company estimates
its fiscal year 2008 capital expenditures will be within a range
of $10.0 million to $12.0 million. The Company has
restricted cash accounts reserved for domestic capital
expenditures in accordance its long-term borrowing agreements.
As of June 24, 2007 the Company had $4.0 million in
restricted cash funds available for domestic capital
expenditures. The Company expects to receive an additional
$10.8 million in proceeds from the sale of idle properties
which in total will exceed its projected domestic capital
expense budget for fiscal year 2008. The Companys 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.
|
|
|
|
Restructuring/Cost Reductions. During the
first quarter fiscal year 2008, the Company reorganized its
domestic business operations, in addition to announcing the
closing of its Kinston facility and, as a result, expects to
record approximately $4.9 million in severance expenses in
the first half of fiscal year 2008 including $2.4 million
of severance in connection with the termination of its former
President and Chief Executive Officer. Approximately
310 employees including approximately 110 salaried
positions and 200 wage positions will be affected by these plans
of reorganization which included the Companys former Vice
President and Chief Information Officer. On April 26, 2007,
the Company announced plans to close its Dillon, South Carolina
facility. The Company recorded an assumed liability of
$0.7 million for severance related costs in connection with
purchase accounting in the second half of fiscal year 2007.
|
|
|
|
Joint Venture Investments. During fiscal year
2007 the Company received $6.4 million in dividend
distributions from its joint ventures. Although historically
over the past five years the Company has received distributions
from its joint ventures, there is no guarantee that it will
continue to receive distributions in the future. 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.
|
Contractual
Obligations
The Companys significant long-term obligations as of
June 24, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
Description of Commitment
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(Amounts in thousands)
|
|
|
2014 notes
|
|
$
|
190,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
190,000
|
|
2008 notes
|
|
|
1,273
|
|
|
|
1,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended credit facility
|
|
|
36,000
|
|
|
|
|
|
|
|
|
|
|
|
36,000
|
|
|
|
|
|
Capital lease obligation
|
|
|
1,659
|
|
|
|
317
|
|
|
|
698
|
|
|
|
608
|
|
|
|
36
|
|
Other long-term debt(1)
|
|
|
20,236
|
|
|
|
12,969
|
|
|
|
7,267
|
|
|
|
|
|
|
|
|
|
Interest on long-term debt
|
|
|
163,199
|
|
|
|
25,174
|
|
|
|
49,736
|
|
|
|
46,409
|
|
|
|
41,880
|
|
Operating leases
|
|
|
7,207
|
|
|
|
5,108
|
|
|
|
1,954
|
|
|
|
145
|
|
|
|
|
|
Purchase obligations(2)
|
|
|
42,270
|
|
|
|
32,536
|
|
|
|
6,036
|
|
|
|
3,201
|
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
461,844
|
|
|
$
|
77,377
|
|
|
$
|
65,691
|
|
|
$
|
86,363
|
|
|
$
|
232,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other long-term debt consists of Brazilian government loans and
outstanding letters of credit. |
|
(2) |
|
Purchase obligations consist of a Dillon acquisition related
sales and service agreement, a manufacturing agreement for
nitrogen, utility agreements, and a raw material supply
agreement. |
46
Cash
Provided by Continuing Operations
Although the Company had a net loss of $116.3 million in
fiscal year 2007, the Company generated $10.6 million of
cash from continuing operations in fiscal year 2007 compared to
$28.5 million for fiscal year 2006. The fiscal year
2007 net loss was adjusted positively for non-cash income
and expense items such as the impairment charge related to PAL
of $84.7 million, depreciation and amortization of
$44.9 million, fixed asset impairment charges of
$16.7 million, a provision for bad debt of
$7.2 million, losses from unconsolidated equity affiliates
of $7.0 million, a decrease in inventories of
$6.5 million, stock based compensation of
$1.7 million, and prepaid expenses of $0.1 million,
and negatively for decreases in deferred taxes of
$24.1 million, reductions in accounts payable and accrued
expenses of $10.5 million, decreases in accounts
receivables of $2.5 million, income from discontinued
operations of $1.5 million, gains from the sale of capital
assets of $1.2 million, decreases in income taxes of
$1.1 million, and increases in other current assets of
$1.0 million.
Cash provided from operations declined $17.9 million
compared to the prior fiscal year. This is primarily due to the
loss of sales volume, increased bad debt expense and the
increase in interest expense related to the 2014 notes. Although
the weighted average selling price was up 3.7%, the reduction in
sales volume of 10.3% resulted in a net overall pricing decline
of 6.6%. The Company has been consolidating its manufacturing
costs and reducing its selling, general and administrative
expenses to increase overhead absorption and cash flows from
operations but at a slower rate than the decline in sales
For the fiscal year 2007, the Company recorded a
$7.2 million provision for bad debts. This compares to
$1.3 million recorded in the prior fiscal year. The
increase relates to the Companys domestic operations and
is primarily due to the write off of two customers who filed
bankruptcy as discussed previously in Review of Fiscal
Year 2007 Results of Operations (52 Weeks) Compared to Fiscal
Year 2006 (52 Weeks).
Inventories increased $8.1 million from June 25, 2006
to $124.1 million at June 24, 2007 primarily due to
the Dillon asset acquisition which was financed through the
Companys amended credit facility. The cash from operations
relating to inventories was a $6.5 million cash
contribution when excluding the Dillon inventory effect on the
overall change in inventories.
The decrease in the net deferred tax liability consisted of
decreases of $18.9 million, $12.8 million,
$1.2 million and $0.7 million for the impairment
charge related to PAL, depreciation and disposals of property,
plant and equipment, the change in the realizable portion of the
North Carolina investment credits and other items, respectively,
net of increases of $6.7 million and $3.2 million for
the change in the realizable portion of other equity investments
and federal income taxes provided on un-repatriated foreign
earnings, respectively.
Working capital increased from $181.5 million at
June 25, 2006 to $193.7 million at June 24, 2007
due to increases in inventory of $8.1 million, cash of
$4.7 million, deferred income taxes of $1.4 million,
restricted cash of $4.0 million, other current assets of
$2.7 million, receivables of $0.8 million, decreases
in accounts payable and accruals of $2.9 million and
decreases in income taxes payable of $2.1 million offset by
reductions in assets held for sale of $9.6 million and
increases in current maturities of long-term debt of
$4.9 million.
While the Company had a net loss of $14.4 million in fiscal
year 2006, the Company generated $28.5 million of cash from
continuing operations in fiscal year 2006 primarily due to
depreciation and amortization of $49.9 million, a decrease
in accounts receivable 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, income taxes of $0.6 million,
and other current assets of $0.2 million as compared to
$29.9 million for fiscal year 2005. Cash used in 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
$7.8 million, higher inventories of $5.8 million, and
gains from the sale of capital assets of $1.8 million,
increase in prepaid expenses of $1.2 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.
47
While the Company had a net loss of $41.2 million in fiscal
year 2005, it generated $29.9 million of cash from
continuing operations in fiscal year 2005 primarily due to
depreciation and amortization of $52.8 million, an increase
in discontinued operations of $22.7 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, fixed asset impairment
charges of $0.6 million and income taxes of
$0.2 million. Cash used in 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, gains from the sale of capital assets of
$1.8 million, increases in accounts receivable of
$1.5 million, extraordinary charges of $1.2 million,
other items of $1.0 million, prepaid expenses of
$0.9 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
Used in Investing Activities and Financing
Activities
The Company utilized $43.5 million for net investing
activities and provided $35.9 million in net financing
activities during fiscal year 2007. For fiscal year 2006, the
Company utilized $27.6 million for net investing activities
and $90.2 million for net financing activities. The primary
cash expenditures during fiscal year 2007 included
$97.0 million for payment of the credit line revolver,
$42.2 million for the Dillon asset acquisition,
$7.8 million for capital expenditures, $4.0 million
for restricted cash, $0.9 million for additional
acquisition related expenses, $0.6 million for the payment
of sale leaseback obligations, $0.5 million for issuance
and debt refinancing costs, and $0.2 million of split
dollar life insurance premiums, offset by $133.0 million in
proceeds from borrowings on the credit line revolver,
$5.0 million from proceeds from the sale of capital assets,
$3.6 million from return of capital from equity affiliates,
$1.8 million from split dollar life insurance surrender
proceeds, $1.3 million from collection of notes receivable,
and $0.9 million, net of other investing activities.
The Company utilized $27.6 million for net investing
activities and $90.2 million in net financing activities
during fiscal year 2006. For fiscal year 2005, the Company
utilized $5.8 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, $10.1 million in proceeds from the sale of
capital assets, $2.7 million in decreased restricted cash,
$1.8 million in proceeds from life insurance,
$0.9 million, net of other financing activities, and
$0.4 million, net of other investing activities.
The Company utilized net cash of $5.8 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, $1.4 million for acquisition related
costs, and $1.4 million for split dollar life insurance
premiums. 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
$0.7 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 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
48
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 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 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. As of June 24, 2007, 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.
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 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.
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. The tender offer expired on
May 25, 2006. 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 24, 2007, and June 25, 2006, was
approximately $1.3 million for both years.
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 $7.3 million in professional
fees and other expenses which are being amortized to expense
over the life of the 2014
49
notes. The estimated fair value of the 2014 notes, based on
quoted market prices, at June 24, 2007 was approximately
$188.1 million.
During the fourth quarter of fiscal year 2007, the Company sold
property, plant and equipment secured by first-priority liens at
a fair market value of $4.5 million, netting cash proceeds
after selling expenses of $4.3 million. In accordance with
the 2014 note collateral documents and the indenture, the net
proceeds of the sales of the property, plant and equipment
(First Priority Collateral) were deposited into First Priority
Collateral Account whereby the Company may use the restricted
funds to purchase additional qualifying assets. As of
June 24, 2007, the Company had utilized $0.3 million
to repurchase qualifying assets.
Concurrently with the closing of the offering of the 2014 Notes,
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
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.
On January 2, 2007, the Company borrowed $43.0 million
under the amended revolving credit facility to finance the
purchase of certain assets of Dillon Yarn Corporation located in
Dillon, South Carolina. See Footnote 14 Asset
Acquisition for further discussion. The borrowings were
derived from LIBOR rate revolving loans. As of June 24,
2007, the Company had two separate LIBOR rate revolving loans, a
$16.0 million, 7.34%, sixty day loan and a
$20.0 million, 7.36%, ninety day loan. The Company intends
to renew the loans as they come due and reduce the outstanding
borrowings as cash generated from operations becomes available.
As of June 24, 2007, under the terms of the amended
revolving credit facility agreement, $36 million remained
outstanding and the Company had remaining availability of
$58.1 million.
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, the maximum capital
expenditures are limited to $30 million per fiscal year
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. If borrowing capacity is
50
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, receivables are subject to cash dominion,
and annual capital expenditures are limited to $5.0 million
per year of maintenance capital expenditures.
The amended revolving credit facility replaced 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.
Unifi do Brazil, receives loans from the government of the State
of Minas Gerais to finance 70% of the value added taxes due by
Unifi do Brazil 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
Brazil of its obligations under the loans. In return for this
performance bond letter, Unifi do Brazil makes certain cash
deposits with the Brazilian bank. The deposits made by Unifi do
Brazil 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:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Debt Maturities
|
|
Description of Commitment
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2011
|
|
|
Thereafter
|
|
|
|
(Amounts in thousands)
|
|
|
Long-term debt
|
|
$
|
242,295
|
|
|
$
|
9,028
|
|
|
$
|
7,267
|
|
|
$
|
36,000
|
|
|
$
|
190,000
|
|
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 twelve months.
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48) which is an interpretation of
Statement of Financial Accounting Standards (SFAS)
No. 109 Accounting for Income Taxes. The
pronouncement creates a single model to address accounting for
uncertainty in tax positions. FIN 48 prescribes 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
adopted FIN 48 as of the first day of fiscal year 2008 and
management has concluded that the impact of FIN 48 on its
Consolidated Balance Sheets and Consolidated Statements of
Operations will be immaterial.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This new standard provides
guidance for measuring the fair value of assets and liabilities
and is intended to provide increased consistency in how fair
value determinations are made under various existing accounting
standards. SFAS No. 157 also expands financial
statement disclosure requirements about a companys use of
fair value measurements, including the effect of such measures
on earnings. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. While the Company
is currently evaluating the provisions of SFAS No. 157
it has not determined the impact it will have on its results of
operations or financial condition.
51
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans. SFAS No. 158 amends
SFAS No. 87, Employers Accounting for
Pensions, SFAS No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits,
SFAS No. 106, Employers Accounting for
Postretirement Benefits Other than Pensions and
SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. The amendments
retain most of the existing measurement and disclosure guidance
and will not change the amounts recognized in the Companys
Statements of Operations. SFAS No. 158 requires
companies to recognize a net asset or liability with an offset
to equity relating to post retirement obligations. This aspect
of SFAS No. 158 is effective for fiscal years ended
after December 15, 2006. As of June 24, 2007 the
Company does not believe this pronouncement will have any future
effect on its financial reporting.
In February 2007, the FASB issued SFAS No. 159,
Fair Value Option for Financial Assets and Financials
Liabilities-Including an Amendment to FASB Statement
No. 115 that expands the use of fair value
measurement of various financial instruments and other items.
This statement permits entities the option to record certain
financial assets and liabilities, such as firm commitments,
non-financial insurance contracts and warranties, and host
financial instruments at fair value. Generally, the fair value
option may be applied instrument by instrument and is
irrevocable once elected. The unrealized gains and losses on
elected items would be recorded as earnings.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. While the Company is currently
evaluating the provisions of SFAS No. 159, it has not
determined if it will make any elections for fair value
reporting of its assets.
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 24, 2007 on accounts receivable was $99.9 million
against which an allowance for losses of $6.7 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.
52
Inventory Reserves. 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. 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 and increased $0.9 million for fiscal
year 2007 primarily due to increases in raw material prices and
higher inventory levels. The balance of the LIFO reserve was
$8.5 million as of June 24, 2007. 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. In accordance
with SFAS No. 144 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, a 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. See
Footnote 12 Impairment Charges for
further discussion of fiscal year 2007 impairment testing and
related charges.
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. In
fiscal year 2007, the Company performed impairment testing which
resulted in the write down of polyester and nylon plant and
machinery and equipment of $16.7 million.
Impairment of Joint Venture Investments. The
Accounting Principles Board Opinion 18, The Equity Method
of Accounting for Investments in Common Stock (APB
18) states that the inability of the equity investee to
sustain sufficient earnings to justify its carrying value on an
other than temporary basis should be assessed for impairment
purposes. The Company evaluates its equity investments at least
annually to determine whether there is evidence that an
investment has been permanently impaired. As of June 24,
2007 the Company had completed its evaluations of its equity
investees and determined that its investment in PAL was
impaired. As a result, the Company recorded a $84.7 million
non-cash impairment charge. See Footnote 12
Impairment Charges for further discussion of this
impairment charge.
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 investment and real property impairment charges,
state income
53
tax credits and charitable contribution carryforwards. 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 of 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 expected changes to deferred tax assets
and liabilities based on when they reverse in the future. At
June 24, 2007, the Company had a gross deferred tax
liability of approximately $33.7 million relating
specifically to property, plant and equipment. Reversal of this
deferred tax liability through depreciation 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.
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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, 50% 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% of the asset cost is covered by
forward contracts although 100% of the asset cost may be covered
by contracts in certain instances. 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 August 2007 and September 2007,
respectively.
54
The dollar equivalent of these forward currency contracts and
their related fair values are detailed below:
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|
|
|
|
|
|
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|
|
June 24,
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|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Foreign currency purchase
contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
1,778
|
|
|
$
|
526
|
|
|
$
|
168
|
|
Fair value
|
|
|
1,783
|
|
|
|
535
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (gain) loss
|
|
$
|
(5
|
)
|
|
$
|
(9
|
)
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
397
|
|
|
$
|
833
|
|
|
$
|
24,414
|
|
Fair value
|
|
|
400
|
|
|
|
878
|
|
|
|
22,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (gain) loss
|
|
$
|
3
|
|
|
$
|
45
|
|
|
$
|
(1,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 gain of $0.2 million
for the fiscal year ended June 24, 2007, a pre-tax loss of
$0.8 million for the fiscal year ended June 25, 2006,
and a pre-tax gain of $1.1 million for the fiscal year
ended June 26, 2005.
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, tariffs and tax
laws. The degree of impact and the frequency of these events
cannot be predicted.
55
|
|
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 24, 2007 and June 25, 2006, 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 24, 2007. 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 24, 2007 and
June 25, 2006, and the consolidated results of its
operations and its cash flows for each of the three years in the
period ended June 24, 2007, 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 24, 2007, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated September 4, 2007 expressed
an unqualified opinion thereon.
/s/ Ernst & Young LLP
Greensboro, North Carolina
September 4, 2007
56
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
40,031
|
|
|
$
|
35,317
|
|
Receivables, net
|
|
|
93,989
|
|
|
|
93,236
|
|
Inventories
|
|
|
124,127
|
|
|
|
116,018
|
|
Deferred income taxes
|
|
|
13,055
|
|
|
|
11,739
|
|
Assets held for sale
|
|
|
7,880
|
|
|
|
17,418
|
|
Restricted cash
|
|
|
4,036
|
|
|
|
|
|
Other current assets
|
|
|
11,973
|
|
|
|
9,229
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
295,091
|
|
|
|
282,957
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
3,679
|
|
|
|
3,584
|
|
Buildings and improvements
|
|
|
166,663
|
|
|
|
168,367
|
|
Machinery and equipment
|
|
|
647,049
|
|
|
|
642,192
|
|
Other
|
|
|
95,753
|
|
|
|
100,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
913,144
|
|
|
|
914,283
|
|
Less accumulated depreciation
|
|
|
(703,189
|
)
|
|
|
(676,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
209,955
|
|
|
|
237,697
|
|
Investments in unconsolidated
affiliates
|
|
|
93,170
|
|
|
|
190,217
|
|
Intangible assets, net
|
|
|
42,290
|
|
|
|
|
|
Other noncurrent assets
|
|
|
20,424
|
|
|
|
21,766
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
660,930
|
|
|
$
|
732,637
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
64,303
|
|
|
$
|
68,593
|
|
Accrued expenses
|
|
|
25,493
|
|
|
|
23,869
|
|
Deferred gain
|
|
|
102
|
|
|
|
323
|
|
Income taxes payable
|
|
|
247
|
|
|
|
2,303
|
|
Current maturities of long-term
debt and other current liabilities
|
|
|
11,198
|
|
|
|
6,330
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
101,343
|
|
|
|
101,418
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and other
liabilities
|
|
|
236,149
|
|
|
|
202,110
|
|
Deferred gain
|
|
|
|
|
|
|
295
|
|
Deferred income taxes
|
|
|
23,507
|
|
|
|
45,861
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.10 par
(500,000 shares authorized, 60,542 and 52,208 shares
outstanding)
|
|
|
6,054
|
|
|
|
5,220
|
|
Capital in excess of par value
|
|
|
23,723
|
|
|
|
929
|
|
Retained earnings
|
|
|
265,777
|
|
|
|
382,082
|
|
Accumulated other comprehensive
income (loss)
|
|
|
4,377
|
|
|
|
(5,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
299,931
|
|
|
|
382,953
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
660,930
|
|
|
$
|
732,637
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
57
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands,
|
|
|
|
except per share data)
|
|
|
Summary of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
690,308
|
|
|
$
|
738,665
|
|
|
$
|
792,774
|
|
Cost of sales
|
|
|
652,743
|
|
|
|
696,055
|
|
|
|
762,717
|
|
Selling, general and
administrative expenses
|
|
|
44,886
|
|
|
|
41,534
|
|
|
|
42,211
|
|
Provision for bad debts
|
|
|
7,174
|
|
|
|
1,256
|
|
|
|
13,172
|
|
Interest expense
|
|
|
25,518
|
|
|
|
19,266
|
|
|
|
20,594
|
|
Interest income
|
|
|
(3,187
|
)
|
|
|
(6,320
|
)
|
|
|
(3,173
|
)
|
Other (income) expense, net
|
|
|
(2,576
|
)
|
|
|
(1,466
|
)
|
|
|
(2,320
|
)
|
Equity in (earnings) losses of
unconsolidated affiliates
|
|
|
4,292
|
|
|
|
(825
|
)
|
|
|
(6,938
|
)
|
Minority interest income
|
|
|
|
|
|
|
|
|
|
|
(530
|
)
|
Restructuring recoveries
|
|
|
(157
|
)
|
|
|
(254
|
)
|
|
|
(341
|
)
|
Write down of long-lived assets
|
|
|
16,731
|
|
|
|
2,366
|
|
|
|
603
|
|
Write down of investment in equity
affiliate
|
|
|
84,742
|
|
|
|
|
|
|
|
|
|
Loss from early extinguishment of
debt
|
|
|
|
|
|
|
2,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes and extraordinary item
|
|
|
(139,858
|
)
|
|
|
(15,896
|
)
|
|
|
(33,221
|
)
|
Benefit for income taxes
|
|
|
(22,088
|
)
|
|
|
(1,170
|
)
|
|
|
(13,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before extraordinary item
|
|
|
(117,770
|
)
|
|
|
(14,726
|
)
|
|
|
(19,738
|
)
|
Income (loss) from discontinued
operations, net of tax
|
|
|
1,465
|
|
|
|
360
|
|
|
|
(22,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary item
|
|
|
(116,305
|
)
|
|
|
(14,366
|
)
|
|
|
(42,382
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
|
|
|
|
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(116,305
|
)
|
|
$
|
(14,366
|
)
|
|
$
|
(41,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (losses) per common share
(basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before extraordinary item
|
|
$
|
(2.10
|
)
|
|
$
|
(.28
|
)
|
|
$
|
(.38
|
)
|
Income (loss) from discontinued
operations, net of tax
|
|
|
.03
|
|
|
|
|
|
|
|
(.43
|
)
|
Extraordinary gain net
of taxes of $0
|
|
|
|
|
|
|
|
|
|
|
.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(2.07
|
)
|
|
$
|
(.28
|
)
|
|
$
|
(.79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
58
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 27, 2004
|
|
|
52,115
|
|
|
$
|
5,211
|
|
|
$
|
127
|
|
|
$
|
437,519
|
|
|
$
|
(228
|
)
|
|
$
|
(40,728
|
)
|
|
$
|
401,901
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock
|
|
|
8,334
|
|
|
|
834
|
|
|
|
21,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,000
|
|
|
|
|
|
Stock registration costs
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
1,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,691
|
|
|
|
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,655
|
|
|
|
9,655
|
|
|
$
|
9,655
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116,305
|
)
|
|
|
|
|
|
|
|
|
|
|
(116,305
|
)
|
|
|
(116,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 24, 2007
|
|
|
60,542
|
|
|
$
|
6,054
|
|
|
$
|
23,723
|
|
|
$
|
265,777
|
|
|
$
|
|
|
|
$
|
4,377
|
|
|
$
|
299,931
|
|
|
$
|
(106,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
59
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Cash and cash equivalents at
beginning of year
|
|
$
|
35,317
|
|
|
$
|
105,621
|
|
|
$
|
65,221
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(116,305
|
)
|
|
|
(14,366
|
)
|
|
|
(41,225
|
)
|
Adjustments to reconcile net loss
to net cash provided by continuing operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary gain
|
|
|
|
|
|
|
|
|
|
|
(1,157
|
)
|
(Income) loss from discontinued
operations
|
|
|
(1,465
|
)
|
|
|
(360
|
)
|
|
|
22,644
|
|
Net (earnings) loss of
unconsolidated equity affiliates, net of distributions
|
|
|
7,029
|
|
|
|
1,945
|
|
|
|
(2,302
|
)
|
Depreciation
|
|
|
41,594
|
|
|
|
48,669
|
|
|
|
51,542
|
|
Amortization
|
|
|
3,264
|
|
|
|
1,276
|
|
|
|
1,350
|
|
Stock-based compensation expense
|
|
|
1,691
|
|
|
|
676
|
|
|
|
|
|
Net gain on asset sales
|
|
|
(1,225
|
)
|
|
|
(1,755
|
)
|
|
|
(1,770
|
)
|
Non-cash portion of loss on
extinguishment of debt
|
|
|
|
|
|
|
1,793
|
|
|
|
|
|
Non-cash portion of restructuring
recoveries
|
|
|
(157
|
)
|
|
|
(254
|
)
|
|
|
(341
|
)
|
Non-cash write down of long-lived
assets
|
|
|
16,731
|
|
|
|
2,366
|
|
|
|
603
|
|
Non-cash write down of investment
in equity affiliate
|
|
|
84,742
|
|
|
|
|
|
|
|
|
|
Deferred income tax
|
|
|
(24,095
|
)
|
|
|
(7,776
|
)
|
|
|
(19,057
|
)
|
Provision for bad debts
|
|
|
7,174
|
|
|
|
1,256
|
|
|
|
13,172
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(551
|
)
|
Other
|
|
|
(866
|
)
|
|
|
(474
|
)
|
|
|
(461
|
)
|
Changes in assets and liabilities,
excluding effects of acquisitions and foreign currency
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(2,522
|
)
|
|
|
10,592
|
|
|
|
(1,504
|
)
|
Inventories
|
|
|
6,451
|
|
|
|
(5,844
|
)
|
|
|
20,574
|
|
Other current assets
|
|
|
187
|
|
|
|
(1,278
|
)
|
|
|
(901
|
)
|
Accounts payable and accrued
expenses
|
|
|
(10,514
|
)
|
|
|
(8,504
|
)
|
|
|
(10,933
|
)
|
Income taxes
|
|
|
(1,094
|
)
|
|
|
542
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing
operating activities
|
|
|
10,620
|
|
|
|
28,504
|
|
|
|
29,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(7,840
|
)
|
|
|
(11,988
|
)
|
|
|
(9,422
|
)
|
Acquisitions
|
|
|
(43,165
|
)
|
|
|
(30,634
|
)
|
|
|
(1,358
|
)
|
Return of capital from equity
affiliates
|
|
|
3,630
|
|
|
|
|
|
|
|
6,138
|
|
Investment of foreign restricted
assets
|
|
|
|
|
|
|
171
|
|
|
|
388
|
|
Collection of notes receivable
|
|
|
1,266
|
|
|
|
404
|
|
|
|
520
|
|
Proceeds from sale of capital assets
|
|
|
5,099
|
|
|
|
10,093
|
|
|
|
2,290
|
|
Change in restricted cash
|
|
|
(4,036
|
)
|
|
|
2,766
|
|
|
|
(2,766
|
)
|
Net proceeds from split dollar life
insurance surrenders
|
|
|
1,757
|
|
|
|
1,806
|
|
|
|
319
|
|
Split dollar life insurance premiums
|
|
|
(217
|
)
|
|
|
(217
|
)
|
|
|
(1,396
|
)
|
Other
|
|
|
|
|
|
|
(42
|
)
|
|
|
(481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(43,506
|
)
|
|
|
(27,641
|
)
|
|
|
(5,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of long term debt
|
|
|
(97,000
|
)
|
|
|
(273,134
|
)
|
|
|
|
|
Borrowing of long term debt
|
|
|
133,000
|
|
|
|
190,000
|
|
|
|
|
|
Debt issuance costs
|
|
|
(455
|
)
|
|
|
(8,041
|
)
|
|
|
|
|
Issuance of Company stock
|
|
|
|
|
|
|
176
|
|
|
|
104
|
|
Other
|
|
|
321
|
|
|
|
825
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
35,866
|
|
|
|
(90,174
|
)
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows of discontinued
operations Operating cash flow
|
|
|
277
|
|
|
|
(3,342
|
)
|
|
|
(6,273
|
)
|
Investing cash flow
|
|
|
|
|
|
|
22,028
|
|
|
|
13,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued
operations
|
|
|
277
|
|
|
|
18,686
|
|
|
|
7,629
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
1,457
|
|
|
|
321
|
|
|
|
8,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
4,714
|
|
|
|
(70,304
|
)
|
|
|
40,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
40,031
|
|
|
$
|
35,317
|
|
|
$
|
105,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
60
|
|
|
Non-cash investing and
financing activities
|
|
|
Issued 8.3 million shares of
Unifi common stock for the Dillon asset acquisition
|
|
$22.0 million
|
(see Footnote 14 Asset
Acquisition for further discussion of this activity)
|
|
|
61
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 2007, 2006, and 2005 were comprised of
52 weeks.
Reclassification. The Company has reclassified
the presentation of certain prior year information to conform
with the current year presentation.
Revenue Recognition. Revenues from sales are
recognized at the time shipments are made which is when the
significant risks and rewards of ownership are transferred to
the customer, 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) expense, net 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. See Footnote
2 Long-Term Debt and Other Liabilities for
further discussions.
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
$6.7 million at June 24, 2007 and $5.1 million at
June 25, 2006.
Inventories. The Company utilizes the
last-in,
first-out (LIFO) method for valuing certain
inventories representing 38.6% and 38.2% of all inventories at
June 24, 2007, and June 25, 2006, 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
$8.2 million and $7.3 million in excess of the LIFO
valuation at June 24, 2007, and June 25, 2006,
respectively. The Company did not have LIFO liquidations during
fiscal year 2007 and fiscal year 2006. The Company maintains
reserves for inventories valued utilizing the FIFO
62
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
The Company is currently considering changing its inventory
valuation method from LIFO to FIFO for the following reasons:
changing to the FIFO method would conform the Companys
entire inventory to a single costing method; the FIFO method
provides a more meaningful presentation of financial position
because it reflects more recent costs in the Companys
balance sheet; fully adopting a method that is considered more
preferable by the international accounting standard setters;
improving accountability over inventory levels in its operating
groups which it expects will lead to improved cash flows;
conforming its Generally Accepted Accounting Principles-based
inventory method with its tax method which was changed to FIFO
in the 2001 return; streamlining its internal control processes
by allowing the Company to adopt a consistent inventory reserve
methodology across business units; and improve comparability
with other companies in the industry since the majority of them
are on the FIFO method. 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 24, 2007 and June 25, 2006 were
$15.7 million and $10.7 million, respectively. The
following table reflects the composition of the Companys
inventory as of June 24, 2007 and June 25, 2006:
|
|
|
|
|
|
|
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
Raw materials and supplies
|
|
$
|
47,201
|
|
|
$
|
48,594
|
|
Work in process
|
|
|
7,573
|
|
|
|
10,144
|
|
Finished goods
|
|
|
69,353
|
|
|
|
57,280
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
124,127
|
|
|
$
|
116,018
|
|
|
|
|
|
|
|
|
|
|
Other Current Assets. Other current assets
consist of government tax deposits ($7.1 million and
$4.3 million), prepaid insurance ($1.9 million and
$2.5 million), prepaid VAT taxes ($1.1 million and
$1.4 million), deposits of ($1.7 million and
$0.7 million) and other assets ($0.1 million and
$0.3 million) as of June 24, 2007 and June 25,
2006, 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.
Impairment of Long-Lived Assets. In accordance
with SFAS No. 144 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, a 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. See
Footnote 12 Impairment Charges for
further discussion of fiscal year 2007 impairment testing and
related charges.
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
63
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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. In fiscal year 2007, the Company performed
impairment testing which resulted in the write down of polyester
and nylon plant and machinery and equipment of
$16.7 million.
Impairment of Joint Venture Investments. The
Accounting Principles Board Opinion 18, The Equity Method
of Accounting for Investments in Common Stock (APB
18) states that the inability of the equity investee to
sustain sufficient earnings to justify its carrying value on an
other than temporary basis should be assessed for impairment
purposes. The Company evaluates its equity investments at least
annually to determine whether there is evidence that an
investment has been permanently impaired. As of June 24,
2007 the Company had completed its evaluations of its equity
investees and determined that its investment in Parkdale
America, LLC (PAL) was impaired. As a result, the
Company recorded a $84.7 non-cash million impairment charge. See
Footnote 12 Impairment Charges for
further discussion of this impairment charge.
Goodwill and Other Intangible Assets: Goodwill
and other intangible assets at June 24, 2007 consist of
acquisition related assets and other intangibles of
$18.4 million and $23.9 million, respectively. See
Footnote 14 Asset Acquisitions for
further discussion of the Companys fiscal year 2007
acquisition related activities.
The Company accounts for its goodwill and other intangibles
under the provisions of Statements of Financial Accounting
Standard (SFAS) 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 write-down necessary that previously required no
such write-down.
Other intangible assets subject to amortization consisted of
customer relationships and non-compete agreements entered in
connection with an asset acquisition consummated in fiscal year
2007. The customer list is being amortized using a declining
balance method over thirteen years and the non-compete agreement
is being amortized using the straight-line method over seven
years. There are no residual values related to these intangible
assets. Accumulated amortization at June 24, 2007 for these
intangible assets was $2.1 million.
The following table represents intangible assets with a finite
life, net of accumulated amortization, as of June 24, 2007
and the expected intangible asset amortization for the next five
fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Amortization Expenses
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 24, 2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(Amounts in thousands)
|
|
|
Customer list
|
|
$
|
20,157
|
|
|
$
|
2,914
|
|
|
$
|
2,545
|
|
|
$
|
2,659
|
|
|
$
|
2,173
|
|
|
$
|
2,022
|
|
Non-compete contract
|
|
|
3,714
|
|
|
|
571
|
|
|
|
571
|
|
|
|
571
|
|
|
|
571
|
|
|
|
571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,871
|
|
|
$
|
3,485
|
|
|
$
|
3,116
|
|
|
$
|
3,230
|
|
|
$
|
2,744
|
|
|
$
|
2,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Noncurrent Assets. Other noncurrent
assets at June 24, 2007, and June 25, 2006, consist
primarily of cash surrender value of key executive life
insurance policies ($3.0 million and $4.6 million),
bond issue costs and debt origination fees ($7.3 million
and $7.9 million), restricted cash investments in Brazil
($7.3 million and $6.2 million), other miscellaneous
assets ($2.8 million and $2.8 million), and various
notes receivable due from both affiliated and non-affiliated
parties ($0.0 million and $0.3 million), respectively.
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 24, 2007 and June 25, 2006 for
debt origination costs was $1.2 million and
$0.1 million respectively.
64
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accrued Expenses. The following table reflects
the composition of the Companys accrued expenses as of
June 24, 2007 and June 25, 2006:
|
|
|
|
|
|
|
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
Payroll and fringe benefits
|
|
$
|
8,867
|
|
|
$
|
11,112
|
|
Severance
|
|
|
877
|
|
|
|
576
|
|
Interest
|
|
|
2,849
|
|
|
|
1,984
|
|
Utilities
|
|
|
4,324
|
|
|
|
3,225
|
|
Closure reserve
|
|
|
2,900
|
|
|
|
|
|
Retiree benefits
|
|
|
2,470
|
|
|
|
2,031
|
|
Other
|
|
|
3,206
|
|
|
|
4,941
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,493
|
|
|
$
|
23,869
|
|
|
|
|
|
|
|
|
|
|
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. Except as disclosed in
Footnote 3. Income Taxes, income taxes have not been
provided for the undistributed earnings of certain foreign
subsidiaries as such earnings are deemed to be permanently
invested.
Other (Income) Expense, Net. The following
table reflects the components of the Companys other
(income) expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Net gains on sales of fixed assets
|
|
$
|
(1,218
|
)
|
|
$
|
(971
|
)
|
|
$
|
(778
|
)
|
Currency (gains) losses
|
|
|
(166
|
)
|
|
|
813
|
|
|
|
(1,082
|
)
|
Rental income
|
|
|
(106
|
)
|
|
|
(319
|
)
|
|
|
(319
|
)
|
Technology fees
|
|
|
(1,226
|
)
|
|
|
(724
|
)
|
|
|
(195
|
)
|
Other, net
|
|
|
140
|
|
|
|
(265
|
)
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,576
|
)
|
|
$
|
(1,466
|
)
|
|
$
|
(2,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Losses Per Share. The following table details
the computation of basic and diluted losses per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before discontinued operations
|
|
$
|
(117,770
|
)
|
|
$
|
(14,726
|
)
|
|
$
|
(19,738
|
)
|
Income (loss) from discontinued
operations, net of tax
|
|
|
1,465
|
|
|
|
360
|
|
|
|
(22,644
|
)
|
Extraordinary gain, net of taxes
of $0
|
|
|
|
|
|
|
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(116,305
|
)
|
|
$
|
(14,366
|
)
|
|
$
|
(41,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic losses per
share weighted average shares
|
|
|
56,184
|
|
|
|
52,155
|
|
|
|
52,106
|
|
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
|
|
|
56,184
|
|
|
|
52,155
|
|
|
|
52,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal years 2007, 2006, and 2005, 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 9,935 shares,
232,986 shares, and 199,207 shares, respectively.
Stock-Based Compensation. With the adoption of
SFAS 123 at the beginning of fiscal year 2006, the Company
elected for fiscal year 2005 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 year 2005 based
on their respective vesting schedules. 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.
66
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table reflects the fiscal 2005 amounts of
stock-based employee compensation cost, net of tax effects,
included in the determination of net loss as reported and the
stock-based employee compensation, net of tax effects, that
would have been included in the determination of net loss if the
fair value method had been applied to all awards in the
Companys presentation of pro forma net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands, except
|
|
|
|
per share amounts)
|
|
|
Net loss as reported
|
|
$
|
(116,305
|
)
|
|
$
|
(14,366
|
)
|
|
$
|
(41,225
|
)
|
Basic and diluted net loss per
share as reported
|
|
|
(2.07
|
)
|
|
|
(.28
|
)
|
|
|
(.79
|
)
|
Stock-based employee compensation
cost, net of related tax effects, included in net loss as
reported
|
|
|
(1,655
|
)
|
|
|
(625
|
)
|
|
|
|
|
Stock-based employee compensation
cost, net of related tax effects that would have been included
in the determination of net loss if the fair value based method
had been applied
|
|
|
|
|
|
|
|
|
|
|
(3,321
|
)
|
Pro forma net loss
|
|
|
(116,305
|
)
|
|
|
(14,366
|
)
|
|
|
(44,546
|
)
|
Pro forma net loss per share
|
|
|
(2.07
|
)
|
|
|
(.28
|
)
|
|
|
(.85
|
)
|
Stock options were granted during fiscal years 2007, 2006, and
2005. The fair value and related compensation expense of options
were calculated as of the issuance date using the Black-Scholes
model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
Options Granted
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected term (years)
|
|
|
6.2
|
|
|
|
6.1
|
|
|
|
7.0
|
|
Interest rate
|
|
|
5.0
|
%
|
|
|
4.9
|
%
|
|
|
4.4
|
%
|
Volatility
|
|
|
56.2
|
%
|
|
|
57.2
|
%
|
|
|
57.0
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 16, 2004, the Financial Accounting Standards
Board (FASB) finalized 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(Loss). Comprehensive
income (loss) includes net loss and other changes in net assets
of a business during a period from non-owner sources, which are
not included in net loss. Such non-owner changes may include,
for example, available-for-sale securities and foreign currency
translation adjustments. Other than net loss, foreign currency
translation adjustments presently represent the only component
of comprehensive income (loss) 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 June
2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48) which is an interpretation of
SFAS No. 109 Accounting for Income Taxes.
The pronouncement creates a single model to address accounting
for uncertainty in tax positions. FIN 48
67
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
prescribes 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 management has concluded that the impact of
FIN 48 on its Consolidated Balance Sheets and Consolidated
Statements of Operations will be immaterial.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This new standard provides
guidance for measuring the fair value of assets and liabilities
and is intended to provide increased consistency in how fair
value determinations are made under various existing accounting
standards. SFAS No. 157 also expands financial
statement disclosure requirements about a companys use of
fair value measurements, including the effect of such measures
on earnings. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. While the Company
is currently evaluating the provisions of SFAS No. 157
it has not determined the impact it will have on its results of
operations or financial condition.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans. SFAS No. 158 amends
SFAS No. 87, Employers Accounting for
Pensions, SFAS No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits,
SFAS No. 106, Employers Accounting for
Postretirement Benefits Other than Pensions and
SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. The amendments
retain most of the existing measurement and disclosure guidance
and will not change the amounts recognized in the Companys
statements of operations. SFAS No. 158 requires
companies to recognize a net asset or liability with an offset
to equity relating to post retirement obligations. This aspect
of SFAS No. 158 is effective for fiscal years ended
after December 15, 2006.
In February 2007, the FASB issued SFAS No. 159,
Fair Value Option for Financial Assets and Financials
Liabilities-Including an Amendment to FASB Statement
No. 115 that expands the use of fair value
measurement of various financial instruments and other items.
This statement permits entities the option to record certain
financial assets and liabilities, such as firm commitments,
non-financial insurance contracts and warranties, and host
financial instruments at fair value. Generally, the fair value
option may be applied instrument by instrument and is
irrevocable once elected. The unrealized gains and losses on
elected items would be recorded as earnings.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. While the Company is currently
evaluating the provisions of SFAS No. 159, it has not
determined if it will make any elections for fair value
reporting of its assets.
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.
68
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
2.
|
Long-Term
Debt and Other Liabilities
|
A summary of long-term debt and other liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
Senior secured notes
due 2014
|
|
$
|
190,000
|
|
|
$
|
190,000
|
|
Senior unsecured notes
due 2008
|
|
|
1,273
|
|
|
|
1,273
|
|
Amended revolving credit facility
|
|
|
36,000
|
|
|
|
|
|
Brazilian government loans
|
|
|
14,342
|
|
|
|
10,499
|
|
Other obligations
|
|
|
5,732
|
|
|
|
6,668
|
|
|
|
|
|
|
|
|
|
|
Total debt and other obligations
|
|
|
247,347
|
|
|
|
208,440
|
|
Current maturities
|
|
|
(11,198
|
)
|
|
|
(6,330
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt and other
liabilities
|
|
$
|
236,149
|
|
|
$
|
202,110
|
|
|
|
|
|
|
|
|
|
|
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 on February 1, 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 24, 2007, and June 25, 2006,
was approximately $1.3 million for both years.
On May 26, 2006 the Company issued $190 million of
11.5% senior secured notes due May 15, 2014
(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 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
$7.3 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 24, 2007 was approximately
$188.1 million.
During the fourth quarter of fiscal year 2007, the Company sold
property, plant and equipment secured by first-priority liens at
a fair market value of $4.5 million, netting cash proceeds
after selling expenses of $4.3 million. In accordance with
the 2014 note collateral documents and the indenture, the net
proceeds of the sales of the property, plant and equipment
(First Priority Collateral) were deposited into First Priority
Collateral Account whereby the Company may use the restricted
funds to purchase additional qualifying assets. As of
June 24, 2007, the Company had utilized $0.3 million
to repurchase qualifying assets.
69
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Concurrently with the issuance of the 2014 notes, 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 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.
On January 2, 2007, the Company borrowed $43.0 million
under the amended revolving credit facility to finance the
purchase of certain assets of Dillon Yarn Corporation
(Dillon) located in Dillon, South Carolina. See
Footnote 14 Asset Acquisition for further
discussion. The borrowings were derived from LIBOR rate
revolving loans. As of June 24, 2007, the Company had two
separate LIBOR rate revolving loans, a $16.0 million,
7.34%, sixty day loan and a $20.0 million, 7.36%, ninety
day loan. The Company intends to renew the loans as they come
due and reduce the outstanding borrowings as cash generated from
operations becomes available. As of June 24, 2007, under
the terms of the amended revolving credit facility agreement,
$36.0 million remained outstanding and the Company had
remaining availability of $58.1 million.
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, the maximum capital
expenditures are limited to $30 million per fiscal year
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. 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,
receivables are subject to cash dominion, and annual capital
expenditures are limited to $5.0 million per year of
maintenance capital expenditures.
The amended revolving 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
70
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
Unifi do Brazil, receives loans from the government of the State
of Minas Gerais to finance 70% of the value added taxes due by
Unifi do Brazil 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
Brazil of its obligations under the loans. In return for this
performance bond letter, Unifi do Brazil makes certain cash
deposits with the Brazilian bank. The deposits made by Unifi do
Brazil 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
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 24,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Commitment
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2011
|
|
|
Thereafter
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
Long-term debt
|
|
$
|
242,295
|
|
|
$
|
9,028
|
|
|
$
|
7,267
|
|
|
$
|
36,000
|
|
|
$
|
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 24, 2007, the
balance of the note was $1.7 million and the net book value
of the related assets was $4.2 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 $1.9 million of liquidation
accruals associated with the closure of a dye operation in
England in June 2004 and $1.5 million for a deferred
compensation plan created in fiscal year 2007 for certain key
management employees.
Income (loss) from continuing operations before income taxes is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Income (loss) from continuing
operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(135,868
|
)
|
|
$
|
(15,256
|
)
|
|
$
|
(40,838
|
)
|
Foreign
|
|
|
(3,990
|
)
|
|
|
(640
|
)
|
|
|
7,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(139,858
|
)
|
|
$
|
(15,896
|
)
|
|
$
|
(33,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The provision for (benefit from) income taxes applicable to
continuing operations for fiscal years 2007, 2006 and 2005
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(218
|
)
|
|
$
|
(29
|
)
|
|
$
|
2,729
|
|
Repatriation of foreign earnings
|
|
|
|
|
|
|
2,125
|
|
|
|
|
|
State
|
|
|
(16
|
)
|
|
|
21
|
|
|
|
203
|
|
Foreign
|
|
|
2,452
|
|
|
|
2,221
|
|
|
|
2,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,218
|
|
|
|
4,338
|
|
|
|
5,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(24,381
|
)
|
|
|
(4,956
|
)
|
|
|
(18,096
|
)
|
Repatriation of foreign earnings
|
|
|
3,206
|
|
|
|
(1,122
|
)
|
|
|
1,122
|
|
State
|
|
|
(2,322
|
)
|
|
|
290
|
|
|
|
(908
|
)
|
Foreign
|
|
|
(809
|
)
|
|
|
280
|
|
|
|
(606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,306
|
)
|
|
|
(5,508
|
)
|
|
|
(18,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefits
|
|
$
|
(22,088
|
)
|
|
$
|
(1,170
|
)
|
|
$
|
(13,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefits were 15.8%, 7.4%, and 40.6% of pre-tax
losses in fiscal 2007, 2006, and 2005, respectively. A
reconciliation of the provision for income tax benefits with the
amounts obtained by applying the federal statutory tax rate is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal statutory tax rate
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
State income taxes net of federal
tax benefit
|
|
|
(3.3
|
)
|
|
|
(10.4
|
)
|
|
|
(4.2
|
)
|
Foreign taxes less than domestic
rate
|
|
|
2.2
|
|
|
|
17.3
|
|
|
|
(0.7
|
)
|
Foreign tax adjustment
|
|
|
|
|
|
|
|
|
|
|
(3.0
|
)
|
Repatriation of foreign earnings
|
|
|
2.3
|
|
|
|
6.3
|
|
|
|
3.4
|
|
Change in valuation allowance
|
|
|
17.8
|
|
|
|
11.9
|
|
|
|
2.5
|
|
Change in tax status of subsidiary
|
|
|
|
|
|
|
|
|
|
|
(3.9
|
)
|
Nondeductible expenses and other
|
|
|
0.2
|
|
|
|
2.5
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(15.8
|
)%
|
|
|
(7.4
|
)%
|
|
|
(40.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In late July 2007, the Company began repatriating approximately
$9.2 million of dividends from a foreign subsidiary.
Federal income tax on the dividends was accrued during fiscal
year 2007 since the previously unrepatriated foreign earnings
were no longer deemed to be indefinitely reinvested outside the
U.S.
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.
72
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
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 24, 2007 and June 25, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
33,727
|
|
|
$
|
50,044
|
|
Investments in equity affiliates
|
|
|
|
|
|
|
11,251
|
|
Unremitted foreign earnings
|
|
|
3,206
|
|
|
|
|
|
Other
|
|
|
91
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
37,024
|
|
|
|
61,337
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Investments in equity affiliates
|
|
|
17,879
|
|
|
|
|
|
State tax credits
|
|
|
8,352
|
|
|
|
10,597
|
|
Accrued liabilities and valuation
reserves
|
|
|
16,809
|
|
|
|
11,783
|
|
Net operating loss carryforwards
|
|
|
10,722
|
|
|
|
7,799
|
|
Intangible assets
|
|
|
2,474
|
|
|
|
4,278
|
|
Charitable contributions
|
|
|
651
|
|
|
|
876
|
|
Other items
|
|
|
1,471
|
|
|
|
1,114
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
58,358
|
|
|
|
36,447
|
|
Valuation allowance
|
|
|
(31,786
|
)
|
|
|
(9,232
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
26,572
|
|
|
|
27,215
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
10,452
|
|
|
$
|
34,122
|
|
|
|
|
|
|
|
|
|
|
As of June 24, 2007, the Company has approximately
$28.8 million in federal net operating loss carryforwards
and approximately $14.4 million in state net operating loss
carryforwards that may be used to offset future taxable income.
The Company also has approximately $12.6 million in North
Carolina investment tax credits and approximately
$1.9 million charitable contribution carryforwards the
deferred income tax effects of which are fully offset by
valuation allowances. These carryforwards, if unused, will
expire as follows:
|
|
|
|
|
Federal net operating loss
carryforwards
|
|
|
2024 through 2028
|
|
State net operating loss
carryforwards
|
|
|
2012 through 2028
|
|
North Carolina investment tax
credit carryforwards
|
|
|
2008 through 2016
|
|
Charitable contribution
carryforwards
|
|
|
2008 through 2013
|
|
For the year ended June 24, 2007, the valuation allowance
increased approximately $22.6 million primarily as a result
of investment and real property impairment charges that could
result in nondeductible capital losses. For the year ended
June 25, 2006, the valuation allowance decreased
approximately $1.7 million. 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.
73
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. Common
Stock, Stock Option Plans and Restricted Stock Plan
Common shares authorized were 500 million in fiscal years
2007 and 2006. Common shares outstanding at June 24, 2007
and June 25, 2006 were 60,541,800 and 52,208,467,
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 24, 2007, 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 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 Company currently has only one share-based compensation plan
which had unvested stock options as of June 24, 2007. The
compensation cost that was charged against income for this plan
was $1.7 million and $0.7 million for the fiscal years
ended June 24, 2007 and June 25, 2006, respectively.
The total income tax benefit recognized for share-based
compensation in the Consolidated Statements of Operations was
not material for the fiscal years 2007, 2006 and 2005. During
the first quarter of fiscal year 2007, the Board of Directors
authorized the issuance of approximately 1.1 million shares
to certain key employees. With the exception of the immediate
vesting of 300 thousand granted to the CEO, the remaining stock
options 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. As a result of these grants, the Company incurred
$1.5 million in stock-based compensation charges which were
recorded as selling, general and administrative expense with the
offset to additional
paid-in-capital.
During the fourth quarter of fiscal year 2006, the Board
authorized the issuance of 150,000 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 300 thousand unvested stock options.
74
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 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 4,290,686 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 47,500
common shares reserved and previous NQSO plans with 135,000
common shares reserved at June 24, 2007. No additional
options will be issued under any previous ISO or NQSO plan. The
stock option activity for fiscal years 2007, 2006 and 2005 of
all three plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISO
|
|
|
NQSO
|
|
|
|
Options
|
|
|
Weighted
|
|
|
Options
|
|
|
Weighted
|
|
|
|
Outstanding
|
|
|
Avg. $/Share
|
|
|
Outstanding
|
|
|
Avg. $/Share
|
|
|
Fiscal year 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option
beginning of year
|
|
|
3,534,827
|
|
|
|
10.66
|
|
|
|
533,175
|
|
|
|
24.48
|
|
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
|
|
Fiscal year 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,065,000
|
|
|
|
2.89
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(456,488
|
)
|
|
|
6.22
|
|
|
|
(81,667
|
)
|
|
|
31.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option
end of year
|
|
|
4,338,186
|
|
|
|
5.16
|
|
|
|
135,000
|
|
|
|
17.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
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 24, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
Contractual Life
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
Options
|
|
|
Average
|
|
|
Remaining
|
|
|
Options
|
|
|
Average
|
|
Exercise Price
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
(Years)
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$ 2.76 - $ 3.40
|
|
|
2,770,000
|
|
|
$
|
2.84
|
|
|
|
7.9
|
|
|
|
2,210,056
|
|
|
$
|
2.82
|
|
3.78 - 7.64
|
|
|
794,949
|
|
|
|
7.21
|
|
|
|
4.8
|
|
|
|
794,949
|
|
|
|
7.21
|
|
8.10 - 12.00
|
|
|
554,510
|
|
|
|
10.59
|
|
|
|
3.0
|
|
|
|
554,510
|
|
|
|
10.59
|
|
12.53 - 18.75
|
|
|
353,727
|
|
|
|
14.83
|
|
|
|
1.9
|
|
|
|
353,727
|
|
|
|
14.83
|
|
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 24, 2007:
|
|
|
|
|
|
|
|
|
|
|
ISO
|
|
|
NQSO
|
|
|
Number of options expected to vest
|
|
|
4,310,736
|
|
|
|
135,000
|
|
Weighted-average price of options
expected to vest
|
|
$
|
5.18
|
|
|
$
|
17.22
|
|
Intrinsic value of options
expected to vest
|
|
$
|
46,650
|
|
|
$
|
|
|
Weighted-average remaining
contractual term of options expected to vest
|
|
|
6.40
|
|
|
|
1.43
|
|
Number of options exercisable as
of June 24, 2007
|
|
|
3,778,242
|
|
|
|
135,000
|
|
Option price range
|
|
$
|
2.76 - $16.31
|
|
|
$
|
16.31 - $18.75
|
|
Weighted-average exercise price
for options currently exercisable
|
|
$
|
5.50
|
|
|
$
|
17.22
|
|
Intrinsic value of options
currently exercisable
|
|
$
|
46,650
|
|
|
$
|
|
|
Weighted-average remaining
contractual term of options currently Exercisable
|
|
|
6.02
|
|
|
|
1.43
|
|
Weighted-average fair value of
options granted
|
|
$
|
1.70
|
|
|
|
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 24, 2007, unrecognized compensation costs
related to unvested share based compensation arrangements
granted under the 1999 Long-Term Incentive Plan was
$0.3 million. The costs are estimated to
76
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
be recognized over a period of 1.1 years. The restricted
stock activity for fiscal years 2007, 2006 and 2005 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Grant-Date Fair Value
|
|
|
Fiscal year 2005:
|
|
|
|
|
|
|
|
|
Unvested shares
beginning of year
|
|
|
31,200
|
|
|
|
7.46
|
|
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
|
|
Fiscal year 2007:
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(5,800
|
)
|
|
|
6.92
|
|
|
|
|
|
|
|
|
|
|
Unvested shares end of
year
|
|
|
4,600
|
|
|
|
6.27
|
|
|
|
|
|
|
|
|
|
|
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 24, 2007,
June 25, 2006, and June 26, 2005, the Company incurred
$2.2 million, $2.4 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 year 2005, the Company
recorded pension expense of $11.1 million which was
recorded on the Loss from discontinued operations, net of
tax line item of the Consolidated Statements of Operations.
77
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Obligations and funded status related to the DB Plan is
presented below:
|
|
|
|
|
|
|
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of
year
|
|
$
|
|
|
|
$
|
32,511
|
|
Service cost
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
|
|
|
|
852
|
|
Plan participants
contributions
|
|
|
|
|
|
|
|
|
Actuarial gain
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
|
|
|
|
(33,736
|
)
|
Curtailments
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
|
|
|
|
373
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
$
|
|
|
|
$
|
26,370
|
|
Actual return on plan assets
|
|
|
|
|
|
|
852
|
|
Employer contributions
|
|
|
|
|
|
|
6,212
|
|
Plan participants
contributions
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
|
|
|
|
(33,736
|
)
|
Translation adjustment
|
|
|
|
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
382
|
|
Interest cost
|
|
|
|
|
|
|
853
|
|
|
|
1,783
|
|
Expected return on plan assets
|
|
|
|
|
|
|
(853
|
)
|
|
|
(1,910
|
)
|
Amortization of net loss
|
|
|
|
|
|
|
|
|
|
|
9,935
|
|
Cost of termination events
|
|
|
|
|
|
|
|
|
|
|
1,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
11,209
|
|
Less plan participants
contributions
|
|
|
|
|
|
|
|
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys net periodic
benefit cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
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 24, 2007 are $2.1 million in 2008,
$1.5 million in 2009, $0.5 million in 2010,
$0.1 million in 2011, and $0.0 million in aggregate
thereafter. Rental expense was $3.3 million,
$3.6 million, and $6.8 million for the fiscal years
2007, 2006, and 2005, respectively. The Company had no
significant binding commitments for capital expenditures as of
June 24, 2007.
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 agreement does not provide for a fixed or minimum
amount of yarn purchases, therefore there is a degree of
uncertainty associated with the obligation. The actual purchases
under this agreement for fiscal years 2007, 2006, and 2005 were
$22.2 million, $24.3 million, and $30.2 million.
|
|
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.
79
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In accordance with SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information,
segmented financial information of the polyester and nylon
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 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
530,092
|
|
|
$
|
160,216
|
|
|
$
|
690,308
|
|
Inter-segment net sales
|
|
|
7,645
|
|
|
|
1,492
|
|
|
|
9,137
|
|
Depreciation and amortization
|
|
|
27,247
|
|
|
|
13,642
|
|
|
|
40,889
|
|
Restructuring recoveries
|
|
|
(103
|
)
|
|
|
(54
|
)
|
|
|
(157
|
)
|
Write down of long-lived assets
|
|
|
6,930
|
|
|
|
8,601
|
|
|
|
15,531
|
|
Segment operating loss
|
|
|
(12,368
|
)
|
|
|
(10,327
|
)
|
|
|
(22,695
|
)
|
Total assets
|
|
|
416,638
|
|
|
|
108,431
|
|
|
|
525,069
|
|
Fiscal year 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
566,266
|
|
|
$
|
172,399
|
|
|
$
|
738,665
|
|
Inter-segment net sales
|
|
|
5,525
|
|
|
|
6,022
|
|
|
|
11,547
|
|
Depreciation and amortization
|
|
|
30,356
|
|
|
|
14,576
|
|
|
|
44,932
|
|
Restructuring charges (recoveries)
|
|
|
533
|
|
|
|
(787
|
)
|
|
|
(254
|
)
|
Write down of long-lived assets
|
|
|
51
|
|
|
|
2,315
|
|
|
|
2,366
|
|
Segment operating profit (loss)
|
|
|
5,557
|
|
|
|
(6,593
|
)
|
|
|
(1,036
|
)
|
Total assets
|
|
|
359,208
|
|
|
|
128,165
|
|
|
|
487,373
|
|
Fiscal year 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
586,338
|
|
|
$
|
206,436
|
|
|
$
|
792,774
|
|
Inter-segment net sales
|
|
|
5,858
|
|
|
|
5,758
|
|
|
|
11,616
|
|
Depreciation and amortization
|
|
|
32,640
|
|
|
|
14,870
|
|
|
|
47,510
|
|
Restructuring recoveries
|
|
|
(212
|
)
|
|
|
(129
|
)
|
|
|
(341
|
)
|
Write down of long-lived assets
|
|
|
|
|
|
|
603
|
|
|
|
603
|
|
Segment operating loss
|
|
|
(2,239
|
)
|
|
|
(10,177
|
)
|
|
|
(12,416
|
)
|
Total assets
|
|
|
430,159
|
|
|
|
156,936
|
|
|
|
587,095
|
|
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 $7.2 million,
$1.3 million, and $13.2 million for fiscal years 2007,
2006, and 2005, 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 increase of $57.4 million in the polyester segment
total assets between fiscal year end 2006 and 2007 primarily
reflects increases in other assets of $44.3 million, cash
of $9.2 million, inventory of $6.4 million, assets
80
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
held for sale of $2.6 million, other current assets of
$1.9 million, accounts receivable of $1.1 million, and
deferred taxes of $1.0 million offset by a decrease in
fixed assets of $9.1 million. The increase in other assets
is primarily made up of $18.4 million of goodwill,
$23.9 million in other intangible assets, net relating to
the Dillon acquisition, and other asset changes of
$2.0 million. The reduction in fixed assets is
predominately associated with asset impairments and depreciation
offset by $13.1 million in asset additions all primarily
obtained through the purchase of Dillon. The net decrease of
$19.7 million in the nylon segment total assets between
fiscal year end 2006 and 2007 is primarily a result of a
decrease in fixed assets of $13.2 million and assets held
for sale of $10.9 million offset by an increase in accounts
receivable of $1.6 million, inventories of
$1.5 million, deferred taxes of $0.7 million, cash of
$0.4 million and other assets of $0.2 million. The
reduction in property and equipment is primarily associated with
current year depreciation.
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
impairment charges.
The following tables present reconciliations from segment data
to consolidated reporting data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of
specific reportable segment Assets
|
|
$
|
40,889
|
|
|
$
|
44,932
|
|
|
$
|
47,510
|
|
Depreciation of allocated assets
|
|
|
2,835
|
|
|
|
3,737
|
|
|
|
4,032
|
|
Amortization of allocated assets
|
|
|
1,134
|
|
|
|
1,274
|
|
|
|
1,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation and
amortization
|
|
$
|
44,858
|
|
|
$
|
49,943
|
|
|
$
|
52,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable segments loss
|
|
$
|
(22,695
|
)
|
|
$
|
(1,036
|
)
|
|
$
|
(12,416
|
)
|
Provision for bad debts
|
|
|
7,174
|
|
|
|
1,256
|
|
|
|
13,172
|
|
Interest expense
|
|
|
25,518
|
|
|
|
19,266
|
|
|
|
20,594
|
|
Interest income
|
|
|
(3,187
|
)
|
|
|
(6,320
|
)
|
|
|
(3,173
|
)
|
Other (income) expense, net
|
|
|
(2,576
|
)
|
|
|
(1,466
|
)
|
|
|
(2,320
|
)
|
Equity in (earnings) losses of
unconsolidated affiliates
|
|
|
4,292
|
|
|
|
(825
|
)
|
|
|
(6,938
|
)
|
Write down of long-lived assets
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
Write down of investment in equity
affiliates
|
|
|
84,742
|
|
|
|
|
|
|
|
|
|
Loss on early extinguishment of
debt
|
|
|
|
|
|
|
2,949
|
|
|
|
|
|
Minority interest income
|
|
|
|
|
|
|
|
|
|
|
(530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes and extraordinary item
|
|
$
|
(139,858
|
)
|
|
$
|
(15,896
|
)
|
|
$
|
(33,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Reportable segments total assets
|
|
$
|
525,069
|
|
|
$
|
487,373
|
|
Sourcing segment total assets
|
|
|
|
|
|
|
21
|
|
Corporate current assets
|
|
|
23,075
|
|
|
|
24,828
|
|
Unallocated corporate fixed assets
|
|
|
12,507
|
|
|
|
17,974
|
|
Other non-current corporate assets
|
|
|
10,293
|
|
|
|
13,616
|
|
Investments in unconsolidated
affiliates
|
|
|
93,170
|
|
|
|
190,217
|
|
Intersegment eliminations
|
|
|
(3,184
|
)
|
|
|
(1,392
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated assets
|
|
$
|
660,930
|
|
|
$
|
732,637
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for long-lived assets during fiscal year
2007 totaled $7.8 million of which $6.7 million
related to the polyester segment and $0.3 million related
to the 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 $90.4 million in fiscal
year 2007, $78.9 million in fiscal year 2006, and
$94.7 million in fiscal year 2005. In fiscal year 2007 and
2006, the Company had nylon segment net sales of
$71.6 million and $76.4 million, respectively, to one
customer which is in excess of 10% of consolidated net sales. In
fiscal year 2005, 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. Net sales and
total assets of the Companys continuing foreign and
domestic operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Domestic operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
574,857
|
|
|
$
|
633,354
|
|
|
$
|
699,354
|
|
Total assets
|
|
|
533,105
|
|
|
|
609,458
|
|
|
|
693,928
|
|
Foreign operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
115,451
|
|
|
$
|
105,311
|
|
|
$
|
93,420
|
|
Total assets
|
|
|
127,825
|
|
|
|
123,179
|
|
|
|
151,447
|
|
|
|
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 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.
82
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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, 50% 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% of the asset cost is covered by
forward contracts although 100% of the asset cost may be covered
by contracts in certain instances. 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 August 2007 and September 2007,
respectively.
The dollar equivalent of these forward currency contracts and
their related fair values are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Foreign currency purchase
contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
1,778
|
|
|
$
|
526
|
|
|
$
|
168
|
|
Fair value
|
|
|
1,783
|
|
|
|
535
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (gain) loss
|
|
$
|
(5
|
)
|
|
$
|
(9
|
)
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
397
|
|
|
$
|
833
|
|
|
$
|
24,414
|
|
Fair value
|
|
|
400
|
|
|
|
878
|
|
|
|
22,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (gain) loss
|
|
$
|
3
|
|
|
$
|
45
|
|
|
$
|
(1,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 gain of $0.2 million for the fiscal
year ended June 24, 2007, a pre-tax loss of
$0.8 million for the fiscal year ended June 25, 2006,
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.
83
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
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 year
2007 payments totaling $1.5 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. The Company has a put
right under the USTF operating 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 in cash to SANS Fibres. Under the terms of the
agreement, after December 31, 2006, the Company must give
one years prior written notice of its election to exercise
the put right. On January 2, 2007, the Company notified
SANS Fibres that it was exercising its put right to sell its
interest in the joint venture. Negotiations to determine an
agreeable price for the Companys interest in the joint
venture began during the third quarter of fiscal year 2007 with
an anticipated transaction completion date in the third quarter
of fiscal year 2008.
The Company 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 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 12 manufacturing facilities
primarily located in central and western North Carolina.
The Companys investment in PAL at June 24, 2007 was
$52.3 million which is net of an asset impairment charge of
$84.7 million recorded in the fourth quarter of fiscal year
2007. See Footnote 12 Asset Impairments
for further discussions. 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 June 10, 2005, Unifi and Sinopec Yizheng Chemical Fiber
Co., Ltd. (YCFC) entered into an Equity Joint
Venture Contract (the JV Contract), to
form Yihua Unifi Fibre Company Limited (YUFI)
to manufacture, process and market polyester filament yarn in
YCFCs facilities in Yizheng, Jiangsu Province,
Peoples Republic of China. 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 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 2007, payments received under
this agreement were $1.8 million.
84
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Condensed balance sheet information as of June 24, 2007 and
June 25, 2006, and income statement information for fiscal
years 2007, 2006, and 2005, of combined unconsolidated equity
affiliates are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
Current assets
|
|
$
|
164,874
|
|
|
$
|
149,278
|
|
Noncurrent assets
|
|
|
185,313
|
|
|
|
217,955
|
|
Current liabilities
|
|
|
56,576
|
|
|
|
48,334
|
|
Noncurrent liabilities
|
|
|
11,220
|
|
|
|
44,460
|
|
Shareholders equity and
capital accounts
|
|
|
282,391
|
|
|
|
274,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Net sales
|
|
$
|
610,013
|
|
|
$
|
572,077
|
|
|
$
|
477,266
|
|
Gross profit
|
|
|
12,711
|
|
|
|
30,268
|
|
|
|
46,063
|
|
Income (loss) from operations
|
|
|
(9,283
|
)
|
|
|
3,539
|
|
|
|
23,715
|
|
Net income (loss)
|
|
|
(7,733
|
)
|
|
|
(4,298
|
)
|
|
|
20,601
|
|
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 24, 2007,
June 25, 2006, and June 26, 2005, distributions
received by the Company from its equity affiliates amounted to
$6.4 million, $2.8 million, and $11.1 million,
respectively. The total undistributed earnings of unconsolidated
equity affiliates were $0.7 million as of June 24,
2007. Included in the above net sales amounts for the 2007,
2006, and 2005 fiscal years are sales to Unifi of approximately
$22.0 million, $24.0 million, and $29.6 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 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
19,642
|
|
|
$
|
18,153
|
|
|
$
|
16,536
|
|
Income taxes, net of refunds
|
|
|
2,677
|
|
|
|
3,164
|
|
|
|
5,012
|
|
|
|
11.
|
Severance
and Restructuring Charges
|
In fiscal year 2004, the Company recorded restructuring charges
of $5.7 million in lease related costs associated with the
closure of the facility in Altamahaw, North Carolina. 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
85
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. During fiscal year 2007, the Company recorded an
additional $0.3 million for severance relating to this
reorganization.
On April 26, 2007 the Company announced that it planned to
consolidate its domestic capacity and therefore close its
recently acquired Dillon, South Carolina facility. The Company
recorded an assumed liability in purchase accounting of
$0.7 million for severance related costs in the third
quarter of fiscal year 2007. Approximately 291 wage employees
and 25 salaried employees were affected by this consolidation
plan.
The restructuring charges in fiscal year 2004 and fiscal year
2007 relate to the polyester segment. The restructuring charges
in fiscal year 2006 relate to indirect manufacturing and
selling, general, and administrative costs that are allocated to
the operating segments.
The table below summarizes changes to the accrued severance and
accrued restructuring accounts for the fiscal years ended
June 24, 2007 and June 25, 2006 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
June 25,
|
|
|
Additional
|
|
|
|
|
|
Amount
|
|
|
June 24,
|
|
|
|
2006
|
|
|
Charges
|
|
|
Adjustments
|
|
|
Used
|
|
|
2007
|
|
|
Accrued severance
|
|
$
|
576
|
|
|
$
|
191
|
|
|
$
|
714
|
|
|
$
|
(604
|
)
|
|
$
|
877
|
|
Accrued restructuring
|
|
|
3,550
|
|
|
|
|
|
|
|
233
|
|
|
|
(998
|
)
|
|
|
2,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
June 26,
|
|
|
Additional
|
|
|
|
|
|
Amount
|
|
|
June 25,
|
|
|
|
2005
|
|
|
Charges
|
|
|
Adjustments
|
|
|
Used
|
|
|
2006
|
|
|
Accrued severance
|
|
$
|
5,252
|
|
|
$
|
812
|
|
|
$
|
44
|
|
|
$
|
(5,532
|
)
|
|
$
|
576
|
|
Accrued restructuring
|
|
|
5,053
|
|
|
|
|
|
|
|
(195
|
)
|
|
|
(1,308
|
)
|
|
|
3,550
|
|
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 1 in Mayodan, North Carolina and moving its
operations and offices to Plant 3 in nearby Madison, North
Carolina which is the Nylon divisions largest facility
with approximately 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
a non-cash 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 Assets,
(SFAS No. 144) the Company recorded a
non-cash 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.
86
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During the quarter ended September 25, 2005, management
decided to consolidate its domestic nylon operations to improve
overall operating efficiencies. This initiative included closing
Plant 1 in Mayodan, North Carolina and moving its operations and
offices to Plant 3 in Madison, North Carolina which is the Nylon
divisions largest facility with approximately one million
square feet of production space. As a part of the consolidation
plan, three nylon facilities (the Madison
facilities) were vacated and classified as held for sale
later in fiscal year 2006. The Company received appraisals on
the three properties, and after reviewing the reports,
determined that one of the facilities carrying value exceeded
its appraised value. As a result of this determination, the
Company recorded a non-cash impairment charge of
$1.5 million in the first quarter of fiscal year 2006 which
included $0.2 million of estimated selling costs. During
fiscal year 2007, the Company reviewed the Madison facilities as
the facilities have been classified as Assets Held for
Sale for a one year period and have not been sold. The
Company completed its SFAS 144 review relating to the
Madison facilities and recorded an additional non-cash
impairment charge of $3.0 million which included
$0.3 million in estimated selling expenses. As a result,
the Company has reduced its offering price for the Madison
facilities. In addition, the Madison facilities stored idle
equipment relating to their operations. This equipment has also
been classified as Assets Held for Sale for the past
year and the Company has determined that a sale is not possible.
The Company completed its SFAS 144 review and recorded a
non-cash impairment charge of $5.6 million relating to the
idle equipment and $0.5 million relating to the facilities.
The sale of Plant 1 was completed on June 19, 2007 and
Plant 5 on June 25, 2007 with no further impairment charges
incurred.
On October 26, 2006 the Company announced its intent to
sell a manufacturing facility that the Company had leased to a
tenant since 1999. The lease expired in October 2006 and the
Company decided to sell the property upon expiration of the
lease. Pursuant to this determination, the Company received
appraisals relating to the property and performed an impairment
review in accordance with SFAS No. 144. The Company
evaluated the recoverability of the long-lived asset and
determined that the carrying amount of the property exceeded its
fair value. Accordingly, the Company recorded a non-cash
impairment charge of $1.2 million during the first quarter
of fiscal year 2007, which included $0.1 million in
estimated selling costs that will be paid from the proceeds of
the sale when it occurs.
In November 2006, the Companys Brazilian operation
committed to a plan to modernize its facilities by replacing ten
of its older machines with newer machines purchased from the
domestic polyester division. These machine purchases will allow
the Brazilian facility to produce tailor made products at higher
speeds resulting in lower costs and increased competitiveness.
The Company recognized a $2.0 million impairment charge on
the older machines in the second quarter of fiscal year 2007
related to the book value of the machines and the related
dismantling and removal costs.
The Company operated two polyester dye facilities which are
located in Mayodan, North Carolina (the Mayodan
facility) and Reidsville, North Carolina (the
Reidsville facility). On March 22, 2007, the
Company committed to a plan to idle the Mayodan facility and
consolidate all of its dyed operations into the Reidsville
facility. The consolidation process was completed as of
June 24, 2007. The Company performed an impairment review
in accordance with SFAS No. 144, and received an
appraisal on the Mayodan facility which indicated that the
carrying amount of the Mayodan facility exceeded its fair value.
Accordingly, in the third quarter of fiscal year 2007, the
Company recorded a non-cash impairment charge of
$4.4 million. Since management is not confident that a sale
will occur within twelve months, the facility is not classified
as part of the Assets held for sale line item in the
Consolidated Balance Sheets.
The Company has been exploring the possible sale of its 34%
ownership interest in Parkdale America, LLC (PAL), a
joint venture with Parkdale Mills, Inc. PAL is a producer of
cotton and synthetic yarns for sale to the textile and apparel
industries primarily within North America. PAL has 12
manufacturing facilities primarily located in central and
western North Carolina. As a part of its fiscal year 2007
financial statement closing process, the Company initiated a
review of the carrying value of its investment in PAL, in
accordance with APB Opinion No. 18, The Equity Method
of Accounting for Investments in Common Stock. As a
result, the Company determined that the carrying value of the
Companys investment in PAL exceeded its fair value and the
impairment was other that temporary. The Company recorded a
non-cash impairment charge of $84.7 million in the fourth
87
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
quarter of the Companys fiscal year 2007. The
Companys investment in PAL as of June 24, 2007 was
$52.3 million.
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,
Plants 1, 5, 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 sale of the
CDC and the Staunton, Virginia properties were closed in the
fourth quarter of fiscal year 2006 and the net gain was recorded
in the line item Other (income) expense, net in the
Consolidated Statements of Operations.
The reduction in assets held for sale at the end of fiscal year
2007 compared to the end of fiscal year 2006 was primarily
attributable to impairment charges on Plants 1, 5, 7, and
machinery and equipment, the sale of Plant 1 in Madison, North
Carolina along with all of the idle machinery and equipment, and
the sale of a property in Yadkinville, North Carolina. These
reductions were offset by additions of $3.7 million for the
real property located in Dillon, South Carolina and
$0.8 million for a rental property located in Reidsville,
North Carolina.
On October 26, 2006 the Company announced its intent to
sell a manufacturing facility that the Company had leased to a
tenant since 1999. The lease expired in October 2006 and the
Company decided to sell the property upon expiration of the
lease. During the third fiscal quarter of fiscal 2007, the
Company listed the property for sale with a broker and as a
result the property was classified as assets held for sale.
The following table summarizes by category assets held for sale:
|
|
|
|
|
|
|
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
Land
|
|
$
|
619
|
|
|
$
|
656
|
|
Building
|
|
|
6,605
|
|
|
|
12,007
|
|
Machinery and equipment
|
|
|
|
|
|
|
4,238
|
|
Leasehold improvements
|
|
|
656
|
|
|
|
517
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,880
|
|
|
$
|
17,418
|
|
|
|
|
|
|
|
|
|
|
On September 30, 2004, 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 seller financed. 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.
On January 1, 2007, the Company completed its acquisition
of certain assets from Dillon Yarn Corporation in order to more
effectively compete in the U.S. market. The aggregate
consideration paid in connection with the Dillon acquisition was
$64.2 million consisting of a combination of
$42.2 million in cash and approximately 8.3 million
shares of the Companys common stock valued at
$22.0 million. These assets primarily relate to the
Companys polyester segment. The acquisition included
$10.7 million in inventories, $13.1 million in fixed
assets, and $26.0 million of intangible assets, offset by
$4.0 million in assumed liabilities. Intangible assets
subject to amortization consists of a customer list and
non-compete agreements. The customer list of $22.0 million
is being
88
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
amortized using a declining balance method over thirteen years
and the non-compete agreement of $4.0 million is being
amortized using the straight-line method over seven years. There
are no residual values related to these intangible assets.
Accumulated amortization at June 24, 2007 for these
intangible assets was $2.1 million. The remaining
$18.4 million was attributable to goodwill. The operational
results of Dillon were included in the Companys
consolidated financial results for the period from
January 1, 2007 to June 24, 2007.
On April 26, 2007, the Company announced its plans to move
all production from Dillon, South Carolina to its facility in
Yadkinville, North Carolina. As a result, the Company recorded
$1.0 million in severance and vacation pay for
approximately 316 wage and salaried employees. In addition, the
Company recorded a $2.9 million unfavorable contract
reserve for a portion of a sales and services agreement it
entered into with Dillon for continued support of the Dillon
business for two years. These reserves were recorded as assumed
liabilities in purchase accounting. The Company expects to
complete this transition by July 2007 with no interruption of
service to its customers.
|
|
15.
|
Discontinued
Operations
|
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 $38.0 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 fiscal years 2005 and
2006.
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.
During fiscal year 2007, the Company recorded a
$1.1 million previously unrecognized foreign income tax
benefit with respect to the sale of certain capital assets. In
accordance with SFAS No. 5, management determined it
is no longer probable that additional taxes accrued on the sale
had been incurred.
Results of all discontinued operations which include the
sourcing segment, European Division and the dyed facility in
England are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
3,967
|
|
|
$
|
30,261
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
14,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations before income taxes
|
|
$
|
385
|
|
|
$
|
(784
|
)
|
|
$
|
(22,073
|
)
|
Income tax (benefit) expense
|
|
|
(1,080
|
)
|
|
|
(1,144
|
)
|
|
|
571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from
discontinued operations, net of taxes
|
|
$
|
1,465
|
|
|
$
|
360
|
|
|
$
|
(22,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In February 2007, the Company received notice of a claim from
the Employment Security Commission of North Carolina for the
underpayment of state unemployment taxes. The Employment
Security Commissions claim is approximately
$1.5 million, including interest and penalties. The Company
is evaluating the validity of this claim and at this time does
not know the extent of any potential liability.
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). The land for the Kinston site is leased
pursuant to a 99 year ground lease (Ground
Lease) with E.I. DuPont de Nemours (DuPont).
Since 1993, DuPont has been investigating and cleaning up the
Kinston site under the supervision of the United 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 comply with
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.
As part of its consolidation effort, the Company has assets held
for sale including Plant 5 in Madison, North Carolina. On
June 25, 2007, Plant 5 was sold for $2.1 million which
was equal to the net book value. On July, 26, 2007 the Company
entered into a contract to sell its manufacturing facility in
Staunton, Virginia along with land and improvements for
$3.1 million. Management expects the sale to close in the
first quarter of fiscal year 2008. In conjunction with this
expected sale, the Company entered into a leasing arrangement
whereby the Company will pay a rental rate of $26,250 a month in
addition to taxes, insurance and maintenance.
On August 2, 2007, the Company announced the closure its
Kinston, North Carolina facility. The Kinston facility produces
POY for internal consumption and third party sales. In the
future, the Company will purchase its commodity POY needs from
external suppliers for conversion in its texturing operations.
The Company will continue to produce POY in the Yadkinville,
North Carolina facility for its specialty and premium value
yarns and certain commodity yarns. The Company expects that it
will take four to five months to transition from producing POY
at the Kinston location and completing the supply chain
logistics enabling a complete shut-down by the end of calendar
year 2007. During the first quarter of fiscal year 2008, the
Company reorganized certain corporate staff and manufacturing
support functions to further reduce costs. Approximately
310 employees including 110 salaried positions and 200 wage
positions will be affected as a result of these reorganization
plans including the termination of the Companys Vice
President and Chief Information Officer. The Company will accrue
a severance expense of approximately $4.9 million in the
first half of fiscal year 2008, which includes severance of
$2.4 million in connection with the termination of its
former President and Chief Executive Officer.
90
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
18.
|
Quarterly
Results (Unaudited)
|
Quarterly financial data for the fiscal years ended
June 24, 2007 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)
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
169,944
|
|
|
$
|
156,895
|
|
|
$
|
178,202
|
|
|
$
|
185,267
|
|
Gross profit
|
|
|
9,040
|
|
|
|
2,620
|
|
|
|
13,450
|
|
|
|
12,455
|
|
Income (loss) from discontinued
operations, net of tax
|
|
|
(36
|
)
|
|
|
(167
|
)
|
|
|
666
|
|
|
|
1,002
|
|
Net loss
|
|
|
(11,053
|
)
|
|
|
(16,542
|
)
|
|
|
(13,219
|
)
|
|
|
(75,491
|
)
|
Per Share of Common Stock (basic
and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(.21
|
)
|
|
$
|
(.32
|
)
|
|
$
|
(.22
|
)
|
|
$
|
(1.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales(a)
|
|
$
|
183,092
|
|
|
$
|
191,101
|
|
|
$
|
181,283
|
|
|
$
|
183,189
|
|
Gross profit(a)
|
|
|
8,393
|
|
|
|
9,354
|
|
|
|
13,022
|
|
|
|
11,841
|
|
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
|
|
|
(208
|
)
|
|
|
208
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,086
|
)
|
|
|
(3,768
|
)
|
|
|
(2,117
|
)
|
|
|
(5,395
|
)
|
Per share of common stock (basic
and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(.06
|
)
|
|
$
|
(.07
|
)
|
|
$
|
(.04
|
)
|
|
$
|
(.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Net sales and gross profit for the four quarters of fiscal year
2006 have been restated for customer chargebacks which were
originally classified as part of other (income) expense, net.
There was no effect on previously reported net income. Below is
a reconciliation of the net sales and gross profit amounts as
previously reported in the Companys quarterly reports on
Form 10-Q
to the restated amounts reported above: (Amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(13 Weeks)
|
|
|
(13 Weeks)
|
|
|
(13 Weeks)
|
|
|
(13 Weeks)
|
|
|
Net sales as previously reported
|
|
$
|
183,102
|
|
|
$
|
191,117
|
|
|
$
|
181,398
|
|
|
$
|
183,208
|
|
Less chargebacks
|
|
|
10
|
|
|
|
16
|
|
|
|
115
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales as restated
|
|
$
|
183,092
|
|
|
$
|
191,101
|
|
|
$
|
181,283
|
|
|
$
|
183,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as previously reported
|
|
$
|
8,403
|
|
|
$
|
9,370
|
|
|
$
|
13,137
|
|
|
$
|
11,860
|
|
Less gross profit (loss) of
chargebacks
|
|
|
10
|
|
|
|
16
|
|
|
|
115
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as restated
|
|
$
|
8,393
|
|
|
$
|
9,354
|
|
|
$
|
13,022
|
|
|
$
|
11,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
19.
|
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 24, 2007 (Amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,808
|
|
|
$
|
1,645
|
|
|
$
|
20,578
|
|
|
$
|
|
|
|
$
|
40,031
|
|
Receivables, net
|
|
|
(1
|
)
|
|
|
75,521
|
|
|
|
18,469
|
|
|
|
|
|
|
|
93,989
|
|
Inventories
|
|
|
|
|
|
|
100,790
|
|
|
|
23,337
|
|
|
|
|
|
|
|
124,127
|
|
Deferred income taxes
|
|
|
(3,206
|
)
|
|
|
14,585
|
|
|
|
1,676
|
|
|
|
|
|
|
|
13,055
|
|
Assets held for sale
|
|
|
|
|
|
|
7,880
|
|
|
|
|
|
|
|
|
|
|
|
7,880
|
|
Restricted cash
|
|
|
|
|
|
|
4,036
|
|
|
|
|
|
|
|
|
|
|
|
4,036
|
|
Other current assets
|
|
|
|
|
|
|
2,924
|
|
|
|
9,049
|
|
|
|
|
|
|
|
11,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
14,601
|
|
|
|
207,381
|
|
|
|
73,109
|
|
|
|
|
|
|
|
295,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
11,847
|
|
|
|
832,226
|
|
|
|
69,071
|
|
|
|
|
|
|
|
913,144
|
|
Less accumulated depreciation
|
|
|
(1,841
|
)
|
|
|
(652,430
|
)
|
|
|
(48,918
|
)
|
|
|
|
|
|
|
(703,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,006
|
|
|
|
179,796
|
|
|
|
20,153
|
|
|
|
|
|
|
|
209,955
|
|
Investments in unconsolidated
affiliates
|
|
|
|
|
|
|
68,737
|
|
|
|
24,433
|
|
|
|
|
|
|
|
93,170
|
|
Investments in consolidated
subsidiaries
|
|
|
413,825
|
|
|
|
|
|
|
|
|
|
|
|
(413,825
|
)
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
42,290
|
|
|
|
|
|
|
|
|
|
|
|
42,290
|
|
Other noncurrent assets
|
|
|
78,432
|
|
|
|
(63,608
|
)
|
|
|
5,600
|
|
|
|
|
|
|
|
20,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
516,864
|
|
|
$
|
434,596
|
|
|
$
|
123,295
|
|
|
$
|
(413,825
|
)
|
|
$
|
660,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other
|
|
$
|
512
|
|
|
$
|
57,714
|
|
|
$
|
6,179
|
|
|
$
|
|
|
|
$
|
64,405
|
|
Accrued expenses
|
|
|
3,040
|
|
|
|
19,059
|
|
|
|
3,394
|
|
|
|
|
|
|
|
25,493
|
|
Income taxes payable
|
|
|
42
|
|
|
|
|
|
|
|
205
|
|
|
|
|
|
|
|
247
|
|
Current maturities of long-term
debt and other current liabilities
|
|
|
1,273
|
|
|
|
318
|
|
|
|
9,607
|
|
|
|
|
|
|
|
11,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,867
|
|
|
|
77,091
|
|
|
|
19,385
|
|
|
|
|
|
|
|
101,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and other
liabilities
|
|
|
226,000
|
|
|
|
2,882
|
|
|
|
7,267
|
|
|
|
|
|
|
|
236,149
|
|
Deferred income taxes
|
|
|
(13,934
|
)
|
|
|
36,256
|
|
|
|
1,185
|
|
|
|
|
|
|
|
23,507
|
|
Shareholders/invested equity
|
|
|
299,931
|
|
|
|
318,367
|
|
|
|
95,458
|
|
|
|
(413,825
|
)
|
|
|
299,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
516,864
|
|
|
$
|
434,596
|
|
|
$
|
123,295
|
|
|
$
|
(413,825
|
)
|
|
$
|
660,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Balance Sheet Information as of June 25, 2006 (Amounts 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
|
|
|
|
|
|
|
17,418
|
|
|
|
|
|
|
|
|
|
|
|
17,418
|
|
Other current assets
|
|
|
|
|
|
|
2,558
|
|
|
|
6,671
|
|
|
|
|
|
|
|
9,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
22,993
|
|
|
|
196,013
|
|
|
|
63,951
|
|
|
|
|
|
|
|
282,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
11,806
|
|
|
|
846,014
|
|
|
|
56,463
|
|
|
|
|
|
|
|
914,283
|
|
Less accumulated depreciation
|
|
|
(1,553
|
)
|
|
|
(637,432
|
)
|
|
|
(37,601
|
)
|
|
|
|
|
|
|
(676,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,253
|
|
|
|
208,582
|
|
|
|
18,862
|
|
|
|
|
|
|
|
237,697
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Statement of Operations Information for the Fiscal Year Ended
June 24, 2007 (Amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Summary of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
574,857
|
|
|
$
|
117,452
|
|
|
$
|
(2,001
|
)
|
|
$
|
690,308
|
|
Cost of sales
|
|
|
|
|
|
|
549,065
|
|
|
|
105,748
|
|
|
|
(2,070
|
)
|
|
|
652,743
|
|
Selling, general and
administrative expenses
|
|
|
|
|
|
|
38,704
|
|
|
|
6,234
|
|
|
|
(52
|
)
|
|
|
44,886
|
|
Provision for bad debts
|
|
|
|
|
|
|
6,763
|
|
|
|
411
|
|
|
|
|
|
|
|
7,174
|
|
Interest expense
|
|
|
24,927
|
|
|
|
587
|
|
|
|
4
|
|
|
|
|
|
|
|
25,518
|
|
Interest income
|
|
|
(454
|
)
|
|
|
|
|
|
|
(2,733
|
)
|
|
|
|
|
|
|
(3,187
|
)
|
Other (income) expense, net
|
|
|
(24,701
|
)
|
|
|
20,081
|
|
|
|
(75
|
)
|
|
|
2,119
|
|
|
|
(2,576
|
)
|
Equity in (earnings) losses of
unconsolidated affiliates
|
|
|
|
|
|
|
(3,561
|
)
|
|
|
8,083
|
|
|
|
(230
|
)
|
|
|
4,292
|
|
Equity in subsidiaries
|
|
|
113,236
|
|
|
|
|
|
|
|
|
|
|
|
(113,236
|
)
|
|
|
|
|
Restructuring recovery
|
|
|
|
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
(157
|
)
|
Write down of long-lived assets
|
|
|
|
|
|
|
99,471
|
|
|
|
2,002
|
|
|
|
|
|
|
|
101,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
(113,008
|
)
|
|
|
(136,096
|
)
|
|
|
(2,222
|
)
|
|
|
111,468
|
|
|
|
(139,858
|
)
|
Provision (benefit) for income
taxes
|
|
|
3,297
|
|
|
|
(27,347
|
)
|
|
|
1,988
|
|
|
|
(26
|
)
|
|
|
(22,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(116,305
|
)
|
|
|
(108,749
|
)
|
|
|
(4,210
|
)
|
|
|
111,494
|
|
|
|
(117,770
|
)
|
Income from discontinued
operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
1,465
|
|
|
|
|
|
|
|
1,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(116,305
|
)
|
|
$
|
(108,749
|
)
|
|
$
|
(2,745
|
)
|
|
$
|
111,494
|
|
|
$
|
(116,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Statement of Operations Information for the Fiscal Year Ended
June 25, 2006 (Amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Summary of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
633,354
|
|
|
$
|
108,584
|
|
|
$
|
(3,273
|
)
|
|
$
|
738,665
|
|
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
|
|
|
|
150
|
|
|
|
|
|
|
|
19,266
|
|
Interest income
|
|
|
(1,888
|
)
|
|
|
(129
|
)
|
|
|
(4,303
|
)
|
|
|
|
|
|
|
(6,320
|
)
|
Other (income) expense, net
|
|
|
(17,413
|
)
|
|
|
14,490
|
|
|
|
1,457
|
|
|
|
|
|
|
|
(1,466
|
)
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Statement of Operations Information for the Fiscal Year Ended
June 26, 2005 (Amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Summary of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
699,352
|
|
|
$
|
98,462
|
|
|
$
|
(5,040
|
)
|
|
$
|
792,774
|
|
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
|
|
|
|
19
|
|
|
|
|
|
|
|
20,594
|
|
Interest income
|
|
|
(518
|
)
|
|
|
(116
|
)
|
|
|
(2,539
|
)
|
|
|
|
|
|
|
(3,173
|
)
|
Other (income) expense, net
|
|
|
(17,802
|
)
|
|
|
15,912
|
|
|
|
(579
|
)
|
|
|
149
|
|
|
|
(2,320
|
)
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Statements of Cash Flows Information for the Fiscal Year Ended
June 24, 2007 (Amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
continuing operating
|
|
$
|
(697
|
)
|
|
$
|
1,652
|
|
|
$
|
8,736
|
|
|
$
|
929
|
|
|
$
|
10,620
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(41
|
)
|
|
|
(4,012
|
)
|
|
|
(3,787
|
)
|
|
|
|
|
|
|
(7,840
|
)
|
Acquisitions
|
|
|
(64,222
|
)
|
|
|
21,057
|
|
|
|
|
|
|
|
|
|
|
|
(43,165
|
)
|
Return of capital in equity
affiliates
|
|
|
|
|
|
|
3,630
|
|
|
|
|
|
|
|
|
|
|
|
3,630
|
|
Investment of foreign restricted
assets
|
|
|
|
|
|
|
(3,019
|
)
|
|
|
3,019
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
(4,036
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,036
|
)
|
Collection of notes receivable
|
|
|
266
|
|
|
|
1,612
|
|
|
|
(612
|
)
|
|
|
|
|
|
|
1,266
|
|
Proceeds from sale of capital
assets
|
|
|
|
|
|
|
4,985
|
|
|
|
114
|
|
|
|
|
|
|
|
5,099
|
|
Net proceeds from split dollar
life insurance surrenders
|
|
|
1,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,757
|
|
Split dollar life insurance
premiums
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(62,457
|
)
|
|
|
20,217
|
|
|
|
(1,266
|
)
|
|
|
|
|
|
|
(43,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of long term debt
|
|
|
(97,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97,000
|
)
|
Borrowing of long term debt
|
|
|
133,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,000
|
|
Debt issue costs
|
|
|
(455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(455
|
)
|
Issuance of Company stock
|
|
|
22,000
|
|
|
|
(22,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend paid
|
|
|
488
|
|
|
|
|
|
|
|
(488
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(63
|
)
|
|
|
384
|
|
|
|
|
|
|
|
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
57,970
|
|
|
|
(21,616
|
)
|
|
|
(488
|
)
|
|
|
|
|
|
|
35,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows of discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flow
|
|
|
|
|
|
|
|
|
|
|
277
|
|
|
|
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
277
|
|
|
|
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
2,386
|
|
|
|
(929
|
)
|
|
|
1,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
(5,184
|
)
|
|
|
253
|
|
|
|
9,645
|
|
|
|
|
|
|
|
4,714
|
|
Cash and cash equivalents at
beginning of year
|
|
|
22,992
|
|
|
|
1,392
|
|
|
|
10,933
|
|
|
|
|
|
|
|
35,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
17,808
|
|
|
$
|
1,645
|
|
|
$
|
20,578
|
|
|
$
|
|
|
|
$
|
40,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Statements of Cash Flows Information for the Fiscal Year Ended
June 25, 2006 (Amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
continuing operating
|
|
$
|
20,472
|
|
|
$
|
(1,740
|
)
|
|
$
|
9,622
|
|
|
$
|
150
|
|
|
$
|
28,504
|
|
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
|
|
Net proceeds from split dollar
life insurance surrenders
|
|
|
1,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,806
|
|
Split dollar life insurance
premiums
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(217
|
)
|
Other
|
|
|
|
|
|
|
32
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
2,153
|
|
|
|
(1,136
|
)
|
|
|
(28,658
|
)
|
|
|
|
|
|
|
(27,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Statements of Cash Flows Information for the Fiscal Year Ended
June 26, 2005 (Amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
continuing operating activities
|
|
$
|
5,299
|
|
|
$
|
23,518
|
|
|
$
|
(3,827
|
)
|
|
$
|
4,872
|
|
|
$
|
29,862
|
|
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
|
)
|
Net proceeds from split dollar
life insurance surrenders
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319
|
|
Split dollar life insurance
premiums
|
|
|
(1,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,396
|
)
|
Other
|
|
|
|
|
|
|
(884
|
)
|
|
|
(206
|
)
|
|
|
748
|
|
|
|
(342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(534
|
)
|
|
|
(2,504
|
)
|
|
|
(3,572
|
)
|
|
|
842
|
|
|
|
(5,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
|
|
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 24, 2007.
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 concludes that the Companys
internal control over financial reporting was effective as of
June 24, 2007.
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
effectiveness of the Companys internal control over
financial reporting, which begins on page 101 of this
Annual Report on
Form 10-K.
100
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 Unifi, Inc.s internal control over
financial reporting as of June 24, 2007, 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
included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on 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, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, 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, Unifi, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of June 24, 2007 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 24,
2007 and June 25, 2006, 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 24, 2007 of Unifi,
Inc. and our report dated September 4, 2007, expressed an
unqualified opinion thereon.
Greensboro, North Carolina
September 4, 2007
101
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.
102
|
|
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
2007 Annual Meeting of Shareholders to be filed within
120 days after June 24, 2007 (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 15, 2006.
|
|
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,
Transactions with Related Persons, Promoters and Certain
Control Persons, and Compensation, Discussions and
Analysis 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, Employment and Termination
Agreements and Transactions with Related Persons,
Promoters and Certain Control Persons 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 Information Relating to the
Companys Independent Registered Public Accounting
Firm and is incorporated herein by reference.
103
|
|
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
|
|
|
|
|
100
|
|
|
|
|
56
|
|
|
|
|
57
|
|
|
|
|
58
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
62
|
|
2. Financial
Statement Schedules
|
|
|
|
|
II Valuation and
Qualifying Accounts
|
|
|
109
|
|
Yihua Unifi Fibre Industry Company
Limited Financial Statements as of May 30, 2007, and for
the period from May 31, 2006 to May 31, 2007
|
|
|
110
|
|
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.
104
3. Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Asset Purchase Agreement dated
October 25, 2006 between Unifi, Inc. and Dillon Yarn
Corporation (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on
Form 8-K
dated October 25, 2006).
|
|
2
|
.2
|
|
Amendment to Asset Purchase
Agreement dated October 25, 2006 between Unifi, Inc. and
Dillon Yarn Corporation, dated January 1, 2007
(incorporated by reference from Exhibit 10.2 to the
Companys Current Report on
Form 8-K
dated January 1, 2007).
|
|
3
|
.1(i) (a)
|
|
Restated Certificate of
Incorporation of Unifi, Inc., as amended (incorporated by
reference to 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 to 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 to
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 (incorporated by reference to
Exhibit 4.1 to the Companys Annual Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
|
4
|
.2
|
|
Form of Exchange Note
(incorporated by reference to Exhibit 4.2 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
|
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 (incorporated by reference to
Exhibit 4.3 to the Companys Annual Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
|
4
|
.4
|
|
Security Agreement, dated as of
May 26, 2006, among Unifi, Inc., the guarantors party
thereto and U.S. Bank National Association (incorporated by
reference to Exhibit 4.4 to the Companys Annual
Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
|
4
|
.5
|
|
Pledge Agreement, dated as of
May 26, 2006, among Unifi, Inc., the guarantors party
thereto and U.S. Bank National Association (incorporated by
reference to Exhibit 4.5 to the Companys Annual
Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
|
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 (incorporated by
reference to Exhibit 4.6 to the Companys Annual
Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
|
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 (incorporated by
reference to Exhibit 4.7 to the Companys Annual
Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
|
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
(incorporated by reference to Exhibit 4.8 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
|
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.
(incorporated by reference to Exhibit 4.9 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
105
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
4
|
.10
|
|
Amended and Restated Security
Agreement, dated May 26, 2006, among Unifi, Inc., the
subsidiaries party thereto and Bank of America N.A.
(incorporated by reference to Exhibit 4.10 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
|
4
|
.11
|
|
Pledge Agreement, dated
May 26, 2006, among Unifi, Inc., the subsidiaries party
thereto and Bank of America N.A. (incorporated by reference to
Exhibit 4.12 to the Companys Annual Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
|
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. (incorporated by reference to
Exhibit 4.12 to the Companys Annual Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
|
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. (incorporated by reference to
Exhibit 4.13 to the Companys Annual Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
|
4
|
.14
|
|
Registration Rights Agreement
dated January 1, 2007 between Unifi, Inc. and Dillon Yarn
Corporation (incorporated by reference from Exhibit 7.1 to
the Companys Schedule 13D dated January 2, 2007).
|
|
10
|
.1
|
|
Deposit Account Control Agreement,
dated as of May 26, 2006, between Unifi Manufacturing, Inc.
and Bank of America, N.A. (incorporated by reference to
Exhibit 10.1 to the Companys Annual Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
|
10
|
.2
|
|
Deposit Account Control Agreement,
dated as of May 26, 2006, between Unifi Kinston, LLC and
Bank of America, N.A. (incorporated by reference to
Exhibit 10.2 to the Companys Annual Report on
Form 10-K
for the fiscal year ended June 25, 2006 (Reg.
No. 001-10542)
filed on September 8, 2006).
|
|
10
|
.3
|
|
*Unifi, Inc. 1992 Incentive Stock
Option Plan, effective July 16, 1992 (incorporated by
reference to 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).
|
|
10
|
.4
|
|
*Unifi, Inc.s 1996 Incentive
Stock Option Plan (incorporated by reference to 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 to
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).
|
|
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 to
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 to 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 to 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 to 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 to
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 to Exhibit 10.2 to the
Companys Current Report on
Form 8-K
(Reg.
No. 001-10542)
dated November 1, 2005).
|
106
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.13*
|
|
Change of Control Agreement
between Unifi, Inc. and Charles F, McCoy, effective
November 1, 2005 (incorporated by reference to
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 to
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 to
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 to
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 to
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 to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
(Reg.
No. 001-10542)
dated June 10, 2005).
|
|
10
|
.19
|
|
Waiver, Assignment and Assumption
Agreement dated May 17, 2007 between Unifi, Inc., Dillon
Yarn Corporation, and the several purchasers listed therein.
|
|
10
|
.20
|
|
Sales and Services Agreement dated
January 1, 2007 between Unifi, Inc. and Dillon Yarn
Corporation (incorporated by reference to Exhibit 99.1 to
the Companys Registration Statement on
Form S-3
(Re.
333-140580)
filed on February 9, 2007).
|
|
10
|
.22
|
|
Manufacturing Agreement dated
January 1, 2007 between Unifi Manufacturing, Inc. and
Dillon Yarn Corporation (incorporated by reference to
Exhibit 99.2 to the Companys Registration Statement
on
Form S-3
(Re.
333-140580)
filed on February 9, 2007).
|
|
12
|
.1
|
|
Statement of Computation of Ratios
of Earnings to Fixed Charges.
|
|
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.
|
|
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
|
|
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.
|
107
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 7, 2007.
UNIFI, Inc.
Stephen Wener
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Stephen
Wener
Stephen
Wener
|
|
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
|
|
September 7, 2007
|
|
|
|
|
|
/s/ William
M. Lowe,
Jr.
William
M. Lowe, Jr.
|
|
Vice President, Chief Operating
Officer and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
September 7, 2007
|
|
|
|
|
|
/s/ William
J. Armfield,
IV
William
J. Armfield, IV
|
|
Director
|
|
September 7, 2007
|
|
|
|
|
|
/s/ Kenneth
G. Langone
Kenneth
G. Langone
|
|
Director
|
|
September 7, 2007
|
|
|
|
|
|
/s/ Chiu
Cheng Anthony
Loo
Chiu
Cheng Anthony Loo
|
|
Director
|
|
September 7, 2007
|
|
|
|
|
|
/s/ George
R. Perkins, Jr.
George
R. Perkins, Jr.
|
|
Director
|
|
September 7, 2007
|
|
|
|
|
|
/s/ William
M. Sams
William
M. Sams
|
|
Director
|
|
September 7, 2007
|
|
|
|
|
|
/s/ G.
Alfred Webster
G.
Alfred Webster
|
|
Director
|
|
September 7, 2007
|
108
(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 24, 2007
|
|
$
|
5,064
|
|
|
$
|
6,670
|
|
|
$
|
(34
|
)
|
|
$
|
(5,009
|
)
|
|
$
|
6,691
|
|
Year ended June 25, 2006
|
|
|
13,967
|
|
|
|
1,256
|
|
|
|
(1,172
|
)
|
|
|
(8,987
|
)
|
|
|
5,064
|
|
Year ended June 26, 2005
|
|
|
10,721
|
|
|
|
14,028
|
|
|
|
(324
|
)
|
|
|
(10,458
|
)
|
|
|
13,967
|
|
Valuation allowance for
deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 24, 2007
|
|
$
|
9,232
|
|
|
$
|
24,948
|
|
|
$
|
|
|
|
$
|
(2,394
|
)
|
|
$
|
31,786
|
|
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
|
|
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. In fiscal year 2007, the
valuation allowance increased $22.6 million as a result of
investment and real property impairment charges that could
result in non-deductible capital losses.
109
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 May 31, 2006 to May 31, 2007
and the period from August 4, 2005
(inception) to May 30, 2006
110
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
Financial Statements
For the Period From May 31, 2006 to May 31, 2007
and
the period from August 4, 2005 (inception) to 30 May
2006
Table of
Contents
|
|
|
|
|
|
|
|
112
|
|
Financial Statements:
|
|
|
|
|
|
|
|
113
|
|
|
|
|
114
|
|
|
|
|
115
|
|
|
|
|
116
|
|
|
|
|
117
|
|
111
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of Unifi, Inc.
We have audited the accompanying balance sheets of Yihua Unifi
Fibre Industry Company Limited (the Company) as of
May 31, 2007 and May 30, 2006, and the related
statements of operations, changes in shareholders equity
and comprehensive income (loss), and cash flows for the period
from May 31, 2006 to May 31, 2007 and the period from
August 4, 2005 (inception) to May 30, 2006,
respectively. 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 31,
2007 and May 30, 2006, and the results of its operations
and its cash flows for the period from May 31, 2006 to
May 31, 2007 and the period from August 4, 2005
(inception) to May 30, 2006, respectively, 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
August 30, 2007
112
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2007
|
|
|
As of May 30, 2006
|
|
|
|
(In thousands, USD)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
963
|
|
|
$
|
1,308
|
|
Restricted cash
|
|
|
1,699
|
|
|
|
|
|
Accounts receivable
|
|
|
227
|
|
|
|
323
|
|
Related party accounts receivable
|
|
|
628
|
|
|
|
810
|
|
Notes receivable
|
|
|
1,861
|
|
|
|
1,380
|
|
Inventories
|
|
|
10,676
|
|
|
|
9,155
|
|
Related-party prepaid technology
fee
|
|
|
946
|
|
|
|
750
|
|
Other current assets
|
|
|
411
|
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
17,411
|
|
|
|
14,524
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Buildings and improvements
|
|
|
19,484
|
|
|
|
18,419
|
|
Machinery and equipment
|
|
|
46,042
|
|
|
|
43,538
|
|
Other
|
|
|
2,735
|
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,261
|
|
|
|
62,646
|
|
Less accumulated depreciation
|
|
|
(9,496
|
)
|
|
|
(4,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
58,765
|
|
|
|
58,617
|
|
Intangible asset, net
|
|
|
418
|
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
76,594
|
|
|
$
|
73,666
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
629
|
|
|
$
|
637
|
|
Related party accounts payable
|
|
|
21,465
|
|
|
|
25,777
|
|
Accrued expenses
|
|
|
1,345
|
|
|
|
1,729
|
|
Related-party debt
|
|
|
|
|
|
|
15,000
|
|
Bank loan
|
|
|
7,842
|
|
|
|
6,228
|
|
Other current liabilities
|
|
|
2,838
|
|
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
34,119
|
|
|
|
50,971
|
|
|
|
|
|
|
|
|
|
|
Registered capital
|
|
|
60,000
|
|
|
|
30,000
|
|
Additional paid-in capital
|
|
|
1,480
|
|
|
|
389
|
|
Accumulated losses
|
|
|
(21,643
|
)
|
|
|
(8,073
|
)
|
Accumulated other comprehensive
income
|
|
|
2,638
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
42,475
|
|
|
|
22,695
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
76,594
|
|
|
$
|
73,666
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
113
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from August 4,
|
|
|
|
May 31, 2006 to
|
|
|
2005 (Inception)
|
|
|
|
May 31, 2007
|
|
|
to May 30, 2006
|
|
|
|
(In thousands, USD)
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
Related-party
|
|
$
|
21,124
|
|
|
$
|
21,116
|
|
Others
|
|
|
102,788
|
|
|
|
80,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,912
|
|
|
|
101,808
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Related-party
|
|
|
(110,874
|
)
|
|
|
(93,755
|
)
|
Others
|
|
|
(20,526
|
)
|
|
|
(12,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(131,400
|
)
|
|
|
(105,939
|
)
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(7,488
|
)
|
|
|
(4,131
|
)
|
Related-party technology license
fee
|
|
|
(2,178
|
)
|
|
|
(1,250
|
)
|
Selling, general and
administrative expenses
|
|
|
(3,068
|
)
|
|
|
(2,305
|
)
|
Other income (expense), net
|
|
|
12
|
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12,722
|
)
|
|
|
(7,782
|
)
|
Interest expense
|
|
|
(861
|
)
|
|
|
(316
|
)
|
Interest income
|
|
|
13
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,570
|
)
|
|
$
|
(8,073
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
114
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
Statements
of Changes In Shareholders Equity and Comprehensive Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
Other
|
|
|
|
Registered
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Shareholders
|
|
|
Comprehensive
|
|
|
|
Capital
|
|
|
Capital
|
|
|
Losses
|
|
|
Equity
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
(In thousands, USD)
|
|
|
|
|
|
|
|
|
Balance, August 4, 2005
(inception)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 30, 2006
|
|
|
30,000
|
|
|
|
389
|
|
|
|
(8,073
|
)
|
|
|
22,695
|
|
|
$
|
(7,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributions
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
Capital contributions (non-cash)
|
|
|
|
|
|
|
1,091
|
|
|
|
|
|
|
|
1,091
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(13,570
|
)
|
|
|
(13,570
|
)
|
|
$
|
(13,570
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,259
|
|
|
|
2,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2007
|
|
$
|
60,000
|
|
|
$
|
1,480
|
|
|
$
|
(21,643
|
)
|
|
$
|
42,475
|
|
|
$
|
(11,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
115
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from August 4,
|
|
|
|
May 31, 2006 to
|
|
|
2005 (Inception)
|
|
|
|
May 31, 2007
|
|
|
to May 30, 2006
|
|
|
|
(In thousands, USD)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,570
|
)
|
|
$
|
(8,073
|
)
|
Depreciation
|
|
|
5,147
|
|
|
|
4,018
|
|
Amortization
|
|
|
129
|
|
|
|
105
|
|
Inventory provision
|
|
|
155
|
|
|
|
|
|
Bad debts written off
|
|
|
50
|
|
|
|
|
|
Senior management costs paid by
shareholders
|
|
|
1,091
|
|
|
|
389
|
|
Other
|
|
|
|
|
|
|
7
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(1,660
|
)
|
|
|
|
|
Accounts receivable
|
|
|
109
|
|
|
|
(323
|
)
|
Related party accounts
receivable
|
|
|
12
|
|
|
|
(810
|
)
|
Notes receivable
|
|
|
(404
|
)
|
|
|
(1,380
|
)
|
Inventories
|
|
|
(1,199
|
)
|
|
|
(9,155
|
)
|
Other current assets
|
|
|
416
|
|
|
|
(1,548
|
)
|
Related-party accounts payable
|
|
|
10,069
|
|
|
|
10,915
|
|
Accounts payable and accrued
expenses
|
|
|
(1,811
|
)
|
|
|
2,366
|
|
Other current liabilities
|
|
|
2,446
|
|
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
980
|
|
|
|
(1,889
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property, plant and
equipment
|
|
|
(2,464
|
)
|
|
|
(32,986
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(2,464
|
)
|
|
|
(32,986
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Issuance of equity interest
|
|
|
|
|
|
|
15,000
|
|
Net borrowings under line of credit
|
|
|
1,277
|
|
|
|
6,228
|
|
Related-party borrowings
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
1,277
|
|
|
|
36,228
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
(138
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(345
|
)
|
|
|
1,308
|
|
Cash and cash equivalents at
beginning of period
|
|
|
1,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
963
|
|
|
$
|
1,308
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
861
|
|
|
$
|
316
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
Conversion of loan to registered
capital
|
|
$
|
15,000
|
|
|
$
|
|
|
Conversion of accounts payable to
registered capital
|
|
|
15,000
|
|
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
116
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
Period from August 4, 2005 (inception) to May 30, 2006
and
from May 31, 2006 to May 31, 2007 (in USD)
|
|
1.
|
Organization
and Activities
|
On June 10, 2005, Sinopec Yizheng Chemical Fibre Company
Limited (YCFC), a company 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.
On 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 to YCFC into registered capital. On
June 7, 2006, both of the previously described liabilities
were converted to registered capital thereby increasing the
registered capital by $30.0 million.
2. Summary
of Significant Accounting Policies
Basis of Presentation: The financial
statements have been prepared in accordance with U.S generally
accepted accounting principles (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 RMB at the foreign
exchange rates at the date of measurement. Gains and losses
resulting from translation are accumulated in a separate
component of shareholders equity. Gains and losses
resulting from foreign currency translations (transactions
denominated in a currency other than the functional currency)
are included in Other (income) expenses, net in the
Statements of Operations.
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 provide sufficient working capital, either by
advancing funds or postponing the due dates of debt due from the
Company, to allow the Company to operate for, at a minimum, one
year.
Year End: The Company has elected to change
the fiscal year end to May 31; as a result, the current fiscal
period presented in the financial statements is from
May 31, 2006 to May 31, 2007. The comparative period
is 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 the significant risks and rewards of ownership
are transferred to the customer. Revenue excludes value added
taxes or other sales taxes and is arrived at after deduction of
trade discounts and sales returns. The Company estimates and
records provisions for sales returns and allowances in the
period the sale is recorded, based on its experience. Freight
paid by customers is included in net sales in the Statements of
Operations and the Company records the shipping cost incurred as
cost of revenue.
117
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
2. Summary
of Significant Accounting Policies (continued)
Sales Rebate Program: The Company has entered
into sales incentive agreements with certain distributors and
customers. Rebates are granted 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 31, 2007,
cash and cash equivalents consisted of RMB7.4 million
(May 30, 2006: RMB10.5 million) which are subject to
local foreign exchange controls.
Restricted Cash: Cash deposits held for
specific purposes or held as security for contractual
obligations are classified as restricted cash.
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: 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, Thailand, Pakistan, Japan and
United Kingdom. During the period ended May 31, 2007,
export sales aggregated to $1.2 million (May 30, 2006:
$1.1 million). Approximately 17% (May 30, 2006: 21%)
of the Companys revenue was generated from a related
party. As of May 31, 2007, the net receivable from related
parties was $0.6 million (May 30, 2006:
$0.8 million) (See Note 8 for further discussion).
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 31,
2007 was $0.3 million (May 30, 2006:
$0.2 million). The following table reflects the composition
of the Companys inventories as of the balance sheet dates
(Amounts in thousands, USD):
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2007
|
|
|
As of May 30, 2006
|
|
|
Raw materials and supplies
|
|
$
|
3,013
|
|
|
$
|
2,858
|
|
Work in process
|
|
|
919
|
|
|
|
688
|
|
Finished goods
|
|
|
7,083
|
|
|
|
5,781
|
|
|
|
|
|
|
|
|
|
|
Gross inventories
|
|
|
11,015
|
|
|
|
9,327
|
|
Lower of cost or market reserves
|
|
|
(339
|
)
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,676
|
|
|
$
|
9,155
|
|
|
|
|
|
|
|
|
|
|
Other Current Assets: Other current assets
consist of the following (Amounts in thousands, USD):
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2007
|
|
|
As of May 30, 2006
|
|
|
Prepayment on purchases
|
|
$
|
198
|
|
|
$
|
414
|
|
Value added tax receivable
|
|
|
|
|
|
|
295
|
|
Other
|
|
|
213
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
411
|
|
|
$
|
798
|
|
|
|
|
|
|
|
|
|
|
118
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
2. Summary
of Significant Accounting Policies (continued)
On 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 31, 2007 was
$1.3 million (May 30, 2006: $2.0 million) of
which $1.5 million (May 30, 2006: $1.3 million)
was expensed during the period. See Note 8 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
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. Buildings 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 31, 2007 was $5.2 million
(May 30, 2006: $4.0 million). The following table
summarizes the estimated useful lives by asset category:
|
|
|
|
|
|
|
Estimated Useful Lives
|
|
|
Buildings 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 Statement
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 31, 2007 was $0.2 million
(May 30, 2006: $0.1 million). The estimated annual
aggregate amortization expense is $126 thousand for fiscal years
ending May 2008 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 31, 2007, 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: The Company follows the
liability method of accounting for income taxes in accordance
with SFAS No. 109, Accounting for Income Taxes. Under
this method, deferred tax assets and liabilities are determined
based on the difference between the financial reporting and tax
bases of assets and liabilities using enacted tax rates that
will be in effect in the period in which the differences are
expected to reverse. The Company records a valuation allowance
to offset deferred tax assets when it is more-likely-than-not
that some portion, or all, of the deferred tax
119
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
2. Summary
of Significant Accounting Policies (continued)
assets will not be realized. The effect on deferred taxes of a
change in tax rates is recognized in income in the period the
tax rate is enacted.
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, movements in fair values of 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.
Recent Accounting Pronouncements: In June
2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48) which is an interpretation of
SFAS No. 109, Accounting for Income Taxes. The
pronouncement creates a single model to address accounting for
uncertainty in tax positions. FIN 48 prescribes 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
does not expect that FIN 48 will have a material effect on
its balance sheet.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This new standard provides
guidance for measuring the fair value of assets and liabilities
and is intended to provide increased consistency in how fair
value determinations are made under various existing accounting
standards. SFAS No. 157 also expands financial statement
disclosure requirements about a companys use of fair value
measurements, including the effect of such measures on earnings.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. While the Company is currently
evaluating the provisions of SFAS No. 157, it has not
determined the impact it will have on its results of operations
or financial condition.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans. SFAS No. 158 amends
SFAS No. 87, Employers Accounting for
Pensions, SFAS No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits,
SFAS No. 106, Employers Accounting for
Postretirement Benefits Other than Pensions and
SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. The amendments
retain most of the existing measurement and disclosure guidance
and will not change the amounts recognized in the Companys
statements of operations. SFAS No. 158 requires companies
to recognize a net asset or liability with an offset to equity
relating to post retirement obligations. This aspect of SFAS
No. 158 is effective for fiscal years ended after
December 15, 2006. The Company currently does not expect
that SFAS No. 158 will have a material effect on its
balance sheet.
In February 2007, the FASB issued SFAS No. 159,
Fair Value Option for Financial Assets and Financials
Liabilities-Including an Amendment to FASB Statement
No. 115 that expands the use of fair value
measurement of various financial instruments and other items.
This statement permits entities the option to record certain
financial assets and liabilities, such as firm commitments,
non-financial insurance contracts and warranties, and host
financial instruments at fair value. Generally, the fair value
option may be applied instrument by instrument and is
irrevocable once elected. The unrealized gains and losses on
elected items would be recorded as earnings.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. While the Company is currently
evaluating the provisions of SFAS No. 159, it has not
determined if it will make any elections for fair value
reporting of its assets.
120
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
Under the existing PRC Income Tax Law, the Company is 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 (FIE) and therefore 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 (two years income tax exemption followed by three
years 50% income tax exemption), commencing the year when 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).
In March 2007, the Law of the PRC on Enterprise Income Tax was
enacted and will take effect on January 1, 2008 (New
PRC Income Tax Law). The New PRC Income Tax Law generally
unifies the income tax rate for all enterprises in the PRC at
25%. Existing FIEs which have not started their tax holidays
(e.g. due to no cumulative taxable income) will commence their
tax holidays from the effective date of the New PRC Income Tax
Law irrespective of whether cumulative taxable income has been
achieved. Thus, the New PRC Income Tax Law accelerates the
commencement of the Companys tax holiday to 2008 and
terminates the tax holiday in 2013, regardless of the
Companys cumulative taxable income or realization of tax
benefit from the tax holiday.
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 from
|
|
|
Period from August 4,
|
|
|
|
May 31, 2006 to
|
|
|
2005 (Inception)
|
|
|
|
May 31, 2007
|
|
|
to May 30, 2006
|
|
|
Statutory tax rate
|
|
|
33.0
|
%
|
|
|
33.0
|
%
|
Preferential tax rate reduction
|
|
|
(6.0
|
)
|
|
|
(6.0
|
)
|
Tax holiday rate reduction
|
|
|
(27.0
|
)
|
|
|
(27.0
|
)
|
Change in valuation allowance
|
|
|
14.0
|
|
|
|
4.8
|
|
Deferred taxes (including impact
of New PRC Income Tax Law)
|
|
|
(14.0
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the
balance sheet dates are as follows (Amounts in thousands, USD):
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2007
|
|
|
As of May 30, 2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
243
|
|
|
$
|
263
|
|
License fees
|
|
|
505
|
|
|
|
115
|
|
Inventory provision
|
|
|
42
|
|
|
|
|
|
Customer list
|
|
|
17
|
|
|
|
8
|
|
Net operating loss
|
|
|
1,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
2,249
|
|
|
|
386
|
|
Valuation allowance
|
|
|
(2,249
|
)
|
|
|
(386
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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
121
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
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3.
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Income
Taxes (continued)
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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. As of
May 31, 2007 and May 30, 2006, the Company provided a
full valuation allowance against its total gross deferred tax
assets due to the uncertainty as to their ultimate realization.
As of May 31, 2007, the Company had net operating loss
carryforwards available for income tax purposes of approximately
$14.9 million (May 30, 2006: $4.3 million) that
may be used to offset future taxable income. The net operating
loss carryforwards begin expiring in fiscal year 2011.
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4.
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Employee
Retirement Plan
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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 $1.1 million (May 30, 2006: $1.0 million)
for the period ended May 31, 2007 .
The Company maintains unsecured lines of credit up to
$26.0 million (May 30, 2006: $31 million) with
various financial institutions. As of May 31, 2007, the
total amount of outstanding loans was $7.8 million
(May 30, 2006: $6.2 million), with maturity dates
ranging from September 20, 2007 to January 18, 2008
and bearing interest rates of 5.30% to 5.58% per annum
(May 31, 2006: 5.4%). There are no covenant calculations or
other financial reporting requirements associated with these
debts. The loans availability is reviewed and renewed on an
annual basis.
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6.
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Fair
Value of Financial Instruments
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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 31, 2007, have readily ascertainable market values;
however, the carrying values are considered to approximate their
respective fair values. See Notes 5 and 8 for the terms and
carrying values of the Companys various debt instruments.
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7.
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Severance
and Restructuring Charges
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On October 9, 2006, the Company committed to a plan to
terminate approximately 130 production employees. In December
2006, 127 employees who are eligible for this plan have
applied and entered into a severance agreement with the Company.
As included in the severance agreement from January 1,
2007, these employees are being paid with monthly living
allowances until the earlier of the expiration date of severance
agreement or employment contract. The allowance paid is deemed
to be the severance payments to compensate for the past services
rendered to YCFC and the Company. In accordance with the JV
Contract, YCFC is responsible for the severance payment
associated with the employment period with YCFC and YCFC agreed
to reimburse the Company for the entire severance costs. For the
year ended May 31, 2007, the Company recorded a severance
liability of $287 thousand of which $156 thousand was recorded
as personnel expenses in cost of sales, $178 thousand as a
receivable from YCFC , and $47 thousand as a capital
contribution from YCFC.
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8.
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Related
Party Transactions
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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
122
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
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8.
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Related
Party Transactions (continued)
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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 $68 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. On June 7, 2006, the
Companys Board of Directors approved the conversion of the
$15.0 million loan owed to Unifi Asia into registered
capital and $15.0 million of accounts payable to YCFC into
registered capital. Other related-party disclosures are as
follows:
(a) Related parties with controlling relationships:
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Relationship with the Company
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YCFC
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Investor (50% ownership interest)
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Unifi Asia
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Investor (50% ownership interest)
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(b) Relationship between the Company and related parties
without controlling relationships:
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Relationship with the Company
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Unifi Manufacturing, Inc.
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Affiliate of Unifi Asia
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Shaoxing Yihua Kangqi Chemical
Fibre Co., Ltd. (Shaoxing)
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Affiliate of YCFC
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123
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
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8.
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Related
Party Transactions (continued)
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(c) The amount of the Companys related party
transactions during the period and its balances with related
parties as of the balance sheet dates are summarized as follows:
(i) The material related party transactions of the Company
are summarized as follows (Amounts in thousands, USD):
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Period from
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Period from August 4,
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May 31, 2006 to
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2005 (Inception)
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May 31, 2007
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to May 30, 2006
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YCFC
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Purchases of raw materials
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$
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118,432
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$
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94,796
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Purchase of property, plant and
equipment
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45,785
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Utilities
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10,318
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8,114
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Comprehensive services fees
expenses
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268
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341
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Land lease expenses
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135
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110
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$
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129,153
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$
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149,146
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Sales of goods
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$
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4
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$
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386
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Unifi Asia
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Cash loan to the Company
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$
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$
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15,000
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Unifi Manufacturing,
Inc.
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Technology license and support
contract fees expenses
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$
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2,178
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$
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1,250
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Purchases of goods
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192
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34
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$
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2,370
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$
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1,284
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Shaoxing
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Sales of goods
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$
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21,124
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$
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20,730
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Purchases of goods
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$
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$
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1,500
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124
YIHUA
UNIFI FIBRE INDUSTRY COMPANY LIMITED
NOTES TO
FINANCIAL STATEMENTS (Continued)
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8.
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Related
Party Transactions (continued)
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(ii) The balances of related party receivables and payables
are summarized as follows (Amounts in thousands, USD):
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As of May 31, 2007
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As of May 30, 2006
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YCFC
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Related-party accounts payable
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$
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21,093
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$
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25,777
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Related-party accounts receivable
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(216
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)
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(128
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)
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$
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20,877
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$
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25,649
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Unifi Asia
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Current maturity of long-term debt
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$
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$
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15,000
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Unifi Manufacturing,
Inc.
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Related party accounts payable
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$
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372
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$
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Advance to related-party
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(946
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)
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750
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$
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(574
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)
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$
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750
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Shaoxing
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Related-party accounts receivable
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$
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(412
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)
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$
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(682
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)
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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 Statements of
Operations of the Company and recorded as a capital contribution.
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10.
|
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 31, 2007 are $135
thousand for each year. Rental expense was $138 thousand
(May 30, 2006: $110 thousand) for the fiscal year ended
May 31, 2007. The aggregate lease obligation is
$2.5 million over the initial term of twenty years. As of
May 31, 2007 the Company had commitments of $271 thousand,
related to acquisition of machinery. The commitment for
acquisition of machinery is expected to be settled within the
next twelve months.
As of May 31, 2007, the Company is not aware of any pending
claims, lawsuits or proceedings that will materially affect the
financial position of the Company.
125