-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EOfnUc/WMint1wX43VhYr7CuaWJhwCZ2mqSE/FHuq4wbgd8lfPqcRTmN4C0+e95Z KjdxVkFHz0ZKlsW6wDsDsg== 0000950144-99-003975.txt : 19990405 0000950144-99-003975.hdr.sgml : 19990405 ACCESSION NUMBER: 0000950144-99-003975 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JOHNSTON INDUSTRIES INC CENTRAL INDEX KEY: 0000041017 STANDARD INDUSTRIAL CLASSIFICATION: BROADWOVEN FABRIC MILS, MAN MADE FIBER & SILK [2221] IRS NUMBER: 111749980 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06687 FILM NUMBER: 99586258 BUSINESS ADDRESS: STREET 1: 105 THIRTEENTH ST CITY: COLUMBUS STATE: GA ZIP: 31901 BUSINESS PHONE: 7066413140 MAIL ADDRESS: STREET 2: 105 THIRTEENTH ST CITY: COLUMBUS STATE: GA ZIP: 31901 FORMER COMPANY: FORMER CONFORMED NAME: GI EXPORT CORP DATE OF NAME CHANGE: 19850403 FORMER COMPANY: FORMER CONFORMED NAME: GEON INDUSTRIES INC DATE OF NAME CHANGE: 19770921 FORMER COMPANY: FORMER CONFORMED NAME: GEON TRADING CORP DATE OF NAME CHANGE: 19700915 10-K 1 JOHNSTON INDUSTRIES, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] Annual Report for the period from January 4, 1998 to January 2, 1999 -------------------------------------------------------------------- Commission file number 1-6687 ------ JOHNSTON INDUSTRIES, INC. ------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 11-1749980 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 105 Thirteenth Street, Columbus, Georgia 31901 (Address of principal executive offices) (Zip Code) (706) 641-3140 ------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Common Stock, $.10 Par Value New York Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None ---- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 2 The aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant on March 22, 1999 was $13,821,139. The aggregate market value was computed by reference to the closing price of the stock on the New York Stock Exchange on such date. For purposes of this response, executive officers, directors and Redlaw Industries, Inc. are deemed to be affiliates of the Registrant and the holdings by non-affiliates was computed as 5,670,211 shares. The number of shares outstanding of the Registrant's Common Stock as of March 22, 1999 was 10,721,872 shares. DOCUMENTS INCORPORATED BY REFERENCE: The Registrant's Proxy Statement for its 1999 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A within 120 days of the close of the Registrant's fiscal year is incorporated by reference in answer to Part III but only to the extent indicated in Part III herein. 2 3 PART I. ITEM 1. BUSINESS GENERAL Johnston Industries, Inc. ("Johnston") is a consolidated entity which includes its direct wholly owned operating subsidiary, Johnston Industries Alabama, Inc. ("JI Alabama"), and its indirect wholly owned subsidiaries, Johnston Industries Composite Reinforcements, Inc. ("JICR"), and Greater Washington Investments, Inc. ("GWI") (collectively, the "Company"). Prior to April 3, 1996, consolidated financial statements included the accounts of Johnston, its wholly owned subsidiaries, Southern Phenix Textiles, Inc. ("Southern Phenix") and Opp and Micolas Mills, Inc. ("Opp and Micolas"), JICR,, and its then majority-owned subsidiary, Jupiter National, Inc. ("Jupiter") and Jupiter's wholly-owned subsidiaries, Wellington Sears Company ("Wellington") and GWI, (for such periods, collectively, the "Company"). The Company is a leading designer, manufacturer and marketer of finished and unfinished (greige) cotton, synthetic and blended fabrics used in a broad range of industrial and consumer applications. The Company's products are sold to a number of "niche" markets, including segments of the home furnishings, hospitality, industrial, automotive and specialty markets. Management believes that it is one of the largest domestic manufacturers of fabrics used for upholstery backing, automotive belts and hoses, and abrasive applications. In addition, the Company reprocesses and markets waste textile fiber and off-quality fabrics for sale to a broad range of specialty markets. The Company also manufactures fabrics used in engineered composite materials serving primarily the recreation and construction markets. The Company conducts its operations through four business units: (i) the Greige Fabrics Division, (ii) the Finished Fabrics Division, (iii) the Fiber Products Division, and (iv) JICR as follows: Greige Fabrics Division. The Greige Fabrics Division manufactures cotton, synthetic and poly-cotton (blended) unfinished (unbleached, undyed) fabric. The Greige Fabrics product line includes upholstery backing manufactured for the home furnishings market, decorative and print base unfinished goods (upholstery, window treatment and bedding) for the home furnishings and hospitality markets and fabric used in a variety of products manufactured for such automotive and industrial applications as belts, hosing and abrasives. Management believes this division's diversified product line and range of markets to which it sells enable it to mitigate the effects of a long-term decline in any single market. This division's competitive strengths include its (i) long standing relationships with key customers, (ii) proven product quality as evidenced by numerous "Supplier of the Year" and "Preferred Supplier" designations awarded by its customers, (iii) high level of operating efficiency and flexibility resulting from significant capital investment which enable this unit to foster innovative new products and to respond quickly to changing market demands while minimizing manufacturing overheads and (iv) ability to target traditionally more stable markets which have been served by domestic fabric manufacturers such as the industrial and home furnishings markets. Finished Fabrics Division. The Finished Fabrics Division is a vertically integrated manufacturer of finished (dyed, treated or coated) fabrics through the application of value-added dyeing and finishing processes to greige fabrics manufactured by this division. The vertically integrated nature of this division offers the potential for significant cost savings, allowing the spinning, weaving, dyeing, and finishing of fabric in one facility. The Finished Fabrics product line includes finished upholstery fabrics manufactured for the mid-priced home furnishings market, the contract seating (i.e., stadium and theater) market and the outdoor decorative (lawn and patio furniture) upholstery market, premium napery (table linen products) for the home and hospitality markets, print cloth for the 3 4 home and hospitality (top of the bed) markets and coated industrial (filtration and bagging) markets and automotive (seating components, speaker covers, and lining) products. This unit's competitive strengths include its (i) state-of-the-art air jet spinning, yarn dyeing, cloth dyeing and finishing applications and wide-width weaving capability on its dobby looms, (ii) vertically integrated structure which enables the Company to provide a diverse product offering with shorter lead times, allowing the Company to adapt rapidly to changes in customer preferences and (iii) focus on traditionally more stable markets which have been served by domestic textile manufacturers such as the industrial and home furnishings segments. Fiber Products Division. The Fiber Products Division reprocesses and markets waste textile fiber and off-quality fabrics converting millions of pounds of waste, which might otherwise be sent to landfills, into raw materials that can be recycled in the textile manufacturing process or used as a low cost substitute in a wide range of consumer and industrial applications. The applications include padding (used in a variety of applications from mattresses to sound proofing in automobiles), clean and reprocessed fiber reintroduced into the textile yarn manufacturing process, wiper cloth and reworked off-quality textile products, such as towels and sheets. This unit's competitive strengths include its (i) position as the only captive fiber reprocessing facility of its size owned by a domestic textile product manufacturer and (ii) focus on the higher margin bedding and absorbent cotton market segments. JI Composite Reinforcements. JICR produces a variety of non-crimp multi-axial fabrics from fiberglass, carbon and aramid fibers, which are sold to specialty markets. JICR's products are used in engineered composite materials to replace traditional fiberglass and metal components when superior performance or specific weight characteristics are required. JICR serves the recreation market with materials used in skis, snowboards, hockey sticks, baseball bats, sailing and power yachts and the construction markets with materials used in utility and lighting poles, bridges, oil well platforms and infrastructure rehabilitation projects, such as structural bridge column repair, utility pole repair and pipe rehabilitation. In order to maintain its leadership position in the evolving textile industry and to continually improve customer service, the Company has invested from fiscal 1991 to fiscal 1998 approximately $130 million to upgrade, modernize and expand plant operations and reduce production bottlenecks, establishing state-of-the-art vertically integrated, flexible manufacturing capabilities with low cost structures. The Company's Greige Fabrics operations are highly flexible as many of its current fabrics may be produced at more than one of its three manufacturing facilities. This division allocates such production to its facilities based on the technological features of the equipment needed, available capacity and to maximize throughput efficiency. In addition to producing fabric in a greige state or a variety of finished states, the Company can produce fabrics in a broad range of widths, including 125 inch width jacquard fabric which the Company believes only one other manufacturer can provide. RECENT HISTORY AND DEVELOPMENTS The Company was incorporated in 1987 as a successor to a New York corporation of the same name formed in 1948. The Company's principal offices are located at 105 Thirteenth Street, Columbus, Georgia 31901, telephone number (706) 641-3140. Prior to March 1996, the Company conducted its operations through its wholly owned subsidiaries, Opp and Micolas, Southern Phenix, JICR, and one majority-owned subsidiary, Jupiter. Each of the four business units operated with a great deal of autonomy. During this time, Southern Phenix, and, to a lesser degree, Opp and Micolas, enjoyed long-standing reputations as innovative textile manufacturers serving niche markets. In 1987, the Company acquired a 28.4% interest in Jupiter, a publicly traded company engaged in venture capital investments. Over time, and as Jupiter invested in textile operations, the Company gradually increased its ownership until it reached 54.2% in January, 1995. On March 28, 1996, the Company acquired the outstanding minority interest of Jupiter for a total purchase consideration of $45.9 4 5 million dollars, funded substantially from new bank borrowings. Also in March 1996, the Company acquired the T. J. Beall Company ("TJ Beall"), a specialized textile waste broker, for a combination of preferred stock and the conversion of certain outstanding indebtedness from TJ Beall into intercompany obligations. In connection with these acquisitions, the Company's organizational structure was altered centralizing the sales and marketing functions for all units at the corporate level and removing much of the control over operations from unit level managers. However, the Company did not consolidate the basic administrative functions, such as accounting and management information services of the acquired operations. Subsequently, the Company determined that the organizational changes introduced upon the acquisition of Jupiter, together with the failure to take appropriate measures to consolidate overlapping administrative functions, contributed to disappointing operating performance from certain of the Company's textile operations including TJ Beall. These factors, along with delays and shortfalls in liquidating the venture capital portfolio of Jupiter, adversely restricted the Company's liquidity and its ability to successfully capitalize on the opportunities created by the acquisitions. In order to reinvigorate entrepreneurial spirit and bottom line accountability among the Company's employees, the Company realigned its operations into its four current business units during 1997 (the "1997 Realignment") and established measures to achieve substantial cost reductions, principally through the elimination of redundant administrative functions and the divestiture of unprofitable operations. The new structure aligned sales, marketing, production and administration by product-oriented operating divisions, with the Company's corporate headquarters coordinating strategies, finance and capital allocations and identifying and capitalizing on synergistic opportunities among the units. The Company has continued to build upon the foundation of the 1997 Realignment during 1998. Significant elements of the 1997 Realignment include: - - Reinstitute Divisional Accountability. The new management team determined that the 1996 centralization of the sales and marketing forces of the Company and the transfer of key operational management from the Company's business units to corporate headquarters blurred profit and managerial responsibility at the divisional level. Operational and sales management have now been reassigned to the business units, with each unit having a president responsible for delivering business unit profits. - - Reduce Operating Costs. In Fiscal 1997 and 1998, the Company consolidated or sold unprofitable, non-core operations and assets acquired in the Jupiter and TJ Beall acquisitions. In addition, management decreased the Company's number of business units from five to four and reduced divisional general and administrative staffs; redistributed products at each facility; centralized certain support functions such as management information services; and simplified the manufacturing process by redesigning certain Finished Fabrics product lines. This program eliminated approximately 325 jobs (primarily in the third and fourth quarters of fiscal 1997) without impairing the quality of the Company's products or sacrificing profitable sales. - - Improve Management Information Systems. The Company is currently installing an integrated procurement, inventory, manufacturing management and customer order system at both the Finished Fabrics and the Fiber Products Divisions and is re-engineering many of the associated business processes around this system. When this project is completed, management believes its access to divisional information and key decision-making tools will be significantly enhanced and many computer processes will be streamlined. The second phase of the implementation at the Finished Fabrics Division was placed in operation in July 1998. Both divisions are expected to be fully operational by August 1999. - - Improve Product Line Management. During 1997 and 1998, management focused considerable attention and resources on improving product line profitability and identifying opportunities to strengthen its market position in its key niche markets. As a result, the Company strategically exited certain product lines or elements of product lines, and has successfully obtained price 5 6 increases for other lines. Product line profitability has also been enhanced by significant cost savings, including negotiating lower brokerage commissions and better management of sample production and product design parameters. On September 29, 1997 and in conjunction with the 1997 Realignment, the Company's management reached an agreement to sell the assets of TJ Beall to a member of the Beall family. The sale was executed for consideration including surrender of the Series 1996 Preferred Stock, which had been issued as part of the purchase consideration of the TJ Beall acquisition, and execution of a promissory note in the amount of $1,500,000 payable in annual installments over 5 years. This divestiture eliminated an operation which had been unprofitable during the Company's brief ownership and also eliminated large cyclical cash requirements inherent in the gin mote business. CUSTOMERS AND BACKLOG The Company sells its products to approximately 3,500 customers with net sales to the single largest customer accounting for 5%, 6%, and 5% of total sales for the fiscal years ended January 2, 1999, January 3, 1998 and December 28, 1996. The Company traditionally manufactures approximately 75% of its production against firm orders with finishing, packaging and other specifications generally determined by its customers. At January 2, 1999, the Company's backlog of orders was approximately $49.4 million compared to $69.4 million at January 3, 1998 and $88.5 million at December 28, 1996. Historically, the Company's backlog of orders is completed and realized as sales in approximately 2 1/2 months. The reduced order backlog at January 2, 1999, as compared to January 3, 1998, includes the impact of currency and economic difficulties in Eastern Europe, Asia and South America as well as the resulting reduction in domestic demand. The 1998 year end order backlog for outdoor furniture fabrics was much lighter compared to prior years as certain customers switched to low cost Asian imports. Demand has slowed significantly for the Company's upholstery substrate fabrics which were sold by its customers to eastern European markets. Although consolidated order backlog returned to $66.7 million by February 27, 1999, management believes that world and domestic economic conditions will impact demand through at least the first two quarters of 1999, and perhaps longer for certain markets. The decrease in backlog of orders from December 28, 1996 to January 3, 1998 resulted largely from the Company's elimination of unprofitable operations and products during 1997 including TJ Beall which was sold in September 1997. Open orders for TJ Beall were $16.3 million at December 28, 1996. For the year ended January 2, 1999, the Company's production facilities operated at approximately 66% of normal aggregate capacity. Management believes the Company's production capability is sufficient to accommodate existing and new production orders. PRODUCTS The Company's Finished Fabrics and Greige Fabrics Divisions provide products for the home and hospitality, automotive and industrial segments of the textile industry, as well as a variety of miscellaneous products. The home, hospitality and industrial products manufactured by the Finished Fabrics and Greige Fabrics Divisions include a variety of woven and non-woven fabrics, including some proprietary applications. Such products include all cotton fabrics, cotton/polyester blended fabrics, all polyester fabrics and other products manufactured from blends and various synthetic and natural fibers. The finished fabrics manufactured for these market segments include woven and printed upholstery fabrics for indoor and outdoor use, ticking and filler cloth for mattresses, finished premium napery (table linens) and coated, rubber goods, filtration, scrim, bagging and footwear fabrics. The Greige Fabrics Division manufactures upholstery backing, top of the bed fabrics, decorative and print base unfinished goods, window and napery 6 7 unfinished goods and, for the industrial segment, abrasives, filtration media, wipecloth and certain footwear fabrics. The Company's Fiber Products Division markets a variety of waste textile fiber and fabric reclamation products comprised of, for example, padding used in a variety of applications, cleaned and reprocessed fiber and off-quality towels and sheets (sold primarily in Africa). Cleaned and reprocessed fibers provide a cost advantage for use in certain products and can be sold as raw fiber or in a variety of manufactured states from yarn through woven and bonded non-woven fabrics. JICR manufactures fabrics, which are sold in specialty markets and used in engineered composite materials, consisting of a variety of non-crimp multi-axial fabrics manufactured from fiberglass, carbon and aramid fibers. Composite reinforcement fabrics produced by the Company include its proprietary Vectorply(R) fabrics. The Company's composite reinforcement fabrics are used in a variety of industrial, transportation, marine and sporting goods applications, from sea walls and roof panels to motor campers and heavy trucks to large yachts and off-shore racing boats to water skis, baseball bats and hockey sticks. For the year ended January 2, 1999, approximately 77% of the Company's fabric was manufactured for the home furnishings and industrial segments of the textile market; the balance was for the automotive segment, basic apparel, including commercial uniform manufacturers (ducks, twills and bull denims), and specialty markets, which in 1998 primarily involved sales of yarn, recycled textile fibers and composite reinforcement fabrics. The following table sets forth the percentage of sales by product type:
JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 ---------- ----------- ------------ Automotive 4% 3% 3% Industrial 22% 25% 24% Home Furnishings 55% 49% 53% Apparel 2% 4% 2% Specialty Markets 17% 19% 17% Miscellaneous 0% 0% 1% --- --- --- 100% 100% 100% === === ===
Outside of the United States, the Company principally markets its products in Europe, Canada, and Mexico primarily through its direct sales force. For the year ended January 2, 1999, the international direct sales volume constituted approximately 7% of sales. Although no assurances can be given that its plans will be successful, the Company's is exploring opportunities to expand its sales into international markets. MANUFACTURING Since its establishment in 1948, the Company has positioned itself as a leader in the textile industry as evidenced by numerous awards it has received. For example, the Company was selected by Textile World Magazine as its 22nd Annual Model Mill in 1994, recognizing the Company's (i) outstanding performance, (ii) aggressive management approach to product and market innovation and (iii) strategic commitment to capital spending and high-tech operations. In 1995, the Company's Opp Mill was selected as "Outstanding Greige Mill" by a leading international independent consulting firm. In addition, the Company has been selected "Supplier of the Year" or preferred supplier by various customers on numerous occasions over the years and received America's Textile International's first annual Award for Innovation in 1996. In order to improve customer service and maintain its leadership position in the constantly evolving textile industry, the Company has maintained an aggressive capital improvement program across all of its units for the past few years. For fiscal 1991 through 1998, the Company invested approximately $130 million to upgrade and modernize plant operations and to reduce bottlenecks, establishing state-of-the-art, vertically integrated, flexible manufacturing capabilities with low cost structures. Of these expenditures, capital 7 8 improvement for the year ended January 2, 1999 was $9.1 million compared to $10.4 million at January 3, 1998 and $20.5 million for the year ended December 28, 1996. The Company's extensive capital expenditure program over this period has resulted in the conversion of substantially all of its mills to open-end or air jet spinning and shuttleless weaving. Future capital expenditures will be driven by market opportunities evaluated against the cost of funds. The Company spins its own yarn primarily using Rieter(R) and Schlafhorst(R) open-end automatic rotor spinning machines, Murata(R) air jet spinning machines and some ring spinning equipment. Open-end and air jet are fully automated spinning processes which yield an excellent quality yarn that is produced using highly efficient processes. Fabric is manufactured on a variety of shuttleless looms using rapier, projectile and air jet technologies, as well as a few shuttle looms. Additionally, the Company manufactures non-woven (stitchbond, chima, and weft insertion warp knitted) fabrics using a variety of specialized machines. As of January 2, 1999, the Company's mills have an annual capacity of approximately 186 million linear yards of woven fabric (approximately 104 million pounds), 6 million pounds of non-woven (stitchbond, chima and weft insertion warp knitted) fabric, approximately 137 million linear yards of value-added finishing, approximately 3 million pounds of sales yarn, approximately 12 million pounds of non-woven fabric and composite reinforcements fabrics manufactured from man-made synthetic fibers, approximately 67 million pounds of waste textile fiber and fabric reclamation, and approximately 53 million pounds of bonded non-woven fabric (manufactured through reclamation of textile waste products). The Company's mix of a variety of types of equipment, each with distinct capabilities, permits it to produce many products in either a "greige" state (i.e., unbleached and undyed as taken from the loom), a "finished" or converted state (e.g., dyed, treated and/or coated) or both. Greige fabrics are sold directly to manufacturers which have their own converting departments or finishing facilities and to fabric converters who dye and print unfinished fabrics and, in some instances, are finished internally on a contract basis by the Finished Fabrics Division. DISTRIBUTION AND MARKETING The Company's marketing activities, which are organized by operating division and by product, utilize in-house sales personnel, commissioned sales agents and independent brokers. In the aggregate, the Company employs a 43 person in-house sales force and utilizes approximately 32 commissioned sales agents and brokers. For the year ended January 2, 1999, approximately 84% of revenues were generated by in-house sales personnel, with 16% generated by commissioned sales agents and independent brokers. Fabrics sold through in-house personnel include home furnishings, abrasive, napery, rubber products, filtration, duck, wipe cloth, reprocessed waste products and various industrial fabrics. Mattress pads, certain of the Company's upholstery fabrics, and a significant portion of composite reinforcement fabrics are sold through commissioned sales agents. In addition to its various employed and independent sales people, approximately 30 Company personnel provide support services such as design, technical support, customer services, and coordination of production with the mill. COMPETITION The Company's competition consists of numerous companies, a limited number of which compete with the Company in a substantial portion (more than fifty percent) of the product groups serviced by the Company. The competing companies in each of its product groups include a number of companies which are larger and have significantly greater resources than the Company. Although market shares vary substantially from product to product within a group, the Company believes that there are several competitors with greater sales than it in each product group. There are individual products for which the Company is the market leader as well as others for which it does not have a significant market share. Competitive factors include product quality, service, design and price. Management believes that service is an important positive competitive 8 9 factor for the Company's operations. Management also believes that competition from domestic manufacturers has intensified over the last several years and will continue to increase in the future. Although management believes that, in general, the Company is not directly affected by foreign competition; from time to time, there is an indirect effect. Recently, certain of the Company's outdoor furniture and home furnishings products have experienced competition from imports. While such direct foreign competition arose only recently, management believes that such competition may not be permanent and that the Company has sufficient competitive advantages to regain market share over the long term. Periodically, when total domestic textile sales volume is reduced as a result of increased imports, the companies that are directly affected (generally fashion and apparel manufacturers) search for sales volume in other product groups to replace their lost volume. Historically, this has resulted in increased competition and price pressures with respect to certain fabrics, most notably in lower margin commodity fabrics which may be produced by a number of the Company's competitors. RAW MATERIALS The Company utilizes cotton, polyester and other natural and synthetic fibers in its manufacturing operations. Currently, the supplier for most of its polyester fiber is Wellman, Inc., formerly Fiber Industries, Inc. ("Wellman"). The Company does not have a long-term agreement with Wellman and does not maintain long-term supply contracts with Wellman or any other synthetic fiber suppliers. Other potential suppliers of polyester include DuPont and Hoechst-Celanese, as well as a number of other domestic and foreign sources. The Company purchases cotton through approximately ten established merchants with whom it has long standing relationships. The majority of the Company's purchases are executed using "on-call" contracts. These on-call arrangements are used to insure that an adequate supply of cotton is available for the Company's requirements. Under on-call contracts, the Company agrees to purchase specific quantities for delivery on specific dates, with pricing to be determined at a later time. Prices are set according to prevailing prices, as reported by the New York Cotton Exchange, at the time of the Company's election to fix specific contracts. Management believes that adequate supplies of cotton, polyester and its other fiber needs are available in the open market and should supplies of cotton, polyester or other fibers cease to be available from any of the Company's principal suppliers, management does not expect any significant difficulty in obtaining fibers from one or more other suppliers. EMPLOYEES As of February 27, 1998, the Company had approximately 2,600 full-time employees, none of whom is covered by collective bargaining agreements. The Company believes its relations with its employees are good. INVESTMENT ACTIVITIES The investment activities of the Company were acquired in connection with its acquisition of Jupiter on March 28, 1996 and are principally conducted through Johnston's indirect wholly-owned subsidiary, GWI. The Company's plan is to effect the divestiture of its non-textile industry investments. Since the March 28, 1996 acquisition, twelve investments have been sold with six remaining as of January 2, 1999. These remaining investments include debt securities with maturities ranging from 1999 to 2004, equity securities, and one real estate investment. No additional funding or investment of any significant amount is contemplated while such investments are held for sale. Because of the speculative nature of GWI's investments, and the lack of any ready market for most of its investments when purchased, there is minimal liquidity and a significantly greater risk of loss on each investment than is the case with traditional investment companies. The carrying value of the remaining six securities included (i) five investments totaling $3.3 million, which were recorded as assets held for sale on the balance sheet at January 2, 1999 plus (ii) one 9 10 investment totaling $1 million which was recorded as a note receivable on the balance sheet at January 2, 1999. This note receivable was subsequently paid in full during March 1999. The "fair value" reflects the value expected to be realized by the Company upon sale of the securities after consideration of the Company's plans to liquidate the venture capital segment. THIS REPORT CONTAINS CERTAIN "FORWARD LOOKING STATEMENTS." THESE STATEMENTS ARE AN ATTEMPT TO PREDICT FUTURE OCCURENCES AND ARE INTENDED TO BE COVERED BY THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD LOOKING STATEMENTS ARE IDENTIFIED BY WORDS SUCH AS "BELIEVES," "EXPECTS," "ANTICIPATES" AND SIMILAR EXPRESSIONS. RISK FACTORS AND INVESTMENT CONSIDERATIONS The Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual consolidated results for the first quarter of 1999, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company: The Company believes it has benefited and continues to benefit substantially from the skills, experience and efforts of its senior management. The loss of the services of members of the Company's senior management could have a material adverse effect on the Company's business and prospects. For Biographies of Executive Officers, See Executive Officers of Johnston Industries, Inc. below and for Biographies of Directors, See the Registrant's Definitive Proxy Statement for the 1999 Annual Meeting of Shareholders. Additional or related factors which could affect the Company's actual results and could cause the Company's actual consolidated results for the first quarter of 1999, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company include: The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations, other activities of governments, agencies and similar organizations, and social and economic conditions, such as trade restrictions or prohibitions, inflation and monetary fluctuations, import and other changes or taxes, the ability or inability of the Company to obtain, or hedge against, foreign currency, foreign exchange rates and fluctuations in those rates, loss of international contracts or lower international revenue resulting from increased expenses associated with overseas operations, the impact of foreign labor laws and disputes, adverse effects arising out of political unrest, terrorist activity, nationalizations and unstable governments and legal systems, and intergovernmental disputes and the possibility of a decline in domestic demand as a result of any of the foregoing; Continued or increased pressure to change the selling prices for the Company's products, and the resulting effects on margins, the Company's actions in connection with continued and increasing competition in many product areas, including, but not limited to, price competition and fluctuating demand for certain textile products by one or more textile customers; Difficulties or delays in the development, production, testing and marketing of products, including, but not limited to, a failure to ship new products, the failure of customers to accept these products or technologies when planned, any defects in products and a failure of manufacturing economies to develop when planned; Occurrences affecting the Company's ability to reduce product and other cost, and to increase productivity; 10 11 Inability to offset pricing competition with production efficiencies and economies of scale; under-utilization of the Company's plants and factories resulting in production inefficiencies and higher costs; start-up expenses and inefficiencies and delays and increased depreciation costs in connection with the start of production in new plants and expansions; Continued or increased dumping of low priced textile products into the US markets by predatory foreign producers; The amount, and rate of growth in, the Company's selling, general and administrative expenses, and the impact of unusual items resulting from the Company's ongoing evaluation of its business strategies, asset valuations and organizational structures; The potential adverse effect of significant upward fluctuation of raw material costs as specifically experienced in 1995 and 1996 plus difficulties in obtaining raw materials, supplies, power and natural resources and any other items needed for the production of products; The acquisition of fixed assets and other assets, including inventories and receivables, and the making or incurring of any expenditures and expenses, including, but not limited to, depreciation and research and development expenses, any revaluation of assets or related expenses and the amount of, and any changes to, tax rates; Unexpected losses in connection with the disposition of investments formerly made by Jupiter and GWI, unanticipated write down of the value of such investments due to among other things their limited liquidity, and/or an inability to dispose of one or more of such investments due to the nature or character of such investments involving, without limitation, the liquidity of such investment, the lack of a market for such investment, and whether the Company's investment represents a minority interest in such enterprise; The costs and other effects of legal and administrative cases and proceedings (whether civil, such as environmental and product-related, or criminal), settlements and investigations, claims, and changes in those items, developments or assertions by or against the Company relating to intellectual property rights and intellectual property licenses, adoptions of new, or changes in, accounting policies and practices and the application of such policies and practices; The effects of changes within the Company's organization or in compensation and benefit plans, the ability of participants of the employee stock purchase plan to satisfy obligations under the plan guaranteed by the Company, any activities of parties with which the Company has an agreement or understanding, including any issues affecting any investment or joint venture in which the Company has an investment, the amount, type and cost of the financing which the Company has, and any changes to that financing; and The ability to integrate any future acquisitions into the Company's existing operations and unexpected difficulties or problems with such acquired entities including inadequate production equipment, inadequate production capacity or quality, outdated or incompatible technologies or an inability to realize anticipated synergies and efficiencies, whether within anticipated time frames or at all. 11 12 EXECUTIVE OFFICERS OF JOHNSTON INDUSTRIES, INC. HAROLD HARVEY, age 58, has served as President of the Greige Fabrics Division since the first quarter of 1999. Prior to that time he was the Principal of Harvey TMC International, a textile consulting firm, since 1994. Mr. Harvey was the Chief Executive Officer of Carrington Viyella from 1992 until 1994 and Chief Executive Officer of John Foster and Sons plc from 1988 until 1992. For more than five years prior to that time, he had served in various consulting and textile management positions. WILLIAM I. HENRY, age 58, has served as President of the Finished Fabrics Division since February 5, 1998. Prior to that time, he served as Executive Vice President from May 12, 1997 to February 5, 1998, Vice President of Operations from April 1996 to May 12, 1997, and Vice President of Product and Operations Planning from January 1993 to April 1996. For more than five years prior he had served as Vice President, Operations of Southern Phenix. OWEN J. HODGES, III, age 44, has served as President of the Fiber Products Division since February 5, 1998. Prior to that time, he served as Vice President - Manufacturing of the Company from April 1996 to February 1998 and Vice President - Operations of Wellington Sears since its formation in November 1992. For more than three years prior, Mr. Hodges was Vice President of Manufacturing for the Custom Fabrics Division of WestPoint Pepperell. DONALD L. MASSEY, age 53, has served as President of Johnston Industries Composite Reinforcements, Inc. since February 5, 1998. Prior to that time, he served as Executive Vice President from May 12, 1997 to February 5, 1998 and as Vice President of the Company and President-Home Furnishings-Sales and Marketing of Johnston Industries Alabama, Inc. from April 1996 to May 12, 1997. Mr. Massey was President and CEO of Johnston Industries Composite Reinforcements, Inc. from March 31, 1992 until March 31, 1996. From December 1, 1990 until March 30, 1992, Mr. Massey was President and CEO of Fiber and Fabrics Marketing, and for more than 5 years prior to that, he served as Senior Vice President for world sales of denim for Dominion Textiles. JAMES J. MURRAY, age 38, has served as Executive Vice President and Chief Financial Officer since September 22, 1997. Prior to that time, he was Managing Director of Corporate Transaction Services for KPMG LLP since March 1996 and had served in a variety of capacities with KPMG LLP from January 1984 to March 1996. Prior to that time, Mr. Murray was a tax accountant in private industry. D. CLARK OGLE, age 52, has served as President and Chief Executive Officer since March 20, 1998. Prior to that time, Mr. Ogle served as Managing Director of National Strategic and Operational Improvement Consulting for KPMG LLP. From April 1987 to October 1996, he served as CEO for a number of companies including Victory Markets, Inc., Teamsports, Inc., WSR Corporation, Consumer Markets, Inc., and Peter J. Schmitt Co., Inc. Mr. Ogle was Executive Vice President and Chief Operating Officer, then President and Chief Executive Officer, of Scrivner, Inc. for more than five years prior to that time. F. FERRELL WALTON, age 54, has served as Vice President, Secretary and Treasurer of the Company since November 14, 1997 and prior to that time, had served as Secretary and Treasurer from September, 1994 to November 14, 1997. Mr. Walton served as Director of Financial Operations for the Company from April 1, 1993 to September, 1994 and for more than five years prior to that time was Vice President, Finance of Opp and Micolas. 12 13 ITEM 2. PROPERTIES Set forth below is a listing of facilities owned and leased by the Company for each division describing the principal use and approximate size, in square feet, of each facility.
FACILITY LOCATION PRINCIPAL USE FLOOR OWNED/ SPACE IN LEASED SQ FT - ------------------------------------------------------------------------------------------------------- Johnston Industries, Inc. Executive Offices Columbus, Georgia Admin. Offices 20,000 Owned NY Sales Office New York, New York Sales/Marketing 10,000 Leased - ------------------------------------------------------------------------------------------------------- Greige Fabrics Division Opp Plant Opp, Alabama Manufacturing/ 339,000 Owned Warehousing Micolas Plant Opp, Alabama Manufacturing/ 430,000 Owned Warehousing Columbus Plant Columbus, Georgia Manufacturing/ 572,000 Owned Warehousing Warehouse Opp, Alabama Warehousing 92,000 Leased - ------------------------------------------------------------------------------------------------------- Finished Fabrics Division Marketing & Sales Ctr. Valley, Alabama Sales/Marketing 23,000 Owned Southern Phenix Plant Phenix City, Alabama Manufacturing/ 629,000 Owned Warehousing Stitchbond Plant Phenix City, Alabama Manufacturing 76,000 Owned Shawmut Plant Valley, Alabama Manufacturing/ 493,000 Owned Warehousing Cusseta Plant (1) Columbus, Georgia Warehousing 54,000 Owned Textest Valley, Alabama UL Testing Lab 5,000 Owned State Docks Warehouse Phenix City, Alabama Warehousing 83,000 Leased - ------------------------------------------------------------------------------------------------------- Fiber Products Division Utilization Plant Valley, Alabama Manufacturing 175,000 Owned Lantuck Plant Lanett, Alabama Manufacturing 42,000 Leased Langdale Plant Valley, Alabama Warehousing/ 441,000 Owned Light Mfg. DeWitt Plant DeWitt, Iowa Manufacturing 115,000 Owned - ------------------------------------------------------------------------------------------------------- JICR Stitchbond Plant (2) Phenix City, Alabama Manufacturing Warehouse Phenix City, Alabama Warehousing 26,000 Leased - -------------------------------------------------------------------------------------------------------
(1) See Properties Held for Disposition below for further discussion of Cusseta Plant. (2) JICR leases approximately 37,000 of the 76,000 square foot Stitchbond Plant which is shared with the Finished Fabrics Division. 13 14 Set forth below is the manufacturing capacity of each operating division by product line and the average percent of capacity operated for the year ended January 2, 1999 for each division and the Company as a whole.
(Units Presented in Millions) - --------------------------------------------------------------------------------------------------------- PRODUCT GREIGE FINISHED FIBER JICR TOTAL UNIT FABRICS FABRICS PRODUCTS DIVISION DIVISION DIVISION - --------------------------------------------------------------------------------------------------------- Weaving Capacity Linear Yards 137 49 186 Pounds 73 31 104 Sales Yarn Capacity Pounds 3 3 Non-Woven Capacity Pounds 6 53 12 71 Waste Textile and Fiber Reclamation Pounds 67 67 Value Added Finishing Capacity Linear Yards 137 137 Percent Capacity Utilization - 1998 78% 61% 64% 50% 66% - ---------------------------------------------------------------------------------------------------------
ENVIRONMENTAL The Company is subject to regulation under federal, state, and local laws and regulations governing pollution and protection of human health and the environment, including air emissions, water discharges, management and cleanup of solid and hazardous substances and wastes. The Company believes that its facilities and operations are in material compliance with all existing applicable laws and regulations. The Company cannot, at this time, estimate the impact of any future laws or regulations on its future operations or future capital expenditure requirements. The Company is not aware of any pending federal or state legislation that would have a material impact on the Company's financial position, results of operations or capital expenditure requirements. PROPERTIES HELD FOR DISPOSITION The Finished Fabrics Division's former Cusseta Plant in Columbus, Georgia is presently listed for sale with a commercial real estate broker. This facility, which had once been a fabric coating operation and more recently used for warehousing, is located at 628 5th Street in Columbus, Georgia, and includes a 54,000 square foot brick building located on a parcel of land approximately 5.3 acres in size. 14 15 ITEM 3. LEGAL PROCEEDINGS The Company is periodically involved in legal proceedings arising out of the ordinary conduct of its business. Management does not expect that the resolution of these proceedings will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. During 1997, management became aware of certain industrial espionage activities that targeted the Company and several other textile manufacturers, allegedly carried out by agents of a large competitor. On October 8, 1998, the Company filed suit in Alabama seeking recourse for damages and losses resulting from these alleged activities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's security holders during the quarter ended January 2, 1999. 15 16 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock has traded on the New York Stock Exchange under the symbol "JII" since December 1987. The following table indicates the high and low closing sales prices for the common stock as quoted on the New York Stock Exchange composite tape for the periods indicated below.
INCLUDES NYSE TRADING ONLY PRICE RANGE -------------------------- ----------- HIGH LOW ---- --- Quarter Ended: January 2, 1999 $4 $2 13/16 October 3, 1998 4 5/8 3 July 4, 1998 6 4 9/16 April 4, 1998 6 1/16 4 5/16 January 3, 1998 $6 3/4 $4 1/4 September 27, 1997 6 13/16 5 1/2 June 28, 1997 8 1/8 6 1/8 March 29, 1997 8 3/8 7
Holders of common stock are entitled to such dividends as may be declared and paid out of funds legally available for payment of dividends. The Company's amended bank credit agreement permits the Company to pay dividends on its common stock provided it is in compliance with various covenants and provisions contained therein, which among other things, limits dividends and restricts investments to the lesser of: (a) 20% of total assets of the Company, on a fully consolidated basis, as of the date of determination thereof; (b) $5 million plus 50% of cumulative consolidated net income for the period commencing on January 1, 1997, minus 100% of cumulative consolidated net loss for the consolidated entities for such period, as calculated on a cumulative basis as of the end of each fiscal quarter of the consolidated entities with reference to the financial statements for such quarter. Regular quarterly dividends were paid from September 28, 1990 to June 28, 1997. No dividends have been paid since August, 1997, when the Company suspended dividend payments. The Company does not expect to resume the payment of dividends for the forseeable future. The number of shareholders of record at January 2, 1999 was approximately 700. 16 17 JANUARY 2, 1999 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial data for the years ended January 2, 1999, January 3, 1998 and December 28, 1996, the six month period ended December 30, 1995 and for each of the full fiscal years in the two year period ended June 30, 1995. The statement of operations data for the years ended January 2, 1999, January 3, 1998 and December 28, 1996 and the balance sheet data as of January 3, 1999 and January 2, 1998 have been derived from the Company's consolidated financial statements included elsewhere in this report. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and the notes thereto. (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR YEAR YEAR SIX MONTHS FISCAL YEAR ENDED ENDED ENDED ENDED ENDED JUNE 30, JAN. 2, JAN.3, DEC. 28, DEC. 30 --------------------- 1999 (1) 1998 (1) 1996 1995 (2) 1995 (3) 1994 --------- --------- --------- ---------- --------- --------- STATEMENT OF OPERATIONS: Net sales $ 283,724 $ 332,537 $ 321,883 $ 148,773 $ 262,279 $ 159,904 Income (loss) from continuing operations (608) (8,622) (2,183) (6,348) 6,889 7,409 Income (loss) from discontinued operations -- 126 5,582 158 986 (914) Extraordinary loss -- -- (527) -- -- -- Net income (loss) (608) (8,496) 2,872 (6,190) 7,875 6,495 Dividends on preferred stock -- (82) (125) -- -- -- Net income (loss) available to common stockholders $ (608) $ (8,578) $ 2,747 $ (6,190) $ 7,875 $ 6,495 Earnings (loss) per common share-basic: Income (loss) from continuing operations $ (.06) $ (.82) $ (.22) $ (.60) $ .65 $ .68 Income (loss) from discontinued operations .-- .01 .53 .01 .09 (.08) Extraordinary loss .-- .-- (.05) .-- .-- .-- Earnings (loss) per common share $ (.06) $ (.81) $ .26 $ (.59) $ .74 $ .60 Income (loss) from continuing operations to sales % (.21)% (2.59)% (.68)% (4.27)% 2.63% 4.63% Net income (loss) to sales % (.21)% (2.55)% .89% (4.16)% 3.00% 4.06% Net income (loss) available to common stockholders to sales % (.21)% (2.58)% .85% (4.16)% 3.00% 4.06% BALANCE SHEET DATA: Total assets $ 219,539 $ 234,788 $ 269,264 $ 240,539 $ 232,402 $ 140,194 Long-term debt - less current maturities 51,109 61,688 144,191 110,755 83,560 36,216 Stockholders' equity 48,274 49,124 59,192 55,179 63,427 59,808 OTHER DATA: Equity per share $ 4.50 $ 4.57 $ 5.53 $ 5.22 $ 5.93 $ 5.51 Dividends per share .-- .200 .400 .200 .390 .345 Depreciation and amortization 19,895 21,370 19,715 8,874 13,766 10,202 Capital expenditures 9,136 10,363 20,527 17,781 21,448 12,701 Return on beginning assets (.26)% (3.13)% 1.19% (2.66)% 5.62% 4.77% Return on beginning equity (1.24)% (14.35)% 5.20% (.96)% 13.17% 10.79%
- --------------- (1) Earnings per common share-diluted are not presented as they are either antidilutive in periods for which a loss is presented or immaterial. 17 18 (2) Effective September 1995, the Company's year end closing date was changed to the Saturday closest to December 31. Therefore, the Company's transition period 1995 ended on December 30, 1995. (3) The operations of Jupiter, a majority-owned subsidiary, have been included in the consolidated financial statements from January 1, 1995 forward. On March 28, 1996 Jupiter became a wholly owned subsidiary of the Company. Note: See Notes 2, 3, and 4 of the consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for discussion of certain transactions impacting the years ended January 2, 1999, January 3, 1998 and December 28, 1996. 18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The operations of Johnston Industries, Inc. ("Johnston") include its direct wholly owned operating subsidiary, Johnston Industries Alabama, Inc., and its indirect wholly owned subsidiaries, Johnston Industries Composite Reinforcements, Inc. ("JICR"), and Greater Washington Investments, Inc. ("GWI") (collectively, the "Company"). Prior to April 3, 1996, the consolidated financial statements included the accounts of Johnston, its wholly owned subsidiaries, Southern Phenix Textiles, Inc. ("Southern Phenix"), Opp and Micolas Mills, Inc. ("Opp and Micolas"), and JICR; its majority owned subsidiary, Jupiter National, Inc. ("Jupiter") and Jupiter's wholly owned subsidiaries, Wellington Sears Company ("Wellington"), Pay Telephone America, Ltd., and GWI. On April 3, 1996, after the acquisition by Johnston of T.J. Beall Company ("TJ Beall" and the "TJ Beall Acquisition") and of the minority interest in Jupiter, Jupiter was merged into Opp and Micolas. In June 1996, the name of Opp and Micolas was changed to JI Alabama; Southern Phenix and Wellington were merged into JI Alabama and JICR, TJ Beall and GWI became subsidiaries of JI Alabama. During the second quarter of 1997, the Company's management embarked on a restructuring (the "1997 Realignment") which further integrated operations of the former Wellington Sears Division into the Company's operations and eliminated the administrative infrastructure of the Wellington Sears Division. The 1997 Realignment included (i) the Company's decision to cease weaving operations at Wellington's historic Langdale Plant, which included buildings dating back to 1866, (ii) the alignment of manufacturing operations of Wellington's Columbus Plant with the former Opp and Micolas Division to form the Greige Fabrics Division and (iii) alignment of Wellington's Shawmut Finishing and Textest plants with the former Southern Phenix Division to form the Finished Fabrics Division. The resulting structure of JI Alabama includes three divisions which are the Greige Fabrics Division, the Finished Fabrics Division, and the Fiber Products Division plus one operating subsidiary, JICR. The 1997 Realignment vested greater operating autonomy at the division level and returned sales and marketing functions to the division level. On September 29, 1997 and in conjunction with the 1997 Realignment, the Company's management reached an agreement to sell the assets of TJ Beall to a member of the Beall family. The sale was executed for consideration including surrender of the series 1996 preferred stock, which had been used to finance the TJ Beall Acquisition, and issuance, by the buyer, of a promissory note in the amount of $1.5 million payable in annual installments over 5 years. This divestiture eliminated an operation which had been unprofitable during the Company's brief ownership and also eliminated large cyclical cash requirements inherent in the gin mote business. The Company's GWI subsidiary was a "small business development company" under the Small Business Investment Act of 1958 ("1958 Act"). On September 26, 1996, the Company repaid $14.5 million of subordinated debentures issued by GWI and guaranteed by the United States Small Business Administration (the "SBA"), plus accrued interest thereon. On April 25, 1997, in consideration of the Company's exit of venture capital investment activities, the Board of Directors of GWI voted to return the SBIC license held by GWI to the SBA. At January 2, 1999, the Company's total assets attributable to the remaining portfolio investment activities were approximately $3.65 million and all other assets, which are attributable to its textile operations, were approximately $215.9 million. The Company has developed, implemented and continues to follow a business strategy designed to build upon its 1997 Realignment initiatives and to grow revenues and EBITDA (earnings before interest, taxes, depreciation and amortization). The key elements for implementing these strategies include (i) focus on 19 20 niche market opportunities, (ii) leverage customer relationships, (iii) rationalize product offerings, and (iv) continued improvement in operating efficiencies. RESULTS OF OPERATIONS YEAR ENDED JANUARY 2, 1999 COMPARED WITH THE YEAR ENDED JANUARY 3, 1998 The results of operations for the year ended January 2, 1999 reflect continuing improvement following on the 1997 Realignment. The third and fourth quarters of 1998 marked the first profitable quarters for the Company since the first quarter of 1997. The full impact of the 1998 improvements, however, was mitigated in part by several factors including general weakness in domestic textile markets resulting from economic conditions in Asia and to a lesser degree, in South America, weakness in indirect exports due to currency and financial instability in Russia and Eastern Europe, the residual effects of relocating production of certain upholstery fabrics from the closed Langdale facility to other of the Company's facilities, and disruption of operations due to a tornado which struck Greige Fabric's Opp Mill in April 1998. Net sales for the year ended January 2, 1999 were $283.7 million compared to $332.5 million for the year ended January 3, 1998, declining by $48.8 million or approximately 14.7%. Changes in net sales by major market were as follows (in millions):
Increase (Decrease) ------------------ Automotive $ 1.7 Industrial (7.5) Home Furnishings (20.1) Apparel (5.5) Specialty Markets (15.9) Miscellaneous (1.5) ------- Total Change in Annual Net Sales $ (48.8) =======
- - Sales of automotive fabrics, which grew by 17.9% in 1998, reflect an increase for a long-standing product of the Company, which has been on the decline for several years. Additionally, 1998 included increased sales of a relatively new seat support fabric. - - During 1998, sales of industrial fabrics declined by 10.7%. Demand for fabrics sold to rubber products customers fell by approximately $3 million as two of the Company's customers lost sales volume to their competitors and another rubber products customer experienced a labor strike. Sales of fabrics for abrasives customers declined by $2 million, largely the result of one customer's planned shut down to convert and upgrade their production line. Sales to other industrial customers including footwear, filtration, and coated fabrics also declined as the latter half of 1998 reflected softness in demand. - - Sales of home furnishings fabrics fell by 11.5% in 1998 reflecting an approximate $17 million decline in sales of certain substrate fabrics which were sold by the Company's customers into Russia and Eastern Europe where currency and economic difficulties prevailed. The Company's discontinuance of certain unprofitable fabrics for window products caused reduced sales of $4.6 million. During 1998, several customers for outdoor furniture fabrics began purchasing low cost Asian imports which reduced sales of such fabrics by $3.8 million. These declines were offset in part by growth in sales of napery fabrics and increased sales for certain residential upholstery fabrics. - - During 1997, the Greige Fabrics Division capitalized on certain short-term opportunities to sell apparel fabrics at attractive margins. These opportunities concluded in early 1998 resulting in reduced sales of apparel fabrics of $5.5 million. - - Sales to specialty markets declined by 25% reflecting elimination of unprofitable operations and products associated with the 1997 Realignment. TJ Beall recorded sales of $13.9 million prior to its sale in September 1997 and the Fiber Products Division recorded revenues of $5.7 million for sales yarn prior to closure of the Langdale facility late in 1997. These revenue declines were partially mitigated by growth of $1.6 million in other areas of the Fiber Products Division's business plus 33% growth in sales for JICR. 20 21 - - Sales of miscellaneous fabrics were reduced by 63.7% as the Finished Fabrics Division discontinued several unprofitable products which were characterized by short runs and low margins. Miscellaneous fabrics now account for less than 1% of the Company's total revenues. The Company's backlog of customer orders was $49.4 million at January 2, 1999 compared to $69.4 million at January 3, 1998. The reduced order backlog at January 2, 1999 includes the impact of currency and economic difficulties in Eastern Europe, Asia and South America as well as the resulting reduction in domestic demand. The 1998 year end order backlog for outdoor furniture fabrics was much lighter compared to prior years as certain customers switched to low cost Asian imports. Demand has slowed significantly for the Company's upholstery substrate fabrics which were sold by its customers to eastern European markets. Although consolidated order backlog returned to $66.7 million by February 27, 1999, management believes that world and domestic economic conditions will impact demand through at least the first two quarters of 1999, and perhaps longer for certain markets. Gross margin improved to 13.6% for 1998 from 11.2% for 1997. This 2.4% increase reflects the impact of LIFO income of $2.6 million, the majority of which was recorded in the fourth quarter of 1998. The increase in gross margin also includes the elimination of unprofitable operations and products beginning mid-year in 1997, increased manufacturing efficiencies during 1998, and reduction in raw material prices. These improvements in gross margin were somewhat offset by lower capacity utilization in the second half of 1998 resulting from decreased market demand. The 1997 Realignment included closure of the Langdale facility, elimination of certain unprofitable product lines, and relocation of selected manufacturing equipment and products to the Southern Phenix Facility and to the Micolas Facility. During the first quarter of 1998, the Finished Fabrics Division incurred the negative impact of costs for administering the phase out of the discontinued products plus inefficiencies associated with absorption of the relocated production. The second, third and fourth quarters of 1998 reflect continued improvement following the transitional activities which were substantially completed during the first quarter of 1998. Contributing in part to the improvement in margins was the reclassification of $817 thousand in costs for corporate human resources functions, which were included in costs of sales for 1997, but have been included in general and administrative costs for 1998. Selling, general and administrative expenses for 1998 decreased by $898 thousand compared to 1997. Beginning in April 1997 and continuing through April 1998, the Company incurred professional fees associated with the 1997 Realignment. This net improvement is principally due to reduced expenses for professional services in 1998 coupled with administrative savings realized upon integration of Wellington Sears into the Greige and Finished Fabrics Divisions as part of the 1997 Realignment, but also includes additional costs for human resources functions as described above. Restructuring and impairment charges resulting from the 1997 Realignment were substantially completed in 1997. An additional $168 thousand was recorded in 1998 for severance costs associated with positions which were not scheduled for termination until early 1998, but was offset by a favorable adjustment of $75 thousand to the impairment reserve for Jupiter's former office building, which was sold in February of 1998. Interest expense was reduced by $586 thousand to $13.4 million in 1998 from $14 million in 1997. Changes in interest expense include both reduced average borrowings and increased average rates associated with the March 30, 1998 amendment to the bank credit agreement, as discussed below. Obligations under the Company's bank credit agreement were reduced by $10.7 million from $137 million at January 3, 1998 to $126.3 million at January 2, 1999. Additionally, the $550 thousand mortgage associated with Jupiter's former office in Rockville, Maryland, was discharged upon its sale in February 1998. 21 22 YEAR ENDED JANUARY 3, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 28, 1996 Continuing Operations Net sales for the year ended January 3, 1998 were $332.5 million compared to $321.9 million for the year ended December 28, 1996 reflecting an increase of $10.6 million or approximately 3.3%. Changes in net sales by major market were as follows (in millions):
Increase (Decrease) ------------------- Automotive $ (1.4) Industrial 1.0 Home Furnishings 8.5 Apparel 6.8 Specialty Markets (3.8) Miscellaneous (.5) ---------- Total Change in Annual Net Sales $ 10.6 ==========
- - Net sales in the automotive market declined by $1.4 million reflecting weaker demand for the Company's automotive products resulting in part from changing manufacturing processes of automotive manufacturers. - - Sales of industrial fabrics remained at the reduced level exhibited in 1996, growing by only $1 million for the year while sales of home furnishing fabrics grew by $8.5 million. - - Apparel fabrics sales increased by $6.8 million as the Company capitalized on certain profitable opportunities resulting from changes in apparel styling which played to strengths in the Company's manufacturing capabilities. While such styling changes and the related increased demand are not expected to be permanent, apparel sales for 1997 grew by approximately 126% over 1996. - - Sales to specialty markets declined by $3.8 million including declines of $2.3 million in woven goods, $1.1 million in fiber goods and $400 thousand in composite reinforcement goods. These changes reflect the Company's woven operations emphasis on core industrial and home furnishings markets plus soft markets for cleaned fiber and garnet grades experienced by the Fiber Products Division coupled with a shortage of certain raw materials and loss of a customer. - - Sales to miscellaneous markets, which for 1997 represent 0.3% of the total sales, declined by $502 thousand from the prior year. The Company's sales backlog was $69.4 million and $88.5 million at January 3, 1998 and December 28, 1996, respectively. The decrease primarily reflects the sale of T.J. Beall on September 29, 1997 which represented $16.3 million of the total backlog at December 28, 1996. To a lesser degree, open orders at year end also declined as a result of the Company's discontinuing of certain unprofitable window covering products late in 1997 plus the Company's exit of sales yarn business at the Langdale facility where manufacturing activities ceased in the fourth quarter of 1997. Cost of sales increased in 1997 to $295.3 million from $284.8 million for the year ended December 28, 1996, largely due to the increase in sales discussed above. The gross margin declined slightly to approximately 11.2% for the 1997 fiscal year compared to approximately 11.5% for the 1996 fiscal year. Raw material costs, which remained at very high levels well into 1996, had significant negative impact on the gross margin for 1996. Fiscal year 1997 included operational inefficiencies associated with closure of the Langdale facility and relocation of selected equipment and products to other of the Company's facilities which reduced gross margin for 1997. Offsetting in part the negative effect of these factors was the reclassification of certain product development and sample costs which for some divisions were included in cost of sales for 1996, but 22 23 which for all divisions were charged to selling costs during 1997. This reclassification of expense causes a minor disparity when comparing gross margin between 1997 and 1996. Selling, general and administrative expenses of $27.6 million for 1997 increased $2.8 million from $24.8 million in 1996. The increase is comprised of an increase of $1.4 million in selling expenses and an increase of $1.4 million in general and administrative expenses. The increased selling expenses reflects inclusion of sample costs and product development costs which had previously been classified as cost of sales for some but not all divisions. Increased general and administrative expenses primarily resulted from significant consulting fees incurred in 1997 in connection with the 1997 Realignment. Management's decision to end manufacturing operations at the Company's historic Langdale facility and dispose of T.J. Beall was a significant part of the 1997 Realignment. This decision resulted in the transfer of selected equipment and products from the Langdale facility to newer and more efficient facilities within the Company and also resulted in recording of restructuring and impairment charges totaling $6.3 million during 1997. Charges directly related to the Langdale facility included write-downs in valuation of property assets of $2.6 million, employee severance accruals of $140 thousand and $249 thousand for costs to relocate production equipment. The 1997 restructuring charges also included impairment losses of $180 thousand and $11 thousand for a retail store and for the Tarboro facility, respectively, both of which were ultimately sold during 1997 plus a $253 thousand impairment loss for Jupiter's former office building in Rockville, Maryland which was held for sale at January 3, 1998 and subsequently sold on February 27, 1998. Other 1997 restructuring charges included the write off of $2 million in goodwill associated with the T.J. Beall acquisition, $551 thousand in costs associated with an abandoned software implementation and $275 thousand in severance accruals resulting from realignment of divisions of JI Alabama. In connection with the Jupiter Acquisition, the Company decided to close the manufacturing facility located in Tarboro, North Carolina, which had been operated by Jupiter's Wellington Sears subsidiary (the "Tarboro Facility") in an effort to realign and consolidate certain operations, concentrate capital resources on more profitable operations and better position itself to achieve its strategic corporate objectives. All activities related to the closing of the Tarboro Facility were substantially completed in January 1997. The Tarboro Facility, which was sold in December 1997, was recorded at its estimated net realizable value at December 28, 1996. During the year ended December 28, 1996, the Company recorded restructuring charges totaling $4.7 million which included $1.6 million related to write-downs of accounts receivable and inventory, $705 thousand for severance costs, $625 thousand for relocating production equipment, $915 thousand for actual operating losses and $879 thousand for other costs related to the operation. Of these restructuring costs, $1.8 million was recorded in the purchase accounting for the Jupiter Acquisition, with the remaining $2.9 million recorded as an expense on the consolidated statement of operations. Also, in 1996, the Company recorded a $200 thousand impairment charge on Jupiter's former office building in Rockville, Maryland. Net interest expense increased $2.2 million for fiscal year 1997 to $13.2 million from $11 million for the fiscal year 1996. The increase was due to higher average borrowings during fiscal 1997 as compared to the 1996 fiscal year. On March 28, 1996, the Company signed an agreement with a syndicate of banks (the "Bank Credit Agreement") to provide financing required to consummate the merger with Jupiter, to refinance certain existing indebtedness, to pay related fees and expenses, and to finance the ongoing working capital requirements of the Company. Such refinancing of existing indebtedness included existing credit agreements of Wellington, which when paid, were subject to prepayment penalties of approximately $850 thousand, and which resulted in an extraordinary loss on early extinguishment of debt of $527 thousand net of income tax of $323 thousand. The 1997 income tax benefit was at an effective rate of 26% versus a 1996 income tax provision at an effective rate of 36%. The reduced rate for the 1997 income tax benefit was mainly due to the write-off of goodwill related to the T.J. Beall acquisition, which was not deductible for income tax purposes. 23 24 Discontinued Operations Concurrent with the Jupiter Acquisition, the Company's management made the decision to discontinue the venture capital investment segment of Jupiter's operation. The segment was accounted for as a discontinued operation from April 1996 through June 1997 when the remaining investment portfolio was reclassified as a part of continuing operations. All prior periods have been restated accordingly. For fiscal year 1997, a loss from discontinued operations of $11 thousand was recorded net of benefit for income taxes of $5 thousand compared to 1996 when income from discontinued operations was $6.6 million net of taxes of $6.2 million and minority interest of $1.5 million. For the year ended December 28, 1996, net realized investment portfolio gain of $30.9 million was primarily due to gains realized on the sale of the Company's investment in EMC Corporation, Viasoft, Fuisz Technologies and Zoll Medical during the year ended December 28, 1996. (See Note 2 of the consolidated financial statements for further discussion.) In connection with the 1996 Jupiter Acquisition and after considering the Company's plans to liquidate the Jupiter investment portfolio, the Company recorded a loss on disposal of the Jupiter investment portfolio of $1 million, net of income tax benefit of $2.5 million, which included a write down of the carrying value of the investment portfolio in the amount of $4.4 million, a gain of $1.6 million on sale of Pay Telephone America, Ltd., and a reserve of $625 thousand for phase out of Jupiter's operations. During 1997, a gain on disposal of $137 thousand was recorded, net of taxes of $60 thousand, in settlement of actual charges against reserves included in the 1996 loss on disposal. (See Note 2 of the consolidated financial statements for further discussion.) YEAR 2000 As a result of computer programs which historically were written using a two rather than four digit convention to define the year component of dates, a concern commonly known as the Year 2000 ("Year 2000") issue has arisen globally. Computer programs and equipment that use a two digit convention may not be able to differentiate between the 20th and 21st centuries (e.g. "00" could be either 1900 or 2000). This could result in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Year 2000 Plan - In 1997, the Company began systematic replacement of legacy software applications, both purchased and developed in-house, with purchased software as to which the vendor has represented to be Year 2000 compliant or the vendor has indicated that subsequent releases will be Year 2000 compliant prior to July 1999. During 1998, the Company appointed a Year 2000 Coordinator, assembled a Year 2000 Team, and prepared a Year 2000 Plan. The Company's Year 2000 Plan is subject to modification and is revised periodically as additional information is developed. The Company's plan to resolve potential Year 2000 problems involved the following four phases: assessment, remediation, testing, and implementation. Contingency plans, including data back-up, disaster recovery, and possible modifications to procurement and production scheduling, will be developed during the second half of 1999. Assessment of significant computer application systems was completed in 1998. All systems were considered to be vulnerable until objective data could be obtained and in the case of packaged software, until vendor certification was obtained to support our assessment. Several of the Company's computer application systems were determined to be Year 2000 compliant and the remainder were identified for replacement or remediation. The majority of the Company's application systems are being completely replaced by packaged systems represented as being Year 2000 compliant. The largest replacement project began in August 1997 for the Company's Finished Fabrics Division. Replacement for the Fiber Products Division, which is considerably less sophisticated than the Finished Fabrics systems, began in November 1998. Once software is replaced or reprogrammed, a working model is prepared and work proceeds to testing and implementation. These phases run concurrently for different systems. The replacements, as identified 24 25 above, are expected to be completed by August 1999. For the remaining computer application systems which will not be replaced, remediation is underway and subsequent testing is expected to be complete by October 1999. All told, management believes that lines of code for systems requiring remediation, as opposed to replacement, represent only a small percentage of the total lines of computer code in service. For personal computers which are critical to operations or which are part of decision support systems, the hardware, operating systems, and application software are being reviewed for compliance. The Company intends to upgrade or replace all such systems once they are identified as out of compliance. Year 2000 Exposure for Products - Based on a review of its product line, the Company has determined that all of the products it has sold and will continue to sell contain no electronic or computerized components which would require remediation to be Year 2000 compliant. Accordingly, the Company believes that it does not have material exposure as it relates to the Company's products. Third Party Readiness - The Company has material relationships with third parties whose failure to be Year 2000 compliant could have material adverse impacts on the Company's business, operations or financial condition. Third parties considered by the Company's Year 2000 Team to be in this category ("Key Business Partners") include critical suppliers, significant customers, financial institutions, and utility providers. In conjunction with identification of Key Business Partners, the Company's assessment of Year 2000 risk included evaluation of production equipment, building systems, and critical services provided by Key Business Partners. Production (manufacturing) and building (telephone, alarm, fire control, climate control, etc.) equipment is being investigated for compliance. Additionally, the Company screens all purchases to insure that new equipment acquisitions are compliant. The Key Business Partner representing each model of equipment in use is being contacted to determine (a) if the equipment contains any hardware or software with Year 2000 exposure, (b) if any equipment with Year 2000 exposure is non-compliant, and (c) if upgrades or enhancements will be provided for all non-compliant equipment. To date, the majority of Key Business Partners representing production and building equipment have been contacted and most have responded. The Company is not presently aware of any equipment at risk for which remedial upgrades or enhancements will not be available. Contingency plans will be prepared for any vulnerable equipment for which remediation is not available on a timely basis, practical, or possible. Vendors and suppliers of raw materials, operating supplies, utilities, plus financial and other critical services are being surveyed for Year 2000 readiness, and the Company's Year 2000 Team is meeting with those who are identified as Key Business Partners. Responses from vendors and suppliers of less critical importance to our business are being evaluated and follow-up action is being taken by the Company as it deems appropriate. A majority of the Company's Key Business Partners for these goods and services have been contacted and many have responded. Significant customers identified by the Company's Year 2000 Team as Key Business Partners are being contacted for the purpose of assessing Year 2000 preparedness. The Company is not presently aware of any customer identified as a Key Business Partner who has been determined to be at risk and whose failure as a result of Year 2000 exposure would materially impact the Company's business, operations or financial condition. To date, the Company is not aware of any Key Business Partner who has been identified as vulnerable and whose failure as a result would materially impact the Company's business, operations or 25 26 financial condition. Although no assurance can be given that acceptable alternatives can be developed to mitigate a failure of business partners to achieve Year 2000 compliance, the Company will monitor business partners for exposure and to the extent practicable, contingency plans will be evaluated for any critical business partner who may be vulnerable. Year 2000 Risks and Costs As a result of the upgrades described above and assuming the projects in progress are completed in a satisfactory manner, the Company believes that the Year 2000 issue will not pose significant operational problems for the Company's computer systems and that it will be prepared in time to minimize any material impact to the Company's business, operations or financial condition. Failure to achieve a timely state of readiness or failure of a Key Business Partner or other third party to effectively remediate their affected systems could have a materially adverse impact on the Company's business operations, or financial condition. The Company anticipates completing the Year 2000 project no later than October 1999. The cost of addressing the Year 2000 issues has been and will continue to be substantially absorbed in the budget for improvement in management information systems and by normal costs for administrative and technical employees. The Company does not anticipate incurring significant third party costs to test or reprogram systems, however the Company has from time to time retained contract programmers and consultants to work on discrete projects or review aspects of the Company's information systems, and will continue this practice into the foreseeable future. Management believes that the cost of Year 2000 modifications will not have a material effect on its business, operations or financial condition. The Company has a high level of dependence on computer application systems, which are used to drive the business, and manufacturing equipment, which may include advanced computerized controls. The Company believes that a number of Key Business Partners also rely on such systems and equipment. There can be no guarantee that the software replacement projects will be successful or that the vendors supplying software to the Company will provide new software releases that are Year 2000 compliant. In addition, there can be no assurances that there will not be problems identified when screening production and support equipment, and ancillary systems and that such problems will not have a material effect on the Company's business, operations or financial condition. Additionally, as the Company relies on representations given by its Key Business Partners and other third parties, there can be no assurances that all such representations are accurate and effective in identifying Key Business Partners and other third parties potentially at risk and that unidentifiable risk will not have a material adverse impact on the Company's business, operations or financial condition. EFFECTS OF INFLATION Management does not believe that inflation has had a material impact on the results of operations for the periods presented, except as related to sharply escalating raw material costs which began in 1995 and extended into 1996. While these increased raw material costs had a significant impact on the Company and the industry during 1996, raw material prices returned to traditional levels during 1997 and have exhibited deflationary trends during 1998. Management believes that, while no assurances can be given, the Company can generally offset the effects of inflation by increasing prices if competitive conditions permit. LIQUIDITY AND CAPITAL RESOURCES The Company's primary needs for capital resources have been funded by (a) borrowings under its bank credit agreement, which was entered into on March 28, 1996 (the "Bank Credit Agreement") and thereafter amended several times to modify certain covenants, the latest amendment of which was executed on April 1, 1999, and (b) a $10 million leasing program with Boeing Capital, which was entered into on September 28, 1998. Borrowings under the Bank Credit Agreement were used to finance the purchase of the outstanding public shares of Jupiter (as discussed above), to refinance certain indebtedness, and to pay related 26 27 fees and expenses related to the foregoing, and available borrowings will be used as needed to finance working capital and capital expenditures in the future. The leasing program has been utilized to facilitate installation of certain new manufacturing equipment without drawing on available borrowings under the Bank Credit Agreement. The Bank Credit Agreement is comprised of two term loan facilities and a revolving credit facility. Term loan facility A ("Term Loan A") is a $40 million facility with an amended maturity date of July 2000. Principal is repayable for the Company's year ending as follows: 1999 - $6.9 million, and 2000 - $20.1 million. At January 2, 1999 and January 3, 1998, the blended interest rate on these borrowings was 9.06% and 8.40%, respectively, which is based on a Base Rate, the prime commercial lending rate, plus 1.75% and 1.25%, respectively, and is subject to change at the Company's option to a rate based on the London Interbank Offered Rate ("LIBOR") plus 3.50% and 2.50%, respectively. As of January 2, 1999 and January 3, 1998 the borrowings outstanding under Term Loan A were $27 million and $29.4 million, respectively. Term loan facility B ("Term Loan B") is a $40 million facility with an amended maturity date of July 2000. Principal is repayable for the Company's year ending as follows: 1999 - $.5 million, and 2000 - $32.3 million. At January 2, 1999 and January 3, 1998, the blended interest rate on these borrowings was 9.56% and 8.90%, respectively, and is based on a Base Rate, as defined, plus 2.25% and 1.75%, respectively, and is subject to change at the Company's option to a rate based on LIBOR, plus 4.00% and 3.00%, respectively. As of January 2, 1999 and January 3, 1998, the borrowings outstanding under Term Loan B were $32.4 million and $33.6 million respectively. The revolving credit facility (the "Revolving Credit Facility") provides up to $80 million in borrowing, with an amended maturity date of July 2000. Principal amounts outstanding are due and payable at final maturity. The interest rate on these borrowings ranges from 8.40% to 9.25% and from 8.25% to 9.75% at January 2, 1999 and January 3, 1998, respectively, which is based on a Base Rate, as defined, plus 1.50% and 1.25%, respectively, and is subject to change at the Company's option to a rate based on LIBOR plus 3.00% and 2.50% , respectively. Commitment fees are payable quarterly at 1/2 of 1%, based on the unused portion of the facility. The Bank Credit Agreement has been amended several times to modify certain covenants, the latest amendment of which was executed on April 1, 1999 (the "1999 Amendment"). Although the Company was in compliance with existing covenants at January 2, 1999, it has anticipated the need for amendments to cover periods beyond January 2, 1999, without which, technical noncompliance with certain financial covenants was considered to be imminent. In addition to covenant modifications, the 1999 amendment also includes an increase in interest rates of 1/2% to take effect April 4, 1999. In addition to limited covenant modifications, which were effective through January 2, 1999, and increased interest rates, a March 30, 1998 amendment (the "March 1998 Amendment") required the Company to adopt new cash management procedures during the second quarter of 1998, which included establishment of a lock-box with instruction for customers to remit payments directly to the lock-box. Deposits into the lock-box are applied daily against the Revolving Credit Facility, which, in general, management believes to have enhanced the Company's availability under the Revolving Credit Facility. As a result of this lock-box arrangement, Generally Accepted Accounting Principles require the Company to classify the Revolving Credit Facility, which has a maturity date of July 1, 2000, as a current liability. Pursuant to the March 1998 Amendment, the Company agreed that a collateral monitoring arrangement should be put into effect whereby the Company is required, through an independent collateral monitoring agent, to report certain financial data on a periodic basis to the lenders. Substantially all assets are pledged as collateral for the borrowings under the Bank Credit Agreement. The amended Bank Credit Agreement requires the Company to maintain certain financial ratios and specified levels of tangible net worth and places a limit on the Company's level of capital expenditures and type of mergers or acquisitions. The amended Bank Credit Agreement permits the Company to pay dividends on its common stock provided it is in compliance with various covenants and provisions contained therein, which 27 28 among other things, limits dividends and restricts investments to the lesser of: (a) 20% of total assets of the Company, on a fully consolidated basis, as of the date of determination thereof; or (b) $5 million plus 50% of cumulative consolidated net income for the period commencing on January 1, 1997, minus 100% of cumulative consolidated net loss for the consolidated entities for such period, as calculated on a cumulative basis as of the end of each fiscal quarter of the consolidated entities with reference to the financial statements for such quarter. Accordingly, at January 2, 1999, the Company is not permitted to declare and pay dividends. (See Note 10 of the consolidated financial statements for an expanded discussion of financing agreements.) The net cash provided by operating activities for the year ended January 2, 1999 was $16.4 million. The cash provided by operating activities for the year ended January 2, 1999 reflects a net loss of $608 thousand total adjustments for non-cash expenses of $21.9 million and net cash used for changes in the components of working capital of $4.9 million. Capital expenditures for the years ended January 2, 1999 and January 3, 1998 were $9.1 million and $10.4 million, respectively. Heightened review of proposed capital expenditures has resulted in a decreased level of capital investment during both 1998 and 1997 in response to the Company's scheduled repayments of outstanding debt and in accordance with management's goal of deleveraging the Company. During 1998, the Company repaid principal on Term Loans A and B totalling $3.6 million while reducing obligations under its revolving credit facility by $7.1 million for a total decrease in obligations under the Bank Credit Facility of $10.7 million. Dividends were paid through the second quarter of 1997 when the Company suspended dividends, subject to re-evaluation by the Board of Directors on a quarterly basis, in consideration of operating results and constrained liquidity. Operating improvements resulting from the 1997 Realignment, which contributed to improvements in cash generations, were offset during the latter half of 1998 by economic conditions, both domestic and global, which resulted indirectly in heightened competition and were reflected in reduced revenues. Cash provided by operating activities was used proportionately for debt service and for a prudent level of capital spending. Initiatives to strengthen margins through improved operating efficiencies and product rationalization have begun to enhance operating results, however, management remains focused in these areas with the goal of enhancing liquidity through further improvements in operating results coupled with continued efforts to reduce debt and debt service requirements. In addition to these initiatives, management continues to evaluate alternative financing arrangements which would enhance liquidity while enabling growth through the Company's ability to generate positive cash flow. Although compliance with financial covenants under the 1999 Amendment to the Bank Credit Agreement must be monitored closely, management believes that funds generated from operations and funds available under the Credit Agreement will be sufficient to satisfy the Company's liquidity requirements for at least the next year. As discussed above, the Company entered into a leasing program during 1998 and management is actively pursuing other financing arrangements in order to enhance the Company's liquidity. From time to time the Company received unsolicited indications of interest relating to the acquisition of the Company or certain assets of the Company by others. While management and the Board of Directors reviews each offer in accordance with the appropriate discharge of their fiduciary duties to the shareholders of the Company, neither the Company or any of its operations are for sale as management does not believe that an appropriate value is likely to be received given current market conditions. OTHER MATTERS The Company is periodically involved in legal proceedings arising out of the ordinary conduct of its business. Management does not expect that the resolution of these proceedings will have a material adverse 28 29 effect on the Company's consolidated financial position, results of operations or liquidity. During 1997, management became aware of certain industrial espionage activities that targeted the Company and several other textile manufacturers, allegedly carried out by agents of a large competitor. On October 8, 1998, the Company filed suit in Alabama seeking recourse for damages and losses resulting from these alleged activities. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates and changes in commodity prices. Exposure to interest rate risk relates to variable rate obligations under the Company's Bank Credit Agreement which permits the Company to allocate its total obligations between prime and LIBOR rate basis. Interest rate swap agreements are utilized to manage overall borrowing costs and reduce exposure to adverse fluctuations in interest rates. Two interest rate swap agreements are currently in place under which the Company pays an average of certain LIBOR based variable rates on $38 million notional principal. These agreements, which expire on June 4, 1999, also contain interest rate caps which further limit interest rate exposures. If interest rates related to the Company's LIBOR obligations increased by 100 basis points over the rates in effect at January 2, 1999, interest expense, after considering the effects of interest rate swap agreements, would increase by approximately $870 thousand in 1999. These amounts were determined by considering the impact of hypothetical interest rates on the Company's borrowing cost and interest rate swap agreements. The analyses do not consider the effects of the overall reduced debt levels anticipated in 1999. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its interest rate exposures. An April 1, 1999 amendment to the Company's bank credit agreement includes an increase in interest rates of 1/2% to take effect on April 4, 1999. The Company purchases cotton through approximately ten established merchants with whom it has long standing relationships. The majority of the Company's purchases are executed using "on-call" contracts. These on-call arrangements are used to insure that an adequate supply of cotton is available for the Company's requirements. Under on-call contracts, the Company agrees to purchase specific quantities for delivery on specific dates, with pricing to be determined at a later time. Prices are set according to prevailing prices, as reported by the New York Cotton Exchange, at the time of the Company's election to fix specific contracts. Cotton on-call with a fixed price at January 2, 1999 was valued at $7.4 million, and is scheduled for delivery early in 1999. At January 2, 1999, the Company had unpriced contracts for deliveries between April 1, 1999 and July 1, 2000. Based on the prevailing price at January 2, 1999, the value of these commitments are approximately $14 million for deliveries between April and December of 1999 and approximately $9 million for deliveries between January and July of 2000. As commodity price aberrations are generally short-term in nature, and have not historically had a significant long-term impact on operating performance, financial instruments are not used to hedge commodity price risk. The Company does not utilize financial instruments for trading or other speculative purposes. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated balance sheets as of January 2, 1999 and January 3, 1998, the related consolidated statements of operations, comprehensive operations, stockholders' equity and cash flows for the years ended January 2, 1999, January 3, 1998 and December 28, 1996, notes thereto and Independent Auditors' Reports are reproduced in Exhibit 13(a). Supplementary Data under the caption "Quarterly Information" is reproduced in Exhibit 13(b). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On May 27, 1998, (a) the Company determined not to renew the engagement of Deloitte & Touche LLP ("Deloitte"), the Company's auditors, who were previously engaged as the principal accountant to audit the consolidated financial statements of the Company and (b) selected KPMG LLP ("KPMG") as the Company's principal accountant and replacement for Deloitte. The Audit Committee of the Company's Board of Directors recommended that Deloitte's engagement not be renewed and that KPMG be engaged to replace Deloitte, and the Board of Directors approved this recommendation effective May 27, 1998. 29 30 The reports of Deloitte on the consolidated financial statements of the Company as of and for the fiscal years ended January 3, 1998 and December 28, 1996 contained no adverse opinion or disclaimer of opinion, nor were such financial statements qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's two most recent fiscal years and the subsequent interim period preceding the replacement of Deloitte, there were no disagreements with Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of Deloitte, would have caused it to make a reference to the subject matter of the disagreement(s) in connection with its report. Further, Deloitte did not advise the Company during the Company's two most recent fiscal years or during the subsequent interim period preceding the Company's decision not to extend Deloitte's engagement: (a) that the internal controls necessary for the Company to develop reliable financial statements did not exist; (b) that information had come to its attention that had led it to no longer be able to rely on management's representations, or that had made it unwilling to be associated with the financial statements prepared by management; (c) of the need to expand significantly the scope of its audit, or that information had come to its attention during the two most recent fiscal years or any subsequent period that if further investigated might (i) materially have impacted the fairness or reliability of either: a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report or (ii) have caused it to be unwilling to rely on management's representations or be associated with the Company's financial statements; or (d) that information had come to its attention that it had concluded materially impacts the fairness or reliability of either (i) a previously issued audit report or the underlying financial statements, or (ii) the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report. Deloitte was authorized by the Company to respond fully to inquiries of KPMG. During the two most recent fiscal years and during the interim period prior to engaging KPMG, neither the Company nor anyone on its behalf consulted KPMG regarding either: (a) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements, and neither a written report nor oral advice was provided to the Company that KPMG concluded was an important factor considered by the Company in reaching a decision as to accounting, auditing, or financial reporting issues; or (b) any matter that was the subject of either a disagreement or any other event described above. On June 1, 1998, and at the Company's request, Deloitte furnished a letter to the Securities and Exchange Commission stating whether or not it agreed with the above statement. A copy of that letter is included as an exhibit to the Company's Form 8-K, which was filed with the Securities and Exchange Commission on June 2, 1998. 30 31 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF JOHNSTON INDUSTRIES, INC. The information required by Item 10 is incorporated by reference from the information in the Registrant's Proxy Statement (to be filed pursuant to Regulation 14A) for its 1999 annual meeting of stockholders, except as to biographical information on Executive Officers which is contained in Item 1 of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference from the information in the Registrant's Proxy Statement (to be filed pursuant to Regulation 14A) for its 1999 annual meeting of stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated by reference from the information in the Registrant's Proxy Statement (to be filed pursuant to Regulation 14A) for its 1999 annual meeting of stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated by reference from the information in the Registrant's Proxy Statement (to be filed pursuant to Regulation 14A) for its 1999 annual meeting of stockholders. 31 32 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Consolidated Financial Statements The consolidated financial statements are filed herewith within Exhibit 13(a), as provided in Item 8 hereof: -Consolidated Balance Sheets as of January 2, 1999 and January 3, 1998. - Consolidated Statements of Operations for the years ended January 2, 1999, January 3, 1998 and December 28, 1996. - Consolidated Statements of Comprehensive Operations for the years ended January 2, 1999, January 3, 1998 and December 28, 1996. - Consolidated Statements of Stockholders' Equity for the years ended January 2, 1999, January 3, 1998 and December 28, 1996. - Consolidated Statements of Cash Flows for the years ended January 2, 1999, January 3, 1998 and December 28, 1996. - Notes to Consolidated Financial Statements. (a)(2) Financial Statement Schedules The following report and consolidated financial statement schedules are filed herewith as Exhibit 13(a). - Independent Auditors' Reports - Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because such schedules are not required under the related instructions or are inapplicable or because the information required is included in the Consolidated Financial Statements or notes thereto. (a)(3) Reports on Form 8-K There were no reports on Form 8-K during the last quarter of the year ended January 2, 1999. 32 33 (a)(4) Listing of Exhibits The exhibits listed below are filed with or incorporated by reference into this annual report on Form 10-K.
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 3.1(a) Certificate of Incorporation of Registrant (7). 3.1(b) Certificate of Amendment of Registrant's Certificate of Incorporation dated December 20, 1993 (7). 3.2 By-Laws of Registrant (7). 10.2 Third Amended and Restated Credit and Security Agreement dated as of January 31, 1995 among Johnston Industries, Inc., Southern Phenix Textiles, Inc., Opp and Micolas Mills, Inc., The Chase Manhattan Bank, N. A., NationsBank of North Carolina, N. A. and Comerica Bank [Exhibit 10] (6) +10.3 Registrant's Executive Insurance Plan, as amended and restated effective May 21, 1984(7). +10.4 Letter to Participants dated March 1, 1989 in Registrant's Executive Insurance Plan setting forth revisions thereto [Exhibit 10.3(b)] (7). +10.5 Registrant's Salaried Employees, Pension Plan, as amended and restated effective July 1, 1989 [Exhibit 10.4] (2). +10.6 Amended and Restated Stock Incentive Plan for Key Employees of the Registrant and its Subsidiaries (7). +10.7 Employee Stock Purchase Plan effective October 15, 1990 (with 1991 and 1992 amendments) [Exhibit 10.5(b)(i)] (3). +10.8 Amendment dated October 29, 1992 to Employee Stock Purchase Plan [Exhibit 10.5(b)(ii)] (4). +10.9 Amendment dated December 17, 1993 to Employee Stock Purchase Plan [Exhibit 10.9(b)(iii)] (7). +10.10 Amendment dated January 24, 1995 to Employee Stock Purchase Plan [Exhibit 10.9(b)(iii)] (7). +10.11 Employment Agreement with Gerald B. Andrews dated as of October 17, 1992 [Exhibit 10.6(b)] (4). +10.12 Employment Agreement with David L. Chandler effective as of January 1, 1990 [Exhibit 10.6(d)(1)] (3). +10.13 Trust Agreement dated as of February 12, 1991, with Chemical Bank & Trust Company and David L. Chandler [Exhibit 10.6(d)(2)] (3). +10.14 Employment Agreement with Roger J. Gilmartin dated April 22, 1993 [Exhibit 10.6(d)] (4) +10.16 Employment Agreement with W. I. Henry dated as of January 1, 1993 [Exhibit 10.6(f)] (4). +10.17 Employment Agreement with John W. Johnson dated January 27, 1993 [Exhibit 10.6(g)] (4). +10.18 Johnston Industries, Inc. Deferred Payment Plan Trust Agreement dated as of October 17, 1992 with First Alabama Bank & Trust Company [Exhibit 10.7] (4) +10.19 Employment Agreement with Larry L. Galbraith dated May 31, 1995. (9) +10.20 Employment Agreement with L. Allen Hinkle dated May 26, 1995. (9) 10.21 Agreement and Plan of Merger, dated August 16, 1995, among and between Johnston Industries, Inc., JI Acquisition Corp., and Jupiter National, Inc. [Exhibit 99.3] (8). 10.22 Bank Credit Agreement dated as of March 28, 1996 among Johnston Industries, Inc., Wellington Sears Company, Southern Phenix Textiles, Inc., Opp and Micolas Mills, Inc., Johnston Industries Composite Reinforcements, Inc., T.J. Beall Company and the banks named therein, The Chase Manhattan Bank, N.A as Administrative Agent, Chase Securities, Inc. as Arranger, and Nationsbank, N.A. as Syndication Agent. (9) 10.23 Amendment # 1 dated June 28, 1996 to Bank Credit Agreement. (10) 10.24 Amendment # 2 dated February 28, 1997 to Bank Credit Agreement. (10) +10.25 Employment Agreement with James J. Murray dated September 15, 1997. (11)
33 34
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 10.26 Amendment #3 dated December 18, 1997 to Bank Credit Agreement.(12) +10.27 Employment Agreement with D. Clark Ogle dated March 20, 1998. (12) 10.28 Amendment #4 dated March 30, 1998 to Bank Credit Agreement. (12) 10.29 Amendment #5 dated July 10, 1998 to Bank Credit Agreement. (13) 10.30 Amendment #6 dated December 22, 1998 to Bank Credit Agreement. 10.31 Amendment #7 dated April 1, 1999 to Bank Credit Agreement. 11 Statement of Computation of Per Share Earnings for the years ended January 2, 1999, January 3, 1998 and December 28, 1986. 13(a) Consolidated balance sheets as of January 2, 1999 and January 3, 1998, the related consolidated statements of operations, comprehensive operations, stockholders' equity and cash flows for the years ended January 2, 1999, January 3, 1998 and December 28, 1996, notes thereto and Independent Auditors' Reports and related financial statement schedule. 13(b) Supplementary Data captioned "Quarterly Information" 21 List of Subsidiaries of Registrant. 23(a) Consent of KPMG LLP. 23(b) Consent of Deloitte & Touche LLP 27 Financial Data Schedule as of January 2, 1999 (for SEC use only)
- -------------------------------------------------------------------------------- (1) Previously filed with the Company's Annual Report on Form 10-K for the year ended June 30, 1990. (2) Previously filed with the Company's Annual Report on Form 10-K for the year ended June 30, 1991. (3) Previously filed with the Company's Annual Report on Form 10-K for the year ended June 30, 1992. (4) Previously filed with the Company's Annual Report on Form 10-K for the year ended June 30, 1993. (5) Previously filed with the Company's Annual Report on Form 10-K for the year ended June 30, 1994. (6) Previously filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. (7) Previously filed with the Company's Annual Report on Form 10-K for the year ended June 30, 1995. (8) Previously filed with the Company's Form 8-K on August 21, 1995. (9) Previously filed with the Company's Annual Report on Form 10-K for the transition period ended December 30, 1995. (10) Previously filed with the Company's Annual Report on Form 10-K for the year ended December 28, 1996. (11) Previously filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 1997. (12) Previously filed with the Company's Annual Report on Form 10-K for the year ended January 3, 1998. (13) Previously filed with the Company's Quarterly Report on Form 10-Q for the quarter ended October 3, 1998. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to Form 10-K pursuant to Item 14(c). 34 35 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. JOHNSTON INDUSTRIES, INC. Date: March 30, 1999 By: /s/ D. Clark Ogle ------------------------------------------ D. Clark Ogle President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ D. Clark Ogle President and March 30, 1999 - ------------------------ Chief Executive Officer D. Clark Ogle (Principal Executive Officer) /s/ J. Reid Bingham Director March 30, 1999 - ------------------------ J. Reid Bingham /s/ Allyn P. Chandler Director March 30, 1999 - ------------------------ Allyn P. Chandler /s/ John A. Friedman Director March 30, 1999 - ------------------------ John A. Friedman /s/ William J. Hart Director March 30, 1999 - ------------------------ William J. Hart /s/ Gaines R. Jeffcoat Director March 30, 1999 - ------------------------ Gaines R. Jeffcoat /s/ James J. Murray Chief Financial Officer March 30, 1999 - ------------------------ (Principal Accounting Officer) James J. Murray /s/ C. Philip Stanley Director March 30, 1999 - ------------------------ C. Philip Stanley - --------------------------------------------------------------------------------------------------
35 EX-10.30 2 AMENDMENT #6 TO THE BANK CREDIT AGREEMENT 1 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 10.30 AMENDMENT # 6 DATED DECEMBER 22, 1998 TO BANK CREDIT AGREEMENT - -------------------------------------------------------------------------------- AMENDMENT NO. 6 TO CREDIT AGREEMENT AMENDMENT NO. 6, dated as of December 22, 1998, among Johnston Industries, Inc., a Delaware Corporation ("Johnston"), Johnston Industries Alabama, Inc., an Alabama corporation formerly known as Opp and Micolas Mills, Inc. ("Johnston Alabama"), J.I. Georgia, Inc., a Georgia corporation formerly known as T.J. Beall Company ("JIG"), and Johnston Industries Composite Reinforcements, Inc., an Alabama corporation ("JICR", and collectively with Johnston, Johnston Alabama and JIG, the "Borrowers" and each individually, a "Borrower"), NationsBank, N.A., as Syndication Agent, The Chase Manhattan Bank, the successor by merger to The Chase Manhattan Bank, N.A., as Agent for the banks party hereto ("Banks") and as Collateral Monitoring Agent ("Agent"), to the Credit Agreement dated as of March 28, 1996 among Johnston, Wellington Sears Company ("Wellington"), Southern Phenix Textiles, Inc. ("Phenix"), Opp and Micolas Mills, Inc. ("Opp"), T.J. Beall Company ("TJB") and JICR, the banks named therein, The Chase Manhattan Bank, N.A., as Administrative Agent, Chase Securities, Inc., as Arranger and NationsBank, N.A., as Syndication Agent, as amended by Amendment No. 1 dated as of June 28, 1996, Amendment No. 2 dated as of February 28, 1997, Amendment No. 3 dated as of December 18, 1997, Amendment No. 4 dated as of March 28, 1998 and Amendment No. 5 dated as of July 10, 1998 (collectively, the "Credit Agreement"). All capitalized terms used herein but not otherwise defined herein shall have the meanings given them in the Credit Agreement. W I T N E S S E T H: WHEREAS, pursuant to the Credit Agreement, a credit facility in an aggregate amount of up to $160,000,000 is available to the Borrowers on the terms and conditions set forth therein; WHEREAS, pursuant to Amendment No. 5 to Credit Agreement referred to above, the Borrowers entered into collateral monitoring arrangements for the benefit of the Banks and certain cash management arrangements to facilitate and implement such collateral monitoring arrangements; and WHEREAS, the Borrowers and the Banks have agreed to amend in certain respects such collateral monitoring arrangements as hereinafter set forth. NOW, THEREFORE, each Bank, the Agent, the Syndication Agent and each Borrower, on a joint and several basis, hereby agree as follows: 1. Amendments to Section 7.01(b)(v) - Affirmative Covenants. Section 7.01(b)(v) of the Credit Agreement is hereby amended by: (a) adding the following sentence immediately after the second sentence thereof: "Notwithstanding the foregoing, such $400,000 aggregate amount in the Exempt Accounts may be increased up to a maximum aggregate amount not to exceed $750,000 at any one time on a cumulative basis solely to enable the Borrowers to deposit in the payroll accounts included in the Exempt Accounts such monies as are necessary to pre- 1 2 fund such payroll accounts in such amounts and at such times as may be required to satisfy the requirements of the applicable paying banks when the payment of such payroll expenses is made utilizing the Automated Clearinghouse payment system."; and (b) by adding the following sentence at the end of such clause (v): "Each Borrower hereby acknowledges and agrees that to the extent that such Borrower directly receives any payments or other items that should have been deposited in a Lockbox Account or a Blocked Account or receives any other payments (including, without limitation, tax refunds and rebates), such payments and other items shall be held as the Banks' property by such Borrower, as trustee of an express trust for the Banks' benefit, and such Borrower shall immediately deliver to the bank identified in Exhibit M such payments and other items for deposit in the Blocked Account." 2. Amendments to Section 7.02 - Negative Covenants. Section 7.02(r) of the Credit Agreement is hereby amended by adding the following after the last word thereof: ", or such increased amount as may be permitted pursuant to the terms and conditions of Section 7.01(b)(v)". 3 . Amendments to Exhibits to the Credit Agreement. (a) Exhibit M to the Credit Agreement is hereby amended by deleting from the Blocked Accounts, Concentration Account No. _____ of Johnston at Regions Bank, Birmingham, Alabama. A copy of Exhibit M, as amended, is attached hereto and is hereby substituted for Exhibit M to the Credit Agreement. (b) Exhibit P to the Credit Agreement is hereby amended by adding to the Exempt Accounts, Account No. _____ at Regions Bank, Birmingham, Alabama. A copy of Exhibit P, as amended, is attached hereto and is hereby substituted for Exhibit P to the Credit Agreement. 4. Representations, Warranties and Covenants of the Borrowers. Each Borrower hereby represents and warrants to each Bank that on and as of the date hereof (i) the representations and warranties of the Borrowers contained in the Credit Agreement and any other Loan Document delivered in connection therewith to which it is a party are true and correct and apply to the Borrowers hereto with the same force and effect as though made on and as of the date hereof, (ii) the Borrowers are in compliance with all covenants contained in the Credit Agreement (as amended hereby), and (iii) no Default or Event of Default has occurred and is continuing under the Credit Agreement (as amended hereby) or any other Loan Document delivered in connection therewith to which it is a party, after giving effect to this Amendment. To the extent any claim or off-set may exist as of the date hereof, each Borrower, on behalf of itself and its successors and assigns, hereby forever and irrevocably (a) releases each Bank, the Agent and the Syndication Agent and their respective officers, representatives, agents, attorneys, employees, successors and assigns (collectively, the "Released Parties"), from any and all claims, demands, damages, suits, cross-complaints and causes of action of any kind and nature whatsoever, whether known or unknown and wherever and howsoever arising, and (b) waives any right of off-set such Borrower may have against any of the Released Parties. 5. Conditions Precedent to Amendment No.6. The obligation of the Banks and the Agent to enter into this Amendment shall be subject to the Agent having received from the Borrowers, prior to or simultaneously with the execution and delivery of this Amendment, the following: (a) Amendment No. 1 to Lockbox Account Agreement, duly executed by the Borrowers and the bank identified on Exhibit M, pursuant which the Concentration Account identified in paragraph 4(b) of the Lockbox Agreement shall be amended to refer to Account No. ___________; (b) Amendment No. 1 to Blocked Account Agreement, duly executed by the Borrowers and the bank identified on Exhibit M, pursuant to which Account No. ____________ shall be deleted as Blocked Account; and (c) A Pledged Account Letter, duly executed by the Borrowers, with respect to Account No. ____________. 2 3 6. Pledged Account Letter. The Borrowers agree that the Pledged Account Letter referred to in Paragraph 5(c), to be executed and delivered to the Agent simultaneously with this Amendment, shall be held by the Agent until (i) a Default or an Event of Default has occurred and is continuing, or (ii) the occurrence of a Material Adverse Change, as determined by the Required Banks. In either case, upon such event or occurrence, the Agent may, and upon the request of the Required Banks shall, release such Pledged Account Letter to the banks or other financial institutions to which such Letter has been addressed, and the Borrowers each hereby expressly authorize such release by the Agent. 7. Credit Agreement in Full Force and Effect. Except as expressly modified hereby, the Credit Agreement shall remain unchanged and in full force and effect as executed and each Borrower hereby confirms and reaffirms all of the terms and conditions of the Credit Agreement. 8. Entire Understanding. The Credit Agreement and this Amendment contain the entire understanding of and supersede all prior agreements, written and verbal, among the Banks, the Agent, the Syndication Agent and the Borrowers with respect to the subject matter hereof and shall not be modified except in writing executed by the parties hereto. 9. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York without giving effect to its conflict of laws principles. 10. Counterparts. This Amendment may be executed in counterparts, each of which shall be deemed an original, and together which shall constitute one and the same instrument. 3 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. THE BORROWERS: JOHNSTON INDUSTRIES, INC. JOHNSTON INDUSTRIES ALABAMA, INC. By: By: ---------------------- ------------------------------- Name: Name: Title: Title: J.I. GEORGIA, INC. JOHNSTON INDUSTRIES COMPOSITE REINFORCEMENTS, INC. By: By: ---------------------- ------------------------------- Name: Name: Title: Title: THE AGENT: THE CHASE MANHATTAN BANK By: --------------------- Name: Title: THE SYNDICATION AGENT: NATIONSBANK, N.A. By: --------------------- Name: Title: 4 5 THE LENDERS: THE CHASE MANHATTAN BANK BANK OF AMERICA (F/K/A NATIONSBANK, N.A.) By: By: ---------------------- ------------------------------- Name: Name: Title: Title: REGIONS BANK COMERICA BANK By: By: ---------------------- ------------------------------- Name: Name: Title: Title: VAN KAMPEN PRIME RATE THE SUMITOMO BANK, LIMITED INCOME TRUST By: By: ---------------------- ------------------------------- Name: Name: Title: Title: By: ------------------------------- Name: Title: MERRILL LYNCH, PEARCE, DK ACQUISITION PARTNERS, L.P. FENNER & SMITH INCORPORATED By: By: ---------------------- ------------------------------- Name: Name: Title: Title: FIRST UNION N.B. (F/K/A CORESTATES BANK, N.A.) By: ---------------------- Name: Title: 5 EX-10.31 3 AMENDMENT #7 TO THE BANK CREDIT AGREEMENT 1 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 10.31 AMENDMENT # 7 DATED APRIL 1, 1999 TO BANK CREDIT AGREEMENT - ------------------------------------------------------------------------------- AMENDMENT NO. 7 TO CREDIT AGREEMENT AMENDMENT NO. 7, dated as of April 1, 1999, among Johnston Industries, Inc., a Delaware corporation ("Johnston"), Johnston Industries Alabama, Inc., an Alabama corporation formerly known as Opp and Micolas Mills, Inc. ("Johnston Alabama"), J.I. Georgia, Inc., a Georgia corporation formerly known as T.J. Beall Company ("JIG"), and Johnston Industries Composite Reinforcements, Inc., an Alabama corporation ("JICR", and collectively with Johnston, Johnston Alabama and JIG, the "Borrowers" and each individually, a "Borrower"), NationsBank, N.A., as Syndication Agent, The Chase Manhattan Bank, the successor by merger to The Chase Manhattan Bank, N.A., as Agent for the lenders party hereto ("Lenders") and as Collateral Monitoring Agent ("Agent"), and the Lenders, to the Credit Agreement, dated as of March 28, 1996, among Johnston, Wellington Sears Company, Southern Phenix Textiles, Inc., Opp and Micolas Mills, Inc., T.J. Beall Company and JICR, the banks named therein, The Chase Manhattan Bank, N.A., as Administrative Agent, Chase Securities, Inc., as Arranger, and NationsBank, N.A., as Syndication Agent, as amended by Amendment No. 1 dated as of June 28, 1996, Amendment No. 2 dated as of February 28, 1997, Amendment No. 3 dated as of December 18, 1997, Amendment No. 4 dated as of March 30, 1998, Amendment No. 5 dated as of July 10, 1998, and Amendment No. 6 dated as of December 22, 1998 (collectively, the "Credit Agreement"). All capitalized terms used but not otherwise defined herein shall have the meanings given them in the Credit Agreement. W I T N E S S E T H: WHEREAS, pursuant to the Credit Agreement, a credit facility is available to the Borrowers on the terms and conditions set forth therein; and WHEREAS, the Borrowers have requested, and the Lenders have agreed, subject to the terms and conditions hereinafter set forth, to (i) amend certain provisions of the Credit Agreement and (ii) modify certain of the Borrowers' covenants set forth in the Credit Agreement, and the Borrowers further wish to confirm and reaffirm their joint and several obligations under the Credit Agreement as amended hereby. NOW, THEREFORE, each Lender, the Agent, the Syndication Agent and each Borrower, on a joint and several basis, hereby agree as follows: 1. Amendment to Section 1.01 - Certain Defined Terms. Section 1.01 of the Credit Agreement is amended hereby as follows: 1 2 (a) The definition of "Applicable Margin" is hereby amended (i) by deleting the table contained therein in its entirety and substituting the following in lieu thereof:
Revolver Term Loan A -------- ----------- Debt Ratio LIBOR Base Rate LIBOR Base Rate ---------- ----- --------- ----- --------- Less than or equal to 2.00:1 200.00 bp 75.00 bp 250.00 bp 100.00 bp Greater than 2.00:1 but 225.00 bp 75.00 bp 275.00 bp 100.00 bp less than or equal to 2.75:1 Greater than 2.75:1 but 250.00 bp 100.00 bp 300.00 bp 125.00 bp less than or equal to 3.50:1 Greater than 3.50:1 but 300.00 bp 150.00 bp 350.00 bp 175.00 bp less than or equal to 4.25:1 Greater than 4.25:1 350.00 bp 200.00 bp 400.00 bp 225.00 bp
and (ii) by deleting clause [2] thereof in its entirety and substituting the following in lieu thereof: "[2] with respect to Term Loan B: (a) if such Loan is a Eurodollar Loan, four hundred fifty (450) basis points (4.50%), and (b) if such Loan is a Base Rate Loan, two hundred seventy-five (275) basis points (2.75%)." The Borrowers agree that the foregoing rate increases shall become effective on April 4, 1999 and that all outstanding Debt of the Borrowers under the Credit Agreement and the Notes shall be subject to the repricing set forth herein on April 4, 1999, notwithstanding anything to the contrary contained in the Credit Agreement. (b) The definition of "Fixed Charge Coverage Ratio" is hereby amended by adding "(which, for purposes hereof, shall include only expenditures actually made)" immediately following "Consolidated Capital Expenditures" in clause (a)(ii) thereof. (c) The following defined terms are hereby added to Section 1.01 of the Credit Agreement: "Milliken Proceeds" shall mean all monies paid or payable to any of the Borrowers resulting from or arising out of the action originally brought by Johnston and Johnston Alabama against Milliken & Company, Inc., R.A. Taylor & Associates, Inc., Global Intellectual Network, Inc., Justin D. Waldrop, JDW Consulting and Rodney A. Taylor, et al., in the Circuit Court for Russell County, Alabama, whether obtained by enforcement of a judgment or paid in settlement thereof or otherwise, net of legal fees and expenses and after taking into account all incremental taxes payable by or assessed against any of the Borrowers in connection with any such judgment or settlement." "Term Loan A Commitment Percentage" has the meaning assigned to that term in SECTION 2.06(a)." "Term Loan B Commitment Percentage" has the meaning assigned to that term in SECTION 2.06(a)." 2 3 2. Amendment to Section 2.06 - Prepayments. Section 2.06(a) of the Credit Agreement is hereby amended by deleting the last sentence thereof and substituting the following in lieu thereof: "Each application of such prepayment to the principal installments of the Term Loans shall be made to Term Loans A and to Term Loans B on a pro rata basis in accordance with the Term Loan A Commitment Percentage and the Term Loan B Commitment Percentage and, once so applied, shall be applied pro rata to the principal installments of Term Loans A and Term Loans B in inverse order of their maturities, and in accordance with the Banks' respective Term Loan A Commitment or Term Loan B Commitment, as the case may be. For purposes hereof, "Term Loan A Commitment Percentage" and "Term Loan B Commitment Percentage" shall mean a percentage, the numerator of which is an amount equal to the aggregate of all Term Loan A Commitments or Term Loan B Commitments, as the case may be, and the denominator of which is an amount equal to the aggregate amount of all Term Loan A Commitments and Term Loan B Commitments." 3. Amendment to Section 2.07 - Mandatory Prepayment. Section 2.07 of the Credit Agreement is hereby amended by (i) inserting a new paragraph (d) as follows: "(d) Any Milliken Proceeds received by the Borrowers shall be applied to discharge the Loans as follows: (1) First, to the principal installments of the Term Loans in inverse order of maturities until the Term Loans shall have been paid in full; and (2) Second, to the Revolving Credit Loans until the Revolving Credit Loans have been paid in full." and (ii) by deleting the original paragraph (d) thereof in its entirety and substituting the following in lieu thereof: "(e) The Borrowers shall make all mandatory prepayments due hereunder to the Agent, for the account of the Banks, in amount(s) due within five (5) days after the occurrence of an event triggering the mandatory prepayment hereunder. Each application of such mandatory prepayment to the principal installments of the Term Loans as set forth in clauses (a), (b) and (d) hereof shall be made to Term Loans A and to Term Loans B on a pro rata basis in accordance with the Term Loan A Commitment Percentage and the Term Loan B Commitment Percentage and, once so applied, shall be applied pro rata to the principal installments of Term Loans A and Term Loans B in inverse order of their maturities, and in accordance with the Banks' respective Term Loan A Commitment or Term Loan B Commitment, as the case may be." 4. Amendment to Section 7.03 - Financial Covenants. Section 7.03 of the Credit Agreement is hereby amended by deleting the paragraphs referred to below in their entirety and to substituting the following in lieu thereof: "(b) Capital Expenditures. Permit Consolidated Capital Expenditures to exceed (i) $18,600,000 for the fiscal year ending January 1, 2000, provided that (A) Consolidated Capital Expenditures consisting of direct cash purchases or related disbursements during such fiscal year shall not exceed $11,500,000 in the aggregate, and (B) the computation of Consolidated Capital Expenditures for and/or incurred with respect to Operating Leases during such fiscal year shall include the notional value of equipment leased pursuant to such Operating Leases during such fiscal year; and (ii) $20,000,000 for the fiscal year ending December 31, 2000, of which no more than $5,500,000 may be committed for expenditure but not expended during the period from January 2, 2000 through April 1, 2000." "(c) Consolidated Funded Debt. Incur or permit Consolidated Funded Debt to exceed (i) $139,000,000 at any time through July 3, 1999, (ii) $137,000,000 at any time from July 4, 1999 through 3 4 October 2, 1999, (iii) $133,000,000 at any time from October 3, 1999 through January 1, 2000 and (iv) $129,000,000 at any time from and after January 2, 2000." "(d) Consolidated Tangible Net Worth. Permit its Consolidated Tangible Net Worth, at any time, to be less than the amount set forth below:
Period: Amount: ------ ------ 1/3/99 - 4/3/99 $34,900,000 4/4/99 - 7/3/99 $34,000,000 7/4/99 - 10/2/99 $33,400,000 10/3/99 - 1/1/00 $34,100,000 1/2/00 and at all times thereafter $70,000,000"
"(e) Leverage Ratio. Permit the Leverage Ratio, as determined at the end of each fiscal quarter, to be greater than the ratio set forth opposite the following periods:
Period: Ratio: ------ ----- 1/3/99 - 4/3/99 3.95:1.00 4/4/99 - 7/3/99 3.96:1.00 7/4/99 - 10/2/99 3.85:1.00 10/3/99 - 1/1/00 3.65:1.00 1/2/00 and at all times thereafter 2.00:1.00"
"(g) Interest Coverage Ratio. Permit the Interest Coverage Ratio, as determined at the end of each fiscal quarter, to be less than the ratio set forth opposite the following periods:
Period: Ratio: ------ ----- 1/3/99 - 4/3/99 0.70:1.00 4/4/99 - 7/3/99 0.65:1.00 7/4/99 - 10/2/99 0.63:1.00 10/3/99 - 1/1/00 0.58:1.00 1/2/00 and at all times thereafter 3.00:1.00"
"(h) Fixed Charge Coverage Ratio. Permit the Fixed Charge Coverage Ratio, as determined at the end of each fiscal quarter, to be less than the ratio set forth opposite the following periods:
Period: Ratio: ------ ----- 1/3/99 - 4/3/99 1.42:1.00 4/4/99 - 7/3/99 1.20:1.00 7/4/99 - 10/2/99 0.90:1.00 10/3/99 - 1/1/00 0.75:1.00 1/2/00 and at all times thereafter 1.50:1.00"
"(i) Debt Ratio. Permit the Debt Ratio, as determined at the end of each fiscal quarter, to be greater than the ratio set forth opposite the following periods:
Period: Ratio: ------ ----- 1/3/99 - 4/3/99 4.55:1.00 4/4/99 - 7/3/99 4.65:1.00 7/4/99 - 10/2/99 4.70:1.00 10/3/99 - 1/1/00 4.60:1.00 1/2/00 and at all times thereafter 3.00:1.00"
4 5 2. Representations, Warranties and Covenants of the Borrowers. Each Borrower hereby represents and warrants to each Lender that on and as of the date hereof (i) the representations and warranties of the Borrowers contained in the Credit Agreement and any other Loan Document delivered in connection therewith to which it is a party are true and correct and apply to the Borrowers hereto with the same force and effect as though made on and as of the date hereof, (ii) the Borrowers are in compliance with all covenants contained in the Credit Agreement (as amended hereby), and (iii) no Default or Event of Default has occurred and is continuing under the Credit Agreement (as amended hereby) or any other Loan Document delivered in connection therewith to which it is a party, after giving effect to this Amendment. To the extent any claim or off-set may exist as of the date hereof, each Borrower, on behalf of itself and its successors and assigns, hereby forever and irrevocably (a) releases each Lender, the Agent and the Syndication Agent and their respective officers, representatives, agents, attorneys, employees, successors and assigns (collectively, the "Released Parties"), from any and all claims, demands, damages, suits, cross-complaints and causes of action of any kind and nature whatsoever, whether known or unknown and wherever and howsoever arising, and (b) waives any right of off-set such Borrower may have against any of the Released Parties. 3. Amendment Fee. Borrowers agree to pay to the Agent, for the benefit of each Lender that executes and delivers this Amendment, a fee equal to 1/4 of 1% of the Revolving Credit Commitment plus 1/4 of 1% of the Term Loan A Commitment and the Term Loan B Commitment respectively outstanding as of the date hereof ("Amendment Fee"), together with the costs and expenses (including, without limitation, reasonable attorneys' fees) incurred by the Agent for the preparation, negotiation and delivery of this Amendment, in consideration for the Lenders' agreement to enter into this Amendment, which shall be due and payable upon the execution of this Amendment, and which Amendment Fee shall be deemed earned when paid. 4. Payment of Fees. The Amendment Fee shall be paid to the Agent, for the account of each Lender that executes and delivers this Agreement pro rata in accordance with its respective percentage share of the Commitment outstanding at the time of payment. 5. Conditions Precedent to Amendment No. 7. The obligation of the Lenders and the Agent to enter into this Amendment shall be subject to the Agent having received from the Borrowers, prior to or simultaneously with the execution and delivery of this Amendment, the following: (a) Amendment No. 2 to the Amended and Restated Security Agreement executed by the Borrowers in the form of Exhibit A hereto, providing for the inclusion of the Milliken Proceeds as Collateral. (b) UCC-3 financing statements amending the UCC-1 financing statements filed in connection with the Amended and Restated Security Agreement to reflect the inclusion of the Milliken Proceeds as Collateral. 6. Credit Agreement in Full Force and Effect. Except as expressly modified hereby, the Credit Agreement shall remain unchanged and in full force and effect as executed and each Borrower hereby confirms and reaffirms all of the terms and conditions of the Credit Agreement. 7. Entire Understanding. The Credit Agreement and this Amendment contain the entire understanding of and supersede all prior agreements, written and verbal, among the Lenders, the Administrative Agent, the Syndication Agent and the Borrowers with respect to the subject matter hereof and shall not be modified except in writing executed by the parties hereto. 8. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York without giving effect to its conflict of laws principles. 5 6 9. Counterparts. This Amendment may be executed in counterparts, each of which shall be deemed an original, and together which shall constitute one and the same instrument. 6 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. THE BORROWERS: JOHNSTON INDUSTRIES, INC. JOHNSTON INDUSTRIES ALABAMA, INC. By: By: ----------------------------- ----------------------- Name: Name: Title: Title: J.I. GEORGIA, INC. JOHNSTON INDUSTRIES COMPOSITE REINFORCEMENTS, INC. By: By: ----------------------------- ----------------------- Name: Name: Title: Title: THE AGENT: THE CHASE MANHATTAN BANK By: ----------------------------- Name: Title: THE SYNDICATION AGENT: NATIONSBANK, N.A. By: ----------------------------- Name: Title: 7 8 -8- THE LENDERS: THE CHASE MANHATTAN BANK BANK OF AMERICA (F/K/A NATIONSBANK, N.A.) By: By: ----------------------------- ----------------------- Name: Name: Title: Title: REGIONS BANK COMERICA BANK By: By: ----------------------------- ----------------------- Name: Name: Title: Title: VAN KAMPEN PRIME RATE THE SUMITOMO BANK, LIMITED INCOME TRUST By: By: ----------------------------- ----------------------- Name: Name: Title: Title: By: By: ----------------------------- ----------------------- Name: Name: Title: Title: MERRILL LYNCH, PEARCE, DK ACQUISITION PARTNERS, FENNER & SMITH INCORPORATED L.P. By: By: ----------------------------- ----------------------- Name: Name: Title: Title: FIRST UNION N.B. (F/K/A CORESTATES BANK, N.A.) By: ----------------------------- Name: Title: EX-11 4 STATEMENT OF COMPUTATION OF PER SHARE EARNINGS 1 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11 STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) - -------------------------------------------------------------------------------- The weighted average number of common and common share equivalents on a basic and diluted basis are as follows:
FOR THE FOR THE FOR THE YEAR YEAR YEAR ENDED ENDED ENDED JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 ---------- ---------- ------------ Weighted average common shares outstanding 10,722 10,562 10,413 Shares issued from assumed exercise of Incentive stock options 135 211 201 Shares issued from assumed exercise of Nonqualified stock options (1) 28 58 88 -------- -------- -------- Weighted average number of shares outstanding, As adjusted 10,885 10,831 10,702 ======== ======== ======== Loss from continuing operations $ (608) $ (8,622) $ (2,183) Income (Loss) from discontinued operations -- 126 5,582 Extraordinary loss -- -- 527 -------- -------- -------- Net Income (Loss) $ (608) $ (8,496) $ 2,872 Dividends on Preferred Stock -- (82) (125) -------- -------- -------- Net Income (Loss) available to common stockholders $ (608) $ (8,578) $ 2,747 ======== ======== ======== Earnings (Loss) per common share-basic: Loss from continuing operations $ (.06) $ (.82) $ (.22) Discontinued operations .-- .01 .53 Extraordinary loss .-- .-- (.05) -------- -------- -------- Earnings (Loss) per common share $ (.06) $ (.81) $ .26 ======== ======== ========
- -------------------------------------------------------------------------------- (1) Shares issued from assumed exercise of options included the number of incremental shares which result from applying the "treasury stock method" for options. Note: Earnings per share is not presented on a diluted basis as the effect of potentially dilutive securities was either anti-dilutive due to net losses or immaterial for the periods presented. EX-13.(A) 5 CONSOLIDATED BALANCE SHEETS 1 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 13(A) CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996 - ------------------------------------------------------------------------------- Report of KPMG LLP for the Year ended January 2, 1999................................................ F-1 Report of Deloitte & Touche LLP for the Years ended January 3, 1998 and December 28, 1996................................... F-2 Consolidated Balance Sheets.......................................................................... F-3 Consolidated Statements of Operations................................................................ F-4 Consolidated Statements of Comprehensive Operations.................................................. F-5 Consolidated Statements of Stockholders' Equity...................................................... F-6 Consolidated Statements of Cash Flows................................................................ F-7 to F-8 Notes to the Consolidated Financial Statements....................................................... F-9 to F-23
2 Independent Auditors' Report The Board of Directors and Stockholders Johnston Industries, Inc.: We have audited the accompanying consolidated balance sheet of Johnston Industries, Inc. and subsidiaries (the "Company") as of January 2, 1999 and the related consolidated statements of operations, comprehensive operations, stockholders' equity, and cash flows for the year ended January 2, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Johnston Industries, Inc. and subsidiaries as of January 2, 1999, and the results of their operations and their cash flows for the year ended January 2, 1999, in conformity with generally accepted accounting principles. /s/KPMG LLP KPMG LLP Atlanta, Georgia March 5, 1999, except for note 10, as to which the date is April 1, 1999 F-1 3 4 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Johnston Industries, Inc.: We have audited the accompanying consolidated balance sheet of Johnston Industries, Inc. and subsidiaries (the "Company") at January 3, 1998 and the related consolidated statements of operations, comprehensive operations, stockholders' equity, and cash flows for the years ended January 3, 1998 and December 28, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 3, 1998 and December 28, 1996, and the results of its operations and its cash flows for the years ended January 3, 1998 and December 28, 1996, in conformity with generally accepted accounting principles. Also in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As described in Note 2 to the consolidated financial statements, as of December 28, 1996, net assets of discontinued operations and assets held for sale - Jupiter included $6,140,000 of the Company's investments recorded at their estimated fair market values based on estimates by the Company's Board of Directors. The 1996 estimates were established in the absence of readily ascertainable market values. Losses related to Board-valued investments for the year ended December 28, 1996, were $7,084,000. We have reviewed the procedures used in arriving at the estimates of value of such securities and have inspected underlying documentation and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for these investments existed, and the difference could be material to the Company's consolidated financial statements. S/s DELOITTE & TOUCHE LLP - ------------------------- DELOITTE & TOUCHE LLP Atlanta, Georgia March 6, 1998 March 30, 1998 (As to Note 10) April 1, 1999 (As to Note 17) F-2 5 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JANUARY 2, 1999 AND JANUARY 3, 1998 (in thousands, except per share amounts) ==============================================================================
JANUARY 2, JANUARY 3, 1999 1998 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,231 $ 2,284 Accounts and notes receivable net of allowance for doubtful accounts of $1,442 and $2,176 34,768 34,283 Inventories 58,079 51,083 Assets held for sale 3,788 5,010 Income taxes receivable -- 4,838 Deferred income taxes 1,249 406 Prepaid expenses and other 3,111 4,409 --------- --------- Total current assets 102,226 102,313 Property, plant and equipment-net 99,486 113,783 Goodwill - net of accumulated amortization of $1,728 and $1,096 10,845 11,477 Intangible asset-pension 1,651 1,882 Other assets 5,331 5,333 --------- --------- Total assets $ 219,539 $ 234,788 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 13,867 $ 17,088 Accrued expenses 9,859 10,264 Revolving credit facility 66,954 73,995 Current maturities of long-term debt 9,989 3,393 Income taxes payable 479 -- --------- --------- Total current liabilities 101,148 104,740 Long-term debt - less current maturities 51,109 61,688 Other liabilities 8,878 9,022 Deferred income taxes 10,130 10,214 STOCKHOLDERS' EQUITY: Common stock, par value $.10 per share; authorized, 20,000 shares; issued 12,468 1,246 1,246 Additional paid-in capital 21,445 21,445 Retained earnings 33,850 34,458 --------- --------- Total 56,541 57,149 Less treasury stock; 1,746 shares and 1,725 shares (8,267) (8,025) --------- --------- Total stockholders' equity 48,274 49,124 --------- --------- Total liabilities and stockholders' equity $ 219,539 $ 234,788 ========= =========
See Notes to Consolidated Financial Statements F-3 6 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996 (in thousands, except per share amounts) ================================================================================
YEAR ENDED -------------------------------------------- JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 ---- ---- ---- Net sales $ 283,724 $ 332,537 $ 321,883 --------- --------- --------- Costs and expenses: Cost of sales 245,278 295,338 284,850 Selling, general and administrative 26,718 27,616 24,755 Amortization of goodwill 632 680 547 Restructuring and impairment charges 93 6,273 3,091 --------- --------- --------- Total costs and expenses 272,721 329,907 313,243 --------- --------- --------- Income from operations 11,003 2,630 8,640 Other expenses (income): Interest expense 13,420 14,006 11,315 Interest income (703) (795) (272) Other-net 392 1,681 (558) --------- --------- --------- Total other expenses - net 13,109 14,892 10,485 Realized and unrealized investment gain (loss) (19) 561 (3,725) Equity in earnings of equity investments 326 -- -- --------- --------- --------- Loss from continuing operations before benefit for income taxes (1,799) (11,701) (5,570) Benefit for income taxes (1,191) (3,079) (1,815) --------- --------- --------- Loss before minority interest (608) (8,622) (3,755) Minority interest in loss of consolidated subsidiary -- -- 1,572 --------- --------- --------- Loss from continuing operations (608) (8,622) (2,183) DISCONTINUED OPERATIONS: Income (loss) from discontinued operations of Jupiter National, [less applicable income taxes (benefit) of ($5) and $6,190] net of minority interest in income of $1,455 in 1996 -- (11) 6,562 Income (loss) on disposal of Jupiter National, including provision of $628 in 1996 for operating losses during phase-out period [less applicable taxes (benefit) of $60 and ($2,504)] -- 137 (980) --------- --------- --------- Income from discontinued operations -- 126 5,582 Extraordinary item (less applicable tax benefit of $323) - loss on early extinguishment of debt -- -- 527 --------- --------- --------- Net income (loss) (608) (8,496) 2,872 Dividends on preferred stock -- (82) (125) --------- --------- --------- Net income (loss) available to common stockholders $ (608) $ (8,578) $ 2,747 ========= ========= ========= Earnings (loss) per common share-basic and diluted: Loss from continuing operations $ (0.06) $ (0.82) $ (0.22) Discontinued operations -- 0.01 0.53 Extraordinary loss -- -- (0.05) ========= ========= ========= Net income (loss) per common share-basic and diluted $ (0.06) $ (0.81) $ 0.26 ========= ========= ========= Weighted average number of common shares outstanding 10,722 10,562 10,413 ========= ========= =========
See Notes to Consolidated Financial Statements F-4 7 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996 (in thousands) ================================================================================
YEAR ENDED --------------------------------------------- JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 ----- ------- ------- Net income (loss) $(608) $(8,496) $ 2,872 ----- ------- ------- Other comprehensive income, before tax: Minimum pension liability adjustment -- (754) (2,073) ----- ------- ------- Other comprehensive income (loss) before benefit for income tax related to items of other comprehensive income (608) (9,250) 799 ----- ------- ------- Benefit for income tax related to items of other comprehensive income -- (276) (797) ----- ------- ------- Comprehensive income (loss) $(608) $(8,974) $ 1,596 ===== ======= =======
See Notes to Consolidated Financial Statements F-5 8 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996 (in thousands, except per share amounts) ================================================================================
ADDITIONAL PREFERRED PAID-IN RETAINED MINIMUM STOCK COMMON STOCK CAPITAL EARNINGS TREASURY STOCK PENSION ------------ -------------- --------- -------- --------------- LIABILITY SHARES AMOUNT SHARES AMOUNT AMOUNT AMOUNT SHARES AMOUNT ADJUSTMENT TOTAL ------ ----- ------ ------ --------- -------- ------ ------- ---------- -------- BALANCE - December 30, 1995 -- $ -- 12,427 $1,243 $ 17,293 $ 46,505 1,862 $ (8,108) $(1,754) $ 55,179 Exercise of options -- -- 23 2 70 -- -- -- -- 72 Conversion of Jupiter options -- -- -- -- 2,958 -- -- -- -- 2,958 Purchase of treasury stock -- -- -- -- -- -- 271 (2,241) -- (2,241) Issuance of treasury stock -- -- -- -- -- -- (46) 92 -- 92 Issuance of preferred shares 325 3 -- -- 3,247 -- -- -- -- 3,250 Net income -- -- -- -- -- 2,872 -- -- -- 2,872 Minimum pension liability adjustment, net of taxes of $797 -- -- -- -- -- -- -- -- 1,276 1,276 Dividends paid - common stock ($0.40 per share) -- -- -- -- -- (4,141) -- -- -- (4,141) Dividends paid - preferred stock ($0.50 per share) -- -- -- -- -- (125) -- -- -- (125) ---- --- ------ ------ -------- -------- ------ -------- ------- -------- BALANCE - December 28, 1996 325 3 12,450 1,245 23,568 45,111 2,087 (10,257) (478) 59,192 Exercise of options -- -- 18 1 74 -- (17) 32 -- 107 Issuance of treasury stock -- -- -- -- -- -- (345) 2,200 -- 2,200 Cancellation of preferred shares (325) (3) -- -- (2,197) -- -- -- -- (2,200) Net loss -- -- -- -- -- (8,496) -- -- -- (8,496) Minimum pension liability -- adjustment, net of taxes of $276 -- -- -- -- -- -- -- -- 478 478 Dividends paid - common stock -- ($0.20 per share) -- -- -- -- -- (2,075) -- -- -- (2,075) Dividends paid - preferred stock -- ($0.25 per share) -- -- -- -- -- (82) -- -- -- (82) ---- --- ------ ------ -------- -------- ------ -------- ------- -------- BALANCE - January 3, 1998 -- -- 12,468 1,246 21,445 34,458 1,725 (8,025) -- 49,124 Purchase of treasury stock -- -- -- -- -- -- 21 (242) -- (242) Net loss -- -- -- -- -- (608) -- -- -- (608) ---- --- ------ ------ -------- -------- ------ -------- ------- -------- BALANCE - January 2, 1999 -- $-- 12,468 $1,246 $ 21,445 $ 33,850 1,746 $ (8,267) $ -- $ 48,274 ==== === ====== ====== ======== ======== ====== ======== ======= ========
See Notes to Consolidated Financial Statements F-6 9 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996 (in thousands) ================================================================================
YEAR ENDED -------------------------------------------------- JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 ---------- ---------- ------------ OPERATING ACTIVITIES: CONTINUING OPERATIONS: Net loss from continuing operations $ (608) $ (8,622) $ (2,183) Adjustments to reconcile net loss from continuing operations to net cash provided by continuing operations: Depreciation 19,263 20,690 19,168 Amortization of goodwill 632 680 547 Amortization of deferred financing costs 1,671 843 529 Restructuring and impairment charges -- 5,609 200 Provision for bad debts 507 1,490 245 Loss on disposal of fixed assets 119 292 90 Net unrealized (gain) loss on portfolio investments 19 (478) 3,725 Undistributed income in equity investments (326) -- -- Minority interest in loss of consolidated subsidiary -- -- (1,572) Changes in operating assets and liabilities: Accounts and notes receivable 508 (47) 2,550 Inventories (6,996) 13,063 (4,063) Deferred income taxes (927) 783 2,538 Prepaid expenses and other assets (751) (2,056) 93 Accounts payable (1,916) (6,363) 4,856 Accrued expenses (339) 303 (1,439) Income taxes receivable 5,317 (3,176) (2,878) Other liabilities 94 (1,887) 190 Other-net 121 738 -- -------- -------- -------- Total adjustments 16,996 30,484 24,779 -------- -------- -------- Net cash provided by continuing operations 16,388 21,862 22,596 DISCONTINUED OPERATIONS: Income (loss) from discontinued operations -- (11) 6,562 Gain (loss) on disposal of discontinued operations -- 137 (980) Changes in operating assets and liabilities for discontinued operating activities -- 1,929 (705) Items not affecting cash, net -- -- (12,722) -------- -------- -------- Net cash provided by (used in) discontinued operations -- 2,055 (7,845) -------- -------- -------- Net cash provided by operating activities 16,388 23,917 14,751 -------- -------- -------- INVESTING ACTIVITIES: CONTINUING OPERATIONS: Additions to property, plant and equipment (9,136) (10,363) (20,527) Decrease in non-operating accounts payable (1,305) (2,458) (5,899) Proceeds from sale and leaseback of equipment 3,557 -- -- Proceeds from sale of Jupiter assets 830 932 -- Proceeds from sale of Tarboro assets -- 2,330 -- Purchase of majority interest in Jupiter -- -- (37,693) Purchase of T.J. Beall Company, net of cash acquired -- -- 333 -------- -------- -------- Net cash used in continuing operations (6,054) (9,559) (63,786) -------- -------- --------
Continued F-7 10 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996 (in thousands) ===============================================================================
YEAR ENDED ------------------------------------------ JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 ---- ---- ---- INVESTING ACTIVITIES (CONTINUED): DISCONTINUED OPERATIONS: Additions to property, plant and equipment -- -- (291) Proceeds from sale of investment -- -- 38,113 --------- -------- --------- Net cash provided by discontinued operations -- -- 37,822 --------- -------- --------- Net cash used in investing activities (6,054) (9,559) (25,964) FINANCING ACTIVITIES: CONTINUING OPERATIONS: Principal payments of long-term debt (153,059) (17,173) (112,398) Proceeds from issuance of long-term debt 141,914 5,500 160,544 Borrowing under line-of-credit agreements -- -- 4,750 Repayments under line-of-credit agreements -- -- (18,000) Purchase of treasury stock (242) -- (2,241) Proceeds from issuance of common stock -- 36 164 Dividends paid -- (2,157) (4,266) Extraordinary item, loss on early extinguishment of debt -- -- (850) --------- -------- --------- Net cash provided by (used in) continuing operations (11,387) (13,794) 27,703 DISCONTINUED OPERATIONS: Principal payments of long-term debt -- -- (16,379) Proceeds from issuance of long-term debt -- -- 138 --------- -------- --------- Net cash used in discontinued operations -- -- (16,241) --------- -------- --------- Net cash provided by (used in) financing activities (11,387) (13,794) 11,462 --------- -------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,053) 564 249 CASH AND CASH EQUIVALENTS: Beginning of Year 2,284 1,720 1,471 --------- -------- --------- End of Year $ 1,231 $ 2,284 $ 1,720 ========= ======== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid (received) during the twelve months for: Interest $ 12,365 $ 13,582 $ 13,291 ========= ======== ========= Income taxes $ (5,579) $ (654) $ 4,374 ========= ======== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES - The Company acquired TJ Beall Company in exchange for preferred stock (see Note 3) in 1996. During 1997, the Company sold TJ Beall back to a member of the Beall Family in exchange for the preferred stock and a note receivable in the amount of $1,500. In June 1997, the Company contributed 345 shares of treasury stock, totaling $2,200 to the Company's defined benefit penions plans. See Notes to Consolidated Financial Statements Concluded F-8 11 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996 (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES. ORGANIZATION - The January 2, 1999 consolidated financial statements include the accounts of Johnston Industries, Inc. ("Johnston"), its direct wholly owned subsidiary, Johnston Industries Alabama, Inc. ("JI Alabama") and its indirect wholly owned subsidiaries, Johnston Industries Composite Reinforcements, Inc. ("JICR"), JI Georgia, Inc., formerly T.J. Beal Company ("TJB"), and Greater Washington Investments ("GWI") (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated. Prior to April 3, 1996, the consolidated financial statements included the accounts of Johnston, its wholly owned subsidiaries, Southern Phenix Textiles, Inc. ("Southern Phenix"), Opp and Micolas Mills, Inc. ("Opp and Micolas"), and JICR; its majority owned subsidiary, Jupiter National, Inc. ("Jupiter") and Jupiter's wholly owned subsidiaries, Wellington Sears Company ("Wellington"), Pay Telephone America, Ltd., and GWI. On April 3, 1996, after the acquisition by Johnston of the minority interest in Jupiter (see Note 2), Jupiter was merged into Opp and Micolas. In June 1996, the name of Opp and Micolas was changed to JI Alabama; Southern Phenix and Wellington were merged into JI Alabama and JICR, TJB and GWI became subsidiaries of JI Alabama. On September 29, 1997, the Company sold substantially all of the assets of TJB (see Note 3). OPERATIONS - Johnston and its wholly owned subsidiaries are diversified manufacturers of woven and nonwoven fabrics used principally for home furnishings, industrial, and to a lesser extent, basic apparel, automotive, and other textile markets. The markets for these products are located principally throughout the continental United States. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS - The Company classifies all highly liquid investments with a maturity of three months or less as cash equivalents. INVENTORIES - The Company's inventories of finished goods, work-in-process, and raw materials are generally stated at the lower of cost (using the last-in, first-out ("LIFO") cost flow assumption) or market. However, JICR's inventories and all of the Company's parts and supplies are stated at the lower of cost determined on the first-in, first-out ("FIFO") basis or market (net realizable value). ASSETS HELD FOR SALE - All long-lived assets for which management, having authority to approve the actions, has committed to a plan to dispose of the assets, whether by sale or by abandonment, are classified as "held for sale" and reported at the lower of cost or fair value less cost to sell. Upon management's commitment to a disposal plan, depreciation is stopped for assets included within the plan. Subsequent revisions of estimated fair value less cost to sell are reported as adjustments in carrying F-9 12 amount, provided that the carrying amount does not exceed the carrying amount of the asset before an adjustment was made to reflect the decision to dispose of the asset. PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment is stated at cost. Depreciation and amortization are computed principally using the straight-line method over the estimated useful service lives of 20-40 years for building, 20 years for improvements, and 3-20 years for machinery and equipment. GOODWILL - Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally 20 years. The company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability will be impacted if estimated future operating cash flows are not achieved. REVENUE RECOGNITION - Revenue is generally recognized as products are shipped to customers. When customers, under the terms of specific orders, request that the Company manufacture and invoice goods on a bill-and-hold basis, the Company recognizes revenue based on the completion date required in the order and actual completion of the manufacturing process, because at that time, the customer is invoiced and title and risks of ownership are transferred to the customer pursuant to the terms of the sales contract. Those terms provide that merchandise invoiced and held at any location by the Company, for whatever reason, shall be at the buyer's risk, and the Company may charge for insurance and storage at prevailing rates. Accounts receivable included bill-and-hold receivables of $7,264 and $4,795 at January 2, 1999 and January 3, 1998, respectively. INCOME TAXES - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. EARNINGS (LOSS) PER SHARE - Net income per share-basic is computed based on net income divided by the weighted average common shares outstanding during the year. EPS is not presented on a diluted basis as the effect of potentially dilutive securities was either anti-dilutive due to net losses or immaterial for the periods presented. IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the years ended January 2, 1999, January 3, 1998 and December 28, 1996, the Company recorded impairment charges of ($75), $5,609 and $200, respectively in connection with restructurings (see Note 4) and the revision of prior estimates of the net realizable value of assets held for sale. All long-lived assets held for sale are reported at the lower of cost or fair value less cost to sell. COMMITMENTS AND CONTINGENCIES - Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Recoveries F-10 13 from third parties which are probable of realization are separately recorded, and are not offset against the related environmental liability, in accordance with FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts". The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study, if a remedial feasibility study is appropriate, or required. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. PENSION AND OTHER POSTRETIREMENT PLANS - In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits", which is effective for years beginning after December 15, 1997. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans, but does not change the method of accounting for such plans. The Company adopted SFAS No. 132, effective for the year ended January 2, 1999. Johnston has two noncontributory qualified defined benefits pension plans covering substantially all hourly and salaried employees. The plan covering salaried employees provides benefit payments based on years of service and the employees' final average ten years earnings. The plan covering hourly employees generally provides benefits of stated amounts for each year of service. Johnston's current policy is to fund retirement plans in an amount that falls between the minimum contribution required by ERISA and the maximum tax deductible contribution. STOCK-BASED COMPENSATION - SFAS No. 123, "Accounting for Stock-Based Compensation," established financial accounting and reporting standards for stock-based compensation plans and fair value recognition provisions for stock-based compensation which are elective for employee arrangements and required for nonemployee transactions. The Company adopted SFAS No. 123 during the fiscal year ended December 28, 1996. For the employee arrangements, management has elected to continue with the accounting prescribed by APB Opinion No. 25 and, accordingly, has disclosed net income and earnings per share as if the fair value method of accounting defined in SFAS No. 123 had been applied. COMPREHENSIVE INCOME - In February 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. The statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. The Company adopted SFAS No. 130 effective for the year ended January 2, 1999. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE - In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 98-1 "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use." This statement, which provides guidance on accounting for the costs of computer software developed or obtained for internal use, defines "internal use," and provides guidance for determination of capital and expense costs. The Company adopted this statement effective for the first quarter of 1998. The impact of adopting SOP No. 98-1 is immaterial to the Company's consolidated financial statements. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivatives imbedded in other contracts, and for hedging activities. It requires that, at adoption, hedging relationships should be F-11 14 designated anew and that entities recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. The accounting for changes in fair value of a derivative depends on the intended use of the derivative and the resulting designation. This statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. The Company expects that there will be no material impact as a result of its adoption of SFAS No. 133 in 1999. RECLASSIFICATIONS - Certain prior year and prior period amounts have been reclassified to conform to the current year presentation. 2. JUPITER NATIONAL, INC. HISTORICAL PRESENTATION - Prior to January 1995, the Company owned a minority interest in Jupiter and accounted for its investment using the equity method. In January 1995, the Company purchased additional shares of Jupiter, which increased the Company's ownership interest in the outstanding shares of Jupiter from 49.6% to 54.2%. As a result, Jupiter became a consolidated, majority owned subsidiary of the Company in January 1995. Minority interest was recorded for the minority shareholders' proportionate share of the equity and earnings (losses) of Jupiter. ACQUISITION OF REMAINING THIRD-PARTY OWNED INTEREST - On March 28, 1996, the Company consummated the acquisition of the remaining outstanding shares of Jupiter at a purchase price of $33.97 per share. Total purchase consideration was approximately $45,950 which included payments of $39,000 to stockholders and certain holders of options to purchase common stock and the assumption of certain Jupiter options by Johnston. Other acquisition costs included approximately $5,488 of merger-related expenses paid by Jupiter. The acquisition was accounted for under the purchase method of accounting as a "step acquisition" resulting in a partial step-up in Jupiter's tangible assets. The Company recorded goodwill of $12,447, which was assigned a life of 20 years. DISCONTINUANCE OF THE VENTURE CAPITAL SEGMENT - Concurrent with the Jupiter Acquisition, the Company's management made the decision to discontinue the venture capital investment segment of Jupiter's operation. Accordingly, the Company wrote down the carrying value of the investments by $4,380. Through June 28, 1997, the segment was accounted for as discontinued operations, and the net assets of the discontinued segment were recorded as an asset on the consolidated balance sheet and were expected to be disposed of by June 1997. During that period, the results of operations for Jupiter's venture capital investment activities were recorded as discontinued operations. At June 29, 1997, the remaining undisposed portfolio investments were reclassified from net assets of discontinued operations to assets held for sale on the consolidated balance sheet, and the results of continuing operations for their remaining portfolio investments have been reported as income from continuing operations on the consolidated statements of operations. F-12 15 Income (loss) from discontinued operations of Jupiter includes the following components:
- --------------------------------------------------------------------------------------- YEAR ENDED ----------------------- JANUARY 3, DECEMBER 28, 1998 1996 ---------- ------------ Net realized investment portfolio gain ................... $ 0 $ 30,918 Change in unrealized investment portfolio loss ........... -- (14,072) Equity in losses ......................................... -- 201 Operating costs .......................................... 16 2,117 Interest expense ......................................... -- 321 Income tax expense (benefit) ............................. (5) 6,190 Minority interest ........................................ -- (1,455) ---- -------- Income (loss) from discontinued operations of Jupiter $(11) $ 6,562 ==== ======== - ---------------------------------------------------------------------------------------
INVESTMENTS AND VALUATION (1996 AND PRIOR) - Jupiter's wholly owned subsidiary, Greater Washington Investments ("GWI"), was a small business development company organized pursuant to the United States Small Business Investment Act of 1958. GWI surrendered its special status during 1997. Prior to surrender of the special status, GWI used specialized accounting policies required for investment companies to determine the value of its portfolio of investments. Under these policies, securities with readily available market quotations were valued at the current market price; investments in non-publicly traded entities were valued and recorded at estimated net realizable values as determined in good faith by the Company's Board of Directors. Accordingly, at December 28, 1996, $6,140 of Jupiter's investments were recorded at their estimated fair value based on estimates by Johnston's Board of Directors after consideration of liquidation plans. Losses related to these investments for the year ended December 28, 1996, were $6,064. For the year ended December 28, 1996, net realized investment portfolio gains primarily arose from gains realized on the sale of the Company's investment in EMC Corporation, Viasoft, Fuisz Technologies, Inc., and Zoll Medical. The following summarizes the aggregate carrying value of the portfolio investments held for sale at January 2, 1999 and January 3, 1998:
- -------------------------------------------------------------------------------- JANUARY 2, JANUARY 3, 1999 1998 ---------- ---------- Debt securities ..... $1,550 $3,965 Equity securities ... 872 545 Land ................ 850 -- ------ ------ $3,272 $4,510 ====== ====== - --------------------------------------------------------------------------------
Subsequent to the surrender of GWI's investment company status, the Company classified its investments as available for sale and reported these investments at estimated fair value as determined by collateral values for debt instruments and amortized costs. The fair values of investments in equity securities are not readily determinable and are carried at the lower of cost or estimated net realizable value. F-13 16 3. T.J. BEALL COMPANY On March 25, 1996, the Company acquired all of the outstanding common stock of TJB, a broker in cotton by-products located in West Point, Georgia. The TJB stock was acquired in exchange for 325,000 shares of nonvoting convertible preferred stock ("Series 1996 Preferred Stock") of the Company with an estimated value of $3,250. The Company incurred costs of approximately $115 related to the acquisition. Dividends on the Series 1996 Preferred Stock were payable quarterly at the rate of $.125 per share. The acquisition was accounted for under the purchase method of accounting. Goodwill of $2,116 was recorded and was originally assigned a useful life of 20 years. Each share of Series 1996 Preferred Stock was convertible into the Company's voting common stock, par value $.10 per share (the "Common Stock"), on a one-for-one basis on a specified time frame. In September 1997, an agreement was reached culminating in the sale of substantially all of the assets and current liabilities of TJB back to a member of the Beall family. The sale of TJB resulted in a loss of $546, which is recorded in other - net in the 1997 statement of operations. 4. RESTRUCTURING AND IMPAIRMENT CHARGES The Company recorded the following restructuring and impairment charges:
- -------------------------------------------------------------------------------------------------------------------------------- Year Ended --------------------------------------------------------------------------------- January 2, 1999 January 3, 1998 December 28, 1996 -------------------------- ------------------------- ------------------------ Restructuring Impairment Restructuring Impairment Restructuring Impairment ------------- ---------- ------------- ---------- ------------- ---------- Langdale facility ............................ $168 $ 0 $389 $2,630 $ 0 $ 0 TJ Beall ..................................... -- -- -- 1,984 -- -- Tarboro facility ............................. -- -- -- 11 2,891 -- Other restructuring and impairment charges ... -- (75) 275 984 -- 200 ---- ---- ---- ------ ------ ---- Total ................................... $168 $(75) $664 $5,609 $2,891 $200 ==== ==== ==== ====== ====== ==== - --------------------------------------------------------------------------------------------------------------------------------
LANGDALE FACILITY - In August 1997, the Company finalized its plans to cease manufacturing operations at its Langdale Facility in an effort to further consolidate certain manufacturing activities and concentrate on efficient and profitable operations. The Langdale Facility contained both weaving operations and yarn manufacturing operations. The yarn manufacturing operations were eliminated and selected equipment and associated product offerings of the weaving operations were relocated to other facilities. The remaining weaving operations at the Langdale Facility were closed. The Langdale Facility was retained for light manufacturing, warehouse, distribution, and potential future manufacturing space of JI Alabama's Fiber Products Division. During 1997, the Company recorded charges totaling $3,019 related to closure of the Langdale Facility and the Outlet Store including write-downs on machinery and equipment of $2,057, a write-down of $573 on the Langdale building and restructuring charges of $389. During 1998, the Company recorded $168 in additional restructuring charges related to closure of the Langdale Facility. T.J. BEALL IMPAIRMENT - In recognition of the disappointing operating results realized at TJB since its acquisition in March of 1996 and risks inherent in future operations, the Company recorded restructuring charges of $1,984 in June of 1997 for the write-off of goodwill related to the acquisition of TJB. (See Note 3) TARBORO FACILITY - In 1995, the Company decided to close the manufacturing facility in Tarboro, North Carolina (the "Tarboro Facility"), which had been operated by Jupiter's Wellington subsidiary in an effort to realign and consolidate certain operations, concentrate capital resources on more profitable operations, and better position itself to achieve its strategic corporate objectives. All activities related to the closing F-14 17 of the Tarboro Facility were substantially completed in January 1997. In 1997 and 1996, the Company recorded restructuring and impairment charges totaling $11 and $4,743, respectively. Of the charges recorded in 1996, $1,852, representing the minority interest (the portion of Wellington not owned by Johnston prior to the Jupiter Acquisition), was recorded in the purchase accounting for the Jupiter Acquisition with the remaining $2,891 recorded as an expense on the consolidated statement of operations. The plan for the closing of the Tarboro Facility called for termination of 168 employees with various job descriptions at the facility. As of January 3, 1998, 168 employees had been terminated. Through January 3, 1998, approximately $712 was charged to the reserves established for the closing. These costs included $262 in severance costs. In December 1997, the Tarboro Facility was sold resulting in net proceeds of $2,330. A gain of $405, net of taxes of $234, was recorded on the sale. OTHER RESTRUCTURING AND IMPAIRMENT CHARGES - In 1996, the Company recorded a $200 write-down of the Jupiter building. In 1997, the Company recorded $275 in restructuring charges related to the realignment of divisions. Also, in 1997, the Company recorded impairment losses totaling $984, which includes a $552 write-down of the Company's investment in software for which the original implementation attempt has been abandoned, an additional $253 write-down of the Jupiter building, and a $179 write-down of the outlet store in West Point, Georgia. In 1998, the Company recorded a favorable adjustment of $75 to the impairment reserve for Jupiter's former office building in Rockville, Maryland, which was sold in February 1998. 5. STEEL FABRICATION OPERATIONS The accompanying consolidated balance sheets at January 2, 1999 and January 3, 1998 include liabilities of $6,624 and $7,154, respectively, for the remaining costs expected to be incurred in phasing out the Company's steel fabrication operations. These costs are principally related to health insurance and death benefits for former employees and are stated at the actuarially determined discounted present value. These operations were discontinued in 1981. In February 1994, the current operators of the facility filed a complaint against previous owners and operators of the facility, including the Company, claiming contamination by a former Johnston subsidiary which had operated at the facility before its closing in 1981. During 1995, reserves of $2,200 were established for potential additional legal costs and other costs to be incurred in connection with the defense of this matter. The case was settled in December 1996. The total judgment against the Company was $904, including prejudgment interest. During 1996, approximately $200 in legal fees were charged against the reserve and recognizing that the actual liability would be less than originally estimated, the reserve was reduced by $500. At December 28, 1996, the reserve balance was $596, net of amounts due under the settlement, which were paid in January 1997. There was at December 28, 1996, and continues to be an associated unasserted claim for additional, as yet unspecified damages. The Company re-evaluated the contingency during 1998 and 1997 and determined that a reserve balance of $150 was adequate at January 2, 1999 and January 3, 1998. Accordingly, approximately $446 was released from the reserve account and is included in other-net in the statement of operations for 1997. Although management believes, based upon the currently available facts, that the reserve established for this matter is reasonable, the Company's future potential liability for response costs pursuant to the unasserted claim cannot presently be determined with certainty. F-15 18 6. INVENTORIES Inventories consisted of the following:
- -------------------------------------------------------------------------------- JANUARY 2, JANUARY 3, 1999 1998 ---------- ---------- Inventories - FIFO cost flow assumption Finished goods ............................ $33,136 $30,367 Work-in-process ........................... 8,793 10,581 Raw materials ............................. 12,317 9,093 Direct materials and supplies ............. 4,687 4,514 ------- ------- 58,933 54,555 Less LIFO reserve ......................... 854 3,472 ------- ------- Inventories - LIFO cost flow assumption $58,079 $51,083 ======= ======= - --------------------------------------------------------------------------------
7. ASSETS HELD FOR SALE Assets held for sale consisted of the following:
- -------------------------------------------------------------------------------- JANUARY 2, JANUARY 3, 1999 1998 ---------- ---------- Jupiter investments (see Note 2) $3,272 $4,510 Other real estate .............. 516 500 ------ ------ Assets held for sale ...... $3,788 $5,010 ====== ====== - --------------------------------------------------------------------------------
8. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consisted of the following:
- -------------------------------------------------------------------------------- JANUARY 2, JANUARY 3, 1999 1998 ---------- ---------- Land ........................................ $ 935 $ 961 Buildings and improvements .................. 36,105 35,573 Machinery and equipment ..................... 202,680 200,089 -------- -------- 239,720 236,623 Less accumulated depreciation ............... 140,234 122,840 -------- -------- Property, plant, and equipment - net ... $ 99,486 $113,783 ======== ======== - --------------------------------------------------------------------------------
F-16 19 9. ACCRUED EXPENSES Accrued expenses consisted of the following:
- -------------------------------------------------------------------------------- JANUARY 2, JANUARY 3, 1999 1998 ---------- ---------- Salaries, wages, and employee benefits ......... $5,805 $ 5,445 Taxes, other than income taxes ................. 1,008 995 Interest expense ............................... 791 742 Current portion of estimated phase-out costs of steel fabrication operations ........... 1,150 1,150 Other .......................................... 1,105 1,932 ------ ------- Accrued expenses .......................... $9,859 $10,264 ====== ======= - -------------------------------------------------------------------------------
10. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY Long-term debt consisted of the following:
- ------------------------------------------------------------------------------------------- JANUARY 2, JANUARY 3, 1999 1998 ---------- ---------- Revolving credit facility ...................................... $ 66,954 $ 73,995 Term loans ..................................................... 59,402 63,040 Purchase money mortgage loan ................................... 913 1,000 Industrial Development Note (net of unamortized discount) ...... 439 491 Mortgage ....................................................... -- 550 Capital lease obligations ...................................... 344 -- -------- -------- Total ..................................................... 128,052 139,076 Less current maturities and revolving line of credit .. 76,943 77,388 -------- -------- Long-term debt less current maturities .................... $ 51,109 $ 61,688 ======== ======== - -------------------------------------------------------------------------------------------
In compliance with the Emerging Issues Task Force Issue No. 95-22, "Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement" the revolving credit loan in the amount of $66,954 and $73,995 was classified as short-term debt in the financial statements at January 2, 1999 and January 3, 1998, respectively. The estimated fair value of long-term debt (including current maturities) approximates book value at January 2, 1999 and January 3, 1998. Interest rates that are currently available to the Company for issuance of debt with similar terms, credit characteristics and remaining maturities were used to estimate fair value of long-term debt. REFINANCING - On March 28, 1996, the Company signed an agreement with a syndicate of lenders (the "Bank Credit Agreement") to provide financing required to consummate the merger with Jupiter, to refinance certain existing indebtedness, to pay related fees and expenses, and to finance the ongoing working capital requirements of the Company. This agreement also provided for the consolidation of the Company's outstanding debt. The Bank Credit Agreement is comprised of two term loan facilities and a revolving credit facility. Term loan facility A ("Term Loan A") is a $40,000 facility with an amended maturity date of July 2000. At January 2, 1999 and January 3, 1998, the blended interest rate on these borrowings was F-17 20 9.06% and 8.40%, respectively, which is based on a Base Rate, the prime commercial lending rate, plus 1.75% and 1.25%, respectively, and is subject to change at the Company's option to a rate based on the London Interbank Offered Rate ("LIBOR") plus 3.50% and 2.50%, respectively. As of January 2, 1999 and January 3, 1998 the borrowings outstanding under Term Loan A were $26,987 and $29,398, respectively. Term loan facility B ("Term Loan B") is a $40,000 facility with an amended maturity date of July 2000. At January 2, 1999 and January 3, 1998, the blended interest rate on these borrowings was 9.56% and 8.90%, respectively, and is based on a Base Rate, as defined, plus 2.25% and 1.75%, respectively, and is subject to change at the Company's option to a rate based on LIBOR, plus 4.00% and 3.00%, respectively. As of January 2, 1999 and January 3, 1998, the borrowings outstanding under Term Loan B were $32,415 and $33,642, respectively. Proceeds from certain asset sales are generally applied against the term loans in inverse order of the loan maturities. The revolving credit facility (the "Revolving Credit Facility") provides up to $80,000 in borrowing, with an amended maturity date of July 2000. Principal amounts outstanding are due and payable at final maturity. The interest rate on these borrowings ranges from 8.40% to 9.25% and from 8.25% to 9.75% at January 2, 1999 and January 3, 1998, respectively, which is based on a Base Rate, as defined, plus 1.50% and 1.25%, respectively, and is subject to change at the Company's option to a rate based on LIBOR plus 3.00% and 2.50%, respectively. Commitment fees are payable quarterly at 1/2 of 1%, based on the unused portion of the facility. Substantially all assets are pledged as collateral for the borrowings under the Bank Credit Agreement. The amended Bank Credit Agreement requires the Company to maintain certain financial ratios and specified levels of tangible net worth and places a limit on the Company's level of capital expenditures and type of mergers or acquisitions. The amended Bank Credit Agreement permits the Company to pay dividends on its common stock provided it is in compliance with various covenants and provisions contained therein, which among other things, limits dividends and restricts investments to the lesser of: (a) 20% of total assets of the Company, on a fully consolidated basis, as of the date of determination thereof; (b) $5,000 plus 50% of cumulative consolidated net income for the period commencing on January 1, 1997, minus 100% of cumulative consolidated net loss for the consolidated entities for such period, as calculated on a cumulative basis as of the end of each fiscal quarter of the consolidated entities with reference to the financial statements for such quarter. Accordingly, at January 2, 1999, the Company is not permitted to declare and pay dividends. AMENDMENTS TO THE BANK CREDIT AGREEMENT - The Bank Credit Agreement has been amended several times to modify certain covenants, the latest amendment of which was executed on April 1, 1999 (the "1999 Amendment") to modify certain covenants. Although the Company was in compliance with existing covenants at January 2, 1999, it has anticipated the need for amendments to cover periods beyond January 2, 1999, without which, technical noncompliance with certain financial covenants was considered to be imminent. In addition to covenant modifications, the 1999 amendment also includes an increase in interest rates of 1/2% to take effect April 4, 1999. The increase in interest rates is geared to maintenance of certain ratios. If the Company's financial position, and the related ratios improve, the amended agreement provides for a decrease in interest rates for Term Loan A and the Revolving Credit Facility. In addition to limited covenant modifications, which were effective through January 2, 1999, and increased interest rates, a March 30, 1998 amendment (the "March 1998 Amendment") required the Company to adopt new cash management procedures during the second quarter of 1998, which included establishment of a lock-box with instruction for customers to remit payments directly to the lock-box. As a result of this anticipated lock-box arrangement, Generally Accepted Accounting Principles require the Company to classify the Revolving Credit Facility, which has a maturity date of July 1, 2000, as a current liability. Pursuant to the March 1998 Amendment, the Company agreed that a collateral monitoring F-18 21 arrangement should be put into effect whereby the Company is required, through an independent collateral monitoring agent, to report certain financial data on a periodic basis to the lenders. The Company, which paid amendment fees as a result of the March 1998 Amendment, will be required to pay amendment fees as a result of the 1999 Amendment in an amount equal to 1/4 of 1% of Term Loan A, Term Loan B, and the Revolving Credit Facility. OTHER DEBT INSTRUMENTS - The following discussion relates to debt outstanding that was not refinanced by borrowings under the Bank Credit Agreement. PURCHASE MONEY MORTGAGE LOAN - In connection with the purchase of an office building during 1994, Johnston obtained a Purchase Money Mortgage Loan of $1,325. Borrowings under this loan accrue interest at the lesser of: (1) 30-day adjustable, 60-day adjustable, or 90-day adjustable LIBOR rate plus 2.70% or (2) the prime rate. The interest rate on this loan was 7.75% at January 2, 1999 and 8.42% at January 3, 1998. Beginning on March 31, 1994, Johnston was obligated to make 58 consecutive quarterly payments of principal of $22 plus interest, with all remaining principal and interest due on December 31, 2007. The Company's office building in Columbus, Georgia is pledged as collateral under this loan agreement. INDUSTRIAL DEVELOPMENT NOTE - In October 1995, the Company entered into an Industrial Development Note with the County of Chambers, Alabama, the proceeds of which were used to purchase a building. The original principal amount is repayable in equal annual installments of $100 beginning December 31, 1996 through December 31, 2004. At January 2, 1999 and January 3, 1998, the unamortized discount on the note was $161 and $209 (discount based on an imputed interest rate of 9.75%), respectively. MORTGAGE - In connection with the purchase of the Jupiter office building, the Company obtained a mortgage of $550. The interest rate on this loan was 7%. The remaining principal was repaid upon sale of the building in February 1998. DEBT MATURITIES - Aggregate scheduled repayments, resulting from the amended credit agreement, of long-term debt excluding the revolving credit line which is classified as short-term debt as of January 2, 1999 are summarized as follows:
- --------------------------------------------------------------------------------------------------------- YEAR ENDING AMOUNT - ----------- -------- 1999............................................................................................. $ 9,989 2000............................................................................................. 50,042 2001............................................................................................. 164 2002............................................................................................. 162 2003............................................................................................. 170 Thereafter....................................................................................... 571 -------- $ 61,098 ======== - -----------------------------------------------------------------------------------------------------------
11. FINANCIAL INSTRUMENTS The Company utilizes interest rate swaps to reduce the impact of changes in interest rates on its floating rate debt. The Company does not utilize financial instruments for trading or other speculative purposes. The counterparties to these contractual arrangements are major financial institutions with which the Company also has other financial relationships. The Company is exposed to credit loss in the event of nonperformance by these counterparties. However, the Company does not anticipate F-19 22 nonperformance by the other parties, and no material loss would be expected from nonperformance by any one of such counterparties. The swap agreements are contracts to exchange floating rate for fixed interest payments periodically over the lives of the agreements without the exchange of the underlying notional amounts. The notional amounts of interest rate agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on interest rate agreements is recognized as an adjustment to interest expense. The Company has entered into swap transactions pursuant to which it has exchanged its floating rate interest obligations on $38,000 notional principal amount for a fixed rate payment obligation of 6.705% per annum for the three-year period beginning June 1996. The fixing of the interest rates for these periods minimizes, in part, the Company's exposure to the uncertainty of floating interest rates during this three-year period. The fair values of interest rate instruments are the estimated amounts that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the counterparties. At January 2, 1999 and January 3, 1998, the Company estimates it would have paid $304 and $500, respectively, to terminate the agreement. It is estimated that the carrying value of the Company's other financial instruments (see Note 10) approximated fair value at January 2, 1999 and January 3, 1998. 12. OTHER LIABILITIES Other liabilities consisted of the following:
- ----------------------------------------------------------------------------------------------------- JANUARY 2, JANUARY 3, 1999 1998 ---------- ---------- Long-term portion of estimated phase-out costs of steel fabrication operations......................................... $ 5,474 $ 6,004 Additional pension liability (see Note 18)................................... 324 954 Other........................................................................ 3,080 2,064 ------- ------- $ 8,878 $ 9,022 ======= ======= - -----------------------------------------------------------------------------------------------------
13. STOCK OPTION PLANS EMPLOYEES' STOCK INCENTIVE PLAN - Johnston has a stock incentive plan for key employees and non-employee directors under which Johnston may grant incentive stock options, nonqualified stock options, stock appreciation rights, and restricted stock. Stock appreciation rights may only be granted in conjunction with nonqualified stock options. The maximum number of common shares which could be issued upon exercise of options or through awards granted under this plan is 2,358,450. Incentive stock options granted under the plan are exercisable, on a cumulative basis, at a rate of 25% each year, beginning one year after the date of grant. Nonqualified stock options are exercisable beginning six months after the date of grant. F-20 23 A summary of employee stock option activity is as follows:
- ---------------------------------------------------------------------------------------------------------------------- WEIGHTED INCENTIVE RANGE OF AVERAGE NONQUALIFIED STOCK EXERCISE EXERCISE OPTIONS OPTIONS TOTAL PRICES PRICES ----------- ----------- ----------- -------------- --------- Options outstanding at December 30, 1995............ 393,750 -- 393,750 $ 5.55 -10.17 $ 6.82 Options granted................................ 383,816 410,514 794,330 1.98 - 8.25 4.40 Options exercised.............................. -- (46,000) (46,000) 1.98 1.98 Options cancelled.............................. (63,750) -- (63,750) 10.17 10.17 ----------- ----------- ----------- -------------- --------- Options outstanding at December 28, 1996............ 713,816 364,514 1,078,330 1.98 - 8.25 4.84 Total options granted in 1997.................. 20,000 -- 20,000 7.50 7.50 Total options exercised in 1997................ -- (34,800) (34,800) 1.98 1.98 Total options cancelled in 1997................ (16,000) -- (16,000) 7.50 - 8.25 8.11 ----------- ----------- ----------- -------------- --------- Options outstanding at January 3, 1998.............. 717,816 329,714 1,047,530 1.98 - 8.25 5.15 Total options granted in 1998.................. 415,937 51,063 467,000 4.38 - 5.88 5.47 Total options cancelled in 1998................ (183,000) -- (183,000) 7.50 - 8.25 7.09 ----------- ----------- ----------- -------------- --------- Options outstanding at January 2, 1999.............. 950,753 380,777 1,331,530 7.50 - 8.25 5.00 ----------- ----------- ----------- -------------- --------- Total options exercisable at January 2, 1999... 661,816 329,714 991,530 1.98 - 8.25 4.68 =========== =========== =========== Options available for grant at January 2, 1999...... 1,026,920 =========== - ----------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at January 2, 1999:
- ---------------------------------------------------------------------------------------------------------------------- OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ----------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACT EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE -------------- ----------- ----- ---------- ----------- ---------- $ 1.98 - 2.50 306,376 0.6 $ 2.15 306,376 $ 2.15 3.62 123,154 0.6 3.62 123,154 3.62 $ 4.375 - 8.25 902,000 7.5 6.15 562,000 6.15 ----------- ----- ---------- ----------- ---------- Total 1,331,530 5.2 $ 5.00 991,530 $ 4.68 =========== ====== ========== =========== ========== - ----------------------------------------------------------------------------------------------------------------------
At January 3, 1998 and December 28, 1996, 1,027,530 and 932,330 of the outstanding options were exercisable, respectively. During 1996, the expiration date was modified on 180,000 options previously granted to an officer of the Company. The estimated weighted average fair value of options granted during 1998, 1997 and 1996 was $2.91, $4.03 and $3.89 per share, respectively. The Company applies APB No. 25 and related interpretations in accounting for its stock incentive plan. Accordingly, no compensation cost has been recognized for its stock incentive plan. Had compensation cost for the Company's stock incentive plan been determined based on the fair value at the grant dates for awards under this plan consistent with the method of SFAS No. 123, additional compensation expense of approximately $1,254, $71 and $734 for the years ended January 2, 1999, January 3, 1998 and December 28, 1996, respectively, would have been recorded. F-21 24 Accordingly, the Company's net income (loss) and income (loss) per share would have been reduced to the pro forma amounts indicated below:
- ------------------------------------------------------------------------------------------------------------------- JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 --------- --------- --------- Net income (loss) available to common shareholders: As reported $ (608) $ (8,578) $ 2,747 Pro forma (1,403) (8,623) 2,282 Net income (loss) per common and common equivalent share: As reported $ (0.06) $ (0.81) $ 0.26 Pro forma (0.13) (0.81) 0.22 - -------------------------------------------------------------------------------------------------------------------
Options which are modified during the year are considered to be re-issued options. Such modified options result in pro forma compensation expense to the extent that the fair value of the option exceeds its intrinsic value at the date of modification. The fair value of options granted under the Company's stock incentive plan was estimated on the date of grant or modification using the Black-Scholes option pricing model with the following weighted average assumptions used:
- ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Expected volatility......................................... 36.76% 33.65% 34.45% Risk free interest rate..................................... 5.60% 6.24% 6.68% Dividend yield.............................................. 0.00% 0.00% 0.40% Expected lives in years..................................... 8.00 8.00 5.77 - -------------------------------------------------------------------------------------------------------------------
14. EMPLOYEE STOCK PURCHASE PLAN On October 15, 1990, the Company adopted an employee stock purchase plan under which eligible key employees and directors of the Company may purchase shares of the Company's common stock through loans guaranteed by the Company. Under the plan, as of January 2, 1999, 26 key employees and directors currently have outstanding loans of $5,585 related to the purchase of 614,932 shares of the Company's common stock. To purchase stock, participants generally execute five-year full recourse demand promissory notes with a third-party lender. The notes generally bear interest at prime plus .25%. The third-party lender has the right to recover the loan proceeds from the participant's personal assets, including the purchased stock in the event of default. The participants may not sell their shares until they have made arrangements to pay off their loans with the proceeds from the sale of the stock or by settling the loans with other personal assets. In the event of default, the Company's exposure is limited to the amount by which a participant's loan balance exceeds the market value of the underlying stock less recoveries by the Company from the participant. As of January 2, 1999, the market value of the purchased stock was $1,922. The Company has no obligation to repurchase the stock from the participant. At January 2, 1999 and January 3, 1998, the Company had guaranteed plan participants' borrowings totaling approximately $5,585 and $5,830, respectively. During 1996 the Company F-22 25 made a payment of approximately $198 to a third party lender in connection with a default on a participant's loan. The Company has the discretion to reimburse the participants for their payments of interest under the plan in excess of dividends paid on the Company's common stock in any given year. The Company treats these payments as compensation expense and income to the participants. Compensation expense relating to interest payments under the plan was $435, $385, and $276 for the years ended January 2, 1999, January 3, 1998 and December 28, 1996, respectively. 15. INCOME TAXES The provision (benefit) for income taxes is comprised of the following:
- ------------------------------------------------------------------------------------------------------------------- YEAR ENDED ------------------------------------------------------- JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 --------------- --------------- ---------------- Federal: Current.............................................. $ (370) $ (3,128) $ 5,799 Deferred............................................. (861) 295 (4,514) --------------- --------------- ---------------- (1,231) (2,833) 1,285 State: Current.............................................. 106 (292) 173 Deferred............................................. (66) 101 90 --------------- --------------- ---------------- 40 (191) 263 --------------- --------------- ---------------- Provision (benefit) for income taxes...................... $ (1,191) $ (3,024) $ 1,548 =============== =============== ================ Components of provision (benefits) for income taxes: Continuing operations................................ $ (1,191) $ (3,079) $ (1,815) Discontinued operations.............................. -- 55 3,686 Extraordinary loss................................... -- -- (323) --------------- --------------- ---------------- Total............................................ $ (1,191) $ (3,024) $ 1,548 =============== =============== ================ - -------------------------------------------------------------------------------------------------------------------
The significant components of deferred income tax assets and liabilities are as follows:
- ------------------------------------------------------------------------------------------------------------------- JANUARY 2, JANUARY 3, 1999 1998 --------------- --------------- Deferred tax assets: Estimated phase-out costs of steel fabrication operations............... $ 2,427 $ 2,621 Unrealized depreciation - investments................................... 47 358 Alternative minimum tax credits......................................... 4,986 4,264 State tax net operating loss carryforwards.............................. 1,239 945 Other - net............................................................. 135 770 --------------- --------------- 8,834 8,958 Deferred tax liabilities: Property, plant, and equipment.......................................... (13,032) (14,053) Inventories............................................................. (3,444) (3,768) --------------- --------------- (16,476) (17,821) Valuation allowance..................................................... (1,239) (945) --------------- --------------- Net deferred tax liability.......................................... $ (8,881) $ (9,808) =============== ===============
F-23 26
JANUARY 2, JANUARY 3, 1999 1998 --------------- --------------- Components of net deferred tax assets (liability): Net current deferred tax assets (liability)............................. $ 1,249 $ 406 Net long-term deferred tax liability.................................... (10,130) (10,214) --------------- --------------- $ (8,881) $ (9,808) =============== =============== - ------------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities are classified in the consolidated financial statements as current or long-term depending upon the classification of the temporary difference to which they relate. Management believes it is more likely than not that future taxable income will be sufficient to realize fully the benefits of deferred tax assets. The reconciliation of the Company's effective income tax rate to the federal statutory rate of 34% follows:
- ------------------------------------------------------------------------------------------------------------------ YEAR ENDED ------------------------------------------------------ JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 --------------- --------------- --------------- Federal income taxes at statutory rate.................... $ (612) $ (3,917) $ 960 State income taxes, net of federal tax benefit............ 26 (126) 173 Amortization of goodwill.................................. 219 906 186 Other - net............................................... 95 113 229 Tax rate differential related to net operating loss carryback......................... (919) -- -- --------------- --------------- --------------- $ (1,191) $ (3,024) $ 1,548 =============== =============== =============== - ------------------------------------------------------------------------------------------------------------------
At January 2, 1999 and January 3, 1998, the Company has non-expiring alternative minimum tax credit carryforwards of approximately $4,986 and 4,264, respectively, which have been used as a basis for recording tax assets and are included in the long-term deferred taxes payable account. At January 2, 1999 and January 3,1998, the Company also has state net operating loss carryforwards of $30,969 and $23,613, respectively, based on its June 30 tax year. The state net operating loss carryforwards from the Company's various states of operation expire from 2003 to 2018. The deferred tax asset arising from these state net operating loss carryforwards of $1,239 and $945, respectively are not considered fully realizable and are offset by a valuation allowance. F-24 27 16. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS - Rent expense under operating leases covering production equipment and office facilities was approximately $1,218 for the year ended January 2, 1999, $1,158 for the year ended January 3, 1998, and $1,228 for the year ended December 28, 1996. At January 2, 1999, the Company is committed to pay the following minimum rental payments on non-cancelable operating leases:
- ------------------------------------------------------------------------------------------------------------------- YEAR ENDING AMOUNT - ----------- ---------------- 1999............................................................................................. $ 1,438 2000............................................................................................. 1,136 2001............................................................................................. 944 2002............................................................................................. 856 2003............................................................................................. 737 Thereafter....................................................................................... 2,406 ---------------- $ 7,517 ================ - -------------------------------------------------------------------------------------------------------------------
OTHER COMMITMENTS - The Company has employment contracts with certain of its employees extending through 2001 aggregating approximately $1,505. As of January 2, 1999, the Company has purchase commitments with several vendors to buy inventory totaling approximately $39,500. The Company purchases cotton through approximately ten established merchants with whom it has long standing relationships. The majority of the Company's purchases are executed using "on-call" contracts. These on-call arrangements are used to insure that an adequate supply of cotton is available for the Company's requirements. Under on-call contracts, the Company agrees to purchase specific quantities for delivery on specific dates, with pricing to be determined at a later time. Prices are set according to prevailing prices, as reported by the New York Cotton Exchange, at the time of the Company's election to fix specific contracts. Cotton on-call with a fixed price at January 2, 1999 was valued at $7.4 million, and is scheduled for delivery early in 1999. At January 2, 1999, the Company had unpriced contracts for deliveries between April 1, 1999 and July 1, 2000. Based on the prevailing price at January 2, 1999, the value of these commitments are approximately $14 million for deliveries between April and December of 1999 and approximately $9 million for deliveries between January and July of 2000. As commodity price aberrations are generally short-term in nature, and have not historically had a significant long-term impact on operating performance, financial instruments are not used to hedge commodity price risk. On September 28, 1998, the Company entered into a leasing program, under which, the Company is obligated to enter into operating leases for manufacturing and other equipment for which original cost is expected to approximate $7,500. The Company also has capital commitments with terms extending over one year as of January 2, 1999 with several vendors for the purchase of machinery and equipment aggregating approximately $810. GENERAL - The Company is periodically involved in legal proceedings arising out of the ordinary conduct of its business. Management does not expect that the resolution of these proceedings will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 17. SEGMENT AND RELATED INFORMATION Effective December 15, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information. " The Company's principal operations include manufacturing and marketing of finished and unfinished (greige) fabrics plus processing and marketing of textile waste fibers and fabrics. The Company's operations are organized around manufacturing processes and its reportable business segments include the Greige Fabrics Division, the Finished Fabrics Division and the Fiber Products Division. All remaining operations have been aggregated as "All Other". Segments are evaluated on the basis of income (loss) on continuing operations before income taxes. Intersegment transactions are generally recorded at cost. F-25 28 Financial and related information for business segments is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------- Greige Finished Fiber All Reconciling Year Fabrics Fabrics Products Other Eliminations Consolidated - --------------------------------------- --------- --------- --------- --------- ------------ ------------ AS OF AND FOR THE YEAR ENDED JANUARY 2, 1999 Trade revenues $ 137,443 $ 100,954 $ 34,390 $ 10,937 $ -- $ 283,724 Intersegment revenues 7,221 4,362 1,040 -- (12,623) -- Income (loss) before income taxes 14,296 (3,096) 2,169 (15,168) -- (1,799) Interest income (19) (5) -- (679) -- (703) Interest expense 31 75 -- 13,314 -- 13,420 Income tax expense (benefit) 5,404 (1,057) 842 (6,380) -- (1,191) Equity in income of investees -- -- -- 326 -- 326 Depreciation and amortization 11,391 6,274 1,051 1,179 -- 19,895 Other significant non-cash items: Restructuring and impairment charges -- 132 36 (75) -- 93 Total assets 105,957 73,525 19,714 339,976 (319,633) 219,539 Expenditures for segment assets 3,946 2,603 1,729 858 -- 9,136 Investment in equity method investee -- -- -- 372 -- 372 AS OF AND FOR THE YEAR ENDED JANUARY 3, 1998 Trade revenues $ 161,939 $ 109,986 $ 52,397 $ 8,215 $ -- $ 332,537 Intersegment revenues 5,348 4,608 3,212 -- (13,168) -- Income (loss) before income taxes 19,859 (7,174) (3,919) (20,467) -- (11,701) Interest income (10) (18) -- (767) -- (795) Interest expense 47 69 -- 13,890 -- 14,006 Income tax expense (benefit) 7,428 (2,517) (760) (7,230) -- (3,079) Depreciation and amortization 11,373 7,594 1,213 1,190 -- 21,370 Other significant non-cash items: Restructuring and impairment charges -- 3,383 2,492 398 -- 6,273 Total assets 110,981 78,829 16,238 411,257 (382,517) 234,788 Expenditures for segment assets 6,001 3,438 645 279 -- 10,363 AS OF AND FOR THE YEAR ENDED DECEMBER 28, 1996 Trade revenues $ 153,511 $ 106,294 $ 53,495 $ 8,583 $ -- $ 321,883 Intersegment revenues 1,273 3,483 605 -- (5,361) -- Income (loss) before income taxes 13,437 (6,245) 3,320 (16,082) -- (5,570) Interest income -- (116) (22) (134) -- (272) Interest expense 612 300 253 10,150 -- 11,315 Income tax expense (benefit) 4,932 (2,429) 1,306 (5,624) -- (1,815) Depreciation and amortization 9,566 8,761 897 491 -- 19,715 Other significant non-cash items: Restructuring and impairment charges -- 4,657 86 (1,652) -- 3,091 Extraordinary item (less applicable tax benefit of $323) loss on early extinguishment of debt -- 422 105 -- -- 527 Segment assets 105,823 117,044 36,981 328,308 (318,892) 269,264 Expenditures for segment assets 17,069 1,716 2,595 785 (1,638) 20,527
The Company sells its products to approximately 3,500 customers with net sales to the largest customer accounting for 5%, 6%, and 5% of total sales for the years ended January 2, 1999, January 3, 1998 and December 28, 1997, respectively. The Company sells its products throughout the United States as well as internationally. The largest portion of domestic sales are for customers located in the eastern half of the United States, and though generally no more than 7% of its annual sales are derived from direct international sales, there is no significant concentration of direct sales into any particular country. 18. EMPLOYEE BENEFIT PLANS DEFINED BENEFIT PENSION PLANS - Johnston has two noncontributory qualified defined benefits pension plans covering substantially all hourly and salaried employees. The plan covering salaried employees provides benefit payments based on years of service and the employees' final average ten years earnings. The plan covering hourly employees generally provides benefits of stated amounts for each year of service. Johnston's current policy is to fund retirement plans in an amount that falls between the minimum contribution required by ERISA and the maximum tax deductible contribution. Plan assets F-26 29 consist primarily of government and agency obligations, corporate bonds, common stocks, mutual funds, cash equivalents, and unallocated insurance contracts. Effective July 1, 1995, Johnston adopted a noncontributory, nonqualified defined benefit plan covering the five senior executives of Johnston ("SRP") designed to provide supplemental retirement benefits. The actuarially determined liability for the SRP is immaterial to the consolidated financial statements taken as a whole. SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" supercedes the disclosure requirements in SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". The Company adopted SFAS No. 132 during the year ended January 2, 1999. The provisions of SFAS No. 87 require recognition in the consolidated balance sheet of an additional minimum liability and related intangible asset for pension plans with accumulated benefits in excess of plan assets. At January 2, 1999 and January 3, 1998, an additional liability of $324 and $954, respectively, is recorded in the consolidated balance sheets. At December 28, 1996, the liability exceeded the unrecognized prior service cost resulting in a minimum pension liability, net of taxes, of $478 recorded as a reduction of the Company's equity. Net periodic pension cost for the hourly and salaried defined benefit pension plans included the following components:
- ------------------------------------------------------------------------------------------------------------------ YEAR ENDED ------------------------------------------------------ JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 --------------- --------------- --------------- Service cost.............................................. $ 1,671 $ 1,664 $ 1,195 Interest cost............................................. 2,507 2,444 2,218 Expected return on plan assets............................ (2,757) (2,212) (1,815) --------------- --------------- --------------- Amortization costs: Transition (asset)/obligation........................ 298 298 298 Prior service costs.................................. 255 255 124 Actuarial (gain)/loss................................ -- -- 299 --------------- --------------- --------------- Net amortization................................. 553 553 721 Net periodic pension cost................................. $ 1,974 $ 2,449 $ 2,319 =============== =============== =============== - ------------------------------------------------------------------------------------------------------------------
The following is a reconciliation of the projected benefit obligation for the hourly and salaried defined benefit pension plans:
- ------------------------------------------------------------------------------------------------------------------ YEAR ENDED ------------------------------------------------------ JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 --------------- --------------- --------------- Projected benefit obligation at beginning of year......... $ 36,779 $ 30,302 $ 29,839 Service cost.............................................. 1,671 1,664 1,195 Interest cost............................................. 2,507 2,444 2,218 Actuarial (gain) loss..................................... 1,960 4,344 (1,161) Benefits paid............................................. (2,762) (1,975) (1,789) --------------- --------------- --------------- Projected benefit obligation at end of year............... $ 40,155 $ 36,779 $ 30,302 =============== =============== =============== - ------------------------------------------------------------------------------------------------------------------
F-27 30 The following is a reconciliation of plan assets for the hourly and salaried defined benefit pension plans:
- ------------------------------------------------------------------------------------------------------------------ YEAR ENDED ------------------------------------------------------ JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 --------------- --------------- --------------- Fair value of plan assets at beginning of year............ $ 34,076 26,044 21,062 Actual return on plan assets.............................. 4,939 4,249 2,696 Employer contributions.................................... 1,637 5,758 4,075 Benefits paid............................................. (2,762) (1,975) (1,789) --------------- --------------- --------------- Fair value of plan assets at end of year.................. $ 37,890 $ 34,076 $ 26,044 =============== =============== =============== - ------------------------------------------------------------------------------------------------------------------
The following is a reconciliation of funded status for the hourly and salaried defined benefit pension plans:
- ------------------------------------------------------------------------------------------------------------------ YEAR ENDED ------------------------------------------------------ JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 --------------- --------------- --------------- Accumulated benefit obligation (ABO) Vested............................................... $ 31,858 $ 34,286 $ 28,445 Nonvested............................................ 5,772 291 159 --------------- --------------- --------------- Total accumulated benefit obligation...................... 37,630 34,577 28,604 Projected benefit obligation (PBO)........................ 40,155 36,779 30,302 Market value of plan assets............................... 37,890 34,076 26,044 --------------- --------------- --------------- Unfunded projected benefit obligation..................... 2,265 2,703 4,258 Unrecognized net transition obligation.................... (1,042) (1,340) (1,638) Unrecognized prior service costs.......................... (1,402) (1,657) (404) Unrecognized net gain (loss).............................. (2,942) (2,563) (2,452) Additional liability...................................... 1,651 1,882 2,796 --------------- --------------- --------------- Accrued (prepaid) pension cost recognized in the consolidated balance sheet........................... $ (1,470) $ (975) $ 2,560 =============== =============== =============== Adjustments to Reflect Minimum Liability Additional liability...................................... $ 1,651 $ 1,882 $ 2,796 Intangible asset.......................................... 1,651 1,882 2,042 --------------- --------------- --------------- Charge to equity..................................... $ -- $ -- $ 754 =============== =============== =============== - ------------------------------------------------------------------------------------------------------------------
F-28 31 The following are assumptions regarding determination of pension costs:
- ------------------------------------------------------------------------------------------------------------------ YEAR ENDED ---------------------------------------------------- JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 ------------ ------------ ------------ Weighted average discount rate for obligations............ 6.80% 7.25% 8.00% Long-term rate of investment return....................... 8.00% 8.00% 8.00% Salary increase rate*..................................... 7.50% - 4.00% 7.50% - 4.00% 7.50% - 4.00% * Higher initial rate, gradually decreasing to lower ultimate rate. - ------------------------------------------------------------------------------------------------------------------
DEFINED CONTRIBUTION PLANS - The Company has a defined contribution savings plan that covers substantially all full-time employees who qualify as to age and length of service. The Company expanded this plan in 1997 and may make discretionary contributions to the plan. The Company made no contributions for the years ended January 2, 1999 and January 3, 1998, and contributions of $274 for the year ended December 28, 1996. 19. TRUST AGREEMENTS During 1991, 1993, and 1997, the Company entered into "rabbi" trust agreements with officers to transfer assets to trusts in lieu of paying compensation, bonuses, and consulting fees. These trust assets, which are classified as trading assets (as defined by SFAS No. 115) and included in "Other Assets" on the consolidated balance sheets, are recorded at the fair market value of the underlying assets and short-term investments. The compensation to the officers is determined in accordance with the employment agreements. Upon termination of the officer's employment with the Company, the trust assets will be distributed to the officers. If the Company becomes insolvent at any time before the assets of the trust are distributed to the officers, the trust assets may be used to satisfy the claims of the Company's creditors. As of January 2, 1999 and January 3, 1998, trust assets and corresponding liabilities, which are included in "Other Liabilities" on the consolidated balance sheets, each totaled $2,054 and $814, respectively. 20. RELATED PARTY TRANSACTIONS In May 1994, Redlaw Industries, Inc. ("Redlaw"), a stockholder, became the commissioned sales agent in Canada for sales of textile products manufactured by the Company. The Company paid Redlaw approximately $282, $295 and $172, related to Redlaw's commissioned sales business for the years ended January 2, 1999, January 3, 1998 and December 28, 1996, respectively. At January 3, 1998, consigned inventory placed with Redlaw in Canada was $245. As of November 30, 1998, the Company terminated its commissioned sales agency arrangement with Redlaw. F-29 32 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING SCHEDULES (in thousands) ================================================================================
YEAR ENDED ------------------------------------- JANUARY 2, JANUARY 3, DECEMBER 28, 1999 1998 1996 ---------- ---------- ------------ Allowance for doubtful accounts: Balance at beginning of period $ 2,176 $ 1,379 $ 1,772 Additions charged to operations 507 1,764 245 Deductions (1) (1,241) (967) (638) ------- ------- ------- Balance at end of year $ 1,442 $ 2,176 $ 1,379 ======= ======= =======
================================================================================ (1) Amounts written off, net of recoveries. EX-13.(B) 6 SUPPLEMENTAL DATA CAPTIONED QUARTERLY INFORMATION 1 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 13(b) QUARTERLY INFORMATION (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) ================================================================================ The following summarizes the unaudited quarterly results of operations for the years ended January 2, 1999 (Fiscal Year 1998) and January 3, 1998 (Fiscal Year 1997).
THREE MONTHS ENDED ------------------ FISCAL YEAR 1998 APRIL 4 JULY 4 OCT. 3 JAN. 2 - ---------------- -------- -------- ------- -------- Net sales $ 79,839 $ 69,063 $69,572 $65,250 Gross margin 9,622 8,554 9,255 11,015 Income (loss) from continuing operations (935) (568) 140 755 -------- -------- ------- ------- Net income (loss) available to common stockholders $ (935) $ (568) $ 140 $ 755 ======== ======== ======= ======= Net earnings (loss) per common share-basic (1) $ (.09) $ (.05) $ .01 $ .07 ======== ======== ======= ======= Weighted average shares outstanding 10,710 10,404 10,726 10,722 ======== ======== ======= =======
THREE MONTHS ENDED ------------------ FISCAL YEAR 1997 MARCH 29 JUNE 28 SEPT. 28 JAN. 3 - ---------------- -------- -------- -------- ------- Net sales $ 86,778 $ 87,724 $78,488 $79,547 Gross margin 11,749 9,068 5,451 10,931 Income (loss) from continuing operations 1,550 (6,635) (3,289) (248) Income (loss) from discontinued operations (26) 152 -- -- -------- -------- ------- ------- Net income (loss) $ 1,524 $ (6,483) $(3,289) $ (248) Dividends on preferred stock (41) (41) -- -- -------- -------- ------- ------- Net income (loss) available to common stockholders $ 1,483 $ (6,522) $(3,289) $ (248) ======== ======== ======= ======= Earnings per common share-basic (1): Income (loss) from continuing operations $ .12 $ (.64) $ (.31) $ (.02) Discontinued operations .02 .01 .-- .-- -------- -------- ------- ------- Net earnings (loss) per common share $ .14 $ (.63) $ (.31) $ (.02) ======== ======== ======= ======= Weighted average shares outstanding 10,710 10,404 10,726 10,727 ======== ======== ======= =======
(1) Earnings per common share-diluted are not presented as they are either antidilutive in periods for which a loss is presented or immaterial. Note: See Notes 2, 3 and 4 of the consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for discussion of certain transactions impacting fiscal 1998 and 1997. EX-21 7 LIST OF SUBSIDIARIES OF REGISTRANT 1 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 21 LIST OF SUBSIDIARIES OF JOHNSTON INDUSTRIES, INC. ================================================================================ 1. Johnston Industries Alabama, Inc. State of Incorporation: Alabama 2. Johnston Industries Composite Reinforcements, Inc. State of Incorporation: Alabama 3. Greater Washington Investments, Inc. State of Incorporation: Delaware - -------------------------------------------------------------------------------- EX-23.(A) 8 CONSENT OF KPMG LLP 1 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 23(a) INDEPENDENT AUDITORS' CONSENTS ================================================================================ The Board of Directors Johnston Industries, Inc.: We consent to incorporation by reference in the registration statements (Nos. 33-86414, 33-38359, 33-44669, 33-50100, 33-73268) on Form S-8 of Johnston Industries, Inc. of our report dated March 5, 1999, relating to the consolidated balance sheet of Johnston Industries, Inc. and subsidiaries as of January 2, 1999 and the related consolidated statements of operations, comprehensive operations, stockholders equity, and cash flows for the year ended January 2, 1999, which report appears in the January 2, 1999, annual report on Form 10-K of Johnston Industries, Inc. /s/KPMG LLP - ------------------------------- KPMG LLP Atlanta, Georgia March 29, 1999 ================================================================================ EX-23.(B) 9 CONSENT OF DELOITTE & TOUCHE LLP 1 JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 23(b) INDEPENDENT AUDITORS' CONSENT ================================================================================ The Board of Directors Johnston Industries, Inc.: We consent to the incorporation by reference in Registration Statements No. 33-86414, No. 33-44669, No. 33-50100, and No. 33-73268 of Johnston Industries, Inc. (the "Company") on Form S-8 of our report dated March 6, 1998 (March 30, 1998 as to Note 10 and April 1, 1999 as to Note 17) appearing in the Annual Report on Form 10-K of the Company for the year ended January 2, 1999. /s/ DELOITTE & TOUCHE LLP - ------------------------------- DELOITTE & TOUCHE LLP Atlanta, Georgia April 1, 1999 ================================================================================ EX-27 10 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS AS OF JANUARY 2, 1999 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JAN-02-1999 JAN-04-1998 JAN-02-1999 1,231,000 0 36,210,000 1,442,000 58,079,000 102,226,000 239,720,000 140,234,000 219,539,000 101,148,000 128,052,000 0 0 1,246,000 47,028,000 219,539,000 283,724,000 283,724,000 245,278,000 245,278,000 27,443,000 507,000 13,420,000 (1,799,000) (1,191,000) (608,000) 0 0 0 (608,000) (.06) (.06)
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