UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended APRIL 3, 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 1-8016
----
TULTEX CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-0367896
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
101 Commonwealth Boulevard, P. O. Box 5191, Martinsville, Virginia 24115
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 540-632-2961
------------
(Former name, former address and former fiscal year, if changed since last
report)
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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
30,050,155 shares of Common Stock, $1 par value, as of May 14, 1999
- ---------- ------------
2
PART I. FINANCIAL INFORMATION
ITEM 1.
TULTEX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED - $000'S OMITTED EXCEPT IN
SHARES AND PER SHARE DATA) APRIL 3, 1999 (AND APRIL 4, 1998)
THREE MONTHS ENDED
-----------------------------------------
APRIL 3, 1999 April 4, 1998
--------------- ----------------
Net Sales $ 71,638 $ 99,874
Cost of Products Sold 65,697 80,823
--------------- ----------------
Gross Profit 5,941 19,051
Selling, General and Administrative 12,032 23,983
--------------- ----------------
Operating Income (Loss) (6,091) (4,932)
Other (Income) Expense:
Interest Expense 6,256 6,908
Interest Income and Other, Net (1,066) (635)
--------------- ----------------
Income (Loss) Before Income Taxes (11,281) (11,205)
Provision (Benefit) for Income Taxes (4,174) (4,370)
--------------- ----------------
NET INCOME (LOSS) (7,107) (6,835)
Preferred Dividend Requirement (Note 4) (31) (147)
--------------- ----------------
Balance Applicable to Common Stock $ (7,138) $ (6,982)
=============== ================
Weighted Average Common Shares Outstanding - Basic 30,050,155 29,881,290
Weighted Average Common Shares Outstanding - 30,050,155 29,881,290
Diluted
NET INCOME (LOSS) PER COMMON SHARE
BASIC $ (.24) $ (.23)
DILUTED $ (.24) $ (.23)
Dividends Per Common Share (Note 4) $ .00 $ .00
3
TULTEX CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED - $000'S OMITTED)
APRIL 3, 1999 (AND JANUARY 2, 1999)
Assets APRIL 3, 1999 January 2, 1999
- ------ ----------------- --------------------
Current Assets:
Cash $ 8,533 $ 5,769
Accounts Receivable - Net of Allowance for Doubtful
Accounts $4,441 (1999) and $3,925 (1998) 58,911 74,599
Inventories (Note 2) 199,452 176,818
Prepaid Expenses 4,286 1,913
Income Taxes Refundable 5,070 8,782
Deferred Tax Assets 4,534 4,534
------------------- -----------------
Total Current Assets 280,786 272,415
Property, Plant and Equipment, Net of Depreciation 103,323 107,001
Intangible Assets 22,459 22,777
Deferred Tax Assets 2,419 2,419
Other Assets 40,046 42,716
=================== =================
Total Assets $ 449,033 $ 447,328
=================== =================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable $ 31,910 $ 23,448
Accrued Expenses 19,187 12,815
------------------- -----------------
Total Current Liabilities 51,097 36,263
Long-Term Debt (Notes 3, 8 and 10) 253,155 259,405
Other Liabilities 5,436 5,222
Stockholders' Equity:
5% Cumulative Preferred Stock (Note 4) 198 198
Series B, $7.50 Cumulative Convertible Preferred Stock (Note 4) 1,500 1,500
Common Stock (Note 4) 30,050 30,050
Capital in Excess of Par Value 7,095 7,095
Retained Earnings 105,941 113,079
Accumulated Other Comprehensive Income (5,085) (5,085)
Unearned Stock Compensation (31) (35)
------------------- -----------------
139,668 146,802
Less Notes Receivable - Stockholders 323 364
------------------- -----------------
Total Stockholders' Equity 139,345 146,438
------------------- -----------------
Total Liabilities and Stockholders' Equity $ 449,033 $ 447,328
=================== =================
4
TULTEX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED - $000'S OMITTED)
THREE MONTHS ENDED APRIL 3, 1999 (AND APRIL 4, 1998)
Three Months Ended
------------------------------------------
APRIL 3, 1999 April 4, 1998
------------------ -----------------
Operations:
Net Income (Loss) $ (7,107) $ (6,835)
Items Not Requiring (Providing) Cash:
Depreciation 4,641 5,148
Amortization 1,294 750
Other Non-Cash Items (27) (70)
(Gain) Loss on Sale of Assets (239) -
Changes in Assets and Liabilities
Accounts Receivable 15,688 30,568
Inventories (22,634) (41,650)
Prepaid Expenses (2,373) 81
Accounts Payable and Accrued Expenses 14,834 2,371
Income Taxes Refundable 3,712 (5,151)
Other Long-Term Liabilities 214 (1,384)
-------- --------
Cash Provided (Used) by Operations 8,003 (16,172)
-------- --------
Investing Activities:
Capital Expenditures (2,091) (3,824)
Changes in Other Assets 2,305 (585)
Business Acquisition - (2,743)
Proceeds from Sale of Property and Equipment 756 -
-------- --------
Cash Provided (Used) by Investing Activities 970 (7,152)
-------- --------
Financing Activities:
Issuance (Payment) of Revolving Credit Facility Borrowings (6,250) 22,050
Payments on Long-Term Borrowings - (134)
Cash Dividends - (150)
Proceeds from Stock Plans 41 -
-------- --------
Cash Provided (Used) by Financing Activities (6,209) 21,766
-------- --------
Net Increase (Decrease) in Cash 2,764 (1,558)
Cash at End of Prior Year 5,769 2,507
-------- --------
Cash at End of Period $ 8,533 $ 949
======== ========
TULTEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5
APRIL 3, 1999
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements furnished in this
quarterly 10-Q Report reflect all adjustments, consisting only of normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair statement of the results of the interim periods. The unaudited consolidated
financial statements should be read in conjunction with the Company's annual
report on Form 10-K for the year ended January 2, 1999. The balance sheet,
statement of operations and statement of cash flows included in this 10-Q have
been prepared from the Company's records and are subject to audit and year-end
adjustments.
Certain prior year amounts have been reclassified to conform with current year
presentation.
NOTE 2 - INVENTORIES
A summary of inventories by component follows. (In thousands of dollars)
APRIL 3, 1999 January 2, 1999
------------------------- --------------------------
Raw Materials $2,066 $2,952
Goods-in-Process 26,551 21,688
Finished Goods 160,541 143,506
Supplies 10,294 8,672
========================= ==========================
Total Inventory $199,452 $176,818
========================= ==========================
NOTE 3 - LONG TERM DEBT
Total long-term debt at April 3, 1999 includes Senior Notes of $185 million,
$53.8 million outstanding under the revolving credit facility and $14.4 million
of convertible subordinated notes.
Subsequent to April 3, 1999, the Company replaced its existing revolving credit
facility with a $150 million asset-based lending facility. In addition, a
portion of the 10 5/8% and 9 5/8% senior notes were repurchased and retired as
part of the refinancing. Additional disclosure of these subsequent events is
described in Note 10.
Commencing on April 15, 1999, the holders of the $14.4 million of convertible
notes may convert, at their option, up to 20% per annum of the original
principle amount into the Company's common stock. The number of common shares
will be determined by dividing the principle amount of the notes to be converted
by the closing price of the Company's common stock on the business day prior to
the submission of shares for conversion.
NOTE 4 - STOCKHOLDERS' EQUITY
The 5% cumulative preferred stock is $100 par value, with 22,000 shares
authorized, and 1,975 shares issued and outstanding as of April 3, 1999 and
January 2, 1999. The stated quarterly dividend has not been paid since July 1,
1998 due to restrictions in the Company's bond indenture.
The Series B, $7.50 cumulative, convertible preferred stock is $100 stated
value, with 150,000 shares
6
authorized, and 15,000 shares issued and outstanding as of April 3, 1999 and
January 2, 1999. The stated quarterly dividend has not been paid since July 1,
1998 due to restrictions in the Company's bond indenture.
The Common stock is $1 par value, 60,000,000 shares authorized, with shares
issued and outstanding of 30,050,155 as of April 3, 1999 and January 2, 1999.
There were no dividends declared on the Company's common stock for the three
month period ended April 3, 1999.
NOTE 5 - EARNINGS PER SHARE
Income (loss) per common share is computed using the weighted average common
shares outstanding. The weighted average common shares outstanding are the same
for both basic and diluted earnings per share.
NOTE 6 - COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS 130 requires that the Company report comprehensive income (loss)
components in a full set of general-purpose financial statements. Comprehensive
income (loss) represents the change in stockholders' equity during the period
from non-owner sources. Currently, other comprehensive income (loss) consists of
a minimum pension liability adjustment. The Company adopted SFAS 130 on January
4, 1998. Total comprehensive loss was $7.1 million for the quarter ended April
3, 1999 and $6.8 million for the quarter ended April 4, 1998.
Activity in Stockholders' Equity is as follows (dollar amounts in thousands):
Capital Accumulated Unearned Notes Total
Current 5% Series B In Excess Other Stock Receivable-Stock-
Comprehensive Preferred Preferred Common of Par Retained Comprehensive Compen- Stock- holders'
Income (Loss) Stock Stock Stock Value Earnings Income (Loss) sation holders Equity
------------ -------- -------- ------- -------- -------- ------------ --------- ---------- --------
Balance as of
January 2, 1999 $198 $1,500 $113,079 $(364) $146,438
$30,050 $7,095 $(5,085) $(35)
Collections -
Stockholders'
Notes receivable 41 41
Stock 4 4
Compensation
Dividends on
Preferred stock
(31) (31)
Comprehensive
Income (loss):
Net loss $(7,107) (7,107) (7,107)
------------ -------- -------- ------- -------- -------- ------------ --------- ---------- --------
Balance as of
April 3, 1999 $(7,107) $198 $1,500 $30,050 $7,095 $105,941 $(5,085) $(31) $(323) $139,345
============ ======== ======== ======= ======== ======== ============ ========= ========== ========
NOTE 7 - SEGMENT REPORTING
The Company currently operates in a single business segment which designs,
manufactures and distributes
7
fleece and jersey apparel. During the year ended January 2, 1999, the Company
exited its LogoAthletic, Inc. and LogoAthletic/Headwear, Inc. ("LogoAthletic")
licensed apparel business. The segment information reported below reflects the
operations of the Company's ongoing apparel segment separate from the
LogoAthletic business operations ("Other") through the date of sale (July 15,
1998). Management evaluates performance based upon operating earnings before
interest and income taxes.
(in thousands of dollars) Apparel Other Consolidated
- ----------------------------------------------------------------------------------------
THREE MONTHS ENDED APRIL 3, 1999
Net sales $ 71,638 $ - $71,638
Operating income (loss) (6,091) - (6,091)
........................................................................................
Three months ended April 4, 1998
Net sales $ 71,613 $ 28,261 $99,874
Operating income (loss)
(2,969) (1,963) (4,932)
- ----------------------------------------------------------------------------------------
Reconciling information between reportable segments and the Company's
consolidated totals is shown in the following table:
Three Months Ended
---------------------------------
(in thousands) April 3, April 4,
1999 1998
- --------------------------------- -------------- ------------
Total operating income (loss)
for reportable segments $ (6,091) $(4,932)
Interest expense 6,256 6,908
Interest income and other, net (1,066) (635)
============== ============
Income (loss) before income $ (11,281) $(11,205)
taxes ============== ============
NOTE 8 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following financial information presents consolidated financial data which
includes (i) the parent company only ("Parent"), (ii) the wholly-owned guarantor
subsidiaries on a combined basis ("Wholly-owned Guarantor Subsidiaries"), (iii)
the wholly-owned non-guarantor subsidiaries on a combined basis ("Wholly-owned
Non-guarantor Subsidiaries"), (iv) the LogoAthletic subsidiaries whose assets
were sold during the
8
third quarter of 1998 ("Subsidiaries Sold") and (v) the
Company on a consolidated basis.
Wholly-owned Wholly-owned
Guarantor Non-guarantor Subsidiaries
(In thousands of Parent Sold
dollars) Subsidiaries Subsidiaries Eliminations Consolidated
---------- -------------- -------------- -------------- ------------ --------------
For the three months
ended
April 3, 1999
Net sales $60,833 $28,815 $14,794 $ - $ (32,804) $71,638
Cost and expenses 64,817 31,269 15,463 $ - (32,804) 78,745
------ ------ ------ ------------ -------- ------
Pretax income (loss) $(3,984) $(2,454) $ (669) $ - $ - $(7,107)
-------- -------- ----- ------------ ---------- --------
For the three months
ended
April 4, 1998
Net sales $54,581 $4,777 $38,021 $29,375 $(26,880) $ 99,874
Cost and expenses 62,635 4,032 35,979 30,943 (26,880) 106,709
------ ----- ------ ------ -------- -------
Pretax income (loss) $(8,054) $ 745 $ 2,042 $(1,568) $ - $ (6,835)
-------- ----- ------- -------- ---------
As of April 3, 1999
Current assets $246,645 $54,082 $34,803 $ - $ (54,744) $280,786
Noncurrent assets 183,538 15,012 10,818 - (41,121) 168,247
------- ------ ------ ----------- ------- -------
Total assets $430,183 $69,094 $45,621 $ - $ (95,865) $449,033
-------- ------- ------- ----------- ---------- --------
Current liabilities $ 37,345 $13,685 $31,926 $ - $ (31,859) $ 51,097
Noncurrent liabilities 263,415 (495) (438) - (3,891) 258,591
------- ----- ----- ----------- ------- -------
Total liabilities $300,760 $13,190 $31,488 $ - $ (35,750) $309,688
-------- ------- ------- ----------- ---------- --------
As of January 2, 1999
Current assets $232,075 $53,958 $29,638 $ - $(43,256) $272,415
Noncurrent assets 190,194 14,908 10,865 - (41,054) 174,913
------- ------ ------ ----------- -------- -------
Total assets $422,269 $68,866 $40,503 $ - $(84,310) $447,328
-------- ------- ------- ----------- --------- --------
Current liabilities $ 19,551 $11,002 $26,138 $ - $(20,428) $ 36,263
Noncurrent liabilities 269,288 (495) (438) - (3,728) 264,627
------- ----- ----- ----------- ------- -------
Total liabilities $288,839 $10,507 $25,700 $ - $(24,156) $300,890
-------- ------- ------- ----------- --------- --------
NOTE 9 - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires that an entity recognize
all derivative instruments in the balance sheet at fair value. The statement is
effective for fiscal years beginning after June 15, 1999. Management has not yet
made an assessment
9
of the impact of the adoption of SFAS 133.
NOTE 10 - SUBSEQUENT EVENTS
Subsequent to April 3, 1999, the Company entered into a new, asset-based secured
credit facility which has a maximum borrowing availability of $150 million with
Bank of America Business Credit ("BABC"). Under the new facility, which closed
on May 10, 1999, BABC will lend funds subject to availability under a borrowing
base calculated as a percentage of eligible accounts receivable and inventories,
provided that the total amount advanced will not exceed $150 million. Proceeds
from this facility have been used to pay all outstanding amounts under the
Company's former $87.5 million unsecured revolving credit facility and fund a
partial tender offer for the 9 5/8% and 10 5/8% Senior Notes (see below). The
facility will also be used to provide working capital.
To obtain the required consents of noteholders to permit the Company to grant a
first security interest on accounts receivable, inventories and related assets
to secure the BABC credit facility, the Company initiated a consent
solicitation. In connection with the solicitation the Company also invited
noteholders to tender notes for purchase by the Company in a "modified dutch
auction" with a maximum purchase price of 65% of face value per note and agreed
to provide funding of $42 million (exclusive of accrued interest) for such
purchases. The Company has accepted tenders for $70 million face value of notes
and has received consents from holders of more than 51% of both note series as
required. As a result of the refinancing the Company has purchased $70 million
face value notes for $42 million and has retired the former revolving credit
facility borrowings and accrued interest of $54.5 million by a payment of $39.5
million in cash and the foregiveness of $15.0 million of borrowings by the
former lenders. In connection with the consent solicitation, interest payments
on these notes have been changed to quarterly instead of semiannually. Also, the
holders of notes not accepted for purchase by the Company who also consented
have received freely tradeable and registered warrants for 15,525,000 shares of
the Company's common stock. Two-thirds of these warrants have an exercise price
of $.8125 per share, and the remaining one-third have an exercise price of
$1.425 per share. The warrants have an 8-year term, and may be exercised by
payment of cash or by tender of notes for an amount equal to the exercise price
of the warrants.
The new facility has a maturity date of three years with an extension provision
for an additional two years, subject to lenders' approval. The Company has the
option of setting quarterly interest rates equal to either the Prime Rate or
London Interbank Offered Rate ("LIBOR") plus applicable margins. The applicable
margin is based on a funded debt / EBITDA ratio that will range from 0% to 1.75%
for Prime Rate or 1.75% to 3.75% for LIBOR based loans. The Company shall pay a
fee of .375% per year on any unused borrowings. A $10 million sublimit under the
facility is available for letters of credit.
In connection with this debt refinancing, the Company received waivers for
default of financial covenants under the former credit facility. The most
significant financial covenants of the new facility are the maintenance of a
minimum fixed charge coverage ratio on a quarterly basis and annual limitations
on capital expenditures. Other covenants place restrictions on the Company's
ability to incur additional indebtedness, pay dividends, create liens or other
encumbrances, to make certain payments, investments, loans and guarantees and to
sell or otherwise dispose of a substantial portion of its assets.
This debt refinancing will be reflected in the Company's financial statements in
the quarter ending July 3, 1999.
10
ITEM 2
TULTEX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS APRIL 3, 1999
RESULTS OF OPERATIONS
The following table presents the Company's consolidated statement of operations
as a percentage of net sales.
THREE MONTHS ENDED
-------------------------
4/3/99 4/4/98
----------- ----------
Net Sales 100.0% 100.0%
Cost of Products Sold 91.7 80.9
----------- ----------
Gross Profit 8.3 19.1
Selling, General and Administrative 16.8 24.0
----------- ----------
Operating Income (8.5) (4.9)
Interest Expense 8.7 6.9
Interest Income and Other, Net (1.5) (0.6)
----------- ----------
Income (Loss) Before Income Taxes (15.7) (11.2)
Benefit (Provision) for Income Taxes 5.8 4.4
----------- ----------
Net Income (Loss) (9.9)% (6.8)%
=========== ==========
Note: Certain items have been rounded to cause the columns to add to 100%.
THIS QUARTERLY REPORT ON FORM 10-Q MAY CONTAIN CERTAIN FORWARD-LOOKING
STATEMENTS REFLECTING THE COMPANY'S CURRENT EXPECTATIONS. ALTHOUGH THE COMPANY
BELIEVES THAT THE EXPECTATIONS REFLECTED IN ANY SUCH FORWARD-LOOKING STATEMENTS
ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO
HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE COMPANY'S EXPECTATIONS INCLUDE THE FINANCIAL STRENGTH OF THE
RETAIL INDUSTRY, THE LEVEL OF CONSUMER SPENDING ON APPAREL, THE COMPANY'S
ABILITY TO PROFITABLY AND TIMELY SATISFY CUSTOMER DEMAND FOR ITS PRODUCTS, THE
COMPETITIVE PRICING ENVIRONMENT WITHIN THE APPAREL INDUSTRY, THE COMPANY'S
SUBSTANTIAL LEVERAGE AND THE RESTRICTIVE COVENANTS IN ITS BORROWING DOCUMENTS,
FLUCTUATIONS IN THE PRICE OF COTTON AND POLYESTER USED BY THE COMPANY IN THE
MANUFACTURE OF ITS PRODUCTS, THE COMPANY'S RELATIONSHIP WITH ITS PARTIALLY
UNIONIZED WORKFORCE, THE SEASONALITY AND CYCLICALITY OF THE FLEECEWEAR INDUSTRY,
AND REMEDIATION OF YEAR 2000 COMPUTER APPLICATIONS. SUCH STATEMENTS ARE PROVIDED
IN ACCORDANCE WITH THE SAFE HARBOR PROVISIONS OF THE PRIVATE LITIGATION REFORM
ACT OF 1995. INVESTORS SHOULD CONSIDER OTHER RISKS AND UNCERTAINTIES DISCUSSED
IN OTHER DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION.
Net sales for the three months ended April 3, 1999 were $71.6 million as
compared to $99.9 million in the comparable period of 1998. The 1998 amount
includes $28 million of revenues from LogoAthletic, Inc. and
LogoAthletic/Headwear, Inc. ("LogoAthletic") subsidiaries whose assets were sold
on July 15, 1998. Excluding LogoAthletic, sales revenues were relatively flat
for the quarter on a comparative basis. The higher volume of jersey products
sold was offset by lower fleece and jersey pricing due to competitive conditions
and aggressive selling by the Company to improve management of inventories.
Cost of products sold as a percentage of sales was 91.7% for the first quarter
of 1999 compared to 80.9% for the same period in 1998. The primary reason for
the decrease was lower prices in both fleece and jersey as a result of the
aforementioned competitive pricing and aggressive selling to manage inventories.
11
The sale of LogoAthletic, whose licensed apparel business historically incurred
lower costs as a percent of sales than the Company's activewear business, also
contributed to the increase.
Selling, general and administrative expenses ("S,G&A") of $12.0 million
represent a decrease of $12.0 million as compared to the first quarter of 1998.
As a percentage of sales, S,G&A expenses were 16.8% compared to 24.0% for the
first quarter of 1998. The primary reason for the decrease was the sale of
LogoAthletic, which incurred proportionally higher advertising and marketing
costs than the Company's activewear business. Also contributing to the reduction
was a decrease of $1.0 million in advertising expenses in the activewear
business. Higher computer equipment and software amortization, resulting from
the partial implementation of an enterprise-wide management information system,
offset the reduction in advertising.
Interest expense for the first quarter of 1999 was $6.3 million compared to $6.9
million in the comparable period of 1998. The decrease for the first quarter
over the comparable period of 1998 is due to lower average borrowings, partially
offset by higher borrowing rates. First quarter 1999 working capital borrowings
averaged $54.2 million at an average rate of 8.2% compared to $94.7 million and
7.2%, respectively, for the comparable period of the prior year. The reduction
in average borrowings reflects the proceeds received from the sale of
LogoAthletic during the third quarter of 1998. The nature of the Company's
business requires extensive seasonal borrowings to support its working capital
needs.
Benefit (Provision) for income taxes reflects an effective rate for combined
federal and state income taxes of 37% for the first quarter of 1999 and 39% for
the comparable period of 1998.
YEAR 2000
The Year 2000 issue is the result of computer systems and other equipment with
embedded chips using two digits, rather than four, to define the applicable
year. If the Company's computer systems are not Year 2000 compliant, they may
recognize a date using "00" as the Year 1900 rather than the Year 2000. If not
corrected, computer applications could fail or create erroneous results which
could have a material adverse impact on the Company's business, operations or
financial condition in the future.
The Company began addressing the Year 2000 issue in 1995 with the formation of a
Y2K Team. The Company is in the process of addressing Year 2000 compliance, both
internally and with third parties. The Company's objective is to confirm
compliance by July 3, 1999. Third parties that are not compliant at that time
may delay compliance.
The Year 2000 Project is comprised of four phases:
1. Inventory of all hardware, software, local area networks, personal
computers, telecommunications equipment and software (data and
voice), program logic controllers (PLC) and non-information
technology embedded software and equipment.
2. Assessment of the inventory through testing for Year 2000
compliance.
3. Remediation of all affected systems. Systems will be modified,
upgraded or replaced as appropriate for compliance. Contingency
plans will be established for areas of concern.
4. Testing of internal system compliance and testing with customers
and suppliers will be performed on an ongoing basis until project
completion.
The Company has completed the inventory phase. The assessment and remediation
phases are in process. The assessment phase is 90% complete and is scheduled for
completion by May 30, 1999. The
12
remediation phase is scheduled for completion by July 3, 1999. The testing phase
will be ongoing as hardware and software are remedied, upgraded or replaced.
As part of the Year 2000 Project, the Company is implementing a new Enterprise
Resource Planning system (ERP), which has replaced 80% of the Company's Legacy
systems with Year 2000 compliant software. All major infrastructure, computers,
PC's and telecommunications equipment have been replaced with Year 2000
compliant hardware and software as part of the project. The Company has
implemented 95% of the system to date with the remaining 5% scheduled to be
implemented by June 5, 1999. Additionally, the Company has implemented the Year
2000 compliant versions of electronic data interchange (EDI) systems for testing
with the Company's customers. This testing commenced in the first quarter of
1999 and is scheduled for completion by June 5, 1999. The remaining Legacy
software has been identified, assessment is nearing completion and upgrades or
replacements are being ordered for non-compliant software and hardware. Updates
or modification to this software is scheduled for completion by June 5, 1999,
with testing scheduled for completion by July 3, 1999.
The Company relies on third party suppliers for raw materials, water, utilities,
transportation and other services. Interruption of supplier operations due to
Year 2000 issues could affect Company operations. The Company has initiated
efforts with all major suppliers to gauge compliance and exposure in these
areas. The Company has formally requested written confirmation of Year 2000
compliance from its major contractors and vendors. Approximately 70% have
responded to date. Specific testing will be requested where appropriate. Should
any vendor, supplier, equipment or process not be able to conform within the
prescribed timeframes, the Company will take appropriate action to ensure
continuity of its business. Contingency plans will be developed for any area not
able to conform within the prescribed timeframe. While approaches to reducing
risks of interruption due to supplier failures will vary by facility, options
include identifying of alternate suppliers, stockpiling raw materials and
adjusting operating schedules. Costs associated with any contingency will be
determined as this assessment continues.
Year 2000 Project costs are linked with the ERP implementation costs. Total
costs for both the Year 2000 Project and the ERP system implementation are
expected to be approximately $21.5 million. Of this total, $20.5 million has
been incurred and capitalized as part of the ERP implementation as of April 3,
1999. The remaining $1.0 million is specifically related to Year 2000 project
costs and will be expensed as incurred over the next nine months. These costs
will include external testing with banks, vendors and customers, as well as EDI
software upgrades. The Company believes the remaining costs relating to the Year
2000 issue will not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the readiness of third-party suppliers and customers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. The Year 2000 Project is expected to significantly reduce
the Company's level of uncertainty about the Year 2000 problem and about the
Year 2000 compliance of its major suppliers and customers. The Company believes
that, with the implementation of its new ERP systems and the completion of the
Year 2000 project as scheduled, the possibility of interruptions of normal
operations is reduced.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
13
Net working capital at April 3, 1999 decreased $6.5 million from year-end 1998
due primarily to lower accounts receivable and higher accounts payable and
accrued expenses, partially offset by higher inventories. Compared to January 2,
1999, net accounts receivable decreased $15.7 million and accounts payable and
accrued expenses increased $14.8 million. Receivables normally build to a peak
in September and October and begin to decline in December as shipment volume
decreases and cash is collected. Inventories increased $22.6 million from
January 2, 1999 to April 3, 1999 as compared to an increase of $41.7 million in
the first quarter of 1998. Inventories traditionally increase during the first
half of the year to support second half shipments.
The current ratio at April 3, 1999 was 5.5 compared to 7.5 at January 2, 1999.
The decrease was due to the factors described above.
Total long-term debt at April 3, 1999 includes Senior Notes of $185 million,
$53.8 million outstanding under the revolving credit facility and $14.4 million
of convertible subordinated notes. Debt as a percentage of total capitalization
was 64.5% as of April 3, 1999 compared to 63.9% as of January 2, 1999.
Subsequent to April 3, 1999, the Company entered into a new, asset-based secured
credit facility which has a maximum borrowing availability of $150 million with
Bank of America Business Credit ("BABC"). Under the new facility, which closed
on May 10, 1999, BABC will lend funds subject to availability under a borrowing
base calculated as a percentage of eligible accounts receivable and inventories,
provided that the total amount advanced will not exceed $150 million. Proceeds
from this facility have been used to pay all outstanding amounts under the
Company's former $87.5 million unsecured revolving credit facility and fund a
partial tender offer for the 9 5/8% and 10 5/8% Senior Notes (see below). The
facility will also be used to provide working capital.
To obtain the required consents of noteholders to permit the Company to grant a
first security interest on accounts receivable, inventories and related assets
to secure the BABC credit facility, the Company initiated a consent
solicitation. In connection with the solicitation the Company also invited
noteholders to tender notes for purchase by the Company in a "modified dutch
auction" with a maximum purchase price of 65% of face value per note and agreed
to provide funding of $42 million (exclusive of accrued interest) for such
purchases. The Company has accepted tenders for $70 million face value of notes
and has received consents from holders of more than 51% of both note series as
required. As a result of the refinancing the Company has purchased $70 million
face value notes for $42 million and has retired the former revolving credit
facility borrowings and accrued interest of $54.5 million by a payment of $39.5
million in cash and the foregiveness of $15.0 million of borrowings by the
former lenders. In connection with the consent solicitation, interest payments
on these notes have been changed to quarterly instead of semiannually. Also, the
holders of notes not accepted for purchase by the Company who also consented
have received freely tradeable and registered warrants for 15,525,000 shares of
the Company's common stock. Two-thirds of these warrants have an exercise price
of $.8125 per share, and the remaining one-third have an exercise price of
$1.425 per share. The warrants have an 8-year term, and may be exercised by
payment of cash or by tender of notes for an amount equal to the exercise price
of the warrants.
The new facility has a maturity date of three years with an extension provision
for an additional two years, subject to lenders' approval. The Company has the
option of setting quarterly interest rates equal to either the Prime Rate or
London Interbank Offered Rate ("LIBOR") plus applicable margins. The applicable
margin is based on a funded debt / EBITDA ratio that will range from 0% to 1.75%
for Prime Rate or 1.75%
14
to 3.75% for LIBOR based loans. The Company shall pay a fee of .375% per year on
any unused borrowings. A $10 million sublimit under the facility is available
for letters of credit.
In connection with this debt refinancing, the Company received waivers for
default of financial covenants under the former credit facility. The most
significant financial covenants of the new facility are the maintenance of a
minimum fixed charge coverage ratio on a quarterly basis and annual limitations
on capital expenditures. Other covenants place restrictions on the Company's
ability to incur additional indebtedness, pay dividends, create liens or other
encumbrances, to make certain payments, investments, loans and guarantees and to
sell or otherwise dispose of a substantial portion of its assets.
This debt refinancing will be reflected in the Company's financial statements in
the quarter ending July 3, 1999.
For the first three months of 1999, net cash provided by operations of $8.0
million reflects a decrease in accounts receivable, and an increase in accounts
payable and accrued expenses, partially offset by higher inventory levels. Cash
provided by investing activities was $1.0 million in 1999 compared to cash used
in the first three months of 1998 of $7.2 million. The cash provided in 1999
reflects the proceeds from the surrender of certain life insurance policies and
the sale of non-operating properties, and are partially offset by capital
expenditures. Capital expenditures for the first quarter of 1999 were $2.1
million as compared to $3.8 million for the first three months of 1998. Cash
used by financing activities of $6.2 million in 1999 reflects the reduction in
working capital requirements. Management believes current cash balances, cash
flows from operations and its new secured credit facility to be sufficient
during 1999 and the foreseeable future to fund its planned capital expenditures
and working capital needs.
TULTEX CORPORATION
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.15 Loan and Security Agreement dated May 7, 1999 between Tultex
Corporation and Nationsbank, N.A.
10.16 Second Supplemental Indenture dated May 7, 1999 between Tultex
Corporation and
15
U.S. Bank National Association as Successor Trustee for $75,000,000
Senior Notes.
10.17 Second Supplemental Indenture dated May 7, 1999 between Tultex
Corporation and U.S. Bank National Association as Successor Trustee
for $110,000,000 Senior Notes.
10.18 Master Collateral and Security Agreement dated May 7, 1999 between
Tultex Corporation and U.S. Bank National Association, as Trustee
for the Senior Noteholders.
10.19 Warrant Agreement dated May 7, 1999 between Tultex Corporation and
First Union National Bank as Warrant Agent .
(b) Reports on Form 8-K
None
Items 1, 2, 3, 4 and 5 are inapplicable and are omitted.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
TULTEX CORPORATION
------------------
(Registrant)
16
Date May 17, 1999 /s/ C. W. Davies, Jr.
------------ ---------------------
C. W. Davies, Jr., President and Chief
Executive Officer
Date May 17, 1999 /s/ P. W. Harris, Jr.
------------ ----------------------
P. Woolard Harris, Jr.,
Vice President and Chief Financial Officer