ITEM 1. BUSINESS
Unifi, Inc., a New York corporation formed in 1969, together with its subsidiaries, hereinafter set forth, (the "Company" or "Unifi"), is one of the largest and most diversified producers and processors of textile yarns in the world. The Company is primarily engaged in the processing of synthetic yarns in two primary business segments, polyester and nylon. The polyester segment is comprised of textured, dyed, twisted and beamed yarns with sales to knitters and weavers that produce fabrics for the apparel, automotive and furniture upholstery, home furnishings, industrial and other end use markets. The nylon segment is comprised of textured nylon and covered spandex products with sales to knitters and weavers that produce fabrics for the apparel, hosiery, socks and other end use markets. See footnote to the Consolidated Financial Statements ("Footnote") 2 ("Acquisitions") on page 20 and Footnote 11 ("Investment in Unconsolidated Affiliates") on pages 27 and 28 of this Report for information concerning recent mergers, acquisitions and consolidations of the Company's business, which is incorporated herein by reference.
Texturing polyester and nylon filament fiber involves the processing of partially oriented yarn ("POY"), which is either raw polyester or nylon filament fiber purchased from chemical manufacturers, to give it greater bulk, strength, stretch, consistent dyeability and a softer feel, thereby making it suitable for use in knitting and weaving of fabrics. The texturing process involves the use of high-speed machines to draw, heat and twist the POY to produce yarn having various physical characteristics, depending on its ultimate end use.
During the fourth quarter of fiscal year 1999, the Company formed Unifi Technology Group, LLC ("UTG"), to provide consulting services focused on integrated manufacturing, factory automation and electronic commerce solutions to other domestic manufacturers. Effective June 1, 1999, UTG acquired the assets of Cimtec, Inc. ("Cimtec"), a manufacturing automation solutions provider, for $10.5 million. Subsequently, a five-percent interest in the new entity was sold to certain former Cimtec shareholders. See Footnote 2 ("Acquisitions") on page 20 of this Report for additional information on UTG.
See the information included under "Year 2000 Compliance Status" under Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 11 and 12 of this Report.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The primary suppliers of POY to the Company's polyester segment are E. I. DuPont de Nemours and Company ("Dupont"), Nanya Plastics Corp. of America ("Nanya"), Kosa (formerly Hoechst Celanese Corporation), Wellman Industries, Reliance Industries, LTD. and P.T. Indorama Synthetics TBK, with the majority of the Company's polyester POY being supplied by DuPont. In addition, the Company has polyester POY manufacturing facilities in Ireland and Yadkinville, North Carolina (which provides approximately 35% of its total domestic polyester POY supply needs). The production of POY is comprised of two primary processes, polymerisation (performed in Ireland only) and spinning (performed in both Ireland and Yadkinville). The polymerisation process is the production of polymer by a chemical reaction involving terephthalic acid and ethylene glycol, which are combined to form chip. The spinning process involves the extrusion and melting of chip to form molten polymer. The molten polymer is then extruded through spinnerettes to form continuous multi-filament raw yarn (POY). Substantially all of the raw materials for such manufactured POY is supplied by Nanya for domestic production and by Dupont and Bayer AG for our Irish operation. The primary suppliers of POY to the Company's nylon segment are DuPont and Cookson Fibers, Inc., with the majority of the Company's nylon POY being supplied by DuPont.
Although the Company is heavily dependent upon a limited number of suppliers, the Company has not had and does not anticipate any material difficulty in obtaining its raw POY or raw materials used to manufacture polyester POY.
PATENTS AND LICENSES: The Company currently has several patents and registered trademarks, none of which it considers material to its business as a whole.
CUSTOMERS: The Company, in fiscal year ended June 27, 1999, sold its polyester yarns to approximately 1,150 customers and its nylon yarns to approximately 400 customers, no one customer's purchases exceeded 10% of net sales for the polyester segment during said period, while one customer comprised 19.5% of net sales for the
nylon segment for this time period. The Company does not believe that either its polyester segment or its nylon segment is dependent on any one customer.
BACKLOG: The Company, other than in connection with certain foreign sales and for textured yarns that are package dyed according to customers' specifications, does not manufacture to order. The Company's products can be used in many ways and can be thought of in terms of a commodity subject to the laws of supply and demand and, therefore, does not have what is considered a backlog of orders. In addition, the Company does not consider its products to be seasonal ones.
COMPETITIVE CONDITIONS: The textile industry in which the Company currently operates is keenly competitive. The Company processes and sells high-volume commodity products, pricing is highly competitive with product quality and customer service being essential for differentiating the competitors within the industry. Product quality insures manufacturing efficiencies for the customer. The Company's polyester and nylon yarns compete in a worldwide market with a number of other foreign and domestic producers of such yarns. In the sale of polyester filament yarns, major domestic competitors are Dillon Yarn Company, Inc., Spectrum Dyed Yarns, Inc. and Milliken & Company and in the sale of nylon yarns major domestic competitors are Jefferson Mills, Inc. and Worldtex, Inc. Additionally, there are numerous foreign competitors that sell polyester and nylon yarns in the United States.
RESEARCH AND DEVELOPMENT: The estimated amount spent during each of the last three fiscal years on Company-sponsored and Customer-sponsored research and development activities is considered immaterial.
COMPLIANCE WITH CERTAIN GOVERNMENT REGULATIONS: Management of the Company believes that the operation of the Company's production facilities and the disposal of waste materials are substantially in compliance with applicable laws and regulations.
EMPLOYEES: The number of full-time employees of the Company is approximately 6,250.
FINANCIAL INFORMATION ABOUT SEGMENTS: See the information included in Footnote 9 ("Business Segments, Foreign Operations and Concentrations of Credit Risk") on Page 24 through Page 26 of this Report for the Financial Information About Segments required by Item 101 of Regulation S-K.
ITEM 2.
ITEM 2. PROPERTIES
The Company currently maintains a total of 20 manufacturing and warehousing facilities, one central distribution center and one recycling center in North Carolina; one manufacturing and related warehousing facility in Staunton, Virginia; one central distribution center in Fort Payne, Alabama; four manufacturing operations in Letterkenny, County of Donegal, Republic of Ireland; two warehousing locations in Carrickfergus, Ireland; two manufacturing and one office building in Brazil and one manufacturing and administration facility in Bogota, Colombia. All of these facilities, which contain approximately 8,166,153 square feet of floor space, with the exception of one plant facility leased from NationsBank Leasing and R.E. Corp. pursuant to a Sales-leaseback Agreement entered on May 20, 1997, as amended, two warehouses in Carrickfergus, Ireland, and one plant and the office in Brazil are owned in fee; and management believes they are in good condition, well maintained, and are suitable and adequate for present production.
The polyester segment of the Company's business uses 17 manufacturing, six warehousing and one dedicated office totaling 5.3 million square feet. The nylon segment of the Company's business uses utilizes six manufacturing and four warehousing facilities aggregating 2.7 million square feet.
UTG leases six office locations in several states from which it conducts business.
The Company leases sales offices and/or apartments in New York, Coleshill, England, Oberkotzau, Germany, and Lyon, France, and has a representative office in Tokyo, Japan.
The Company also leases its corporate headquarters building at 7201 West Friendly Avenue, Greensboro, North Carolina, which consists of a building containing approximately 121,125 square feet located on a tract of land containing approximately 8.99 acres. This property is leased from Merrill Lynch Trust Company of North Carolina, Trustee under the Unifi, Inc. Profit Sharing Plan and Trust, and Wachovia Bank & Trust Company, N.A., Independent Trustee. On May 20, 1996, the Company exercised its option to extend the term of the lease on this property for five years, through March 13, 2002. Reference is made to a copy of the lease agreement
attached to the Registrant's Annual Report on Form 10-K as Exhibit (10d) for the fiscal year ended June 27, 1987, which is by reference incorporated herein.
See the related information included in Footnote 8 ("Leases and Commitments") on Page 24 of this Report.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any litigation which is considered material, as that term is used in Item 103 of Regulation S-K.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter for the fiscal year ended June 27, 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed for trading on the New York Stock Exchange. The following table sets forth the range of high and low sales prices of the Unifi Common Stock as reported on the NYSE Composite Tape and the regular cash dividends per share declared by Unifi during the periods indicated.
On July 16, 1998, the Company announced its intention to discontinue the payment of cash dividends and utilize the cash to purchase shares of the Company's common stock. Accordingly, effective July 16, 1998, the Board of Directors of the Company terminated the previously established policy of paying cash dividends equal to approximately 30% of the Company's after tax earnings of the previous fiscal year.
As of August 13, 1999, there were approximately 849 holders of record of the Company's common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Fiscal year 1995 through 1997 amounts include the spun cotton yarn operations that were contributed to Parkdale America, LLC on June 30, 1997.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL 1999
Following is a summary of operating income by segment for fiscal years 1999 and 1998, as reported regularly to the Company's management:
As described in Note 9 to the consolidated financial statements, all "other" revenues and expenses, required to reconcile the polyester and nylon operating segments to consolidated results, are comprised primarily of intersegment sales and cost of sales eliminations and various expenses reported internally at a consolidated level. In addition, fiscal 1999 "other" revenue and expenses contains activity from the June 1, 1999 acquisition of Cimtec (see Note 2 to the consolidated financial statements).
POLYESTER OPERATIONS
In fiscal 1999, polyester net sales decreased $117.0 million, or 12.5% compared to fiscal 1998. Year-over-year performance continues to be negatively impacted by the continuing effects of Asian imports of yarns, fabric and apparel, which have kept sales volumes, sales pricing and gross margins under pressure both domestically and internationally. The fiscal 1999 over 1998 volume increase of 1.0% was aided by twelve months of sales volume generated by the business venture with Burlington Industries consummated May 29, 1998 (see Note 13 to the consolidated financial statements). Average unit sales prices declined 13.5% during fiscal 1999. In addition to the decline in average unit sales prices created by market pressures, the pricing decline was also influenced by decreasing fiber costs and the strengthening of the U.S. dollar. As described in Note 10 to the consolidated financial statements, the Company utilizes forward contracts to hedge exposure for sales in foreign currencies based on specific sales orders with customers or for anticipated sales activity for a future time period. Additionally, currency exchange rate risks are mitigated by purchases and borrowings in local currencies. The Company also enters currency forward contracts for committed equipment and inventory purchases. The Company does not enter into derivative financial instruments for trading purposes.
Polyester gross profit decreased $38.9 million during fiscal 1999 and gross margins declined from 15.1% in 1998 to 12.5% in 1999. Gross profit for fiscal 1999 was reduced by a $4.0 million charge resulting from employee acceptance of an early retirement plan. The remainder of the decline in gross profit and gross margin can be attributed to the aforementioned pressures on sales prices caused by imports.
Selling, general and administrative expense allocated to the polyester segment increased $8.3 million in fiscal 1999. Of this increase, $5.7 million related to a charge resulting from employee acceptance of an early retirement program offered in fiscal 1999. Selling, general and administrative expense, as a percentage of polyester net sales, increased from 3.2% in fiscal 1998 to 4.7% in fiscal 1999.
NYLON OPERATIONS
In fiscal 1999, nylon net sales decreased $22.0 million, or 4.7% compared to fiscal 1998. Unit volumes for fiscal 1999 decreased by 4.8%, while average sales prices, based on product mix, increased 0.1%. The reduction in sales volume is primarily attributable to the continuing decline of the ladies hosiery market. The sales price increase was impacted by a minor shift in domestic product mix to lower volume, higher priced products.
Nylon gross profit decreased $19.3 million and gross margin decreased from 17.7% in 1998 to 14.3% in 1999, due mainly to the previously noted decrease in net sales and the corresponding lack of volume to cover existing fixed manufacturing costs and depreciation. In addition, depreciation increased $8.0 million in fiscal 1999 over 1998 resulting from the completion in fiscal 1999 of a nylon texturing and covering facility, constructed to replace older equipment and consolidate several of the Company's older nylon facilities. Gross profit was also reduced by a $2.6 million charge resulting from employee acceptance of an early retirement plan offered in fiscal 1999.
Selling, general and administrative expense allocated to the nylon segment increased $3.2 million in fiscal 1999. Of this increase, $2.5 million related to a charge resulting from employee acceptance of an early retirement program offered in fiscal 1999. Selling, general and administrative expense, as a percentage of nylon net sales, increased from 2.8% in fiscal 1998 to 3.6% in fiscal 1999.
CONSOLIDATED OPERATIONS
Interest expense increased $10.9 million, from $16.6 million in fiscal 1998 to $27.5 million in fiscal 1999. The increase in interest expense reflects higher levels of debt outstanding at higher average interest rates during fiscal 1999 and a $4.8 million reduction in capitalized interest for major construction projects, as certain significant projects in process during the prior year period have been completed. The weighted average interest rate on debt outstanding at June 27, 1999 was 5.94%.
Interest income improved by $530 thousand from 1998 to 1999 primarily as a result of higher levels of invested funds. Other expense increased from $389 thousand to $1.6 million from 1998 to 1999.
Earnings from our equity affiliates, Parkdale America, LLC. (the "LLC") and Micell Technologies, Inc. ("Micell"), net of related amortization, totaled $4.2 million in fiscal 1999 compared with $23.0 million in fiscal 1998. The decline in earnings is primarily attributable to the reduced earnings of the LLC and higher start-up expenses at Micell. The LLC's operations were negatively impacted by excess capacity in the markets and reduced sales volumes as imported apparel eroded their customer's business.
Effective May 29, 1999, the Company formed a limited liability company (the "Partnership") with Burlington Industries, Inc. ("Burlington") to manufacture and market natural textured polyester. The Company has an 85.42% ownership interest in the Partnership and Burlington has 14.58%. However, for the first five years of the Partnership, Burlington is entitled to receive the first $9.4 million of earnings. Subsequent to this five year period, earnings are to be allocated based on ownership percentages. Burlington's share of the earnings of the Partnership are reflected as minority interest and amounted to $9.4 million in fiscal 1999 and $0.7 million in fiscal 1998.
The effective tax rate decreased from 32.8% in 1998 to 32.5% in 1999. The difference between the statutory and effective tax rate is primarily due to the realization of state tax credits associated with significant capital expenditures and the operating results of our Irish operations that are taxed at a 10.0% effective rate.
In the first quarter of fiscal 1999, the Company recognized a cumulative effect of an accounting change of $4.5 million ($2.8 million after tax) or $.04 per diluted share as a result of changing its accounting policy regarding start-up costs. Pursuant to the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," any previously capitalized start-up costs were required to be written-off as a cumulative effect of an accounting change. Accordingly, the Company has written-off the unamortized balance of the previously capitalized start-up costs.
As a result of the above, the Company realized during the current year net income of $56.3 million, or $0.93 per diluted share, compared to $124.3 million, or $2.01 per diluted share for the prior fiscal year period. Before the previously described cumulative effect of an accounting change in the current year, earnings would have been $59.0 million or $0.97 per diluted share.
In June 1997, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130"). SFAS 130 requires the reporting of comprehensive income and its components in complete, general purpose financial statements as well as requires certain interim comprehensive income information be disclosed. Comprehensive income represents the change in net assets of a business during a period from non-owner sources, which are not included in net income. Foreign currency translation adjustments presently represent the only component of comprehensive income for the Company. As of June 28, 1998, the Company adopted SFAS 130, Reporting Comprehensive Income. SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or shareholders' equity. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities and the foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130.
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131") which the Company adopted in the fourth quarter of fiscal 1999. SFAS 131 establishes standards of reporting financial information from operating segments in annual and interim financial statements of public companies, as well as establishes standards for related disclosures about products and services, geographic areas and major customers. Operating segments are defined in SFAS 131 as components of an enterprise about which separate financial information is available to the chief operating decision-maker for purposes of assessing performance and allocating resources. The required segment reporting is detailed in Note 9 to the consolidated financial statements. The adoption of SFAS 131 had no effect on the consolidated results of operations or financial position.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Cost of Computer Software Developed for or Obtained for Internal-Use," ("SOP 98-1"). This SOP is effective for the Company in the first quarter of fiscal year 2000. SOP 98-1 will require the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The Company currently expenses certain of these internal costs when incurred. As discussed in "Year 2000 Compliance Status" located in Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company is actively implementing an enterprise-wide software solution that is substantially complete at June 27, 1999. Consequently, remaining costs associated with obtaining and modifying this system are not anticipated to be material to the Company's results of operations or financial position after the adoption of this SOP.
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") and in August 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "An Amendment to SFAS 133," which delayed the effective date of SFAS 133 until the Company's fiscal year 2001. SFAS 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. For derivatives that are hedges, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Although the Company does not enter into derivative financial instruments for trading purposes, it has not yet determined what the effect of SFAS 133, for derivatives that are considered hedges, will be on its results of operations or financial position.
FISCAL 1998
Following is a summary of operating income by segment for fiscal years 1998 and 1997, as reported regularly to the Company's management:
As illustrated in Note 9 to the consolidated financial statements, all "other" revenues and expenses, required to reconcile the polyester and nylon operating segments to consolidated results, are comprised primarily of intersegment sales and cost of sales eliminations and various expenses reported internally at a consolidated level. In addition, fiscal 1997 contains activity related to the spinning of cotton and cotton blend fibers, which were contributed to Parkdale America on June 30, 1997 (see Note 11 to the consolidated financial statements).
POLYESTER OPERATIONS
Polyester net sales decreased $27.4 million from fiscal year 1997 to 1998. Overall unit volume increased 1.5% during fiscal 1998. Average unit sales prices declined 4.3% during fiscal 1998 primarily due to export sales comprising a larger percentage of total fiscal 1998 sales as compared with fiscal 1997. Export unit prices were adversely affected in fiscal 1998 due to various factors including the strengthening of the U.S. dollar and increased competition. The stronger U.S. dollar also negatively impacted the translation of our Irish operation's sales in fiscal 1998 from the functional Irish punt currency to the U.S. dollar. Domestically, unit volumes declined in fiscal 1998 as a result of increased fiber, fabric and apparel imports. Unit volumes increased in the fourth quarter due, in part, to the sales generated by the formation of a limited liability company with Burlington Industries on May 29, 1998.
Sales from foreign operations are denominated in local currencies and are hedged in part by the purchase of raw materials and services in those same currencies. As described in Note 10 to the consolidated financial statements, currency exchange rate risks are mitigated by the utilization of foreign currency forward contracts and purchases in local currencies. The Company does not enter into derivative financial instruments for trading purposes.
Polyester gross margins improved from 13.7% in fiscal 1997 to 15.1% in the fiscal 1998. The increase in gross margin primarily reflects raw material cost reductions based on product mix, which were partially offset by higher direct and allocated indirect manufacturing costs as a percentage of net sales. The increase in allocated indirect manufacturing costs results from the lower consolidated sales base in fiscal 1998, in which to allocate indirect costs, as a result of the contribution of our spun cotton yarn operations at the beginning of the 1998 fiscal year.
Selling, general and administrative expense allocated to the polyester segment increased $4.8 million from fiscal 1997 to 1998. As a percentage of net sales these costs increased from 2.6% in the prior fiscal year to 3.2% in the current year. The increase mainly reflects the lower consolidated sales base, in which to absorb allocated costs, as a result of the contribution of our spun cotton yarn operations at the beginning of the 1998 fiscal year.
NYLON OPERATIONS
Nylon net sales remained stable from the fiscal year 1997 to 1998 despite a 4.4% decline in unit volume. The volume decrease was minimized by the acquisition on November 14, 1997, of SI Holding Company (Spanco). The effect of the volume decrease was offset by a 4.4% increase in average unit sales prices.
Nylon gross margins were 17.7% in both fiscal 1998 and 1997. During fiscal 1998 nylon realized average unit raw material cost reductions based on product mix, which were offset by higher direct and allocated indirect manufacturing costs as a percentage of net sales. The increase in allocated indirect manufacturing costs results from the lower consolidated sales base in fiscal 1998, in which to allocate indirect costs, as a result of the contribution of our spun cotton yarn operations at the beginning of the 1998 fiscal year.
Selling, general and administrative expense allocated to the nylon segment increased $1.2 million from fiscal 1997 to 1998. As a percentage of net sales these costs increased from 2.5% in fiscal 1997 to 2.8% in fiscal 1998. The increase mainly reflects the lower consolidated sales base, in which to absorb allocated costs, as a result of the contribution of our spun cotton yarn operations at the beginning of the 1998 fiscal year.
CONSOLIDATED OPERATIONS
Interest expense increased $4.9 million, from $11.7 million in 1997 to $16.6 million in 1998. The increase is associated with both higher levels of debt outstanding during the current year and higher average interest rates during this period. In February 1998, the Company issued $250.0 million of debt securities, the proceeds of which were used to repay a portion of the revolving credit facility. The coupon rate of the new securities is 6.50%. Debt
levels increased during the year as a result of capital expenditures, investments in equity affiliates, stock repurchases and an acquisition.
Interest income declined $350 thousand from 1997 to 1998 primarily as a result of lower levels of invested funds. Other expense decreased from $819 thousand to $389 thousand from 1997 to 1998.
Earnings from our equity affiliates, net of related amortization, totaled $23.0 million in the current year. The effective tax rate decreased from 33.6% in 1997 to 32.8% in 1998. The improvement in the effective tax rate is primarily due to the realization of state tax credits in the current year associated with significant capital expenditures and improved operating results of our Irish operations that are taxed at a 10.0% effective rate.
In the second quarter of fiscal 1998, the Company recognized a write-off of $7.5 million ($4.6 million after tax) or $.07 per diluted share as a result of changing its accounting policy regarding business reengineering costs. Previously, substantially all direct external costs associated with installing a new computer software system were capitalized, including those costs related to business process reengineering. Pursuant to Emerging Issues Task Force 97-13 issued in November 1997, these costs were written off as a cumulative catch-up adjustment.
As a result of the above, the Company realized during fiscal 1998 net income of $124.3 million, or $2.01 per diluted share, compared to $115.7 million or $1.81 per diluted share for fiscal 1997. Before the cumulative effect of an accounting change in fiscal 1998, earnings would have been $128.9 million or $2.08 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations continues to be a primary source of funds to finance operating needs and capital expenditures. Cash generated from operations was $209.8 million for fiscal 1999, compared to $181.7 million for fiscal 1998. The primary sources of cash from operations, other than net income, were a decrease in accounts receivable of $34.5 million, a decrease in inventory of $16.3 million and non-cash adjustments aggregating $103.0 million. Depreciation and amortization of $89.9 million, the after-tax cumulative effect of an accounting change of $2.8 million, the deferred income tax provision of $4.6 million, and the distributions from unconsolidated equity affiliates in excess of earnings of $5.3 million were the primary components of the non-cash adjustments. Offsetting these sources was a decrease in accounts payable and accruals of $14.0 million. All working capital changes have been adjusted to exclude the effects of acquisitions and currency translation. Working capital levels are more than adequate to meet the operating requirements of the Company. The Company ended fiscal 1999 with working capital of $216.9 million, which included cash and cash equivalents of $44.4 million.
The Company utilized $159.6 million for net investing activities and $12.0 million for net financing activities during fiscal 1999. Significant expenditures during this period included $118.8 million for capacity expansions and upgrading of facilities, $27.1 million for acquisitions, $10.0 for investments in equity affiliates, $39.3 million for the purchase and retirement of Company common stock and $9.0 million for distributions to minority interest shareholders. The Company also utilized the net proceeds of $35.4 million from its long-term debt agreements to finance these expenditures. The Company purchased, effective April 1, 1999, the polyester texturing and dyed yarn property, plant and equipment of Fairway Polyester, LTDA located in Brazil for $16.6 million. The Company also acquired the assets of Cimtec Inc, a manufacturing solutions provider, effective June 1, 1999 for $10.5 million. These acquisitions, which are not deemed significant to the Company's consolidated net assets or result of operations, were accounted for by the purchase method of accounting.
At June 27, 1999, the Company has committed approximately $20.2 million for the purchase and upgrade of equipment and facilities during fiscal 2000.
In the third quarter of fiscal 1999, the Company recognized a $14.8 million charge associated with the early retirement and termination of 114 salaried employees. The charge was recorded as a component of selling, general and administrative expenses in the amount of $8.2 million and cost of goods sold in the amount of $6.6 million. Substantially all employees were terminated effective March 31, 1999, with cash payments expected to be spread over a period not to exceed three years.
The Company periodically evaluates the carrying value of long-lived assets, including property, plant and equipment and intangibles to determine if impairment exists. If the sum of expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is required to be recognized for the difference between the fair value or the discounted future cash flows and the carrying amount of the asset. As discussed in the current and prior periods, the performance of our polyester operations continued to be negatively
impacted by the ongoing effects of Asian fiber, fabric and apparel imports which have reduced polyester sales volumes and gross margins. Additionally, in response to the pressures caused by the importation of fabric and apparel, many U.S. textile and apparel manufacturers are downsizing their domestic operations and moving production capacity offshore. During the fourth quarter of fiscal 1999, the Company reviewed its projected future cash flows of the polyester division's long-lived assets and determined no impairment exists at this time.
Effective July 16, 1998, the Board of Directors terminated the previously-established policy of paying cash dividends equal to approximately 30% of the Company's after-tax earnings for the previous year. In lieu of this cash dividend, the Board of Directors authorized management to utilize in fiscal 1999 cash equal to the same 30% of previous year's earnings to purchase shares of the Company's stock, as management deems advisable. The Board of Directors also increased the remaining authorization pursuant to a resolution originally adopted on October 21, 1993, to purchase 10 million shares of Unifi's common stock. During the current year, the Company has purchased 2.1 million shares for $39.3 million. Accordingly, there remains an authorization to repurchase approximately 7.9 million shares. The Company will continue to operate its stock buy-back program, as it deems appropriate, based on prevailing financial and market conditions.
Management believes the current financial position of the Company in connection with its operations and its access to debt and equity markets are sufficient to meet anticipated capital expenditure, strategic acquisition, working capital, Company common stock repurchases and other financial needs.
YEAR 2000 COMPLIANCE STATUS
The Company continues to actively address the business issues associated with the year 2000 that impact information technology systems and non-information technology systems (i.e., embedded technology) both internally and in relation to our external customers, suppliers and other business associates. Factors involved in addressing such business issues include the evaluation, testing and implementation of the Company's enterprise-wide systems; evaluation, upgrading and certifying of non-information technology systems; assessing and testing significant customers' and vendors' compliance strategies and monitoring the status thereof (including electronic commerce with these companies); and, evaluating and monitoring the compliance plans of businesses in which the Company maintains investments in their operations. The Company has created a team of professionals with the responsibility of addressing business issues associated with the year 2000. The Company does not believe any material exposures or contingencies exist with respect to its internal information systems as the installation of the remaining enterprises-wide software is anticipated to be completed in the necessary time frame. At present, the Company estimates it is approximately 95% complete with its enterprise-wide software implementation efforts and approximately 95% complete with respect to manufacturing plant floor applications implementations. Additionally, upgrades are ongoing and are on schedule for certain applications where the Company has elected to postpone enterprise software conversion. Testing of the respective applications is an on-going process, which will go on throughout the next quarter. Embedded technology devices are also being reviewed in conjunction with the manufacturing plant floor compliance procedures.
The Company is also dependent upon its customers' and vendors' compliance with the year 2000 problem and could face disruption of business in the event these efforts are unsuccessful. The Company has requested information on the year 2000 compliance plans and status from its significant vendors and equity affiliates and is presently not aware of any material exposures or contingencies. Face-to-face meetings have been conducted and will continue in order to plan and execute appropriate follow-up activities with its more critical suppliers. The Company has sent surveys to its major customers and is presently evaluating responses as they are submitted to plan and perform necessary follow-up activities. Conversion plans have been established for the Company's EDI customers and vendors and procedures have begun. Efforts are underway to convert the remaining customers in the next fiscal quarter. The Company will continue its efforts to gather information from businesses with which it conducts business. However, such information is subject to accurate and voluntary communication. Consequently, the Company cannot predict the likelihood or impact on its business resulting from noncompliance by such parties. Although the Company believes its business critical systems will be compliant, there can be no assurances that all non-compliant systems will be identified or that all significant suppliers or customers will be year 2000 capable. A worst-case scenario could include interruption in the procurement of necessary materials or the disruption in manufacturing or information systems. Such events would adversely impact the distribution of product, timelines and accuracy of record-keeping and collection of revenue among other consequences which could cause a material impact on the Company's results of operation and financial position.
The Company has substantially completed contingency plans and recovery procedures to deal with potential problems associated with failures in its own computer systems as well as disruptions caused by system failures (or further dependencies) of its critical suppliers. These plans include, among others, the modification and upgrading of necessary business systems for which the enterprise-wide system implementation efforts are not certain. Costs incurred in the Company's year 2000 compliance efforts are being expensed as incurred. Anticipated expenditures related to year 2000 compliance readiness, in addition to those associated with the enterprise- wide software implementation, was $765 thousand for the fiscal year ending June 27, 1999.
EURO CONVERSION
The Company conducts business in multiple currencies, including the currencies of various European countries in the European Union which began participating in the single European currency by adopting the Euro as their common currency as of January 1, 1999. Additionally, the functional currency of our Irish operation and several sales office locations will change before January 1, 2002, from their historical currencies to the Euro. During the period January 1, 1999, to January 1, 2002, the existing currencies of the member countries will remain legal tender and customers and vendors of the Company may continue to use these currencies when conducting business. Currency rates during this period, however, will no longer be computed from one legacy currency to another but instead will first be converted into the Euro. The Company continues to evaluate the Euro conversion and the impact on its business, both strategically and operationally. At this time, the conversion to the Euro has not had, nor is expected to have, a material adverse effect on the financial condition or results of operations of the Company.
FORWARD-LOOKING STATEMENTS
Certain statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this quarterly report contain forward-looking statements within the meaning of federal security laws about the Company's financial condition and results of operations that are based on management's current expectations, estimates and projections about the markets in which the Company operates, management's beliefs and assumptions made by management. Words such as "expects," "anticipates," "believes," "estimates," variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's judgment only as of the date hereof. The Company undertakes no obligation to update publicly any of these forward-looking statements to reflect new information, future events or otherwise. Factors that may cause actual outcome and results to differ materially from those expressed in, or implied by, these forward-looking statements include, but are not necessarily limited to, availability, sourcing and pricing of raw materials, pressures on sales prices and volumes due to competition and economic conditions, reliance on and financial viability of significant customers, technological advancements, employee relations, changes in construction spending and capital equipment expenditures (including those related to unforeseen acquisition opportunities), the timely completion of construction and expansion projects planned or in process, continued availability of financial resources through financing arrangements and operations, negotiations of new or modifications of existing contracts for asset management and for property and equipment construction and acquisition, regulations governing tax laws, other governmental and authoritative bodies' policies and legislation, the continuation and magnitude of the Company's common stock repurchase program and proceeds received from the sale of assets held for disposal. In addition to these representative factors, forward-looking statements could be impacted by general domestic and international economic and industry conditions in the markets where the Company competes, such as changes in currency exchange rates, interest and inflation rates, recession and other economic and political factors over which the Company has no control.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See the information included in Footnote 10 ("Derivative Financial Instruments and Fair Value of Financial Instruments") on Pages 26 and 27 of this Report.
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's report of independent auditors and consolidated financial statements and related notes follow on subsequent pages of this Report.
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF UNIFI, INC.
We have audited the accompanying consolidated balance sheets of Unifi, Inc. as of June 27, 1999, and June 28, 1998, and the related consolidated statements of income, changes in shareholders' equity and comprehensive income, and cash flows for each of the three years in the period ended June 27, 1999. Our audits also include the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Unifi, Inc. at June 27, 1999, and June 28, 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 27, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Greensboro, North Carolina July 20, 1999
CONSOLIDATED BALANCE SHEETS
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF INCOME
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND FINANCIAL STATEMENT INFORMATION
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. The accounts of all foreign subsidiaries have been included on the basis of fiscal periods ended three months or less prior to the dates of the consolidated balance sheets. All significant intercompany accounts and transactions have been eliminated. Investments in 20 to 50% owned companies and partnerships are reported using the equity method.
RECLASSIFICATION: The Company has reclassified the presentation of certain prior year information to conform with the current presentation format.
REVENUE RECOGNITION: Revenues from sales are recognized at the time shipments are made.
FOREIGN CURRENCY TRANSLATION: Assets and liabilities of foreign subsidiaries are translated at year-end rates of exchange and revenues and expenses are translated at the average rates of exchange for the year. Gains and losses resulting from translation are accumulated in a separate component of shareholders' equity and included in comprehensive income. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the subsidiary's functional currency) are included in net income.
CASH AND CASH EQUIVALENTS: Cash equivalents are defined as short-term investments having an original maturity of three months or less.
RECEIVABLES: Certain customer accounts receivable are factored without recourse with respect to credit risk. Factored accounts receivable at June 27, 1999, and June 28, 1998, were $41.6 million and $49.2 million, respectively. An allowance for losses is provided for known and potential losses rising from yarn quality claims and for customers not factored based on a periodic review of these accounts. Reserves for such losses were $8.7 million at June 27, 1999 and $8.2 million at June 28, 1998.
INVENTORIES: The Company utilizes the last-in, first-out ("LIFO") method for valuing certain inventories representing 52.4% of all inventories at June 27, 1999, and the first-in, first-out ("FIFO") method for all other inventories. Inventory values computed by the LIFO method are lower than current market values. Inventories valued at current or replacement cost would have been approximately $0.7 million and $8.9 million in excess of the LIFO valuation at June 27, 1999 and June 28, 1998, respectively. Finished goods, work in process, and raw materials and supplies at June 27, 1999, and June 28, 1998, amounted to $69.7 million and $77.4 million; $14.6 million and $14.8 million; and $45.6 million and $45.0 million, respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost. Depreciation is computed for asset groups primarily utilizing the straight-line method for financial reporting and accelerated methods for tax reporting. For financial reporting purposes, asset lives have been assigned to asset categories over periods ranging between three and forty years.
OTHER NONCURRENT ASSETS: Other noncurrent assets at June 27, 1999, and June 28, 1998, consist primarily of the cash surrender value of key executive life insurance policies ($8.1 million and $7.1 million); unamortized bond issue costs ($6.7 million and $7.5 million); and acquisition related assets consisting of the excess cost over fair value of net assets acquired and other intangibles ($86.3 million and $83.9 million), respectively. Bond issue costs are being amortized on the straight-line method over the life of the bonds which approximates the effective interest method. The acquisition related assets are being amortized on the straight-line method over periods ranging between five and thirty years. Accumulated amortization at June 27, 1999 and June 28, 1998, for bond issue costs and acquisition related assets was $19.2 million and $10.2 million, respectively.
LONG-LIVED ASSETS: Long-lived assets, including the excess cost over fair value of net assets acquired, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying amount of the asset.
INCOME TAXES: The Company and its domestic subsidiaries file a consolidated federal income tax return. Income tax expense is computed on the basis of transactions entering into pretax operating results. Deferred
income taxes have been provided for the tax effect of temporary differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. Income taxes have not been provided for the undistributed earnings of certain foreign subsidiaries as such earnings are deemed to be permanently invested.
EARNINGS PER SHARE: The following table details the computation of basic and diluted earnings per share:
STOCK-BASED COMPENSATION: With the adoption of SFAS 123, the Company elected to continue to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Had the fair value-based method encouraged by SFAS 123 been applied, compensation expense would have been recorded on 414,000 options granted in fiscal 1999 (which mostly vest over a two year period), and 270,500 options granted in fiscal 1997 (which vest over a two year period). No options were granted in fiscal 1998. Net income in fiscal 1999, 1998 and 1997 restated for the effect would have been $53.0 million or $0.88 per diluted share, $122.8 million or $1.98 per diluted share and $115.1 million or $1.80 per diluted share, respectively. The fair value and related compensation expense of the 1999 and 1997 options were calculated as of the issuance date using the Black-Scholes model with the following assumptions:
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130"). SFAS 130 requires the reporting of comprehensive income and its components in complete, general purpose financial statements as well as requires certain interim comprehensive income information be disclosed. Comprehensive income represents the change in net assets of a business during a period from non-owner sources, which are not included in net income. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities and the foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Foreign currency translation adjustments presently represent the only component of comprehensive income for the Company. As of June 29, 1998, the Company adopted SFAS 130, however, the adoption of this Statement had no impact on the Company's net income or shareholders' equity. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130.
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131") which the Company adopted in the fourth quarter of fiscal 1999. SFAS 131 establishes standards of reporting financial information from operating segments in annual and interim financial statements of public companies, as well as establishes standards for related disclosures about products and services, geographic areas and major customers. Operating segments are defined in SFAS 131 as components of an enterprise about which separate financial information is available to the chief operating decision-maker for purposes of assessing performance and allocating resources. The required segment
reporting is detailed in Note 9. The adoption of SFAS 131 had no effect on the consolidated results of operations or financial position.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Cost of Computer Software Developed for or Obtained for Internal-Use," ("SOP 98-1"). This SOP is effective for the Company in the first quarter of fiscal year 2000. SOP 98-1 requires the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The Company currently expenses certain of these internal costs when incurred. As discussed in "Year 2000 Compliance Status" located in Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company is actively implementing an enterprise-wide software solution that is substantially complete at June 27, 1999. Consequently, remaining costs associated with obtaining and modifying this system are not anticipated to be material to the Company's results of operations or financial position after the adoption of this SOP.
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") and in August 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - -- Deferral of the Effective Date of FASB Statement No. 133," which delayed the effective date of SFAS 133 until the Company's fiscal year 2001. SFAS 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. For derivatives that are hedges, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company does not enter into derivative financial instruments for trading purposes and it has not yet determined what the effect of SFAS 133, for derivatives that are considered hedges, will be on its earnings and financial position.
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 accompanying notes. Actual results could differ from those estimates.
2. ACQUISITIONS
The Company formed Unifi do Brasil, LTDA to acquire the assets of Fairway Polyester, LTDA., a Brazilian company, for $16.6 million effective April 1, 1999. Also, effective June 1, 1999, UNIFI Technology Group LLC, the newly formed subsidiary of the Company, acquired the assets of Cimtec Inc. ("Cimtec"), a manufacturing automation solutions provider, for $10.5 million. Subsequently, a five-percent interest in the new entity was sold to certain former Cimtec shareholders. The acquisitions, which are not considered significant to the Company's consolidated net assets or results of operations, were accounted for by the purchase method of accounting and both have been included in the consolidated results of the Company since the respective acquisition dates.
On November 14, 1997, the Company completed its Agreement and Plan of Triangular Merger with SI Holding Company and thereby acquired their covered yarn business for approximately $46.6 million. Additionally, covenants-not-to-compete were entered into with the principal operating officers of the acquired company in exchange for $9.2 million, to be paid generally over the terms of the covenants. The acquisition, which is not considered significant to the Company's consolidated net assets or results of operations, was accounted for by the purchase method of accounting and accordingly, the net assets and operations have been included in the Company's consolidated financial statements beginning on the date the acquisition was consummated. After allocation of the purchase price to the net assets acquired, the excess of cost over fair value has been valued at $31.2 million.
3. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," which requires start-up costs, as defined, to be expensed as incurred. In accordance with this SOP, any previously capitalized start-up costs are required to be written-off as a cumulative effect of a change in accounting principle. The Company, upon adoption of this SOP in the first quarter of fiscal 1999, has written off the unamortized balance of such previously capitalized start-up costs as of June 29, 1998, of $4.5 million ($2.8 million after tax) or $.04 per diluted share as a cumulative catch-up adjustment.
Pursuant to Emerging Issues Task Force No. 97-13 issued in November 1997, the Company changed its accounting policy in the second quarter of fiscal 1998 regarding a project to install an entirely new computer software system which it began in fiscal 1995. Previously, substantially all direct external costs relating to the project were capitalized, including the portion related to business process reengineering. In accordance with this accounting pronouncement, the unamortized balance of these reengineering costs as of September 28, 1997, of $7.5 million ($4.6 million after tax) or $.07 per diluted share was written off as a cumulative catch-up adjustment in the second quarter of fiscal 1998.
4. LONG-TERM DEBT AND OTHER LIABILITIES
A summary of long-term debt follows:
On February 5, 1998, the Company issued $250 million of senior, unsecured debt securities (the "Notes") to qualified institutional buyers. The net proceeds from the sale were used to repay a portion of the Company's bank credit facility. The Notes, which were registered with the Securities and Exchange Commission on April 2, 1998, bear a coupon rate of 6.50% and mature in 2008. The estimated fair value of the Notes, based on quoted market prices, at June 27, 1999 and June 28, 1998, was approximately $229.7 million and $247.4 million, respectively.
The Company entered a $400 million revolving credit facility dated April 15, 1996, with a group of financial institutions that extends through April 15, 2001. The rate of interest charged is adjusted quarterly based on a pricing grid which is a function of the ratio of the Company's debt to earnings before income taxes, depreciation, amortization and other non-cash charges. The credit facility provides the Company the option of borrowing at a spread over the base rate (as defined) for base rate loans or the Adjusted London Interbank Offered Rate (LIBOR) for Eurodollar loans. In accordance with the pricing grid, the Company pays a quarterly facility fee ranging from 0.090%-0.150% of the total amount available under the revolving credit facility. The weighted average interest rates for fiscal years 1999 and 1998 were 5.57% and 5.89%, respectively. At June 27, 1999 and June 28, 1998, the interest rates on the outstanding balances were 5.29% and 5.92%, respectively. As a result of the variable nature of the credit facility's interest rate, the fair value of the Company's revolving credit debt approximates its carrying value.
The revolving credit facility also provides the Company the option to borrow funds competitively from the individual lenders, at their discretion, provided that the sum of the competitive bid loans and the aggregate funds committed under the revolving credit facility do not exceed the total committed amount. The revolving credit facility allows the Company to reduce the outstanding commitment in whole or in part upon satisfactory notice up to an amount no less than the sum of the aggregate competitive bid loans and the total committed loans. Any such partial termination is permanent. The Company may also elect to prepay loans in whole or in part. Amounts paid in accordance with this provision may be re-borrowed.
The terms of the revolving credit facility contain, among other provisions, requirements for maintaining certain net worth and other financial ratios and specific limits or restrictions on additional indebtedness, liens and merger activity. Provisions under this agreement are not considered restrictive to normal operations.
On May 20, 1997, the Company entered into a sales-leaseback agreement with a financial institution whereby land, buildings and associated real and personal property improvements of certain manufacturing facilities were sold to the financial institution and will be leased by the Company over a sixteen year period. Sales proceeds aggregated $27.5 million. The terms of the agreement provide for an early purchase option at the end of year nine. If the agreement has not been terminated before the end of the lease term, by exercising the early purchase option or otherwise, the Company is required to purchase the leased properties at the end of the lease term for
an amount equal to the fair market value as defined in the agreement. This transaction has been recorded as a direct financing arrangement.
On June 30, 1997, the Company entered into a Contribution Agreement associated with the formation of Parkdale America, LLC (see Note 11). As a part of the Contribution Agreement, ownership of a significant portion of the assets financed under the sales-leaseback agreement and the related debt ($23.5 million) were assumed by the LLC.
Payments for the remaining balance of the sales-leaseback agreement are due semi-annually and are in varying amounts, in accordance with the agreement. Principal payments required over the next five years are approximately $100 thousand per year. The interest rate implicit in the agreement is 7.84%, and the fair value of the long-term obligation at June 27, 1999 and June 28, 1998, approximates its carrying value.
Other obligations consist of acquisition related liabilities due within the next four years. Maturities of the obligations over the next four years are $16.3 million, $4.0 million, $3.1 million and $3.6 million, respectively.
Interest capitalized during fiscal 1999 and 1998 was $2.0 million and $6.8 million, respectively.
5. INCOME TAXES
The provision for income taxes before the cumulative effect of accounting change in fiscal 1999 and 1998 consists of the following:
Income taxes were 32.5%, 32.8% and 33.6% of pretax earnings in fiscal 1999, 1998 and 1997, respectively. A reconciliation of the provision for income taxes (before cumulative effect of accounting change, where applicable) with the amounts obtained by applying the federal statutory tax rate is as follows:
The deferred income taxes reflect the net tax effects of temporary differences between the bases of assets and liabilities for financial reporting purposes and their bases for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of June 27, 1999, and June 28, 1998, were as follows:
6. COMMON STOCK AND STOCK OPTION PLANS
Common shares authorized were 500 million in 1999 and 1998. Common shares outstanding at June 27, 1999, and June 28, 1998, were 59,547,819 and 61,634,386, respectively.
The Company has Incentive Stock Option Plans ("ISO") with 1,537,357 shares reserved at June 27, 1999. There remain 691,000 options available for grant at year end. The Company also has a Non-Qualified Stock Option Plan ("NQSO") with 1,613,999 shares reserved at June 27, 1999. There remain 37,992 options available for grant at year end. The transactions for 1999, 1998 and 1997 were as follows:
Substantially all options granted in fiscal years 1997, 1998 and 1999 vest over a two year period from the date of grant.
7. RETIREMENT PLANS
The Company has a qualified profit-sharing plan, which provides benefits for eligible salaried and hourly employees. The annual contribution to the plan, which is at the discretion of the Board of Directors, amounted to $11.0 million in 1999, $13.0 million in 1998 and $17.0 million 1997. The Company leases its corporate office building from its profit-sharing plan through an independent trustee.
8. LEASES AND COMMITMENTS
In addition to the direct financing sales-leaseback obligation described in Note 4, the Company is obligated under operating leases consisting primarily of real estate and equipment. Future obligations for minimum rentals under the leases during fiscal years after June 27, 1999, are $5.6 million in 2000, $4.8 million in 2001, $4.0 million in 2002, $3.1 million in 2003 and $1.9 million in 2004. Rental expense was $7.6 million, $6.8 million and $5.0 million for the fiscal years 1999, 1998 and 1997, respectively. The Company had committed approximately $20.2 million for the purchase and up grade of equipment and facilities at June 27, 1999.
9. BUSINESS SEGMENTS, FOREIGN OPERATIONS AND CONCENTRATIONS OF CREDIT RISK
The Company and its subsidiaries are engaged predominantly in the processing of yarns by texturing of synthetic filament polyester and nylon fiber with sales domestically and internationally, mostly to knitters and weavers for the apparel, industrial, hosiery, home furnishing, automotive upholstery and other end-use markets. Additionally, during fiscal 1999, the Company formed a limited liability company to provide integrated manufacturing, factory automation and electronic commerce solutions to other domestic manufactures. In fiscal year 1997, the Company was also directly involved with the spinning of cotton and cotton blend fibers. These operations were contributed to a limited liability company on June 30, 1997, of which the Company has a 34% ownership interest (see Note 11).
In accordance with SFAS 131, segmented financial information of the polyester and nylon operating segments, as regularly reported to management for the purpose of assessing performance and allocating resources, is detailed below. "All other" represents the results of the limited liability consulting company in fiscal 1999 and the spun cotton operations in fiscal 1997.
Segment operating income for fiscal 1999 was reduced $9.7 million and $5.1 million for polyester and nylon, respectively, as a result of the early retirement and termination charge in the third quarter (see Note 14).
Certain indirect manufacturing and selling, general and administrative costs are allocated to the operating segments based on activity drivers relevant to the respective costs. The primary differences between the segmented financial information of the operating segments, as reported to management, and the Company's consolidated reporting relates to fiber costing and capitalization of property, plant and equipment costs. The domestic portion of the operating division's fiber costs are valued on a standard cost basis, which approximates first-in, first-out accounting to better match current fluctuations in fiber costing. Subsequently, for those components of inventory valued utilizing the last-in, first-out method (see Note 1), an adjustment is made at the corporate level. For significant capital projects, capitalization is delayed for management reporting until the facility is substantially complete, however, for consolidated financial reporting, expenditures are capitalized into construction in progress as costs are incurred.
The Company's domestic operations serve customers principally located in the southeastern United States as well as international customers located primarily in Canada, Mexico, Europe and South America. During fiscal 1999, 1998 and 1997 the Company did not have sales to any one customer in excess of 10% of consolidated revenues. Export sales, excluding those to the Company's international operations, aggregated $153.9 million in 1999, $185.5 million in 1998 and $203.8 million in 1997. The concentration of credit risk for the Company with respect to trade receivables is mitigated due to the large number of customers, dispersion across different industries and geographic regions and its factoring arrangements.
The Company's foreign operations primarily consist of manufacturing operations in Ireland, Brazil and Columbia. Net sales, pre-tax operating income and total assets of the Company's foreign and domestic operations are as follows:
10. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company conducts its business in various foreign currencies. As a result, it is subject to the transaction exposure that arises from foreign exchange rate movements between the dates that foreign currency transactions are recorded (export sales and purchases commitments) and the dates they are consummated (cash receipts and cash disbursements in foreign currencies). The Company utilizes some natural hedging to mitigate these transaction exposures. The Company also enters into foreign currency forward contracts for the purchase and sale of European, Canadian and other currencies to hedge balance sheet and income statement currency exposures. These contracts are principally entered into for the purchase of inventory and equipment and the sale of Company products into export markets. Counter-parties for these instruments are major financial institutions.
Currency forward contracts are entered to hedge exposure for sales in foreign currencies based on specific sales orders with customers or for anticipated sales activity for a future time period. Generally, 60-80% of the sales value of these orders are covered by forward contracts. Maturity dates of the forward contracts attempt to match anticipated receivable collections. The Company marks the outstanding accounts receivable and forward contracts to market at month end and any realized and unrealized gains or losses are recorded as other income and expense. The Company also enters currency forward contracts for committed equipment and inventory purchases. Generally 50-75% of the asset cost is covered by forward contracts. Forward contracts are matched with the anticipated date of delivery of the assets and gains and losses are recorded as a component of the asset cost. The outstanding hedge agreements as of June 27, 1999 mature through June 2000.
The dollar equivalent of these forward currency contracts and their related fair values are detailed below:
The following methods were used by the Company in estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, TRADE RECEIVABLES AND TRADE PAYABLES -- The carrying amounts approximate fair value because of the short maturity of these instruments.
LONG-TERM DEBT -- The fair value of the Company's borrowings is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities (see Note 4).
FOREIGN CURRENCY CONTRACTS -- The fair value is based on quotes obtained from brokers or reference to publicly available market information.
11. INVESTMENT IN UNCONSOLIDATED AFFILIATES
Investments in affiliates consist of a 34% interest in Parkdale America, LLC (the "LLC") and a 41.61% interest in Micell Technologies, Inc. ("Micell"). The LLC was created on June 30, 1997, when the Company and Parkdale Mills, Inc. ("Parkdale") of Gastonia, North Carolina entered into a Contribution Agreement (the "Agreement") that set forth the terms and conditions whereby each entity's open-end and air jet spun cotton yarn assets and certain long-term debt obligations were contributed to the LLC. In accordance with the Agreement, each entity's inventory, owned real and tangible personal property and improvements thereon and the Company's leased real property associated with the operations were contributed to the LLC. Additionally, the Company contributed $32.9 million in cash to the LLC on June 30, 1997, and is required to contribute $10.0 million in cash on June 30, 1998, and $10.0 million on June 30, 1999, whereas Parkdale contributed cash of $51.6 million on June 30, 1997. The LLC assumed certain long-term debt obligations of the Company and Parkdale in the amounts of $23.5 million and $46.0 million, respectively. In exchange for the assets contributed to the LLC and the liabilities assumed by the LLC, the Company received a 34% interest in the LLC and Parkdale received a 66% interest in the LLC. The excess of the Company's investment over its equity in the underlying net assets of the LLC approximated $67.9 million at June 30, 1997 and is being amortized on a straight-line basis over 30 years as a component of the equity in earnings of unconsolidated affiliates.
Condensed balance sheet and income statement information as of June 27, 1999 and June 28, 1998 and for the fiscal year ended June 27, 1999 and June 28, 1998, of the combined LLC and Micell is as follows:
The LLC is organized as a partnership for tax purposes. Taxable income is passed through the LLC to the shareholders in accordance with the Operating Agreement of the LLC. For the fiscal year ended June 27, 1999, distributions received by the Company from the LLC aggregated $9.5 million.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized below:
13. MINORITY INTEREST
Effective May 29, 1998, the Company formed a limited liability company (the "Partnership") with Burlington Industries, Inc. ("Burlington") to manufacture and market natural textured polyester yarns. The Company has an 85.42% interest in the Partnership and Burlington has 14.58%. However, for the first five years of the Partnership, Burlington is entitled to the first $9.4 million of earnings. Subsequent to this five year period, earnings are to be allocated based on ownership percentages. The Partnership's assets, liabilities and earnings are consolidated with those of the Company and Burlington's interest in the Partnership is included in the Company's financial statements as minority interest. Burlington's share of the partnership earnings in fiscal 1999 and 1998 amounted to $9.4 million and $0.7 million, respectively.
14. EARLY RETIREMENT AND TERMINATION CHARGE
During the third quarter of fiscal 1999, the Company recognized a $14.8 million charge associated with the early retirement and termination of 114 salaried employees. The charge was recorded as a component of selling, general and administrative expenses in the amount of $8.2 million and cost of goods sold in the amount of $6.6 million. Substantially all employees were terminated effective March 31, 1999, with cash payments expected to be spread over a period not to exceed three years. At June 27, 1999 there remained a reserve of $11.0 million that is expected to equal the future cash expenditures to such terminated employees.
15. QUARTERLY RESULTS (UNAUDITED)
Quarterly financial data for the years ended June 28, 1998, and June 27, 1999, is presented below:
ITEM 9.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has not changed accountants nor are there any disagreements with its accountants, Ernst & Young LLP, on accounting and financial disclosure that should be reported pursuant to Item 304 of Regulation S-K.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT AND COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
(a) Directors of Registrant: The information included under the headings "Election of Directors", "Nominees for Election as Directors", "Security Holding of Directors, Nominees, and Executive Officers", "Directors' Compensation", "Committees of the Board of Directors", and compliance with Section 16(a) of The Securities and Exchange Act, beginning on Page 3 and ending on Page 6 and on page 17 of the definitive proxy statement filed with the Commission since the close of the Registrant's fiscal year ended June 27, 1999, and within 120 days after the close of said fiscal year, are incorporated herein by reference.
(b) Identification of Executive Officers:
CHAIRMAN OF THE BOARD OF DIRECTORS
G. ALLEN MEBANE, IV Mr. Mebane is 69 and has been an Executive Officer and member of the Board of directors of the Company since 1971, serving as President and Chief Executive Officer of the Company, relinquishing these positions in 1980 and 1985, respectively. He was the Chairman of the Board of Directors for many years, Chairman of the Executive Committee from 1974 to 1995, and was elected as one of the three members of the Office of Chairman on August 8, 1991. On October 22, 1992, Mr. Mebane was again elected as Chairman of the Board of Directors and on January 20, 1999 resumed the positions of Chief Executive Officer and Chairman of the Executive Committee.
PRESIDENT AND CHIEF OPERATING OFFICER
BRIAN R. PARKE Mr. Parke is 51 and has been the Manager or President of the Company's Irish subsidiary (Unifi Textured Yarns Europe) from its acquisition by the Company in 1984 to January 20, 1999, when he was elected President and Chief Operating Officer of the Company. Additionally, Mr. Parke has been a Vice President of the Company since October 21, 1993 and on July 22, 1999 was elected to the Company's Board of Directors.
EXECUTIVE VICE PRESIDENTS
JERRY W. ELLER Mr. Eller is 58 and has been a Vice President or Executive Vice President since 1975. He has been a member of the Board of Directors since 1985 and is a member of the Executive Committee.
G. ALFRED WEBSTER Mr. Webster is 51 and has been a Vice President or Executive Vice President since 1979. He has been a member of the Board of Directors since 1986 and is a member of the Executive Committee.
SENIOR VICE PRESIDENTS
WILLIS C. MOORE, III Mr. Moore is 46 and had been a Partner with Ernst & Young LLP, or its predecessors from 1975 until December 1994, when he became employed by the Company as its Chief Financial Officer. Mr. Moore was elected as a Vice President of the Company on October 19, 1995, and is currently serving as a Senior Vice President and Chief Financial Officer.
JAMES W. BROWN, JR. Mr. Brown is 47 and was an employee of Macfield, Inc. from 1973 until the Macfield merger on August 8, 1991, when he became an employee of the Company. He became a Vice President of the Company on October 22, 1992 and a Senior Vice President on January 20, 1999. He is currently serving as President of the Nylon/Covered Yarn Division of the Company.
STEWART O. LITTLE Mr. Little is 46 and has been a Vice President of the Company since October 24, 1985 and a Senior Vice President since January 20, 1999. He is currently serving as President of the Polyester Division of the Company.
These officers, unless otherwise noted, were elected by the Board of Directors of the Registrant at the Annual Meeting of the Board of Directors held on October 22, 1998. Each officer was elected to serve until the next Annual Meeting of the Board of Directors or until his successor was elected and qualified.
(c) Family Relationship: Mr. Mebane, Chairman of the Board, and Mr. C. Clifford Frazier, Jr., the Secretary of the Registrant, are first cousins. Except for this relationship, there is no family relation between any of the Officers.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the headings "Compensation and Option Committees Interlocks and Insider Participation in Compensation Decisions", "Executive Officers and Their Compensation", "Employment and Termination Agreements", "Options Granted", "Option Exercises and Option/SAR Values", the "Report of the Compensation Committee on Executive Compensation", and the "Performance Graph-Shareholder Return on Common Stock" beginning on Page 6 and ending on Page 13 of the Company's definitive proxy statement filed with the Commission since the close of the Registrant's fiscal year ended June 27, 1999, and within 120 days after the close of said fiscal year, are incorporated herein by reference.
For additional information regarding executive compensation reference is made to Exhibits (101), (10m), (10n), (10p), (10q), (10r) and (10s) of this Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners and management is the same as reported under the heading "Information Relating to Principal Security Holders" on Page 2 of the definitive proxy statement and under the heading "Security Holding of Directors, Nominees and Executive Officers" on Page 5 and Page 6 of the definitive proxy statement filed with the Commission pursuant to Regulation 14 (a) within 120 days after the close of the fiscal year ended June 27, 1999, which are hereby incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the heading "Compensation and Option Committees Interlocks and Insider Participation In Compensation Decisions", on Page 6 and Page 7 of the definitive proxy statement filed with the Commission since the close of the Registrant's fiscal year ended June 27, 1999, and within 120 days after the close of said fiscal year, is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following financial statements and report of independent auditors are filed as a part of this Report.
2. Financial Statement Schedules
Schedules other than those above are omitted because they are not required, are not applicable, or the required information is given in the consolidated financial statements or notes thereto.
Individual financial statements of the Registrant have been omitted because it is primarily an operating company and all subsidiaries included in the consolidated financial statements being filed, in the aggregate, do not have minority equity interest and/or indebtedness to any person other than the Registrant or its consolidated subsidiaries in amounts which together exceed 5% of the total assets as shown by the most recent year end consolidated balance sheet.
With the exception of the information herein expressly incorporated by reference, the 1999 Proxy Statement is not deemed filed as a part of this Annual Report on Form 10-K.
3. Exhibits
- --------- * NOTE: These Exhibits are management contracts or compensatory plans or arrangements required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNIFI, INC.
September 21, 1999 By: /s/ G. ALLEN MEBANE, IV -- --------------------------------------- G. ALLEN MEBANE, IV CHAIRMAN OF THE BOARD (CHIEF EXECUTIVE OFFICER)
September 21, 1999 By: /s/ WILLIS C. MOORE, III -- --------------------------------------- WILLIS C. MOORE, III SENIOR VICE PRESIDENT (CHIEF FINANCIAL OFFICER)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
(d) Schedule II -- Valuation and Qualifying Accounts UNIFI, INC. AND SUBSIDIARIES JUNE 27, 1999 (IN THOUSANDS)
(A) INCLUDES ACQUISITION RELATED ADJUSTMENTS TO WRITE-DOWN ACQUIRED ACCOUNTS RECEIVABLE TO FAIR MARKET VALUE.
(B) INCLUDES UNCOLLECTIBLE ACCOUNTS WRITTEN OFF AND CUSTOMER CLAIMS PAID, NET OF CERTAIN RECOVERIES.