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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File Number 33-27038
JPS TEXTILE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 57-0868166
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
555 North Pleasantburg Drive, Suite 202, Greenville, South Carolina 29607
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number (864) 239-3900
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
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 10,000,000 shares of the
Company's Common Stock were outstanding as of March 15, 1999.
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JPS TEXTILE GROUP, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Condensed Consolidated Balance Sheets
January 30, 1999 (Unaudited) and October 31, 1998............................ 3
Condensed Consolidated Statements of Operations
Three Months Ended January 30, 1999 and
January 31, 1998 (Unaudited)................................................. 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended January 30, 1999 and
January 31, 1998 (Unaudited)................................................. 5
Notes to Condensed Consolidated Financial Statements (Unaudited)................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 16
PART II. OTHER INFORMATION................................................................ 17
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Item 1. Financial Statements
JPS TEXTILE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
January 30, October 31,
1999 1998
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash $ 2,184 $ 1,549
Accounts receivable 57,070 67,949
Inventories (Note 2) 55,839 51,542
Prepaid expenses and other (Note 4) 4,576 4,101
Net assets held for sale (Note 8) 9,652 9,652
--------- ---------
Total current assets 129,321 134,793
Property, plant and equipment, net 97,628 98,456
Reorganization value in excess of amounts
allocable to identifiable assets 36,052 36,532
Other assets 3,148 3,141
--------- ---------
Total assets $ 266,149 $ 272,922
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 19,653 22,158
Accrued interest 986 1,055
Accrued salaries, benefits and withholdings 8,230 8,447
Other accrued expenses 8,935 11,257
Current portion of long-term debt (Note 3) 1,131 1,047
--------- ---------
Total current liabilities 38,935 43,964
Long-term debt (Note 3) 96,366 99,089
Other long-term liabilities 21,463 20,341
--------- ---------
Total liabilities 156,764 163,394
--------- ---------
Shareholders' equity:
Common stock 100 100
Additional paid-in capital 123,230 123,230
Accumulated other comprehensive loss (5,855) (5,855)
Accumulated deficit (8,090) (7,947)
--------- ---------
Total shareholders' equity 109,385 109,528
--------- ---------
Total liabilities and shareholders' equity $ 266,149 $ 272,922
========= =========
Note: The condensed consolidated balance sheet at October 31, 1998 has been
extracted from the audited financial statements.
See notes to condensed consolidated financial statements.
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JPS TEXTILE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
--------------------------------
January 30, January 31,
1999 1998
------------- --------------
Net sales $ 78,950 $ 100,800
Cost of sales 68,024 85,414
------------ ------------
Gross profit 10,926 15,386
Selling, general and administrative expenses 9,463 10,509
Other income, net 139 24
------------ ------------
Operating profit 1,602 4,901
Interest income -- 325
Interest expense (1,890) (2,284)
------------ ------------
Income (loss) before income taxes (288) 2,942
Provision (benefit) for income taxes (145) 1,250
------------ ------------
Net income (loss) $ (143) $ 1,692
============ ============
Weighted average number of common shares outstanding 10,000,000 10,000,000
============ ============
Basic earnings per common share $ (0.01) $ 0.17
============ ============
See notes to condensed consolidated financial statements.
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JPS TEXTILE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
--------------------------------
January 30, January 31,
1999 1998
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (143) $ 1,692
-------- --------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization, except amounts included
in interest expense 2,889 2,979
Interest accretion and debt issuance cost amortization 78 81
Other, net 320 (198)
Changes in assets and liabilities:
Accounts receivable 10,879 4,744
Inventories (4,297) (1,936)
Prepaid expenses and other assets (561) (775)
Accounts payable (2,505) (1,262)
Accrued expenses and other liabilities (1,804) (1,778)
-------- --------
Total adjustments 4,999 1,855
-------- --------
Net cash provided by operating activities 4,856 3,547
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES
Property and equipment additions (1,581) (4,651)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit facility borrowings (repayments), net (3,667) 229
Borrowings and repayment of other long-term debt, net 1,027 (438)
-------- --------
Net cash used in financing activities (2,640) (209)
-------- --------
Net increase (decrease) in cash 635 (1,313)
Cash at beginning of period 1,549 3,888
-------- --------
Cash at end of period $ 2,184 $ 2,575
======== ========
Supplemental cash flow information:
Interest paid $ 1,882 $ 1,188
Income taxes paid 299 488
See notes to condensed consolidated financial statements.
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JPS TEXTILE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Unless the context otherwise requires, the terms "JPS" and the
"Company" as used in these condensed consolidated financial statements
mean JPS Textile Group, Inc. and JPS Textile Group, Inc. together with
its subsidiaries, respectively.
The Company has prepared, without audit, the interim condensed
consolidated financial statements and related notes. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position,
results of operations and cash flows at January 30, 1999 and for all
periods presented have been made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1998. The results of operations for the interim period are
not necessarily indicative of the operating results for the full year.
2. Inventories (in thousands):
January 30, October 31,
1999 1998
---------- -----------
Raw materials and supplies $ 10,614 $ 10,382
Work-in-process 16,024 16,690
Finished goods 29,201 24,470
--------- ---------
Total $ 55,839 $ 51,542
========= =========
3. Long-Term Debt (in thousands):
January 30, October 31,
1999 1998
----------- ---------
Senior credit facility, revolving line of credit $ 90,428 $ 94,095
Equipment financing 2,434 2,645
Capital lease obligation 4,635 3,396
--------- ---------
Total 97,497 100,136
Less current portion (1,131) (1,047)
--------- ---------
Long-term portion $ 96,366 $ 99,089
========= =========
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4. Contingencies
The Company has provided for all estimated future costs associated
with certain roofing products including those sold by the Predecessor
Stevens Division operations. The liability for future costs associated
with these roofing products is subject to management's best estimate,
including factors such as expected future claims by geographic region
and roofing compound applied; expected costs to repair or replace such
roofing products; estimated remaining length of time that such claims
will be made by customers; and the estimated costs to litigate and
settle certain claims now in litigation. Based on warranties that were
issued on the roofs, the Company estimates that substantially all
these roofing product claims will be resolved by the year 2000. The
liability for such products was approximately $2.6 million at January
30, 1999 and $2.8 million at October 31, 1998. The Company records the
costs of meeting these obligations as a reduction of the balance of
the recorded liability and, accordingly, such costs are not reflected
in results of operations. Management updates its assessment of the
adequacy of the remaining reserve for these roofing products quarterly
and if it is deemed that an adjustment to the reserve is required, it
will be charged to operations in the period in which such
determination is made.
At January 30, 1999, the Company had net operating loss carryforwards
for regular federal income tax purposes of approximately $26 million
(subject to adjustment by the Internal Revenue Service). The net
operating loss carryforwards expire in years 2004 through 2013. The
Company also has federal alternative minimum tax net operating loss
carryforwards of approximately $23 million (subject to adjustment)
which expire in 2004 through 2013. Alternative minimum tax credits of
approximately $1.8 million can be carried forward indefinitely and
used as a credit against regular federal taxes, subject to limitation.
The Company generated approximately $1.0 million of net operating loss
carryforwards for regular federal income tax purposes during the
quarter ended January 30, 1999.
The Company's ability to utilize its net operating loss carryforwards
is limited under the income tax laws as a result of the change in the
ownership of the Company's stock occurring as a part of the Plan of
Reorganization. The effect of such an ownership change is to limit the
annual utilization of the net operating loss carryforwards to an
amount equal to the value of the Company immediately after the time of
the change (subject to certain adjustments) multiplied by the Federal
long-term tax exempt rate. Due to the Company's operating history, it
is uncertain that it will be able to utilize all deferred tax assets.
Therefore, a valuation allowance of approximately $32 million has been
provided.
The Company is exposed to a number of asserted and unasserted
potential claims encountered in the normal course of business. Except
as discussed below, management believes that none of this litigation,
if determined unfavorable to the Company, would have a material
adverse effect on the financial condition or results of operations of
the Company.
In June 1997, Sears Roebuck and Co. ("Sears") filed a multi-count
complaint against JPS Elastomerics Corp. ("Elastomerics"), a
wholly-owned subsidiary of JPS, and two other defendants alleging an
unspecified amount of damages in connection with the alleged premature
deterioration of the Company's roofing membrane installed on
approximately 150 Sears stores. No trial date has been established.
The Company believes it has meritorious defenses to the claims and
intends to defend the lawsuit vigorously. Management, however, cannot
determine the outcome of the lawsuit or estimate the range of loss, if
any, that may occur. Accordingly, no provision has been made for any
loss which may result. An unfavorable resolution of the actions could
have a material adverse effect on the business, results of operations
or financial condition of the Company.
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5. Comprehensive Income
Effective November 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
changes in equity during a period from transactions and other events
from nonowner sources. The statement requires certain items such as
minimum pension liability adjustments, unrealized gains or losses on
available-for-sale securities and foreign currency translation
adjustments to be included in other comprehensive income. In the
quarters ended January 30, 1999 and January 31, 1998 there were no
components of other comprehensive income. The accumulated other
comprehensive loss is comprised of an additional minimum pension
liability recorded in Fiscal 1998.
6. Segment Reporting
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 requires publicly-held companies to report
financial and other information about key revenue-producing segments
of the enterprise for which such information is available and is
utilized by the chief operating decision maker in allocating resources
and assessing performance. Specific information to be reported for
individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment
information to amounts reported in the financial statements is also to
be provided. SFAS No. 131 is effective for the Company at the Fiscal
1999 year end, unless adopted earlier. Implementation of this
disclosure standard will not affect the Company's financial position
or results of operations.
7. Earnings Per Share
In the quarter ended January 31, 1998, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" which requires the presentation of basic and diluted earnings
per share, as defined. Basic earnings per share for the quarters ended
January 30, 1999 and January 31, 1998, was computed by dividing net
income by the weighted average number of shares of common stock
outstanding during the period. The presentation of diluted earnings
per share was not required for the quarters ended January 30, 1999 and
January 31, 1998 since the inclusion of additional shares assuming the
exercise of stock options and warrants was antidilutive.
8. Subsequent Events
On February 27, 1999, Jerry E. Hunter resigned as President and Chief
Executive Officer of the Company and as Chairman of the Board of
Directors of the Company in connection with his retirement from the
Company. As provided by his employment agreement, Mr. Hunter will
receive termination benefits including (a) his annual base salary
through October 9, 2000, (b) a lump sum payment of his target annual
bonus computed through October 9, 2000 without regard to whether the
performance goals are met and (c) continuation of all health and life
insurance benefits for twenty-four months following his termination.
The total value of these termination benefits is estimated to be
approximately $1.0 million and will be charged to operations in the
Company's Fiscal 1999 second quarter. Also, on February 27, 1999, the
Board elected Michael L. Fulbright to serve as Chairman of the Board
and as President and Chief Executive Officer of the Company. The
Company entered into an Employment Agreement with Mr. Fulbright, dated
February 28, 1999, which provides that Mr. Fulbright will serve as
Chairman, President and Chief Executive Officer of the Company until
October 31, 2001. Under the Employment Agreement, Mr. Fulbright's base
salary is $550,000 per annum. In addition, Mr. Fulbright received a
relocation grant cash payment of $325,000. Mr. Fulbright is
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eligible to receive an annual bonus for each of fiscal years 1999,
2000 and 2001 of between 50% and 200% of his base salary based upon
the Company's attainment of certain performance goals specified in its
annual Management Incentive Bonus Plan, provided the bonus for the
1999 fiscal year will be not less than 50% of his base salary for the
1999 fiscal year (without regard to whether the performance goals for
such year are met). Simultaneously with the execution of the
Employment Agreement, pursuant to a Stock Option Agreement, the
Compensation Committee of the Board granted Mr. Fulbright options to
acquire 500,000 shares of the Company's common stock at $3.125 per
share (the fair market value per share, as determined by the
Compensation Committee on February 28, 1999). The grant of the options
is subject to stockholder approval of the First Amendment to the JPS
Textile Group, Inc. 1997 Incentive and Capital Accumulation Plan,
which, if approved, would increase the number of shares available
under the Company's 1997 Incentive and Capital Accumulation Plan.
As discussed in the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1998, pursuant to the terms of an Asset
Purchase Agreement dated as of January 11, 1999, as amended, between
JPS Converter and Industrial Corp.("C&I"), a wholly-owned subsidiary
of JPS, and Belding Hausman Incorporated, C&I sold substantially all
of the assets of its Boger City Plant located in Lincolnton, North
Carolina. This plant was engaged primarily in the manufacture and sale
of home fashion textiles and accounted for sales of approximately $4.1
million in each of the 1999 and 1998 first quarters. This transaction
was consummated on March 2, 1999. The net cash proceeds from the sale
were approximately $7.6 million and were used to reduce outstanding
borrowings under the Company's revolving credit facility. The purchase
price is subject to a post-closing adjustment based upon the amount of
inventories transferred. In accordance with SFAS No. 121, the results
of operations for Fiscal 1998 included a charge for writedown of
certain long-lived assets of approximately $12.5 million, including
related organization value in excess of amounts allocable to
identifiable assets. No additional charges were recorded in the 1999
first quarter. The ongoing home fashion textiles business consists
primarily of yarn sales.
On February 10, 1999, the Company announced that it would close its
Angle Plant located in Rocky Mount, Virginia, as a result of the
Company's assessment of the market conditions for apparel products
constructed primarily of filament yarns. As a result of this decision,
the results of operations for Fiscal 1998 included a "charge for
writedown of certain long-lived assets" of approximately $4.3 million
representing the loss on impairment of assets (approximately $2.7
million) for the excess of the carrying value of the plant over its
estimated net realizable value (as determined by independent appraisal
or quoted prices from used equipment dealers) and the writeoff of
approximately $1.6 million of related reorganization value in excess
of amounts allocable to identifiable assets in accordance with SFAS
No. 121. No charges were recorded in the 1999 first quarter. This
plant closing is expected to be completed by the end of the Company's
Fiscal 1999 third quarter. The Company expects to incur approximately
$1.4 million in plant closing costs in Fiscal 1999 related principally
to employee severance and plant run-out costs.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This quarterly report on Form 10-Q contains forward-looking information
statements that involve risks and uncertainties. Such forward looking
statements include, but are not limited to, statements regarding the Company's
expectations of the impact of the year 2000 issue on results of operations. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements,
which are made only as of the date hereof.
The following should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing in Item 7
of the Company's Annual Report on Form 10-K for the fiscal year ended October
31, 1998.
(In Thousands)
Three Months Ended
------------------------------
January 30, January 31,
1999 1998
----------- ------------
Net sales:
Industrial products $ 35,397 $ 33,196
Apparel fabrics 37,352 61,392
Home fashion textiles 6,201 6,212
--------- ---------
Net sales $ 78,950 $ 100,800
========= =========
Operating profit:
Industrial products $ 3,018 $ 2,643
Apparel fabrics 40 3,762
Home fashion textiles 32 (93)
Indirect corporate expenses, net (1,488) (1,411)
--------- ---------
Operating profit 1,602 4,901
Interest income -- 325
Interest expense (1,890) (2,284)
--------- ---------
Income (loss) before income taxes $ (288) $ 2,942
========= =========
INTRODUCTION
The Company is continuing to reposition itself as a diversified industrial and
speciality products company as it streamlines the apparel and yarn businesses.
Certain actions have been taken to improve profitability in Fiscal 1999, as the
Company pursues profitable growth strategies globally in industrial products.
As discussed below, on March 2, 1999, the Company completed the sale of its
Boger City Plant, which generated a majority of the Company's home fashion
textiles business. The closing of the Company's Angle Plant, which produces
apparel products, is proceeding and the Company expects such closing will be
completed by the end of its third fiscal quarter. Additionally, the Company is
performing an analysis of all its businesses, facilities and capital needs and
will use this process to establish its strategic direction and plan of
implementation for the remainder of Fiscal 1999.
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RESULTS OF OPERATIONS
Three Months Ended January 30, 1999 (the "1999 First Quarter") Compared to the
Three Months Ended January 31, 1998 (the "1998 First Quarter")
Consolidated net sales decreased $21.8 million, or 21.6%, from $100.8 million
in the 1998 first quarter to $79.0 million in the 1999 first quarter. Operating
profit decreased $3.3 million from $4.9 million in the 1998 first quarter to
$1.6 million in the 1999 first quarter.
Net sales in the industrial products segment, which includes single-ply roofing
and environmental membrane, woven substrates constructed of synthetics and
fiberglass for lamination, insulation and filtration applications and extruded
urethane products increased $2.2 million, or 6.6%, from $33.2 million in the
1998 first quarter to $35.4 million in the 1999 first quarter. Sales of
fiberglass and roofing products increased in the 1999 first quarter. The
electronics industry represents the largest customer segment for the Company's
fiberglass products. In Fiscal 1998 global consumer demand for electronic
products did not meet expectations and, combined with other factors, including
the weakness in Asian economies, led to a slowdown in demand for certain
fiberglass fabrics used in the manufacture of electrical circuit boards. In
view of this market softness, the Company took a number of steps to improve
capacity utilization including finalizing arrangements with its largest
customers to purchase greater quantities of the Company's production. These
actions led to an increase in sales in the 1999 first quarter compared to the
1998 first quarter. Also, in fiscal 1998, the Company completed its capacity
expansion and modernization program which it believes has contributed to lower
costs and higher productivity in the 1999 first quarter. The domestic roofing
market continues to be characterized by intense competition and market
consolidation with new and aggressive competitors in the Company's market
niches. The Company has addressed these factors with aggressive pricing
strategies and has strengthened its sales management in certain key
territories.
Operating profit in the 1999 first quarter for the industrial products segment
increased $0.4 million from $2.6 million in the 1998 first quarter to $3.0
million in the 1999 first quarter. This increase is principally due to the
increase in sales volume, lower costs and higher productivity in the 1999 first
quarter. Price pressure is expected to continue in the foreseeable future but
the Company believes that through a series of customer agreements and other
marketing improvements, future sales of industrial products will improve. In
addition, improvements in manufacturing efficiencies related to capital
expenditures, lower raw material costs and improved product mix, are expected
to continue.
Net sales of apparel fabrics, which include unfinished woven apparel fabrics
(greige goods) and yarn primarily for women's wear, decreased $24.0 million, or
39.1%, from $61.4 million in the 1998 first quarter to $37.4 million in the
1999 first quarter. Market conditions for apparel fabrics has weakened
significantly since the 1998 first quarter, which was exceptionally strong,
with unit volumes and selling prices well below prior-year levels. The high
level of apparel imports continue to negatively affect demand for domestically
produced fabrics. In addition, apparel manufacturers are continuing the trend
of substituting lower cost imported polyester fabrics for acetate-rich fabrics.
As a result of this market softness and the Company's assessment of the ongoing
market condition for apparel products, management concluded that its Angle
Plant located in Rocky Mount, Virginia, should be closed. As discussed in the
Company's Annual Report on Form 10-K for the fiscal year ended October 31,
1998, the results of operations for Fiscal 1998 included a charge for writedown
of certain long-lived assets of approximately $4.3 million related principally
to the loss on impairment of the plant in accordance with SFAS No. 121. The
Company expects to complete the plant closing by the end of its 1999 third
quarter and expects that the plant closure will result in improved earnings and
cash flow from operations in the future. The Company estimates that
approximately $1.4 million in plant closing costs will be incurred in Fiscal
1999 related principally to employee severance and plant run-out costs.
No such costs were incurred in the 1999 first quarter.
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Operating profit in the 1999 first quarter for the apparel fabrics segment
decreased by $3.8 million from $3.8 million in the 1998 first quarter to break
even in the 1999 first quarter. This decrease is due principally to the lower
sales volume, lower unit prices and the effects of lower production levels.
Net sales in the 1999 first quarter in the home fashion textiles segment, which
includes woven drapery fabrics and yarns for the home furnishings industry,
remained constant with the 1998 first quarter at $6.2 million. As discussed in
the Company's Annual Report on Form 10-K for the fiscal year ended October 31,
1998, pursuant to the terms of an Asset Purchase Agreement dated as of January
11, 1999, as amended, between C&I and Belding Hausman Incorporated, C&I sold
substantially all of the assets of its Boger City Plant located in Lincolnton,
North Carolina. This plant was engaged primarily in the manufacture and sale of
home fashion textiles and accounted for sales of approximately $4.1 million in
the 1999 and 1998 first quarters. This transaction was consummated on March 2,
1999. The net cash proceeds from the sale were approximately $7.6 million and
were used to reduce outstanding borrowings under the Company's revolving credit
facility. The purchase price is subject to a post-closing adjustment based upon
the amount of inventories transferred. In accordance with SFAS No. 121, the
results of operation for Fiscal 1998 included a charge for writedown of certain
long-lived assets, including related reorganization value in excess of amounts
allocable to identifiable assets, of approximately $12.5 million. No additional
charges were recorded in the 1999 first quarter. The ongoing home fashion
textiles business will consist primarily of yarn sales.
Operating profit in the 1999 first quarter for the home fashion textiles
segment increased $0.1 million primarily as a result of lower depreciation
charges reflecting the writedown of fixed assets to net realizable value in
Fiscal 1998, as discussed above.
Indirect corporate expenses increased $0.1 million in the 1999 first quarter
compared to the 1998 first quarter principally due to higher professional fees.
In the 1998 first quarter the Company held certain investments which were to be
used to satisfy the contingent notes payable. On August 31, 1998, the Company
repaid the approximately $34 million in principal amount of contingent notes
plus accrued interest with the proceeds from the sale of these investments.
Accordingly, interest income in the 1999 first quarter decreased by $0.3
million from the 1998 first quarter and interest expense decreased by
approximately the same amount as a result of the repayment of the contingent
notes.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity for operations and expansion are
funds generated internally and borrowings under its Revolving Credit Facility
(as defined below). On October 9, 1997, Elastomerics and C&I (the "Borrowing
Subsidiaries") and JPS entered into the Credit Facility Agreement, (the "Credit
Agreement"), by and among the financial institutions party thereto, Citibank,
as agent, and NationsBank, N.A., as co-agent. The Credit Agreement provides for
a revolving credit loan facility and letters of credit (the "Revolving Credit
Facility") in a maximum principal amount equal to the lesser of (a) $135
million and (b) a specified borrowing base (the "Borrowing Base"), which is
based upon eligible receivables, eligible inventory and a specified dollar
amount (currently $48,501,000 (subject to reduction) based on fixed assets of
the Borrowing Subsidiaries), except that (i) no Borrowing Subsidiary may borrow
an amount greater than the Borrowing Base attributable to it (less any reserves
as specified in the Credit Agreement) and (ii) letters of credit may not exceed
$20 million in the aggregate. The Credit Agreement contains restrictions on
investments, acquisitions and dividends unless, among other things, the Company
satisfies a specified pro forma fixed charge coverage ratio and maintains a
specified minimum availability under the Revolving Credit Facility for a stated
period of time, and no default exists under the Credit Agreement. The Credit
Agreement also restricts, among other things, indebtedness, liens, affiliate
transactions, operating leases, fundamental changes and asset sales other than
the sale of up to $35 million of fixed assets, subject to the satisfaction of
certain conditions. The Credit Agreement contains financial covenants relating
to minimum levels of EBITDA, minimum interest coverage ratio, minimum fixed
charge coverage ratio and maximum capital expenditures. The maturity date of
the Revolving Credit Facility is October 9, 2002. On October 30, 1998, the
Credit Agreement was amended to, among other things (i) modify the financial
covenants relating to minimum levels of EBITDA, minimum interest coverage
ratio, minimum fixed charge coverage ratio and maximum capital expenditures,
(ii) modify the interest rate margin and unused commitment fees and (iii)
provide additional reduction of the fixed asset portion of the Borrowing Base.
As of January 30, 1999, the Company was in compliance with these restrictions
and all financial covenants, as amended. All loans outstanding under the
Revolving Credit Facility, as amended, bear interest at either the Eurodollar
Rate (as defined in the Credit Agreement) or the Base Rate (as defined in the
Credit Agreement) plus an applicable margin (the "Applicable Margin") based
upon the Company's fixed charge coverage ratio (which margin will not exceed
2.50% for Eurodollar Rate borrowings and .25% for Base Rate borrowings). The
weighted average interest rate at January 30, 1999 is approximately 7.45%. The
Company pays a fee of .25% per annum if a specified fixed charge coverage ratio
is satisfied and a letter of credit fee equal to the Applicable Margin for
Eurodollar Rate borrowings. Borrowings under the Revolving Credit Facility are
made or repaid on a daily basis in amounts equal to the net cash requirements
or proceeds for that business day. As of January 30, 1999, unused and
outstanding letters of credit totaled $1,526,000. The outstanding letters of
credit reduce the funds available under the Revolving Credit Facility. At
January 30, 1999, the Company had approximately $30.8 million available for
borrowing under the Revolving Credit Facility.
In Fiscal 1998, the Company entered into a seven-year lease agreement
(classified as capital lease) for certain machinery and equipment. The total
cost of the assets to be covered by the lease is limited to approximately $5.0
million. The total cost of assets under lease at January 30, 1999 was
approximately $5.0 million. The lease provides for an early buyout option at
the end of six years and includes purchase and renewal options at fair market
value at the end of the lease term.
During the 1999 first quarter, cash provided by operating activities was $4.9
million. Working capital decreased slightly from $90.8 million at October 31,
1998 to $90.4 million at January 30, 1999. Accounts receivable decreased by
$10.9 million from October 31, 1998 to January 30, 1999 due to seasonally lower
sales in January 1999 compared to October 1998. Inventories increased by $4.3
million, primarily in finished goods, during the 1999 first quarter as a result
of the lower sales volume in that period. Accounts payable decreased by $2.5
million from October 31, 1998 to January 30, 1999 primarily as a result of the
slowdown in sales
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volume in January 1999 compared to October 1998 and the corresponding decrease
in production requirements. Accrued interest decreased $0.1 million from
October 31, 1998 to January 30, 1999 due to the timing of interest payments on
the Company's revolving credit facility. Accrued salaries, benefits and
withholding decreased $0.2 million from October 31, 1998 to January 30, 1999
due to payment of fiscal year-end accrued incentive compensation. Other accrued
expenses decreased $2.3 million during the 1999 first quarter due to a decrease
in certain accrued restructuring fees and expenses.
The principal use of cash in the 1999 first quarter was for capital
expenditures of $1.6 million and net repayment of borrowings under the
Revolving Credit Facility of $3.7 million. As of January 30, 1999, the Company
had commitments of $0.3 million for capital expenditures. The Company
anticipates making capital expenditures in Fiscal 1999 of approximately $8.2
million and expects such amounts to be funded by cash from operations, bank and
other equipment financing services.
Based upon the Company's ability to generate working capital through its
operations and its Revolving Credit Facility, the Company believes that it has
the financial resources necessary to pay its capital obligations and implement
its business plan.
YEAR 2000 COMPLIANCE
Description of Year 2000 Issue
As a result of the existence of computer programs and chips embedded in process
control equipment that use two digits rather than four to define the applicable
year, a concern commonly known as "Year 2000" has arisen globally. Computer
programs and equipment having time-sensitive software or imbedded processors
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in system failures or miscalculations causing disruptions of
operations, such as production shutdowns, or a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Mission-critical applications which could be impacted include purchasing and
inventory management, production control, general ledger accounting, billing,
payroll and disbursements.
The Company's Plan
In Fiscal 1997, the Company conducted a comprehensive review of its computer
systems to identify those systems that could be affected by the Year 2000
issue. The Company has developed and is currently implementing its plan to
address the Year 2000 issue. Task teams led by senior executives identified six
project phases including (i) inventory of systems and process exposure, (ii)
risk assessment and prioritization, (iii) remediation of non-compliant systems,
(iv) testing and development of compliant systems, (v) maintenance once
compliance is achieved and (vi) contingency planning. The Company has completed
the inventory and risk assessment phases and is currently in the remediation
and testing phases of the project. Remediation involves repair of existing
systems and equipment, and, in some cases, complete replacement with purchased
systems and equipment that are Year 2000 compliant. Replaced and modified
systems are subjected to rigorous testing in a non-production environment in
parallel with production data and, once deployed, are continually monitored for
compliance. Activities to maintain such compliance include monitoring of
reprogrammed systems once back in production, audits of critical systems,
vendor compliance certifications and testing of contingency plans. Management
has also reviewed production equipment used in its operations and has performed
a written survey of its equipment vendors to certify that the systems imbedded
in sophisticated production equipment are Year 2000 compliant. In addition, all
new equipment purchases are screened for Year 2000 compliance. The Company
expects that the remediation phase will be substantially completed by the end
of August 1999. However, testing and maintenance will continue throughout 1999.
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The Company has prepared and mailed letters to vendors and service providers to
discern their Year 2000 compliance status and testing procedures. Most of these
vendors and service providers supply raw materials and equipment to the
Company. The majority of responses have been received and no negative responses
have been received. However, many of the responses will require additional
follow-up which is to be completed by September 1999.
The Company is in the initial steps of developing contingency plans for its
mission-critical applications. The contingency plans will address (i) the
development of a contingency planning framework, including common approaches
and criteria, (ii) clear assignment of accountability for executing the
contingency planning framework, (iii) monitoring of results and (iv) testing
and validation. It is anticipated the contingency plans will enable the
business to continue in the event there are any system interruptions.
Costs Associated with Year 2000 Compliance
The incremental cost of addressing the Year 2000 issue will be substantially
absorbed in the normal budget for improvement in management information systems
and by normal costs for administrative and technical employees. The Company,
however, retains contract programmers to work on discrete projects and will
continue this practice into the foreseeable future. The incremental cost of
addressing the Year 2000 issue is estimated at $210,000 with $79,000 having
been spent as of January 30, 1999. Most of these expenditures have been for
remediation or replacement of existing systems. Management believes that the
cost of Year 2000 modifications will not have a material effect on results of
operations. The estimated cost of the Year 2000 project and the dates on which
the Company believes it will be completed are based on management's best
estimate. There can be no assurances that these estimates will not change.
Specific factors that could cause material differences with actual results
include, but are not limited to, the results of testing and the timeliness and
effectiveness of remediation efforts of third parties.
Risks Presented by Year 2000 Issues
There can be no assurance given that any or all of the Company's systems are or
will be Year 2000 compliant. A failure by the Company to resolve a material
Year 2000 issue could result in an interruption in, or failure of, normal
business operations and could materially and adversely affect the Company's
financial condition. In addition, due to the uncertainties inherent in the Year
2000 problem, the Company cannot insure that its most important vendors,
customers and service providers will be Year 2000 compliant on time. The
failure of critical third parties to timely correct their Year 2000 problems
could materially and adversely affect the Company's operations and financial
condition, even resulting in an interruption in normal business operations if a
critical supplier is unable to meet commitments in a timely manner. However, as
a result of the activities described above, and assuming the remaining project
phases are completed in satisfactory manner, management believes that the Year
2000 issue will not pose significant operational problems for the Company's
computer or process systems.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the enterprise for which such information is available and is
utilized by the chief operating decision maker in allocating resources and
assessing performance. Specific information to be reported for individual
segments includes profit or loss, certain revenue and expense items and total
assets. A reconciliation of segment information to amounts reported in the
financial statements is also to be provided. SFAS No. 131 is effective for the
Company at the Fiscal 1999 year end, unless adopted earlier. Management of the
Company has not yet evaluated the effects of this change on its reporting
segments.
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In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits - an Amendment of FASB Statements
No. 87, 88 and 106." SFAS No. 132 revises disclosures about pension and other
postretirement benefit plans, but it does not change the measurement or
recognition of those plans and therefore will not have a significant impact on
the Company's financial position, results of operations or cash flows. SFAS No.
132 is effective for the Company in Fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 will be effective for
the Company in Fiscal 2000. Management of the Company has not yet evaluated the
effects of this statement on the Company's financial position, results of
operations or cash flows.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which provides guidance on
accounting for the costs of computer software developed or obtained for
internal use. SOP 98-1 requires external and internal indirect costs of
developing or obtaining internal-use software to be capitalized as a long-lived
asset and also requires training costs included in the purchase price of
computer software and costs associated with research and development to be
expensed as incurred. SOP 98-1 is effective for the Company in Fiscal 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk. The Company has exposure to interest rate changes primarily
relating to interest rate changes under its Revolving Credit Facility. The
Company's Revolving Credit Facility bears interest at rates which vary with
changes in (i) the London Interbank Offered Rate (LIBOR) or (ii) a rate of
interest announced publicly by Citibank in New York, New York. The Company does
not speculate on the future direction of interest rates. As of January 30,
1999, approximately $90.4 million of the Company's debt bore interest at
variable rates. The Company believes that the effect, if any, of reasonably
possible near-term changes in interest rates on the Company's consolidated
financial position, results of operations or cash flows would not be
significant.
Commodity price risk. A portion of the Company's raw materials are staple goods
that are affected by commodity pricing and are, therefore, subject to price
volatility caused by weather, production problems, delivery difficulties and
other factors which are outside the control of the Company. In most cases,
essential raw materials are available from several sources. For several raw
materials, however, branded goods or other circumstances may prevent such
diversification and an interruption of the supply of these raw materials could
have a significant impact on the Company's ability to produce certain products.
The Company has established long-term relationships with key suppliers and may
enter into purchase contracts or commitments of one year or less for certain
raw materials. Such agreements generally include a pricing schedule for the
period covered by the contract or commitment. The Company believes that any
changes in commodity pricing which cannot be adjusted for by changes in its
product pricing or other strategies, would not be significant.
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JPS TEXTILE GROUP, INC.
PART II - OTHER INFORMATION
Item
1. Legal Proceedings None
2. Changes in Securities None
3. Defaults Upon Senior Securities None
4. Submission of Matters to a Vote of Security Holders None
5. Other Information None
6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
(11) Statement re: Computation of Per Share Earnings -
not required since such computation can be clearly
determined from the material contained herein.
(27) Financial Data Schedule
(b) Current Reports on Form 8-K:
No reports on Form 8-K were filed for the first quarter
ended January 30, 1999.
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.
JPS TEXTILE GROUP, INC.
Date: March 16, 1999 /s/ John W. Sanders, Jr.
------------------------
John W. Sanders, Jr.
Executive Vice President - Finance &
Chief Financial Officer
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