FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 2002
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Commission file number 1-10984
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BURLINGTON INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 56-1584586
(State or other juris- (I.R.S. Employer
diction of incorpora- Identification No.)
tion or organization)
3330 West Friendly Avenue, Greensboro, North Carolina 27410
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(Address of principal executive offices)
(Zip Code)
(336) 379-2000 (Registrant's telephone number, including area code)
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 X No
As of February 4, 2003 there were outstanding 53,614,546 shares of Common
Stock, par value $.01 per share, and 454,301 shares of Nonvoting Common Stock,
par value $.01 per share, of the registrant.
Part 1 - Financial Information
Item 1. Financial Statements
BURLINGTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
(Debtors-in-Possession as of November 15, 2001)
Consolidated Statements of Operations
(Amounts in thousands, except for per share amounts)
Three Three
months months
ended ended
December 28, December 29,
2002 2001
------------ ------------
Net sales $ 189,742 $ 246,184
Cost of sales 168,733 239,599
------------ ------------
Gross profit 21,009 6,585
Selling, general and
administrative expenses 21,647 27,020
Provision for doubtful accounts 38 962
Provision for restructuring/impairments 4,314 59,176
------------ ------------
Operating loss before
interest and taxes (4,990) (80,573)
Interest expense (contractual interest of
$12,750 and $16,209 for the three
months ended December 28, 2002 and
December 29, 2001, respectively) 7,363 13,495
Equity in (income) loss of joint ventures (462) (271)
Other expense (income) - net (911) (752)
------------ ------------
Loss before reorganization items
and income taxes (10,980) (93,045)
Reorganization items 4,288 7,952
------------ ------------
Loss before income taxes (15,268) (100,997)
Income tax expense (benefit):
Current 713 611
Deferred (394) (26,378)
------------ ------------
Total income tax expense (benefit) 319 (25,767)
------------ ------------
Net loss $ (15,587) $ (75,230)
============ ============
Basic and diluted loss per common share $ (0.29) $ (1.42)
See notes to consolidated financial statements.
1
BURLINGTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
(Debtors-in-Possession as of November 15, 2001)
Consolidated Balance Sheets
(Amounts in thousands)
December 28, September 28,
2002 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 90,716 $ 137,793
Short-term investments 21,462 26,828
Customer accounts receivable after deductions
$10,620 and $10,363 for the respective
dates for doubtful accounts, discounts,
returns and allowances 107,198 118,115
Income taxes receivable 61,196 67,630
Sundry notes and accounts receivable 13,267 13,174
Inventories 136,880 131,363
Prepaid expenses 6,003 5,238
----------- -----------
Total current assets 436,722 500,141
Fixed assets, at cost:
Land and land improvements 13,056 14,339
Buildings 225,635 227,453
Machinery, fixtures and equipment 469,523 474,023
----------- -----------
708,214 715,815
Less accumulated depreciation and amortization 382,622 380,862
----------- -----------
Fixed assets - net 325,592 334,953
Other assets:
Assets held for sale 21,092 21,533
Investments and receivables 29,252 47,825
Intangibles and deferred charges 7,696 9,111
----------- -----------
Total other assets 58,040 78,469
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$ 820,354 $ 913,563
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise:
Current liabilities:
Long-term debt - current $ 430,917 $ 464,617
Accounts payable - trade 26,513 36,146
Sundry payables and accrued expenses 45,488 68,831
Income taxes payable 2,167 2,024
Deferred income taxes 31,078 31,472
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Total current liabilities 536,163 603,090
Other long-term liabilities 35,065 57,058
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Total liabilities not subject to compromise 571,228 660,148
Liabilities subject to compromise 366,087 366,145
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Total liabilities 937,315 1,026,293
Shareholders' equity (deficit):
Common stock issued 707 703
Capital in excess of par value 887,788 887,116
Accumulated deficit (819,773) (804,186)
Accumulated other comprehensive income (loss) (29,750) (40,435)
Cost of common stock held in treasury (155,933) (155,928)
----------- -----------
Total shareholders' equity (deficit) (116,961) (112,730)
----------- -----------
$ 820,354 $ 913,563
=========== ===========
See notes to consolidated financial statements.
2
BURLINGTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
(Debtors-in-Possession as of November 15, 2001)
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(Amounts in thousands)
Three Three
months months
ended ended
December 28, December 29,
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss $ (15,587) $ (75,230)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation and amortization of fixed assets 10,293 14,609
Provision for doubtful accounts 38 962
Amortization of intangibles and deferred
debt expense 1,584 1,672
Equity in (income) loss of joint ventures (462) (271)
Deferred income taxes (394) (26,378)
Gain on disposal of assets (916) 0
Provision for restructuring/impairments 4,314 59,176
Non-cash reorganization items 0 3,577
Changes in assets and liabilities:
Customer accounts receivable - net 10,879 49,605
Income taxes receivable 6,434 0
Sundry notes and accounts receivable (93) (1,361)
Inventories (5,517) 23,031
Prepaid expenses (765) 824
Accounts payable and accrued expenses (33,261) (1,882)
Change in income taxes payable 143 (156)
Other 4,632 (711)
----------- -----------
Total adjustments (3,091) 122,697
----------- -----------
Net cash provided (used) by operating activities (18,678) 47,467
----------- -----------
Cash flows from investing activities:
Capital expenditures (3,069) (952)
Proceeds from sales of assets 6,356 291
Change in investments 2,014 692
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Net cash provided by investing activities 5,301 31
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt (33,700) (99,389)
Proceeds from issuance of long-term debt 0 30,000
Payment of financing fees 0 (4,500)
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Net cash used by financing activities (33,700) (73,889)
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Net change in cash and cash equivalents (47,077) (26,391)
Cash and cash equivalents at beginning of period 137,793 87,473
----------- -----------
Cash and cash equivalents at end of period $ 90,716 $ 61,082
=========== ===========
See notes to consolidated financial statements.
3
BURLINGTON INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
(Debtors-in-Possession as of November 15, 2001)
Notes to Consolidated Financial Statements
As of and for the three months ended December 28, 2002
Note A.
On November 15, 2001 (the "Petition Date"), the Company and certain of
its domestic subsidiaries (collectively, the "Debtors"), filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the
District of Delaware (Case Nos. 01-11282 through 01-11306) (the "Bankruptcy
Court"). The Chapter 11 cases pending for the Debtors (the "Chapter 11 Cases")
are being jointly administered for procedural purposes only. International
operations, joint venture partnerships, Nano-Tex, LLC and Burlington WorldWide
Limited and certain other subsidiaries were not included in the filing.
In conjunction with the commencement of the Chapter 11 Cases, the
Debtors sought and obtained several orders from the Bankruptcy Court which were
intended to enable the Debtors to operate in the normal course of business
during the Chapter 11 Cases. The most significant of these orders (i) permit the
Debtors to operate their consolidated cash management system during the Chapter
11 Cases in substantially the same manner as it was operated prior to the
commencement of the Chapter 11 Cases, (ii) authorize payment of prepetition
employee salaries, wages, and benefits and reimbursement of prepetition employee
business expenses, (iii) authorize payment of prepetition sales, payroll, and
use taxes owed by the Debtors, (iv) authorize payment of certain prepetition
obligations to customers, and (v) authorize limited payment of prepetition
obligations to certain critical vendors to aid the Debtors in maintaining the
operation of their businesses. Subsequent orders set guidelines for sales of
assets, authorized severance payments to terminated employees and authorized
retention incentive payments to certain managers.
On December 12, 2001, the Bankruptcy Court entered an order (the "DIP
Financing Order") authorizing the Debtors to enter into a debtor-in-possession
financing facility (the "DIP Financing Facility") with JPMorgan Chase Bank and a
syndicate of financial institutions, and to grant first priority mortgages,
security interests, liens (including priming liens), and superiority claims on
substantially all of the assets of the Debtors to secure the DIP Financing
Facility. Under the original terms of the DIP Financing Order, a $190.0 million
revolving credit facility, including up to $50.0 million for postpetition
letters of credit, was available to the Company until the earliest of (i)
November 15, 2003, (ii) the date on which the plan of reorganization becomes
effective, (iii) any material non-compliance with any of the terms of the Final
DIP Financing Order, or (iv) any event of default shall have occurred and be
continuing under the DIP Financing Facility. Effective September 28, 2002, the
Company elected to reduce the commitment amount under the DIP Financing Facility
to $100.0 million. Amounts borrowed under the DIP Financing Facility bear
interest at the option of the Company at the rate of the London Interbank
Offering Rate ("LIBOR") plus 3.0% per annum, or the Alternate Base Rate plus
2.0%. In addition, there is an unused commitment fee of 0.50% on the unused
commitment and a letter of credit fee of 3.0% per annum on letters of credit
outstanding. The DIP Financing Facility is secured by, in part, the receivables
that formerly secured the Receivables Facility described below. On November 16,
2001, the Company borrowed $95.0 million under an Interim DIP Financing Facility
principally in order to repay all loans and accrued interest related to such
Receivables Facility, as well as certain other financing fees. At December 28,
2002, there were no borrowings outstanding under the DIP Financing Facility
other than issuances of letters of credit, and the Company had approximately
$84.2 million in unused capacity available under this Facility. The
documentation evidencing the DIP Financing Facility contains financial covenants
requiring the Company to maintain minimum levels of earnings before interest,
taxes, depreciation, amortization, restructuring and reorganization items
("EBITDA"), as defined. In addition, the DIP Financing Facility contains
covenants applicable to the Debtors, including limiting the incurrence of
additional indebtedness and guarantees thereof, the creation of liens and other
encumbrances on properties, the making of investments or acquisitions, the sale
or other disposition of property or assets, the making of cash dividend
payments, the making of capital expenditures beyond certain limits, and entering
into certain transactions with affiliates. In addition, proceeds from sales of
certain assets must be used to repay specified borrowings and permanently reduce
the commitment amount under the Facility.
The Debtors are currently operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code. Pursuant to the
Bankruptcy Code, prepetition obligations of the Debtors, including obligations
under debt instruments, generally may not be enforced against the Debtors, and
any actions to collect prepetition indebtedness are automatically stayed, unless
the stay is lifted by the Bankruptcy Court. The rights of and ultimate payments
by the Company under prepetition obligations may be substantially altered. This
could result in claims being liquidated in the Chapter 11 Cases at less (and
possibly substantially less) than 100% of their face value. In addition, as
debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court
approval and certain other limitations, to assume or reject executory contracts
and unexpired leases. In this context, "assumption" means that the Debtors agree
to perform their obligations and cure all existing defaults under the contract
or lease, and "rejection" means that the Debtors are relieved from their
obligations to perform further under the contract or lease, but are subject to a
claim for damages for the breach thereof. Any damages resulting from rejection
of executory contracts and unexpired leases will be treated as general unsecured
claims in the Chapter 11 Cases unless such claims had been secured on a
prepetition basis prior to the Petition Date. The Debtors are in the process of
reviewing their executory contracts and unexpired leases to determine which, if
any, they will reject. The Debtors cannot presently determine or reasonably
estimate the ultimate liability that may result from rejecting contracts or
leases or from the filing of claims for any rejected contracts or leases, and no
provisions have yet been made for these items. The Bankruptcy Court established
July 22, 2002 as the "bar date" as of which all claimants were required to
submit and characterize claims against the debtors. Debtors are assessing the
claims filed and their impact on the development of a plan of reorganization.
The amount of the claims filed or to be filed by the creditors could be
significantly different than the amount of the liabilities recorded by the
Company.
The United States trustee for the District of Delaware has appointed an
Official Committee of Unsecured Creditors in accordance with the provisions of
the Bankruptcy Code. The Bankruptcy Code provides that the Debtors have
exclusive periods during which only they may file and solicit acceptances of a
plan of reorganization. The initial exclusive period of the Debtors to file a
plan for reorganization expired on March 15, 2002; and subsequent rulings by the
Bankruptcy Court have extended this period to January 31, 2003. The Debtors have
filed a motion to extend the exclusivity period to May 31, 2003; this motion
will be heard on February 27, 2003 by the Bankruptcy Court. If the Debtors fail
to obtain an extension of the exclusive period or file a plan of reorganization
during the exclusive period or, after such plan has been filed, if the Debtors
fail to obtain acceptance of such plan from the parties entitled to vote on the
plan during the exclusive solicitation period, any party in interest, including
a creditor, an equity holder, a committee of creditors or equity holders, or an
indenture trustee, may file their own plan of reorganization for the Debtors.
After a plan of reorganization has been filed with the Bankruptcy Court, the
plan, along with a disclosure statement approved by the Bankruptcy Court, will
be sent to the parties entitled to vote. Following the solicitation period, the
Bankruptcy Court will consider whether to confirm the plan. In order to confirm
a plan of reorganization, the Bankruptcy Court, among other things, is required
to find that (i) with respect to each class of parties entitled to vote, each
holder in such class has accepted the plan or will, pursuant to the plan,
receive at least as much as such holder would receive in a liquidation, (ii)
each class of parties entitled to vote has accepted the plan by the requisite
vote (except as described in the following sentence), and (iii) confirmation of
the plan is not likely to be followed by a liquidation or a need for further
financial reorganization of the Debtors or any successors to the Debtors unless
the plan proposes such liquidation or reorganization. If any class of parties
entitled to vote does not accept the plan and, assuming that all of the other
requirements of the Bankruptcy Code are met, the proponent of the plan may
invoke the "cram down" provisions of the Bankruptcy Code. Under these
provisions, the Bankruptcy Court may confirm a plan notwithstanding the
non-acceptance of the plan by an impaired class of parties entitled to vote if
certain requirements of the Bankruptcy Code are met. These requirements may,
among other things, necessitate payment in full for senior classes of creditors
before payment to a junior class can be made. As a result of the amount of
prepetition indebtedness and the availability of the "cram down" provisions, the
holders of the Company's capital stock may receive no value for their interests
under the plan of reorganization. Because of such possibility, the value of the
Company's outstanding capital stock and unsecured instruments are highly
speculative. It is possible that the plan of reorganization will require the
issuance of common stock or common stock equivalents, thereby diluting current
equity interests. Because of such possibility, the value of the Company's
outstanding capital stock and unsecured instruments are highly speculative.
Since the Petition Date, the Debtors have conducted business in the
ordinary course. Management believes that it has substantially completed the
restructuring steps it has identified as necessary and is evaluating the
elements of a plan of reorganization. After developing a plan of reorganization,
the Debtors will seek the requisite acceptance of the plan by parties entitled
to vote on the plan and confirmation of the plan by the Bankruptcy Court, all in
accordance with the applicable provisions of the Bankruptcy Code. During the
pendency of the Chapter 11 Cases, the Debtors have engaged in the process of
selling certain assets by court order and pursuant to certain sale procedures
approved by the Bankruptcy Court, and the Debtors have engaged in the process of
settling certain liabilities pursuant to certain settlement procedures approved
by the Bankruptcy Court. The Debtors are in the process of reviewing claims
submitted as of the July 22 "bar date" and continuing to evaluate executory
contracts and unexpired leases. To date, the Debtors have rejected certain real
property leases and other executory contracts that are not necessary for
operation of the business going forward. The administrative and reorganization
expenses resulting from the Chapter 11 Cases will unfavorably affect the
Debtors' results of operations. Future results of operations may also be
adversely affected by other factors related to the Chapter 11 Cases. The
discussions below under the captions "2001 Restructuring and Impairment" and
"2002 Restructuring and Impairment" describe the actions the Company is taking
to align manufacturing capacity with market demand and reorganize the manner in
which it makes or services products to meet customer demand. The financial
reporting charges and cash costs of such actions have required the Company to
enter into amendments of certain of the covenants under the DIP Financing
Facility.
Basis of Presentation
The accompanying consolidated financial statements are presented in
accordance with American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" (SOP 90-7), and have been prepared in accordance with
accounting principles generally accepted in the United States applicable to a
going concern, which principles, except as otherwise disclosed, assume that
assets will be realized and liabilities will be discharged in the ordinary
course of business. The Company is currently operating under the jurisdiction of
Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of
the Company as a going concern is contingent upon, among other things, its
ability to formulate a plan of reorganization which will gain approval of the
requisite parties under the Bankruptcy Code and be confirmed by the Bankruptcy
Court, its ability to comply with the DIP Financing Facility, its ability to
return to profitability, generate sufficient cash flows from operations and
obtain financing sources to meet future obligations. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might result from
the outcome of these uncertainties.
While under the protection of Chapter 11, the Company may sell or
otherwise dispose of assets, and liquidate or settle liabilities, for amounts
other than those reflected in the financial statements. Additionally, the
amounts reported on the consolidated balance sheet could materially change
because of changes in business strategies and the effects of any proposed plan
of reorganization. In the Chapter 11 Cases, substantially all unsecured
liabilities as of the Petition Date are subject to compromise or other treatment
under a plan of reorganization which must be confirmed by the Bankruptcy Court
after submission to any required vote by affected parties. For financial
reporting purposes, those liabilities and obligations whose treatment and
satisfaction is dependent on the outcome of the Chapter 11 Cases, have been
segregated and classified as liabilities subject to compromise in the
accompanying consolidated balance sheet. Generally, all actions to enforce or
otherwise effect repayment of pre-Chapter 11 liabilities as well as all pending
litigation against the Debtors are stayed while the Debtors continue their
business operations as debtors-in-possession. The ultimate amount of and
settlement terms for such liabilities are subject to approval of a plan of
reorganization and accordingly are not presently determinable. The principal
categories of obligations classified as liabilities subject to compromise under
the Chapter 11 Cases as of December 28, 2002 are identified below (in
thousands):
7.25% Notes Due 2005.................... $ 150,000
7.25% Notes Due 2027.................... 150,000
---------
Total long-term debt................ 300,000
Interest accrued on above debt.......... 5,293
Accounts payable........................ 50,637
Sundry payables and accrued expenses.... 10,157
----------
$ 366,087
==========
Pursuant to SOP 90-7, professional fees associated with the Chapter 11
Cases are expensed as incurred and reported as reorganization items. Interest
expense is reported only to the extent that it will be paid during the Chapter
11 Cases or that it is probable that it will be an allowed claim. During the
2002 fiscal year, the Company recognized a charge of $21.0 million associated
with the Chapter 11 Cases. Approximately $4.0 million of this charge related to
the non-cash write-off of the unamortized discount on the 7.25% Notes, the
non-cash write-off of deferred financing fees associated with the unsecured debt
classified as subject to compromise and termination costs related to derivative
instruments in default as a result of the Chapter 11 Cases. In addition, the
Company incurred $12.6 million for fees payable to professionals retained to
assist with the filing of the Chapter 11 Cases, and $4.4 million has been
recorded for service rendered through September 28, 2002 related to retention
incentives. During the 2003 fiscal year, the Company has incurred $2.8 million
for fees payable to professionals retained to assist with the filing of the
Chapter 11 Cases, and $1.5 million has been recorded for service rendered
through December 28, 2002 related to retention incentives.
Following is unaudited condensed combined financial information of the
Debtors as of and for the three months ended December 28, 2002, and as of and
for the fiscal year ended September 28, 2002 (in millions). The Debtor
subsidiaries are wholly-owned subsidiaries of Burlington Industries, Inc.
Separate condensed financial information for each of the Debtor subsidiaries are
not presented because such financial information would not provide relevant
material additional information to users of the consolidated financial
statements of Burlington Industries, Inc. Intercompany receivables and payables
of entities in reorganization proceedings are not material.
December 28, September 28,
2002 2002
------------- --------------
Earnings data:
Revenue............................. $ 190.2 $ 985.9
Gross profit........................ 32.9 129.2
Net loss............................ (19.7) (120.9)
Balance sheet data:
Current assets...................... $ 397.1 $ 457.0
Noncurrent assets................... 451.4 464.3
Current liabilities................. 525.9 585.9
Noncurrent liabilities.............. 392.6 396.3
Note B.
With respect to interim quarterly financial data, which are unaudited, in
the opinion of Management, all adjustments necessary to a fair statement of the
results for such interim periods have been included. All adjustments were of a
normal recurring nature.
Note C.
Accounts of certain international subsidiaries are included as of dates
three months or less prior to that of the consolidated balance sheets. The
December 28, 2002 consolidated balance sheet reflects the sale and disposal of
certain insurance programs maintained by the Company's captive insurance
subsidiary in Bermuda, including the sale of investments of $19.2 million and
the commutation of insurance reserves of $22.7 million included in sundry
payables and accrued expenses and other long-term liabilities as of September
28, 2002. The impact of these transactions on the consolidated statement of
operations was not material.
Note D.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and notes thereto. Actual results could differ from those estimates.
Note E.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands):
Three Months Ended
--------------------------
December 28, December 29,
2002 2001
------------ ------------
Numerator:
Net loss........................ $(15,587) $(75,230)
======== ========
Denominator:
Denominator for basic and diluted
earnings per share............. 53,594 52,975
======== ========
Weighted-average shares not
included in the diluted earnings
per share computations because
they were antidilutive........... - 1,053
======== ========
During the first three months of the 2003 fiscal year, outstanding
shares changed due to the forfeiture of 72,735 shares of restricted nonvested
stock, and the issuance of 391,812 vested shares related to the investment in
Nano-Tex.
Note F.
Inventories are summarized as follows (in thousands):
December 28, September 28,
2002 2002
------------ -------------
Inventories at average cost:
Raw materials............................. $ 5,102 $ 5,729
Stock in process.......................... 45,656 44,588
Produced goods............................ 99,039 92,855
Dyes, chemicals and supplies.............. 10,510 10,118
--------- ---------
160,307 153,290
Less excess of average cost over LIFO..... 23,427 21,927
--------- ---------
Total................................. $ 136,880 $ 131,363
========= =========
Note G.
Comprehensive income (loss) totaled $(4,902,000) and $(74,150,000) for
the three months ended December 28, 2002 and December 29, 2001, respectively.
The components of accumulated other comprehensive income (loss), net of related
tax, are as follows (in thousands):
December 28, September 29,
2002 2002
------------ -------------
Foreign currency translation adjustments........ $ (591) $ (604)
Minimum pension liability adjustment............ (28,546) (38,609)
Unrealized gains (losses) on securities......... (613) (1,222)
-------- --------
$(29,750) $(40,435)
======== ========
Note H.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities"("SFAS 146"). SFAS 146 requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, rather than at the date of an
entity's commitment to an exit plan as was previously required under generally
accepted accounting principles, and also established that fair value should be
used for initial measurement of the liability. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. Adopting this
standard had no impact on the consolidated financial position or results of
operations of the Company.
Note I.
The Company conducts its operations in three principal operating
segments: Apparel Fabrics, Interior Furnishings and Carpet. The Company
evaluates performance and allocates resources based on profit or loss before
interest, amortization of goodwill, restructuring charges, certain unallocated
corporate expenses, and income taxes. The following table sets forth certain
information about the segment results and total assets (in millions):
Three Months Ended
----------------------------
December 28, December 29,
2002 2001
-------------- -------------
(Dollar amounts in millions)
Net sales
Apparel Fabrics........ $ 93.5 $ 121.5
Interior Furnishings... 41.1 66.9
Carpet................. 55.6 57.4
Other.................. 3.2 4.2
-------- --------
193.4 250.0
Less:
Intersegment sales.... (3.7) (3.8)
-------- --------
$ 189.7 $ 246.2
======== ========
Income (loss) before income taxes
Apparel Fabrics........ $ (3.6) $ (18.0)
Interior Furnishings... (0.3) (6.6)
Carpet................. 5.4 6.2
Other.................. 0.1 (0.9)
-------- --------
Total reportable
segments............ 1.6 (19.3)
Corporate expenses..... (1.8) (1.8)
Restructuring and
impairment charges... (4.3) (59.2)
Interest expense....... (7.4) (13.5)
Other (expense)
income - net......... 0.9 0.8
Reorganization items... (4.3) (8.0)
-------- ---------
$ (15.3) $ (101.0)
======== ========
December 28, September 29,
2002 2002
------------ -------------
Total Assets
Apparel Fabrics........ $ 413.0 $ 421.5
Interior Furnishings... 103.3 106.1
Carpet................. 105.3 112.4
Other.................. 14.9 39.2
Corporate.............. 183.9 234.4
-------- --------
$ 820.4 $ 913.6
======== ========
Intersegment net sales for the three months ended December 28, 2002 and
December 29, 2001 were primarily attributable to Apparel Fabrics segment sales
of $3.0 million and $3.1 million. Assets decreased in the "Other" category
primarily due to the sale of investment securities in conjunction with the
commutation of insurance liabilities by the Company's captive insurance
subsidiary, and corporate assets declined primarily due to the use of cash to
repay debt of $33.7 million as well as net cash used by operating activities.
Note J.
2001 Restructuring and Impairment
During the September quarter of 2001, management adopted a plan to
further reduce capacities and focus on value-added products in the global supply
chain. Outside factors, including a continuing flood of low-cost and often
subsidized foreign imports and a slowdown in consumer spending have hit the
textile industry hard. Imports have been growing rapidly for many years, but
since 1999, the volume of imported apparel has grown at five times the rate of
consumption, squeezing out U.S.-made products.. The major elements of the plan
include:
(1) Realign operating capacity. During the September 2001 quarter, the
Company reduced operations by closing a plant in Mexico and moving its
production to an underutilized facility, also in Mexico, and reducing operations
at the facilities in Clarksville, Virginia and Stonewall, Mississippi. The
Company has offered for sale and has further reduced or realigned capacity by
closing two older plants in Mexico in the first quarter of fiscal year 2002 (net
sales of $22.0 million and net operating loss of $7.1 million in fiscal year
2001), and by reducing operations at the Hurt, Virginia facility.
(2) Eliminate unprofitable business. The former CasualWear segment sold
its garment-making business in Aguascalientes, Mexico during the June 2002
quarter. Net sales and net operating loss for this business in fiscal year 2001
were $61.8 million and $6.3 million, respectively.
(3) Reduce overhead. The Company analyzed administrative and staff
positions throughout the Company, and identified a number of opportunities to
consolidate and reduce cost. This resulted in job reductions in division and
corporate staff areas during the 2002 fiscal year.
The closings and overhead reductions outlined above resulted in the
elimination of approximately 600 jobs in the United States and 2,000 jobs in
Mexico with severance benefits originally calculated for periods of up to 12
months from the termination date, depending on the employee's length of service.
The Debtors obtained approval of the Bankruptcy Court for payment of severance
benefits equal to one-half of the amounts payable under the Company's former
severance policy. The Company recorded the adjustment of the severance liability
in the December 2001 quarter.
This plan resulted in a pre-tax charge for restructuring, asset
write-downs and impairment of $57.4 million, as adjusted by $9.6 million in the
2002 fiscal year and $0.5 million in the 2003 fiscal year. The components of the
2001 restructuring and impairment charge included the establishment of a $8.5
million reserve for severance benefit payments, write-downs for impairment of
$44.4 million related to long-lived assets resulting from the restructuring
(including $22.5 million related to foreign currency translation adjustments for
the planned liquidation of Mexican assets) and a reserve of $4.5 million for
lease cancellation and other exit costs expected to be paid through March 2003.
Although these lease cancellation costs have been reserved for, any such amounts
due will be treated as general unsecured claims in the Chapter 11 Cases and,
accordingly, the Company's ultimate liability for these amounts cannot yet be
ascertained.
Following is a summary of activity in the related 2001
restructuring reserves (in millions):
Lease
Cancellations
Severance and Other
Benefits Exit Costs
---------- --------------
September 2001 restructuring charge... $ 10.0 $ 6.9
Payments.............................. (1.1) -
------ -------
Balance at September 29, 2001......... 8.9 6.9
Payments.............................. (5.7) (4.9)
Adjustments........................... (1.5) (1.9)
------ -------
Balance at September 28, 2002......... 1.7 0.1
Payments.............................. (0.1) 0.5
Adjustments........................... - (0.5)
------ -------
Balance at December 28, 2002.......... $ 1.6 $ 0.1
====== =======
Other expenses related to the 2001 restructuring (including losses on accounts
receivable and inventories of discontinued styles, relocation of employees and
equipment, and plant carrying and other costs) are charged to operations as
incurred. Through December 28, 2002, $1.2 million and $5.8 million of such costs
have been incurred and charged to operations during the 2002 and 2001 fiscal
years, respectively, consisting primarily of losses on accounts receivable and
inventories.
2002 Restructuring and Impairment
During the March 2002 quarter, management announced a comprehensive
reorganization of its apparel fabrics and interior furnishings groups. Continued
pressures from foreign imports coupled with slowing and uncertain economic
conditions have made it necessary to further reduce U.S. capacity. This
reorganization is part of the Company's initiatives to transition and modify its
business model in order to better serve its customers' expanding needs in the
global supply chain and restructure the Company under Chapter 11 of the U.S.
Bankruptcy Code.
The major elements of the reorganization are:
(1) Unified sales and marketing - All apparel products will be marketed
and sold under one organization, "Burlington WorldWide", instead of its previous
divisional structure.
(2) Accelerate product sourcing - The Company intends to complement the
product offerings of its manufacturing base with sourced products from mills
located in other countries. It is anticipated that many of these products will
be made using technology licensed by Nano-Tex, LLC. Burlington Worldwide is
attempting to put in place a coordinated network of domestic and international
resources to enable the Company to offer a broader range of fabrics to its
customers and deliver them to points of assembly worldwide.
(3) Rationalize its manufacturing base - The Company has reduced its
U.S. manufacturing base for apparel fabrics in response to slowing economic
conditions and continued import competition. This reorganization resulted in the
sale or closing of plants in four locations, which include Mount Holly, North
Carolina; Stonewall, Mississippi; Halifax, Virginia; and Clarksville, Virginia.
Additional capacity reductions have occurred at the Raeford, North Carolina
plant, and company-wide overhead reductions have taken place.
(4) During the June 2002 quarter, the Company sold its bedding and
window consumer products businesses to Springs Industries, Inc. and entered into
an agreement to supply jacquard and decorative fabrics for certain of Springs'
home furnishing product lines. For the first eight months of fiscal 2002, the
bedding and window consumer products businesses had sales of $69.7 million, and
from June through September 2002, the Company had sales of $12.5 million under
its agreement to supply fabrics to Springs. Also, the Company sold certain
assets, inventory and intellectual properties of its upholstery fabrics business
to Tietex International Ltd. These sales will enable the Company to focus its
resources on growing its interior fabrics business. For the first nine months of
fiscal 2002, the upholstery fabrics business had sales of $31.5 million, and
from July through September 2002, the Company had revenues of $3.5 million
related to yarn preparation work for Tietex.
(5) In December 2002, the Company announced that it has signed an
agreement with a third party to manage the Company's growing logistics needs in
line with the Company's new business model. This transition is expected to be
complete by early February 2003.
The closings and overhead reductions outlined above will result in the
elimination of approximately 4,550 jobs in the United States and 1,300 jobs in
Mexico with severance benefits calculated for periods of up to 6 months from the
termination date, depending on the employee's length of service, as approved by
the Bankruptcy Court.
This plan resulted in a pre-tax charge for restructuring, asset
write-downs and impairment of $178.7 million, as adjusted by $4.9 million in the
first quarter of fiscal year 2003. The components of the 2002 restructuring and
impairment charge included the establishment of a $12.8 million reserve for
severance benefit payments, write-downs for impairment of $136.6 million related
to long-lived assets resulting from the restructuring, a loss provision of $28.1
million related to the sale of the consumer products and upholstery businesses,
and a reserve of $1.2 million for lease cancellation and other exit costs
expected to be paid through December 2003. Although these lease cancellation
costs have been reserved for, any such amounts due will be treated as general
unsecured claims in the Chapter 11 Cases and, accordingly, the Company's
ultimate liability for these amounts cannot yet be ascertained. Also in fiscal
year 2002, the Company recorded an additional pre-tax restructuring charge of
$0.9 million, primarily related to impairment write-downs of long-lived assets
in the apparel fabrics business identified in a 1999 restructuring plan.
Following is a summary of activity in the related 2002 restructuring
reserves (in millions):
Lease
Cancellations
Severance and Other
Benefits Exit Costs
---------- -------------
2002 restructuring charge............. $ 12.1 $ 1.1
Payments.............................. (7.0) (0.2)
------ --------
Balance at September 28, 2002......... 5.1 0.9
Payments.............................. (2.5) (0.1)
Adjustments........................... 0.7 0.1
------ --------
Balance at December 28, 2002.......... $ 3.3 $ 0.9
====== =======
Other estimated expenses of $30-34 million related to the 2002
restructuring (including losses on inventories of discontinued styles,
relocation of employees and equipment, and plant carrying and other costs) have
been or will be charged to operations as incurred. Through December 28, 2002,
$4.1 million and $23.8 million of such costs have been incurred and charged to
operations during the 2003 and 2002 fiscal year, respectively.
Assets that have been sold, or are held for sale at December 28, 2002
and are no longer in use, were written down to their estimated fair values less
costs of sale. At December 28, 2002, assets held for sale consisted of real
estate of $19.5 million and machinery and equipment of $1.6 million. The Company
is actively marketing the affected real estate and equipment. The active plan to
sell the assets includes the preparation of a detailed property marketing
package to be used in working with real estate and used equipment brokers and
other channels, including other textile companies, the local Chambers of
Commerce and Economic Development and the State Economic Development Department.
The Company anticipates that the divestitures of real estate and equipment will
be completed within 12 months from the date of closing. However, the actual
timing of the disposition of these properties may vary due to their locations
and market conditions. The Bankruptcy Court has approved certain procedures that
allow the Debtors to consummate asset sales that occur outside of the ordinary
course of business.
Note K.
The total income tax expense (benefit) for the 2003 and 2002 periods is
different from the amounts obtained by applying statutory rates to loss before
income taxes primarily as a result of foreign losses with no tax benefits, tax
rate differences on foreign transactions and changes in the valuation allowance.
The Job Creation and Worker Assistance Act of 2002 changed, for tax years 2001
and 2002, the federal income tax net operating loss carryback period from 2 to 5
years. Through January 2003, the Company has applied for and received income tax
refunds under these changes of $103.2 million. As part of its strategic
realignment of assets and business restructuring announced in January 2002, the
Company terminated its domestic denim manufacturing operations and has closed
its Stonewall, Mississippi and Mt. Holly, North Carolina plants. Such actions
included the transfer of $13.7 million of cash to a trust to restrict these
funds for the sole benefit of creditors of this subsidiary. These, and other
actions, resulted in a deduction for tax purposes only of approximately $303
million. The Company used this tax deduction and operating losses to offset
remaining income in the 5-year carryback period. The Company also has a tax loss
carryforward of approximately $225 million for federal income tax purposes,
which could be realized in 2003 and subsequent years to the extent of taxable
income in such years. There can be no assurances that such deduction will be
successfully utilized as described for a number of reasons, including
limitations imposed upon such use following emergence by companies in Chapter 11
reorganization. It is management's opinion that it is more likely than not that
some portion of the deferred tax assets created by these carryforwards will not
be realized, and in accordance with Statement of Accounting Standards No. 109,
"Accounting for Income Taxes," a valuation allowance has been established.
Operating loss and tax credit carryforwards with related tax benefits of $32.6
million (net of $62.7 million valuation allowance) at December 28, 2002 and
$23.9 million (net of $65.9 million valuation allowance) at September 28, 2002
expire from 2003 to 2023.
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition
Proceedings Under Chapter 11 of the Bankruptcy Code
On November 15, 2001, the Company and certain of its domestic
subsidiaries (referred to herein as the "Debtors") filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code. For further discussion
of the Chapter 11 Cases, see Note A of the Notes to the Consolidated Financial
Statements. The Debtors are currently operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code. Management believes that
it has substantially completed the restructuring steps it has identified as
necessary and is evaluating the elements of a plan of reorganization. After
developing a plan of reorganization, the Debtors will seek the requisite
acceptance of the plan by parties entitled to vote on the plan and confirmation
of the plan by the Bankruptcy Court, all in accordance with the applicable
provisions of the Bankruptcy Code.
During the pendency of the Chapter 11 Cases, the Debtors have engaged
in the process of selling certain assets by court order and pursuant to certain
sale procedures approved by the Bankruptcy Court, and the Debtors have engaged
in the process of settling certain liabilities pursuant to certain settlement
procedures approved by the Bankruptcy Court. The Debtors are in the process of
reviewing claims submitted as of the July 22 "bar date" and continuing to
evaluate executory contracts and unexpired leases. To date, the Debtors have
rejected certain real property leases and other executory contracts that are not
necessary for operation of the business going forward. The administrative and
reorganization expenses resulting from the Chapter 11 Cases will unfavorably
affect the Debtors' results of operations. Future results of operations may also
be adversely affected by other factors related to the Chapter 11 Cases.
Basis of Presentation
The Company's consolidated financial statements are presented in
accordance with American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" (SOP 90-7), and have been prepared in accordance with
accounting principles generally accepted in the United States applicable to a
going concern, which principles, except as otherwise disclosed, assume that
assets will be realized and liabilities will be discharged in the ordinary
course of business. The Company is currently operating under the jurisdiction of
Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of
the Company as a going concern is contingent upon, among other things, its
ability to formulate a plan of reorganization which will gain approval of the
requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy
Court, its ability to comply with the DIP Financing Facility, its ability to
return to profitability, generate sufficient cash flows from operations and
obtain financing sources to meet future obligations. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might result from the outcome
of these uncertainties.
While under the protection of Chapter 11, the Company may sell or
otherwise dispose of assets, and liquidate or settle liabilities, for amounts
other than those reflected in the financial statements. Additionally, the
amounts reported on the consolidated balance sheet could materially change
because of changes in business strategies and the effects of any proposed plan
of reorganization. In the Chapter 11 Cases, substantially all unsecured
liabilities as of the Petition Date are subject to compromise or other treatment
under a plan of reorganization which must be confirmed by the Bankruptcy Court
after submission to any required vote by affected parties. For financial
reporting purposes, those liabilities and obligations whose treatment and
satisfaction is dependent on the outcome of the Chapter 11 Cases, have been
segregated and classified as liabilities subject to compromise in the Company's
consolidated balance sheet. Generally, all actions to enforce or otherwise
effect repayment of pre-Chapter 11 liabilities as well as all pending litigation
against the Debtors are stayed while the Debtors continue their business
operations as debtors-in-possession. The ultimate amount of and settlement terms
for such liabilities are subject to approval of a plan of reorganization and
accordingly are not presently determinable. Pursuant to SOP 90-7, professional
fees associated with the Chapter 11 Cases are expensed as incurred and reported
as reorganization items. Interest expense is reported only to the extent that it
will be paid during the Chapter 11 Cases or that it is probable that it will be
an allowed claim.
Results Of Operations
2002 Restructuring and Impairment
During the March 2002 quarter, management announced a comprehensive
reorganization of its apparel fabrics and interior furnishings groups. Continued
pressures from foreign imports coupled with slowing and uncertain economic
conditions have made it necessary to further reduce U.S. capacity. This
reorganization is part of the Company's initiatives to transition and modify its
business model in order to better serve its customers' expanding needs in the
global supply chain and restructure the Company under Chapter 11 of the U.S.
Bankruptcy Code.
The major elements of the reorganization are:
(1) Unified sales and marketing - All apparel products will be marketed
and sold under one organization, "Burlington WorldWide", instead of its previous
divisional structure.
(2) Accelerate product sourcing - The Company intends to complement the
product offerings of its manufacturing base with sourced products from mills
located in other countries. It is anticipated that many of these products will
be made using technology licensed by Nano-Tex, LLC. Burlington Worldwide is
attempting to put in place a coordinated network of domestic and international
resources to enable the Company to offer a broader range of fabrics to its
customers and deliver them to points of assembly worldwide.
(3) Rationalize its manufacturing base - The Company has reduced its
U.S. manufacturing base for apparel fabrics in response to slowing economic
conditions and continued import competition. This reorganization resulted in the
sale or closing of plants in four locations, which include Mount Holly, North
Carolina; Stonewall, Mississippi; Halifax, Virginia; and Clarksville, Virginia.
Additional capacity reductions have occurred at the Raeford, North Carolina
plant, and company-wide overhead reductions have taken place.
(4) During the June 2002 quarter, the Company sold its bedding and
window consumer products businesses to Springs Industries, Inc. and entered into
an agreement to supply jacquard and decorative fabrics for certain of Springs'
home furnishing product lines. For the first eight months of fiscal 2002, the
bedding and window consumer products businesses had sales of $69.7 million, and
from June through September 2002, the Company had sales of $12.5 million under
its agreement to supply fabrics to Springs. Also, the Company sold certain
assets, inventory and intellectual properties of its upholstery fabrics business
to Tietex International Ltd. These sales will enable the Company to focus its
resources on growing its interior fabrics business. For the first nine months of
fiscal 2002, the upholstery fabrics business had sales of $31.5 million, and
from July through September 2002, the Company had revenues of $3.5 million
related to yarn preparation work for Tietex.
(5) In December 2002, the Company announced that it has signed an
agreement with a third party to manage the Company's growing logistics needs in
line with the Company's new business model. This transition is expected to be
complete by early February 2003.
The closings and overhead reductions outlined above will result in the
elimination of approximately 4,550 jobs in the United States and 1,300 jobs in
Mexico with severance benefits calculated for periods of up to 6 months from the
termination date, depending on the employee's length of service, as approved by
the Bankruptcy Court.
This plan resulted in a pre-tax charge for restructuring, asset
write-downs and impairment of $178.7 million, as adjusted by $4.9 million in the
first quarter of fiscal year 2003. The components of the 2002 restructuring and
impairment charge included the establishment of a $12.8 million reserve for
severance benefit payments, write-downs for impairment of $136.6 million related
to long-lived assets resulting from the restructuring, a loss provision of $28.1
million related to the sale of the consumer products and upholstery businesses,
and a reserve of $1.2 million for lease cancellation and other exit costs
expected to be paid through December 2003. Although these lease cancellation
costs have been reserved for, any such amounts due will be treated as general
unsecured claims in the Chapter 11 Cases and, accordingly, the Company's
ultimate liability for these amounts cannot yet be ascertained. Also in fiscal
year 2002, the Company recorded an additional pre-tax restructuring charge of
$0.9 million, primarily related to impairment write-downs of long-lived assets
in the apparel fabrics business identified in a 1999 restructuring plan.
Following is a summary of activity in the related 2002 restructuring
reserves (in millions):
Lease
Cancellations
Severance and Other
Benefits Exit Costs
---------- -------------
2002 restructuring charge............. $ 12.1 $ 1.1
Payments.............................. (7.0) (0.2)
------ --------
Balance at September 28, 2002......... 5.1 0.9
Payments.............................. (2.5) (0.1)
Adjustments........................... 0.7 0.1
------ --------
Balance at December 28, 2002.......... $ 3.3 $ 0.9
====== =======
Other estimated expenses of $30-34 million related to the 2002
restructuring (including losses on inventories of discontinued styles,
relocation of employees and equipment, and plant carrying and other costs) have
been or will be charged to operations as incurred. Through December 28, 2002,
$4.1 million and $23.8 million of such costs have been incurred and charged to
operations during the 2003 and 2002 fiscal year, respectively.
Assets that have been sold, or are held for sale at December 28, 2002
and are no longer in use, were written down to their estimated fair values less
costs of sale. At December 28, 2002, assets held for sale consisted of real
estate of $19.5 million and machinery and equipment of $1.6 million. The Company
is actively marketing the affected real estate and equipment. The active plan to
sell the assets includes the preparation of a detailed property marketing
package to be used in working with real estate and used equipment brokers and
other channels, including other textile companies, the local Chambers of
Commerce and Economic Development and the State Economic Development Department.
The Company anticipates that the divestitures of real estate and equipment will
be completed within 12 months from the date of closing. However, the actual
timing of the disposition of these properties may vary due to their locations
and market conditions. The Bankruptcy Court has approved certain procedures that
allow the Debtors to consummate asset sales that occur outside of the ordinary
course of business.
Comparison of Three Months ended December 28, 2002 and December 29, 2001.
NET SALES: Net sales for the first quarter of the 2003 fiscal year were
$189.7 million, 22.9% lower than the $246.2 million recorded for the first
quarter of the 2002 fiscal year, partially due to planned volume reductions
resulting from restructuring plans. Export sales totaled $29.8 million and $32.3
million in the fiscal 2003 and 2002 periods, respectively.
Apparel Fabrics: Net sales for the Apparel Fabrics segment for the
first quarter of the 2003 fiscal year were $93.5 million, 23.0% lower than the
$121.5 million recorded in the first quarter of the 2002 fiscal year. This
decrease was due primarily to 25.2% lower volume, primarily due to planned
reductions resulting from restructuring plans, offset by 2.2% higher selling
prices and product mix.
Interior Furnishings: Net sales of products for interior furnishings
markets for the first quarter of the 2003 fiscal year were $41.1 million, 38.6%
lower than the $66.9 million recorded in the first quarter of the 2002 fiscal
year. Excluding $21.6 million sales reduction due to the sale of the consumer
products businesses, net sales of the interior furnishings segment were 14.0%
lower than in the prior year. This decrease was primarily due to 14.6% lower
volume, offset by 0.6% higher selling prices and product mix.
Carpet: Net sales for the Carpet segment for the first quarter of the
2003 fiscal year were $55.6 million, 3.1% lower than the $57.4 million recorded
in the first quarter of the 2002 fiscal year. This decrease was primarily due to
4.7% lower volume, partially offset by 1.6% higher selling prices and product
mix. The Company believes that lower sales volume was principally due to
corporate business customers' budget reductions or postponements of projects.
Other: Net sales of other segments for the first quarter of the 2003
fiscal year were $3.2 million compared to $4.2 million recorded in the first
quarter of the 2002 fiscal year. This decrease was primarily related to
decreased revenues in the transportation business.
SEGMENT INCOME (LOSS): Total reportable segment income for the first
quarter of the 2003 fiscal year was $1.6 million compared to a loss of $(19.3)
million for the first quarter of the 2002 fiscal year.
Apparel Fabrics: Loss of the Apparel Fabrics segment for the first
quarter of the 2003 fiscal year was $(3.6) million compared to $(18.0) million
recorded for the first quarter of the 2002 fiscal year. This improvement was due
primarily to $7.3 million higher margins due to selling price and product mix,
$9.2 million improvement in manufacturing performance due to restructuring, and
$2.2 million due to lower selling, general and administrative expenses resulting
from restructuring and cost reduction programs, partially offset by $3.0 million
of higher run-out expenses related to restructuring and $1.7 million lower
margins due to volume.
Interior Furnishings: Loss of the interior furnishings products segment
for the first quarter of the 2003 fiscal year was $(0.3) million compared to
$(6.6) million recorded for the first quarter of the 2002 fiscal year. This
improvement was due primarily to $5.4 million of improved manufacturing
performance, $2.6 million lower selling, general and administrative expenses
resulting from restructuring and cost reduction programs and $0.8 million lower
bad debt expense, partially offset by $2.5 million lower margins due to reduced
volume resulting from the disposition of the consumer products businesses.
Carpet: Income of the Carpet segment for the first quarter of the 2003
fiscal year was $5.4 million compared to $6.2 million recorded for the first
quarter of the 2002 fiscal year. This decrease was due primarily to $0.8 million
lower margins due to lower volume and $0.6 million deterioration in
manufacturing performance, partially offset by $0.6 million of lower selling,
general and administrative expenses.
Other: Income (loss) of other segments for the first quarter of the
2003 fiscal year were $0.1 million compared to $(0.9) million recorded for the
first quarter of the 2002 fiscal year. This resulted primarily from the absence
of carrying costs for a sold terminal in the transportation business and the
absence of losses in a disposed insurance business.
CORPORATE EXPENSES: General corporate expenses not included in segment
results were $1.8 million for the first quarter of the 2003 and 2002 fiscal
years.
OPERATING INCOME (LOSS) BEFORE INTEREST AND TAXES: Before the
provisions for restructuring and impairment, operating income (loss) before
interest and taxes for the first quarter of the 2003 fiscal year would have been
$(0.7) million compared to $(21.4) million for the first quarter of the 2002
fiscal year.
INTEREST EXPENSE: Subsequent to the Petition Date, interest expense is
reported only to the extent that it will be paid during the Chapter 11 Cases or
that it is probable that it will be an allowed claim. Interest expense for the
first quarter of the 2003 fiscal year was $7.4 million, or 3.9% of net sales,
compared with $13.5 million, or 5.5% of net sales, in the first quarter of the
2002 fiscal year. The decrease was mainly attributable to the Chapter 11 Cases
(contractual interest expense would have been $12.8 million and $16.2 million,
respectively), lower borrowing levels and lower interest rates.
OTHER EXPENSE (INCOME): Other income for the first quarter of the 2003
fiscal year was $0.9 million, consisting principally of gains on the disposal of
assets. Other income for the first quarter of the 2002 fiscal year was $0.8
million, consisting principally of interest income.
REORGANIZATION ITEMS: During the first quarter of the 2003 fiscal year,
the Company recognized a net pre-tax charge of $4.3 million associated with the
Chapter 11 Cases. The Company incurred $2.8 million for fees payable to
professionals retained to assist with the filing of the Chapter 11 Cases, and
$1.5 million was recorded for service rendered for the period related to
retention incentives that were approved by the Bankruptcy Court on January 17,
2002.
INCOME TAX EXPENSE (BENEFIT): Income tax expense (benefit) of $0.3 million
was recorded for the first quarter of the 2003 fiscal year in comparison with
$(25.8) million for the first quarter of the 2002 fiscal year. The total income
tax expense (benefit) for the 2003 and 2002 periods is different from the
amounts obtained by applying statutory rates to loss before income taxes
primarily as a result of foreign losses with no tax benefits, tax rate
differences on foreign transactions, changes in the valuation allowance, and the
favorable tax treatment of export sales from the exclusion for extraterritorial
income under section 114 of the Internal Revenue Code. The change in the
valuation allowance for both the 2003 and 2002 periods relate to deferred tax
assets on net operating loss (NOL) carryforwards. It is management's opinion
that it is more likely than not that some portion of the deferred tax asset will
not be recognized (see "Liquidity and Capital Resources" below).
NET LOSS AND LOSS PER SHARE: Net loss for the first quarter of the 2003
fiscal year of $(15.6) million, or $(0.29) per share, included a net charge of
$(0.16) per share related to restructuring and run-out costs and $(0.08) per
share related to reorganization items. Net loss for the first quarter of the
2002 fiscal year of $(75.2) million, or $(1.42) per share, included a net charge
of $(0.86) per share related to restructuring and run-out costs and $(0.09) per
share related to reorganization items.
Liquidity and Capital Resources
On November 15, 2001, the Company filed the Chapter 11 Cases, which
will affect the Company's liquidity and capital resources in fiscal year 2003.
See Note A of the Notes to Consolidated Financial Statements.
During the first three months of the 2003 fiscal year, cash of $8.4
million was generated from sales of assets and other investing activities. Cash
balances were used primarily for debt repayments of $33.7 million, capital
expenditures of $3.1 million and $18.7 million for operating activities. At
December 28, 2002, total debt of the Company not subject to compromise was
$430.9 million, total debt subject to compromise was $300.0 million, and cash on
hand totaled $90.7 million. At September 28, 2002, total debt of the Company not
subject to compromise was $464.6 million, total debt subject to compromise was
$300.0 million, and cash on hand totaled $137.8 million.
The Company's principal uses of funds during the next several years
will be for repayment and servicing of indebtedness, working capital needs,
capital expenditures and expenses of the Chapter 11 Cases. The Company intends
to fund its financial needs principally from net cash provided by operating
activities, asset sales (to the extent permitted in the Bankruptcy Cases) and,
to the extent necessary, from funds provided by the credit facilities described
below. The Company believes that these sources of funds will be adequate to meet
the Company's foregoing needs.
During the first three months of the 2003 fiscal year, investment in
capital expenditures totaled $3.1 million, compared to $1.0 million during the
first three months of the 2002 fiscal year. The Company anticipates that the
level of capital expenditures for fiscal year 2003 will total approximately $20
million, and under its DIP Financing Facility discussed below, cannot exceed $20
million.
The Company maintains, and plans to continue to maintain, a defined
benefit pension plan ("Retirement System") and a defined contribution 401(k)
plan, both of which require cash contributions from the Company. The market
value of the Retirement System's assets has fallen significantly as a result of
market conditions, and is presently below the accumulated benefit obligation,
resulting in the recognition of a non-cash minimum pension liability adjustment
of $28.5 million as a reduction of shareholders' equity (deficit) as of December
28, 2002. In addition, because of the number of terminations arising from the
Company's ongoing downsizing of its workforce and the universal selection of
lump sum payouts by participants, outflow of funds has been abnormally high. To
address this shortfall, the Company has made in the last two years the maximum
allowable tax deductible cash contributions to the Retirement System, and
expects to continue funding this plan at high levels until its asset levels
reach comparability with projected lump sum payout requirements. Cash
contributions to the Retirement System and 401(k) Plans were $12.9 million and
$6.2 million for the 2002 fiscal year, and are estimated to be $10.5 million and
$5.0 million for the 2003 fiscal year. Market value declines of Retirement
System assets may result in the recognition of higher pension costs in near term
periods; restructuring settlement calculations expected in the March quarter of
2003 will result in an updated valuation of the Plan's funded status, including
the impact of market gains/losses subsequent to fiscal year end, and could
positively or negatively impact the amount of the minimum pension liability, if
any, and the amount of pension cost for fiscal year 2003.
The December 28, 2002 consolidated balance sheet reflects the sale and
disposal of certain insurance programs maintained by the Company's captive
insurance subsidiary in Bermuda, including the sale of investments of $19.2
million and the commutation of insurance reserves of $22.7 million included in
sundry payables and accrued expenses and other long-term liabilities as of
September 28, 2002.
Tax matters. The Company's results of operations and cash position for
the current period and fiscal year 2002 have been, and for future years, may be,
materially affected by certain changes in U. S. income tax laws and by actions
that the Company has taken or is planning to take. The Job Creation and Worker
Assistance Act of 2002 changed, for tax years 2001 and 2002, the federal income
tax net operating loss carryback period from 2 to 5 years. Through January 2003,
the Company has applied for and received income tax refunds under these changes
of $103 million. As part of its strategic realignment of assets and business
restructuring announced in January 2002, the Company terminated its domestic
denim manufacturing operations and has closed its Stonewall, Mississippi and Mt.
Holly, North Carolina plants. These actions, coupled with the associated
indebtedness of the subsidiary in which such business operated, resulted in a
deduction for tax purposes only of approximately $303 million. The Company used
this tax deduction and operating losses to offset remaining income in the 5-year
carryback period. After utilization of the carryback provisions, the Company has
a tax loss carryforward of approximately $225 million for federal income tax
purposes, which could be realized in 2003 and subsequent years to the extent of
taxable income in such years. There can be no assurances that such deduction
will be successfully utilized as described for a number of reasons, including
limitations imposed upon such use following emergence by companies in Chapter 11
reorganization. It is management's opinion that it is more likely than not that
some portion of the deferred tax assets created by these carryforwards will not
be realized, and in accordance with Statement of Accounting Standards No. 109,
"Accounting for Income Taxes," a valuation allowance has been established.
DIP Financing Facility. On December 12, 2001, the Bankruptcy Court
entered an order (the "DIP Financing Order") authorizing the Debtors to enter
into a debtor-in-possession financing facility (the "DIP Financing Facility")
with JPMorgan Chase Bank and a syndicate of financial institutions, and to grant
first priority mortgages, security interests, liens (including priming liens),
and superiority claims on substantially all of the assets of the Debtors to
secure the DIP Financing Facility. Under the original terms of the DIP Financing
Order, a $190.0 million revolving credit facility, including up to $50.0 million
for postpetition letters of credit, was available to the Company until the
earliest of (i) November 15, 2003, (ii) the date on which the plan of
reorganization becomes effective, (iii) any material non-compliance with any of
the terms of the Final DIP Financing Order, or (iv) any event of default shall
have occurred and be continuing under the DIP Financing Facility. Effective
September 28, 2002, the Company elected to reduce the commitment amount under
the DIP Financing Facility to $100.0 million. Amounts borrowed under the DIP
Financing Facility bear interest at the option of the Company at the rate of the
London Interbank Offering Rate ("LIBOR") plus 3.0% per annum, or the Alternate
Base Rate plus 2.0%. In addition, there is an unused commitment fee of 0.50% on
the unused commitment and a letter of credit fee of 3.0% per annum on letters of
credit outstanding. The DIP Financing Facility is secured by, in part, the
receivables that formerly secured the Receivables Facility described below. On
November 16, 2001, the Company borrowed $95.0 million under an Interim DIP
Financing Facility principally in order to repay all loans and accrued interest
related to such Receivables Facility, as well as certain other financing fees.
The documentation evidencing the DIP Financing Facility contains financial
covenants requiring the Company to maintain minimum levels of earnings before
interest, taxes, depreciation, amortization, restructuring and reorganization
items ("EBITDA"), as defined. In addition, the DIP Financing Facility contains
covenants applicable to the Debtors, including limiting the incurrence of
additional indebtedness and guarantees thereof, the creation of liens and other
encumbrances on properties, the making of investments or acquisitions, the sale
or other disposition of property or assets, the making of cash dividend
payments, the making of capital expenditures beyond certain limits, and entering
into certain transactions with affiliates. In addition, proceeds from sales of
certain assets must be used to repay specified borrowings and upon repayment
permanently reduce the commitment amount under the Facility. The financial
reporting charges and cash costs of such actions have required the Company to
enter into amendments of certain of the covenants under the DIP Financing
Facility. In September 2002, the Bankruptcy Court also approved changes to the
DIP Financing Facility to allow the Company to increase asset sales subject to a
specified application of sale proceeds and to make a cash payment with respect
to the principal amount of loans owing to the pre-petition secured lenders (see
"2000 Bank Credit Agreement" below). At February 4, 2003, there were no
borrowings outstanding under the DIP Financing Facility other than issuances of
letters of credit, and the Company had approximately $84.2 million in unused
capacity available under this Facility.
2000 Bank Credit Agreement. On December 5, 2000, the Company entered
into a secured amended bank credit agreement ("2000 Bank Credit Agreement")
which amended and extended an earlier unsecured revolving credit facility (the
"1995 Bank Credit Agreement"). The 2000 Bank Credit Agreement consists of a
total revolving credit facility commitment amount of $525.0 million revolving
credit facility that provided for the issuance of letters of credit by the
fronting bank in an outstanding aggregate face amount not to exceed $75.0
million, and provided short-term overnight borrowings up to $30.0 million,
provided that at no time shall the aggregate principal amount of revolving loans
and short-term borrowings, together with the aggregate face amount of such
letters of credit issued, exceed the total facility commitment amount. Loans
under the 2000 Bank Credit Agreement bear interest at floating rates based on
the Adjusted Eurodollar Rate plus 3.25%. In addition, the Company paid an annual
commitment fee of 0.50% on the unused portion of the facility. Prior to the
Petition Date, the Company was not in compliance with certain financial
covenants under the 2000 Bank Credit Agreement, during which time the Company
engaged in active discussions with its senior lenders to obtain an amendment or
waiver of such non-compliance. As a result of the circumstances confronting the
Company, the Debtors filed the Chapter 11 Cases. The Bankruptcy Court has
approved the payment of all interest and fees under the 2000 Bank Credit
Agreement incurred subsequent to November 15, 2001. In addition, the DIP
Financing Order requires that 50% of the first $25 million of proceeds from
sales of certain assets be used to repay specified borrowings under the 2000
Bank Credit Agreement. The Company has applied $12.5 million of asset sale
proceeds to reduce borrowings under the 2000 Bank Credit Agreement in full
satisfaction of this requirement. In addition, the Company made a further cash
payment of $33.7 million of principal amount on September 30, 2002 pursuant to a
Bankruptcy Court approved motion.
Receivables Facility. In December 1997, the Company established a
five-year, $225.0 million Trade Receivables Financing Agreement ("Receivables
Facility") with a bank. Using funds from the DIP Financing Facility, the Company
repaid all loans related to the Receivables Facility and this facility was
terminated. The receivables which previously secured the Receivables Facility
now secure the DIP Financing Facility.
Senior Unsecured Notes. In August 1997, the Company issued $150.0
million principal amount of 7.25% notes due August 1, 2027 ("Notes Due 2027").
In September 1995, the Company issued $150.0 million principal amount of 7.25%
notes due September 15, 2005 ("Notes Due 2005"). The Notes Due 2027 and the
Notes Due 2005 are unsecured and rank equally with all other unsecured and
unsubordinated indebtedness of the Company. The commencement of the Chapter 11
Cases constitutes an event of default under the Indenture governing both the
2027 Notes and the 2005 Notes. The payment of interest accruing thereunder after
November 15, 2001 is stayed.
Adequacy of Capital Resources
As discussed above, the Company is operating its businesses as
debtors-in-possession under Chapter 11 of the Bankruptcy Code. In addition to
the cash requirements necessary to fund ongoing operations, the Company
anticipates that it will incur significant professional fees and other
restructuring costs in connection with the Chapter 11 Cases and the
restructuring of its business operations. As a result of the uncertainty
surrounding the Company's current circumstances, it is difficult to predict the
Company's actual liquidity needs and sources at this time. However, based on
current and anticipated levels of operations, and efforts to effectively manage
working capital, the Company anticipates that its cash flow from operations,
together with cash on hand, cash generated from asset sales, and amounts
available under the DIP Financing Facility, will be adequate to meet its
anticipated cash requirements during the pendency of the Chapter 11 Cases.
In the event that cash flows and available borrowings under the DIP
Financing Facility are not sufficient to meet future cash requirements, the
Company may be required to reduce planned capital expenditures, sell assets or
seek additional financing. The Company can provide no assurances that reductions
in planned capital expenditures or proceeds from asset sales would be sufficient
to cover shortfalls in available cash or that additional financing would be
available or, if available, offered on acceptable terms.
As a result of the Chapter 11 Cases, the Company's access to additional
financing is, and for the foreseeable future will likely continue to be, very
limited. The Company's long-term liquidity requirements and the adequacy of the
Company's capital resources are difficult to predict at this time, and
ultimately cannot be determined until a plan of reorganization has been
developed and confirmed by the Bankruptcy Court in connection with the Chapter
11 Cases.
Legal and Environmental Contingencies
The Company and its subsidiaries have sundry claims, environmental
claims and other lawsuits pending against them, and also have certain guarantees
of debt of equity investees ($10.5 million at December 28, 2002) that were made
in the ordinary course of business. The Company makes provisions in its
financial statements for litigation and claims based on the Company's assessment
of the possible outcome of such claims, including the possibility of settlement.
As a result of the Chapter 11 Cases, litigation relating to prepetition
claims against the Debtors is stayed; however, certain prepetition claims by the
government or governmental agencies seeking equitable or other non-monetary
relief against the Debtors may not be subject to the automatic stay.
Furthermore, litigants may seek to obtain relief from the Bankruptcy Court to
pursue their claims.
It is not possible to determine with certainty the ultimate liability
of the Company in the matters described above, if any, but in the opinion of
management, their outcome should have no material adverse effect upon the
financial condition or results of operations of the Company.
Forward-Looking Statements
This report contains statements that are forward-looking statements
within the meaning of applicable federal securities laws and are based upon the
Company's current expectations and assumptions, which are subject to a number of
risks and uncertainties that could cause actual results to differ materially
from those anticipated. Such risks and uncertainties include, among other
things, global economic activity and the implications thereon of the attack on
September 11 and the U.S. government's response thereto and the possibility of
armed conflict with Iraq, the success of the Company's overall business strategy
including successful implementation of the Company's restructuring plan and the
Company's development of a global sourcing structure, the demand for textile
products, the cost and availability of raw materials and labor, governmental
legislation and regulatory changes, and the long-term implications of regional
trade blocs and the effect of quota phase-out and lowering of tariffs under the
WTO trade regime, the impact that the Company's Chapter 11 proceeding has had or
may have on the Company's relationships with its principal customers and
suppliers, the nature of the capital structure which is approved in the
Company's plan of reorganization and the Company's ongoing ability to finance
its operations and restructuring activities, the cost of future capital sources,
and the exposure to interest rate and currency fluctuations, the Company's
ability to utilize tax loss carryforwards and retain tax refunds received or to
be received, and other factors identified in Burlington's filings with the
Securities and Exchange Commission.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
None.
b) Reports on Form 8-K.
The Company filed a report on Form 8-K on December 24, 2002.
The Item reported was "Item 9. Regulation FD Disclosure".
SIGNATURES
Pursuant to the requirements 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.
BURLINGTON INDUSTRIES, INC.
By /s/ CHARLES E. PETERS, JR.
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Date: February 10, 2003 Charles E. Peters, Jr.
Senior Vice President and
Chief Financial Officer
By /s/ CARL J. HAWK
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Date: February 10, 2003 Carl J. Hawk
Controller