-----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, WCOon/iV3rJgU0MuE7VI6LKhEVibEPTG8lveoZvinjhrL2hI8jr6UsWz4KMv4Geb POvO+zp7IYxo3TnR9jQ8tw== 0000950155-00-000030.txt : 20000331 0000950155-00-000030.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950155-00-000030 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WORLDTEX INC CENTRAL INDEX KEY: 0000892604 STANDARD INDUSTRIAL CLASSIFICATION: TEXTILE MILL PRODUCTS [2200] IRS NUMBER: 561789271 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11438 FILM NUMBER: 588709 BUSINESS ADDRESS: STREET 1: 212 12TH AVE NE STREET 2: P O BOX 2363 CITY: HICKORY STATE: NC ZIP: 28601 BUSINESS PHONE: 7043285381 MAIL ADDRESS: STREET 1: 121 12TH AVE N E STREET 2: P O BOX 2363 CITY: HICKORY STATE: NC ZIP: 28603 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________________ FORM 10-K _________________________ [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number 1-11438 WORLDTEX, INC. (Exact name of registrant as specified in charter) DELAWARE 56-1789271 (State of Incorporation) (I.R.S. Employer Identification No.) 915 Tate Boulevard, S.E., Suite 106, Hickory, North Carolina 28602 (Address of principal executive offices) 828-322-2242 (Telephone Number) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered __________________________________ _________________________________________ Common stock, par value $.01 per New York Stock Exchange, Inc. share Preferred stock purchase New York Stock Exchange, Inc. rights Securities registered pursuant to Section 12(g) of the Act: None (Cover sheet continued on next page) 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. [ ] As of March 1, 2000: 14,271,171 shares of Common Stock were outstanding; and the aggregate market value of shares held by non-affiliates was $29,995,013. (For these purposes, a reported closing market price of $2.1875 per share on March 1, 2000 has been used and "affiliates" have been arbitrarily determined to be all directors and executive officers, although the Company does not acknowledge that any such person is actually an "affiliate" within the meaning of the federal securities laws.) Documents incorporated by reference: definitive proxy statement for 2000 Annual Meeting of Stockholders (Part III). PART I ITEM 1. BUSINESS Worldtex, Inc. ("Worldtex" or the "Company") is a holding company engaged through its subsidiaries in the supply of elastomeric components to the textile and apparel industries and through one of its subsidiaries dates its operations to 1934. Worldtex is a Delaware corporation organized in July 1992 to acquire the covered yarn manufacturing operations of Willcox & Gibbs, Inc., a New York corporation that later changed its name to Rexel, Inc. ("W&G"). Prior to November 12, 1992, Worldtex was a wholly owned subsidiary of W&G. On that date, W&G declared a dividend of one share of Worldtex Common Stock for each share of W&G Common Stock outstanding on November 23, 1992; such Worldtex shares were distributed and started trading publicly on that date. The Company has one business segment involving elastomeric components which has two main product lines, covered elastic yarns and narrow elastic fabrics within that segment. COVERED ELASTIC YARNS Worldtex's principal subsidiaries engaged in the supply of covered elastic yarns are (i) Regal Manufacturing Company, Inc. ("Regal"), based in Hickory, North Carolina, (ii) Rubyco (1987), Inc. ("Rubyco"), based in Montreal, Canada, (iii) Filix, s.a. ("Filix"), based in Troyes, France, and (iv) Fibrexa, Ltda. ("Fibrexa"), based in Bogota, Colombia. W&G acquired Regal in 1983, acquired Rubyco in 1986 and acquired Filix in 1990, and transferred them to Worldtex in August 1992. Worldtex acquired Fibrexa as of April 1, 1995. In November 1999, the Company entered into a 51% owned joint venture in India, Worldtex Valliappa Private Limited. The Company believes that it is one of the two largest independent suppliers of covered elastic yarn in the world (based on 1999 net sales of $167.6 million for this product line). Covered elastic yarns are used by the Company's customers to produce stretch fabrics for apparel that provide enhanced styling capabilities, better shape retention, and improved aesthetics, durability and comfort. The principal products that utilize covered elastic yarn produced by the Company are sheer and opaque pantyhose, men's, women's and children's socks, sweaters, swimwear, active and athletic wear and men's, women's and children's stretch apparel. During 1999, Worldtex yarns were used in the products of some of the world's best known brands and designers, including Giorgio Armani, Hugo Boss, Pierre Cardin, Liz Claiborne, Danskin, Dim, Christian Dior, Fogal, Fruit of the Loom, Givenchy, Jockey, Calvin Klein, Evan Picone, Polo, Round the Clock, Nina Ricci, and others. The Company, which was one of the first independent producers of covered elastic yarn, currently operates 11 manufacturing, distribution, and warehousing facilities located in the United States, Canada, France and South America. Included in the 11 facilities are a manufacturing facility and a warehouse that Regal plans to close in the first half of 2000. The Company also has 38% and 51% interests in joint ventures located in Estonia and India, respectively, and continues to evaluate joint venture opportunities in Asia. Products The covered elastic yarn manufactured by Worldtex is produced by wrapping material, principally nylon, polyester, cotton or other fibers, around spandex or latex rubber. The core of spandex or rubber provides stretch capability and durability, while the wrapped fiber provides dyeability and results in more comfort to the touch. Advanced manufacturing equipment permits production of ultrafine covered elastic yarns that result in fabrics comparable in appearance to natural fibers, but with superior flexibility, shape retention and durability. Historically, covered elastic yarns were principally used in the manufacture of women's pantyhose and other hosiery products. However, advances in production techniques and trends in consumer apparel preferences have led to a substantial expansion of the end uses for covered elastic yarn. Today, covered elastic yarn is used in a broad range of apparel, including sweaters, swimwear, running clothes, athletic uniforms, slacks, skirts and dresses, as well as in pantyhose and socks. Sales and Distribution The Company's manufacturing and distribution centers are strategically located to serve the Company's principal markets. The Company's operations in the United States and Canada serve customers throughout North America, its operations in France and joint venture in Estonia serve Europe and its operations in Bogota, Colombia serve South America and also provide lower-cost products for the Company's other markets. As of December 31, 1999, the Company maintained a marketing staff located in Hickory, North Carolina, Troyes, France, Montreal, Canada, and Bogota, Colombia. Each sales employee has a designated territory. In addition, certain sales personnel are specialists in designated applications for covered yarn, such as circular knitting or woven fabrics. The sales staff is compensated by salary and a sales incentive bonus plan. The Company also has a network of independent sales agents compensated on a commission basis. The Company's sales force is trained to work with the customer to develop new uses for covered elastic yarns that may improve the customer's products. The Company's significant experience in the production and utilization of covered elastic yarns has provided the Company with expertise not generally available to more broadly-based fabric and apparel producers. The Company utilizes this expertise to develop solutions utilizing covered elastic yarns for the customer's fabric needs. Customers In 1999, the Company provided covered elastic yarns to over 1,400 customers, and no single covered elastic yarn customer accounted for more than 10% of 1999 sales. The Company's ten largest covered elastic yarn customers in 1999 accounted for approximately 30% of 1999 sales of covered elastic yarns which totaled $167.6 million. The Company's customers are principally producers of hosiery and fabric sold for use in apparel products. In 1999, the Company's principal customers included Jockey International, High-Tex (division of Tefron), U.S. Textiles, Sara Lee Hosiery, Hafner, Doris Hosiery, Nalpac, Iris Hosiery, Soieries Peyraverney, and Iril, s.a. During 1999, Worldtex yarns were used in the products of some of the world's best known brands and designers, including Giorgio Armani, Hugo Boss, Pierre Cardin, Liz Claiborne, Danskin, Dim, Christian Dior, Fogal, Fruit of the Loom, Givenchy, Jockey, Calvin Klein, Evan Picone, Polo, Round the Clock, Nina Ricci, and others. Manufacturing Covered elastic yarns are produced by wrapping strands of conventional fabric materials around elastic materials such as spandex or latex rubber. In the manufacturing process, a "cover component" such as nylon, polyester, cotton, or other fiber is fed through high-speed spindles where it is wrapped or twisted around a "core component" of spandex or latex rubber. Strands of elastic may be single or double covered, depending on the desired end-use application. After wrapping, the yarn, which is white in color and otherwise unfinished, is then wound on a "take-up package" which is adaptable to the customer's machinery and equipment for further processing. Worldtex's research and development activities are directed toward improvements in existing products and manufacturing processes and toward development of new uses for its products. During 1999, Worldtex's expenditures for these purposes totaled less than 1% of its sales. Raw Materials In 1999, approximately 69% of the Company's production costs for covered elastic yarns were attributable to raw materials. The principal raw materials utilized by the Company are spandex, nylon and rubber. Spandex is principally supplied by DuPont, Globe and Bayer. Its rubber supply originates in Malaysia and is obtained via various domestic importers. The Company's major suppliers of nylon in 1999 were DuPont, BASF, Nilit, and Nylstar. In 1999, Worldtex purchased a substantial portion of its nylon and spandex from a single source, DuPont. In recent years, DuPont and its competitors have expanded their spandex production capacity, and Worldtex has been able to obtain sufficient supplies to meet its customers' requirements. Competition While Worldtex believes that it is one of the largest suppliers of covered elastic yarn in the world, several companies actively compete with Worldtex, at least one of which, Unifi, Inc., has greater assets and financial resources than Worldtex. Most of Worldtex's major customers do not buy exclusively from Worldtex. Competition is based primarily on product quality, customer service and price. Employees As of December 31, 1999, Worldtex had a total of approximately 1,200 employees engaged in its covered elastic yarn operations. Of these, approximately 440 were employed in the United States by Regal, approximately 80 were employed in Canada by Rubyco, approximately 300 were employed in France by Filix and approximately 380 were employed in Colombia by Fibrexa. A substantial amount of the covered elastic yarn sold by Filix is produced by subcontractors, whose employees are not included in the foregoing totals. Employees of Regal and Fibrexa are not covered by collective bargaining agreements, and certain employees of Filix and Rubyco are covered by such agreements. Worldtex has experienced no significant labor problems during recent years in its covered elastic yarn operations and considers its employee relations to be good. NARROW ELASTIC FABRICS Worldtex's subsidiary engaged in the manufacture of narrow elastic fabrics is Elastic Corporation of America, Inc. ("ECA"). The Company acquired ECA, based in Columbiana, Alabama, in December 1997. The Company's subsidiary Elastex, Inc. ("Elastex") acquired certain narrow elastic fabrics operations, based in Asheboro, North Carolina, from Texfi Industries, Inc. in October 1997. Elastex was merged into ECA effective December 31, 1998, and references to ECA herein shall mean the combined operations of ECA and Elastex unless the context indicates otherwise. In addition, on December 30, 1998, ECA acquired the Lexington, South Carolina, narrow elastic manufacturing facility of Fruit of the Loom. ECA has entered into a long-term agreement to supply narrow elastic fabrics to Fruit of the Loom. The Company believes that it is the largest manufacturer of woven and knitted narrow elastic fabrics in the world (based on 1999 net sales of $118.2 million for this product line). During 1999, ECA's narrow elastic fabrics were used in apparel produced by Bassett Walker, Fruit of the Loom, Maidenform, Playtex, Tommy Hilfiger, Jockey, Donna Karan, Calvin Klein, Ralph Lauren, Russell Corporation, Sara Lee (Hanes products), Vanity Fair, Warnaco (Warner, Olga and Speedo brands) and others. ECA operates a total of six manufacturing facilities, which are located in Alabama, North Carolina, South Carolina and Virginia. Products Narrow elastic fabrics are elasticized fabric bands, typically under six inches in width, that are used as components in the production of a broad range of apparel products, such as waistbands for men's, women's and children's underwear, athletic apparel and other garments, straps, facings and edgings in women's intimate apparel and elastic bands in women's hosiery. In addition, ECA manufactures gauze and elastic wrap products for the medical industry and specialized elastic fabric used by the automotive industry. ECA manufactures a full range of narrow elastic fabric products, from specialty designs to commodity items. These varied product offerings, together with sophisticated weaving and dyeing capabilities, enable the Company to provide bundled and customized products to its customers. In addition to a traditional line of woven elastic inserts and commodity narrow elastic fabrics, ECA has enhanced its product line with several narrow elastic fabric product advancements. For example, ECA developed and patented Quikcord(R) which embeds a drawstring within an elastic waistband. This product offers cost savings to apparel manufacturers by avoiding the costly operation of threading the drawstring cord through the elastic. ECA's most advanced narrow fabrics products are waistbands with brand name logos and other designs woven into the elastics, principally used in designer label underwear. ECA believes that it currently has the largest number of logo looms in the United States. Sales and Distribution ECA sells its products to manufacturers throughout the United States and to foreign manufacturers. Sales offices are based in Greensboro, North Carolina, Miami, Florida, San Francisco and Los Angeles, California, and New York, New York. There is no product specialization among the salesforce. The salesforce is compensated by salary and bonus incentive awards. ECA's key marketing strategy is to sell a customized product and service program that meets specific customer needs and to create relationships with designers at premier apparel manufacturers such as Calvin Klein, Ralph Lauren, Tommy Hilfiger, Donna Karan and Jockey. A customer's order often comprises more than one type of narrow elastic fabric product, and ECA believes that it is critical to offer a coordinated comprehensive supply program for its customers. Customers In 1999, ECA served over 700 narrow elastic fabric customers. Fruit of the Loom accounted for 16.8% of the Company's 1999 sales, and no other customer accounted for more than 10% of 1999 sales. The Company's ten largest narrow elastic fabric customers in 1999 accounted for approximately 77% of 1999 sales of narrow elastic fabrics, which totaled $118.2 million. ECA's top customers in 1999 included apparel manufacturers such as Bassett Walker, Fruit of the Loom, Tommy Hilfiger, Maidenform, Playtex, Jockey, Donna Karan, Calvin Klein, Ralph Lauren, Russell Corporation, Sara Lee (Hanes products), Vanity Fair, Warnaco (Warner, Olga and Speedo brands) and others. The principal customer in 1999 for ECA's medical products was Johnson & Johnson and for its automotive products was Crotty Corporation, a supplier to General Motors Corporation. In connection with the acquisition of Fruit of the Loom's narrow elastic manufacturing facility on December 30, 1998, ECA entered into a long-term supply agreement with Fruit of the Loom. The Company expects that Fruit of the Loom will be ECA's largest customer in 2000, based on Fruit of the Loom's past requirements. In December 1999, Fruit of the Loom filed for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code. The Company cannot predict the course of Fruit of the Loom's bankruptcy proceedings, and no assurances can be given that Fruit of the Loom will continue as a customer. For further discussion regarding Fruit of the Loom's bankruptcy filing, please refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity; Capital Resources. Manufacturing Knit elastic fabrics are primarily used in underwear and sportswear applications. Most commodity knit elastic products are not "finished," and the elastic yarn in the fabric is often bare. In contrast, the elastic yarn used in woven elastic fabrics is covered by natural or synthetic yarns and the products are finished or dyed. ECA operates dye houses for such purposes. Nylon, polyester, spandex and rubber are the basic raw materials used in the manufacture of narrow elastic fabrics. For the manufacturing of knit elastics, the natural or synthetic yarns (such as nylon, polyester or cotton) and the elastic threads (spandex or rubber) are knitted together to form the knitted narrow elastic fabric products on the knitting machines. In woven narrow elastic fabrics, the elastic threads must be covered. High-speed covering machines wrap the elastic core with natural or synthetic yarns under tension to cover the elastic. The covered elastic is collected on take-up packages and then is typically put onto beams. ECA's proprietary covering technology allows the covered elastic to be fed directly onto the loom, thereby eliminating a step wherein the covered elastic is wound onto beams and then sent to the looms. On ECA's weaving looms, the covered elastic is woven with the natural or synthetic yarns (such as nylon, polyester or cotton) to create the narrow elastic fabrics. If logos are required, special looms are used and programmed to weave into the narrow elastic fabric the name of the designer or brand, such as Calvin Klein or Jockey. All woven narrow fabrics are "finished." The rough-edged materials that result from the weaving process are put through a finishing process during which the narrow elastic fabrics are wetted and resin-treated and then dried. Certain knitted narrow elastics are finished as well, depending on customer requirements. Due to ECA's focus on high-end knitted products for intimate apparel, many of its fine quality knitted elastics are finished and dyed. Narrow fabrics may be dyed according to color formulations developed in-house to meet specific customer color requirements. ECA's dyeing processes include continuous acid, pressure beam or batch dyeing methods. ECA believes that it has the largest and most diversified dye lab, computer color matching equipment and dyeing equipment in the industry. ECA uses lab equipment which simulates the dye process, resulting in high accuracy of dye quality and color uniformity in actual production. ECA also produces silicon-backed fabrics. Such fabrics are typically found in hosiery products, particularly in thigh-high stockings. To produce this product, silicon is applied to knit, lace and simulated lace uniformly on one side of the fabric and then dried to create a non-slip band. The band grips the thigh allowing the stocking to stay in place without garters. Utilizing special robotic equipment, the silicon-backed fabrics are banded to the specific size requirements of the customers before inspection and final packaging. Raw Materials Raw materials comprised approximately 50% of ECA's 1999 costs of production. Key raw materials for ECA include synthetic fibers, such as nylon and polyester, spandex, rubber, cotton, chemical dyes and silicon. The Company buys its synthetic materials and spandex primarily from DuPont and Bayer. Its rubber supply originates in Malaysia and is obtained via various domestic importers. Chemical dyes and auxiliary dye ingredients are supplied by various prominent chemical companies, such as Crompton & Knowles and Ciba-Geigy, and silicon is primarily supplied by Dow Corning. Competition ECA believes that it is the leader in many of the market categories in which it operates. There are approximately ten domestic competitors who manufacture narrow elastic fabrics for the apparel industry. Principal domestic competitors in narrow elastic fabrics include Clinton Mills, George C. Moore, and Narrow Fabrics, Inc. Employees As of December 31, 1999, Worldtex had a total of approximately 1,100 employees engaged in its narrow elastic fabrics operations. None of these employees are covered by collective bargaining agreements. Worldtex has experienced no significant labor problems in its narrow elastic fabrics operations and considers its employee relations to be good. ITEM 2. PROPERTIES Worldtex maintains its headquarters in Hickory, North Carolina, in leased office space. COVERED ELASTIC YARN The Company operates a total of eleven covered elastic yarn manufacturing plants, distribution and warehouse facilities of which seven are owned and four are leased. The Company intends to close two facilities in Hickory, North Carolina and consolidate their operations with remaining facilities during the first half of 2000. In addition, the Company has a 38% interest in a joint venture in Estonia that owns and operates a 52,000 square foot covered elastic yarn manufacturing and distribution facility. In general, the Company's facilities are adequate and suitable for the purposes for which they are utilized by the Company. The plants and distribution centers are listed below: SQUARE OWNED/ LOCATION FEET LEASED USE _______________ ______ ______ ____________________________________ UNITED STATES: Hickory, NC 82,000 Owned Manufacturing Plant and Headquarters of Regal Hickory, NC 144,000 Owned Manufacturing Plant - Regal Hickory, NC 69,000 Owned Manufacturing Plant - Regal Hickory, NC 18,000 Leased Warehouse - Regal Hickory, NC 80,000 Leased Distribution Center - Regal - ---------- Regal intends to close these facilities in the first half of 2000 and consolidate within existing facilities. CANADA: Montreal, 85,000 Leased Manufacturing Plant and Headquarters Quebec of Rubyco FRANCE: Troyes 69,000 Owned Distribution Center and Headquarters of Filix Athis 139,000 Owned Manufacturing Plant - Filix Conde 202,000 Owned Manufacturing Plant - Filix Le Grand Serre 111,000 Owned Manufacturing Plant - Filix COLOMBIA: Bogota 239,000 Leased Manufacturing Plant and Headquarters _________ of Fibrexa SUBTOTAL 1,238,000 _________ NARROW ELASTIC FABRICS ECA operates a total of six manufacturing plants, all of which are owned. In addition, a rented sales office is maintained in New York City. The manufacturing plants are listed below. SQUARE OWNED/ LOCATION FEET LEASED USE _______________ ______ ______ ____________________________________ UNITED STATES: Columbiana, AL 245,000 Owned Manufacturing Plant and Headquarters of ECA Columbiana, AL 115,000 Owned Manufacturing Plant Asheboro, NC 143,000 Owned Manufacturing Plant Hemingway, SC 65,000 Owned Manufacturing Plant Lexington, SC 114,000 Owned Manufacturing Plant Woolwine, VA 77,000 Owned Manufacturing Plant _________ SUBTOTAL 759,000 _________ GRAND TOTAL 1,997,000 _________ _________ ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings as of the date of this Report to which the Company or any of its subsidiaries is a party or to which any of their property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the last quarter of the Company's 1999 fiscal year, no matters were submitted to a vote of the Company's security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the New York Stock Exchange. The following table sets forth the high and low per share sales prices for the Common Stock on the New York Stock Exchange for each quarter since December 31, 1997. High Low ______ _____ 1998: 1st Quarter $ 8.06 6.94 2nd Quarter 8.13 5.44 3rd Quarter 6.25 4.25 4th Quarter 4.81 3.50 1999: 1st Quarter 4.00 1.56 2nd Quarter 3.00 1.69 3rd Quarter 2.63 2.00 4th Quarter 2.06 1.13 2000: 1st Quarter 2.69 1.38 (through March 1) At March 1, 2000 there were approximately 941 holders of record of Common Stock. The Company currently does not pay any dividends. Future payment of cash dividends by the Company will be dependent on such factors as business conditions, earnings and the financial condition of the Company. The Company's credit facilities restrict the payment of dividends by the Company. Under the most restrictive of these debt agreements, no amounts were available for the payment of dividends and other distributions as of December 31, 1999. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity; Capital Resources." ACQUISITION BY INVESTMENT MANAGERS OF 34% OF THE COMMON STOCK On February 28, 2000, a Schedule 13D report was filed with the Securities and Exchange Commission stating that certain investment managers were the beneficial owners of approximately 34% of the outstanding shares of Worldtex common stock. According to the Schedule 13D filing, William Ehrman, Frederic Greenberg, Jonas Gerstl, William Lautman and Julia Oliver (collectively the "EGS Persons"), the principals of the firm EGS Partners, L.L.C., were the beneficial owners of such shares, which were held by certain investment partnerships or in discretionary accounts over which they have investment authority. The filing states that the Worldtex shares were acquired for investment. As a consequence of the filing of such report, the "poison pill" shareholder rights attached to the outstanding Worldtex common stock were required to trade separately from such stock and become exercisable after 10 days, unless otherwise provided by the Worldtex Board of Directors. If the rights had become exercisable, each right holder (other than such 34% shareholders) would have been entitled to pay $30 per right and receive Worldtex common stock (or a common stock equivalent) with a value of $60 (determined pursuant to the agreement governing the rights). In addition, the Board of Directors of Worldtex had the option to exchange each right (other than rights held by such 34% shareholders) for one share of Worldtex common stock. The Board of Directors subsequently extended the initial 10-day period on several occasions in order to permit discussions with the EGS Persons. On March 27, 2000, Worldtex entered into a Standstill Agreement (the "Standstill Agreement") with the EGS Persons and certain related entities (collectively, the "EGS Parties"). Pursuant to the Standstill Agreement, Worldtex amended its "poison pill" shareholder rights plan to prevent the rights from trading separately or becoming exercisable as a result of the announced beneficial ownership by the EGS Parties, unless the Board of Directors of Worldtex determines that there has been a breach by an EGS Party of the Standstill Agreement. Under the Standstill Agreement, the EGS Parties agreed, among other things, not to (i) acquire additional shares of Worldtex common stock, (ii) encourage other persons to acquire Worldtex common stock, (iii) submit or encourage a proposal for the acquisition of Worldtex, (iv) make any solicitation of proxies for Worldtex common stock, (v) sell any Worldtex common stock, except sales of not more than 5% of the outstanding shares in any 90 day period so long as the buyer is not and will not thereby become the beneficial owner of 5% or more of the Worldtex common stock or (vi) submit any shareholder proposal. In addition, each EGS Party agreed to vote the Worldtex common stock beneficially owned by it, at its option, (i) in the manner recommended by the Worldtex Board of Directors or (ii) in the same proportion as the votes of other holders of Worldtex common stock. The EGS Parties also agreed to make payments to Worldtex aggregating $8 million, in reimbursement of certain expenses. The term of the Standstill Agreement is ten years. Also as a result of such acquisition of Worldtex common stock by the EGS Persons, all outstanding stock options granted under the 1992 Stock Incentive Plan of Worldtex, representing the right to purchase approximately 1,760,000 shares of Worldtex common stock at exercise prices from $2.81 to $6.75 per share, became vested. In addition, Barry D. Setzer, Chairman of the Board, President and Chief Executive Officer of Worldtex, and Marty R. Kittrell, Senior Vice President and Chief Financial Officer of Worldtex, each has asserted that, under the terms of his employment agreement with Worldtex, he is entitled to terminate his employment and receive payment of 2.99 times his "base salary" (as defined). If both officers were entitled to exercise such right, Worldtex would be obligated to make severance payments of approximately $2.1 million. The Worldtex Board of Directors has taken the position that such officers are not entitled to exercise such right. However, the Board of Directors has entered into negotiations with such officers seeking to settle the matter amicably. The departure from Worldtex of these senior managers could have a material adverse effect on Worldtex. ITEM 6. SELECTED FINANCIAL DATA WORLDTEX, INC. AND SUBSIDIARIES The following table sets forth certain financial data of Worldtex for the five fiscal years ended December 31, 1999, which has been derived from Worldtex's audited financial statements for such years. This data should be read in conjunction with the Consolidated Financial Statements of Worldtex and the Notes thereto appearing elsewhere herein. Results are not directly comparable due to the acquisition of the Fruit of the Loom manufacturing facility on December 30, 1998, ECA as of December 1, 1997 and Elastex as of October 3, 1997. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Historical financial information may not be indicative of Worldtex's future performance. Diluted earnings per share are calculated based upon the weighted average number of common shares outstanding and dilutive common equivalent shares during such year.
YEARS ENDED DECEMBER 31, __________________________________________________ 1999 1998 1997 1996 1995 _________ _________ ________ ________ ________ (Dollars in thousands, except per share amounts) Net Sales $285,787 258,537 203,256 207,829 187,981 Income (loss) before income taxes (9,975) (6,392) 11,869 17,361 10,231 Provision (benefit) for income taxes 170 (494) 5,377 6,415 4,979 Net income (loss) (10,145) (5,898) 5,148 10,946 5,252 Diluted income (loss) per share (.71) (.41) .35 .75 .36 EBITDA 34,732 30,862 26,059 28,777 23,602 Depreciation 14,931 11,934 5,877 5,342 5,234 Amortization 2,951 4,638 968 942 899 Cash flows from operating activities 5,502 9,053 (1,497) 15,032 12,046 Capital expenditures 17,716 19,871 7,706 13,785 8,356 Total assets 314,436 324,120 312,439 206,032 196,065 Long-term debt (including current installments of long-term debt) 207,631 198,771 186,400 69,388 70,187 Stockholders' equity 52,492 73,482 77,502 85,178 78,939 Cash dividends per Common Share - - - - - - ---------- EBITDA represents operating profit plus depreciation and amortization and one-time items. While EBITDA should not be considered as an alternative measure of net income or cash provided by operating activities, it is presented to provide additional information relating to the Company's debt service capacity. EBITDA should not be considered in isolation or as a substitute for other measures of financial performance or liquidity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company believes that it is one of the largest suppliers of elastomeric components to the textile industry in the world (based on 1999 net sales). The Company has two main product lines, covered elastic yarns and narrow elastic fabrics. Covered elastic yarns manufactured by the Company are principally used in the production of sheer and opaque pantyhose, men's, women's and children's socks, sweaters, swimwear, active and athletic wear and men's, women's and children's stretch apparel. Narrow elastic fabrics are elasticized fabric bands, typically under six inches in width, that are used as components in the production of a broad range of apparel products, such as waistbands for men's, women's and children's underwear, athletic apparel and other garments, straps, facings and edgings in women's intimate apparel and elastic bands in women's hosiery. The Company's covered elastic yarn business operates around the world through its subsidiaries Regal, based in Hickory, North Carolina, Rubyco, based in Montreal, Canada, Filix, based in Troyes, France, and Fibrexa, based in Bogota, Colombia. The Company also has 38% and 51% interests in joint ventures in Estonia and India, respectively. The Company's narrow elastic fabrics business is conducted through ECA, acquired on December 1, 1997 based in Columbiana, Alabama. In addition, the Company acquired through Elastex certain narrow elastic fabrics operations based in Asheboro, North Carolina, in October 1997. Elastex was merged into ECA effective December 31, 1998. In addition, on December 30, 1998, ECA acquired the Lexington, South Carolina, narrow elastic manufacturing facility of Fruit of the Loom. RISK FACTORS TO BE CONSIDERED Worldtex is a holding company, the principal assets of which are the stock of its subsidiaries. Significantly all of the operations of Worldtex are conducted through its direct and indirect wholly-owned subsidiaries. Accordingly, Worldtex's ability to service its indebtedness and meet its other obligations is dependent upon earnings and cash flow of its subsidiaries and the payment of funds by those subsidiaries to Worldtex in the form of loans, dividends or otherwise. In addition, the ability of Worldtex's subsidiaries to pay dividends, repay intercompany liabilities or make other advances to Worldtex is subject to restrictions imposed by corporate law and certain United States, state and foreign tax considerations. As a result of the acquisition of beneficial ownership of approximately 34% of the outstanding Worldtex common stock by certain investment managers (as described in Note 17 of the Notes to Consolidated Financial Statements), Barry D. Setzer, Chairman of the Board, President and Chief Executive Officer of Worldtex, and Marty R. Kittrell, Senior Vice President and Chief Financial Officer of Worldtex, each has asserted that, under the terms of his employment agreement with Worldtex, he is entitled to terminate his employment and receive payment of 2.99 times his "base salary" (as defined). If both officers were entitled to exercise such right, Worldtex would be obligated to make severance payments of approximately $2.1 million. The Worldtex Board of Directors has taken the position that such officers are not entitled to exercise such right. However, the Board of Directors has entered into negotiations with such officers seeking to settle the matter amicably. The departure from Worldtex of these senior managers could have a material adverse effect on Worldtex. The Company is highly leveraged. See "- Liquidity; Capital Resources" below. A substantial portion of the Company's sales and operating profits have historically been derived from international operations and export sales, which are subject in varying degrees to risks inherent in doing business abroad. Such risks include the possibility of unfavorable circumstances arising from host country laws or regulations. In addition, foreign operations include risks of partial or total expropriation; currency exchange rate fluctuations and restrictions on currency repatriation; significant changes in taxation policies; the disruption of operations from labor and political disturbances, insurrection or war; and the requirements of partial local ownership of operations in certain countries. Moreover, changes in the value of the currencies of the foreign countries in which the Company does business could have a material adverse impact on the Company's business, financial condition and results of operations. The textile and retail apparel industries are highly cyclical and are characterized by rapid shifts in fashion and consumer demand, as well as competitive pressures and price and demand volatility. The demand for the Company's products is principally dependent upon the level of United States demand for retail apparel. The demand for retail apparel is in turn dependent on United States consumer spending, which may be adversely affected by an economic downturn, changing retailer and consumer demands, a decline in consumer confidence or spending, and other factors beyond the Company's control. In recent years, sales in the United States of sheer pantyhose have declined. Although pantyhose manufacturers have historically accounted for a significant portion of the Company's sales of covered elastic yarn, the Company's business strategy includes the continued development of new end-use applications for covered elastic yarn and the diversification of its product lines with the recent narrow elastics acquisitions. Spandex and nylon are the principal raw materials used in the Company's manufacturing process. In 1999 Worldtex purchased a significant portion of its nylon and spandex from a single source, DuPont. In recent years, DuPont and its competitors have expanded their spandex production capacity, and Worldtex has been able to obtain sufficient supplies to meet its customers' requirements. The textile and apparel industries are highly competitive. The apparel markets are served by a variety of producers, many of which are located in rapidly growing, low-wage countries and use textiles produced in those regions. Many of these textile producers have substantially greater financial and other resources and lower cost of funds than the Company. Unifi, Inc. and Worldtex are the two largest suppliers of covered elastic yarns in the United States and worldwide. Unifi, Inc. has substantially greater financial resources than the Company and is less leveraged. The Company believes it is the largest supplier of narrow elastic fabrics in the world. RESULTS OF OPERATIONS The following table sets forth the relationship of percentages which certain income and expense items have to net sales: YEARS ENDED DECEMBER 31, -------------------------- 1999 1998 1997 ------ ------- ------- Net sales................................... 100.0% 100.0% 100.0% ===== ===== ===== Gross profit................................ 15.0% 16.4% 17.7% Selling and administrative expense.......... 10.0 9.9 7.7 Goodwill amortization....................... 1.0 1.8 .5 ----- ----- ----- Operating profit............................ 4.0 4.7 9.5 Interest expense............................ 7.0 7.3 3.5 Other income (expense)--net................. (.5) .1 (.2) ----- ----- ----- Income (loss) before income taxes........... (3.5)% (2.5)% 5.8% ===== ===== ===== EBITDA.................................. 12.2% 11.9% 12.8% ===== ===== ===== Depreciation................................ 5.2% 4.6% 2.9% ===== ===== ===== - ---------- EBITDA represents operating profit plus depreciation and amortization and one-time items. While EBITDA should not be considered as an alternative measure of net income or cash provided by operating activities, it is presented to provide additional information relating to the Company's debt service capacity. EBITDA should not be considered in isolation or as a substitute for other measures of financial performance or liquidity. 1999 VS. 1998 Sales for the year ended December 31, 1999 were $285.8 million and net loss was $10.1 million, compared with sales of $258.5 million and a net loss of $5.9 million for 1998. Diluted net loss per share was $.71 for 1999 compared with $.41 in 1998. Results for 1999 reflect the acquisition of a narrow elastics manufacturing facility from Fruit of the Loom in December 1998. Worldtex's covered elastic yarn sales in 1999 of $167.6 million decreased $11.1 million, or 6.2%, when compared with 1998, primarily because of continuing softness in the European general textile market, higher apparel imports and overall weak demand by ladies' hosiery customers. Of the decrease, the stronger U.S. dollar versus foreign currency denominated sales decreased covered elastic yarn sales by approximately $2.7 million (assuming currency translation of 1999 sales at the rate applicable to 1998 results). During the fourth quarter of 1999, the Company initiated a consolidation plan to reduce conventional covered yarn production in the United States. One of three manufacturing facilities located in Hickory, North Carolina will be closed during the first half of 2000, with its operations moved into the remaining facilities. The Company recorded a one-time charge of $2.8 million for this consolidation. This charge, recorded in cost of sales, covers provisions for real estate and manufacturing equipment that will be taken out of service, as well as certain inventory provisions. The Company's narrow elastic fabric sales were $118.2 million in 1999, an increase of $38.4 million when compared with 1998. The increase was principally due to the Fruit of the Loom manufacturing facility acquisition in December 1998, as well as organic growth of approximately 7%. The Company's narrow elastic fabric sales originate in the U.S. with no foreign currency translation exposure. Although narrow elastic fabric revenues increased, these revenues did not meet expectations during 1999 primarily due to a less favorable product mix. Customers deferred purchases of narrow elastics for intimate apparel and other higher margin products in order to adjust inventories. The Company also experienced start-up costs and inefficiencies of over $1.0 million as a result of efforts to address the shift in product mix, to introduce new products and to complete a program to add new weaving capacity. Additionally, Fruit of the Loom, the Company's largest narrow elastic fabric customer, filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code on December 29, 1999. As a result, the Company experienced lower revenues due to reduced shipments to Fruit of the Loom in the fourth quarter of 1999 in anticipation of their bankruptcy filing. Purchases by Fruit of the Loom since the filing are currently being paid in advance of shipment. Worldtex's gross margin in 1999 decreased to 15.0% of net sales, as compared to 16.4% for 1998. Gross profit margins decreased primarily due to higher depreciation, start-up costs and changes in product mix. Selling and administrative expenses increased slightly as a percentage of net sales to 10.0% in 1999 from 9.9% in 1998, primarily due to better sales leverage arising from the Fruit of the Loom acquisition in December 1998 offset by the one-time items recorded in 1999. Selling and administrative one-time charges for 1999 included reserves of $4.0 million for accounts receivable owed by Fruit of the Loom as of December 31, 1999, charges of $.4 million for Canadian severance relating to the 1998 restructuring and certain retirement costs of $.5 million. In 1998, $1.7 million of one-time charges relating to the North American covered yarn restructuring and the retirement of the Company's former chairman were included in administrative expenses. Goodwill amortization decreased as a percentage of net sales to 1.0% in 1999 from 1.8% in 1998 due to the $2.3 million goodwill writedown relating to the North American covered yarn restructuring recorded in 1998. The increase in interest expense of $1.2 million was caused primarily by the additional debt associated with the Fruit of the Loom acquisition in December 1998, additional working capital requirements due to fourth quarter operating results and higher borrowing costs of the domestic credit facility related to rising interest rates. Additionally, the Company's financial performance resulted in higher pricing for borrowings under the domestic credit facility. 1998 VS. 1997 Sales for the twelve months ended December 31, 1998 were $258.5 million and net loss was $5.9 million, compared with sales of $203.3 million and income before extraordinary item of $6.5 million for the comparable period in 1997. Diluted net loss per share was $.41 for 1998 compared with diluted income per share before extraordinary item of $.44 in 1997. Results in 1998 reflect the Company's acquisitions of ECA and Elastex in the last quarter of 1997. Worldtex's covered elastic yarn sales in 1998 of $178.7 million decreased $15.7 million, or 8.1%, when compared with 1997, primarily because of continuing softness in the European general textile market, higher apparel imports and overall weak demand by ladies' hosiery customers. Of the decrease, the stronger U.S. dollar versus foreign currency denominated sales decreased covered elastic yarn sales by approximately $5.7 million (assuming currency translation of 1998 sales at the rate applicable to 1997 results). During the fourth quarter, the Company recorded charges of $7.8 million which included a $4.4 million restructuring provision for discontinuing the Company's conventional covered yarn production in Montreal, Quebec, $1.9 million related primarily to asset provisions for underutilized equipment in the United States and $1.5 million related to the retirement of the Company's former chairman and chief financial officer. The Company's narrow elastic fabric sales in 1998 of $79.8 million increased $70.9 million when compared with 1997, due to the inclusion of narrow elastic fabric sales for the full year compared with 1997 sales from the dates of the ECA and Elastex acquisitions in the fourth quarter. Narrow elastic fabric sales originate in the U.S. with no foreign currency translation exposure. Results from the narrow elastic fabric operations did not meet expectations during 1998 due to customer inventory adjustments and softness relating to Asian economic issues. Worldtex's gross margin in 1998 decreased to 16.4% of net sales as compared to 17.7% for 1997. Gross profit margins decreased primarily due to one-time charges of $3.8 million related to the North American covered yarn restructuring that lowered gross margin from 17.8% of sales to 16.4% of sales. Selling and administrative expenses increased as a percentage of net sales to 9.9% in 1998 from 7.7% in 1997 primarily because the fixed component of these expenses increased as a result of the recent acquisitions. In 1998, $1.7 million of the one-time charges relating to the North American covered yarn restructuring and the retirement of the Company's former chairman were included in administrative expenses. Goodwill amortization decreased as a percentage of net sales to 1.8% in 1998 from 0.5% in 1997 due to the $2.3 million of one-time charges relating to the North American covered yarn restructuring recorded in the current year. The increase in interest expense of $11.7 million was caused primarily by the $175.0 million Senior Notes issued December 1, 1997 in connection with the acquisitions of Elastex and ECA and refinancing of existing indebtedness. INCOME TAXES During 1999, France decreased the tax rate from 41.67% to 40%, resulting in a $.4 million reduction to the 1999 income tax provision to decrease the deferred tax liability as of January 1, 1999. A $4.1 million valuation allowance was established in 1999 for deferred tax assets due to uncertainty as to the future benefit of domestic federal net operating loss carryforwards. There was also a valuation allowance as of December 31, 1999 for certain state net operating loss carryforwards of $1.6 million. At December 31, 1999, the Company had U.S. Federal and state net operating loss carryforwards aggregating $33.6 million and $33.1 million, respectively, which expire at various dates through 2019. In 1997, France increased the corporate tax rate from 36.67% to 41.67%, which resulted in a charge to increase the reserve for deferred income taxes of approximately $1.2 million and an additional charge of $.5 million in the fourth quarter to reflect the retroactive effect of the tax increase for all of 1997. LIQUIDITY; CAPITAL RESOURCES The principal indicators of the Company's liquidity are cash flows from operating activities and cash flows from financing activities, which consisted primarily of borrowings under the Company's credit facilities. Worldtex generated $5.5 million from its operating activities in 1999, compared with $9.1 million generated in 1998 and $1.5 million used in 1997. The decrease in net cash provided by operating activities in 1999 was caused primarily by the increase in net loss and increases in accounts receivable. Additionally, Fruit of the Loom, the Company's largest narrow elastic fabrics customer, filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code on December 29, 1999. While the Company has resumed shipments to Fruit of the Loom, the Company's pre-filing accounts receivable of $4.4 million were reduced to their estimated recovery value. Accordingly, the Company recorded in selling, general and administrative expenses reserves of $4.0 million for accounts receivable owed by Fruit of the Loom as of December 31, 1999. Purchases by Fruit of the Loom since the filing are currently being paid in advance of shipment. EBITDA represents operating profit (loss) plus depreciation, amortization and in the case of 1999 and 1998, certain one-time charges and is provided as additional information relating to the Company's debt service capacity. While EBITDA should not be considered as an alternative measure of net income or cash provided by operating activities, it is presented to provide additional information relating to the Company's debt service capability. EBITDA should not be considered in isolation or as a substitute for other measures of financial performance or liquidity. EBITDA may not be comparable to similarly titled measures of financial performance. EBITDA for the years ended December 31, 1999, 1998 and 1997 was $34.7 million, $30.9 million and $26.1 million, respectively. Depreciation and amortization for the years ended December 31, 1999, 1998 and 1997 was $17.9 million, $16.6 million and $6.8 million, respectively. Results for 1999 include one-time charges for depreciation of $2.3 million and results for 1998 include one-time charges for depreciation and amortization of $5.6 million. During 1999, capital expenditures amounted to $17.7 million compared to $19.9 million in 1998. Capital expenditures were $7.7 million in 1997. The majority of such capital expenditures during the years 1997-1999 were used to purchase additional manufacturing equipment in order to increase the Company's production capacity and to obtain productivity improvements. Capital expenditures in 1999 also included $5.2 million for management information systems. The Company currently expects that capital expenditures for 2000 will aggregate approximately $10.0 million, primarily for machinery and property improvements. The Company's business strategy includes the pursuit of strategic acquisitions of other businesses. Any acquisition would be funded through cash on hand, the issuance of additional securities, the sale of other assets or the incurrence of additional indebtedness. The Company's ability to sell assets and incur indebtedness is restricted under the various terms of the Company's debt. On December 1, 1997, the Company issued and sold $175.0 million principal amount of its 9 5/8% Senior Notes due 2007 (the "Notes") under an Indenture, dated as of December 1, 1997 (the "Indenture"). The net proceeds (before deduction of transaction expenses) of approximately $170.0 million, were used to pay the purchase price in the ECA acquisition, repay certain indebtedness and to pay transaction fees and expenses relating thereto. During 1998, the Company cancelled an interest rate swap agreement relating to debt refinanced by the notes and received a cancellation fee of $.3 million. The Company used the balance of the net proceeds from the sale of the Notes for general corporate purposes. The Company has interest rate swap agreements and swap option agreements with a commercial bank that effectively converted a portion of its fixed rate debt to a floating rate for a period of up to three years with the floating rate reset every six months. Under these agreements, the Company receives a weighted average fixed rate of 5.2% at December 31, 1999 and pays a floating rate based on LIBOR or based on a rate indexed to selected foreign currency denominated indices, resulting in a weighted average floating rate of 4.6% at December 31, 1999. Notional principal amounts of $30.0 million in swap agreements and $20.0 million in swap option agreements were outstanding at December 31, 1999. Net amounts due under these agreements decreased interest expense for 1999 by approximately $.1 million. The estimated amounts the Company would have to pay to terminate these agreements was approximately $.3 million at December 31, 1999. The Company has a domestic revolving credit facility that provides for revolving credit borrowings in an aggregate principal amount of up to $25.0 million. The revolving credit facility terminates and all amounts borrowed thereunder will be due December 1, 2002. Loans under the revolving credit facility bear interest at rates based upon a base rate (the higher of the Bank of America, N.A. prime rate or the Federal Funds rate), certificates of deposit rates or Eurodollar rates, in each case plus an applicable margin. Loans under the revolving credit facility are guaranteed by all U.S. subsidiaries of the Company and are required to be secured by liens on the accounts receivable and inventory of the Company and its U.S. subsidiaries, 100% of the outstanding capital stock of the Company's U.S. subsidiaries and 65% of the outstanding capital stock of each of the non-U.S. subsidiaries. At December 31, 1999, the Company had total indebtedness of $214.1 million and $.1 million was available for future borrowings under the domestic credit facility. In addition, at such date the Company's foreign subsidiaries had $20.3 million of U.S. dollar equivalent credit availability under bank lines of credit. Amounts outstanding as of December 31, 1999 were $6.4 million. The most restrictive covenant of the domestic revolving credit facility and Indenture limits short-term borrowings by the Company's foreign subsidiaries to a total of $15.0 million, excluding certain existing indebtedness. At December 31, 1999, Worldtex was not in compliance with financial covenants relating to the leverage ratio, interest coverage ratio, current ratio, minimum tangible net worth and limitations on capital expenditures of its domestic credit facility. The Company obtained a waiver of these covenants and an amendment to the domestic credit facility through June 30, 2000. The Company is currently negotiating to refinance its domestic credit facility and expects to complete this process during the first half of 2000. Accordingly, the $24.9 million outstanding balance on the domestic credit facility has been classified as current installments of long-term debt as of December 31, 1999. The deteriorating financial position of Fruit of the Loom, the Company's largest customer, during the fourth quarter of 1999 and the Chapter 11 bankruptcy reorganization filing by Fruit of the Loom on December 29, 1999, adversely affected the Company's short-term liquidity position as of December 31, 1999. However, the Company's financial position has subsequently improved, and at February 29, 2000 the Company had total indebtedness of $20.0 million and $5.0 million was available for future borrowings under the domestic credit facility. The Company had $3.0 million cash on deposit in the United States earning daily money market investment yields at February 29, 2000. The Company believes that its lines of credit, as expected to be refinanced, together with internally generated funds, will provide sufficient liquidity for the Company's expected short-term and long-term cash requirements. The Company's domestic revolving credit facility and the Indenture restrict the payment of dividends by the Company. Under these provisions, the Company would be required to have net income after December 31, 1999 of more than $16.5 million before any dividends could be paid. The Company is highly leveraged. The Company's ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, its indebtedness (including the Notes), or to fund planned capital expenditures will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations and anticipated revenue growth, management believes that cash flow from operations and available cash, together with available borrowings under the Company's credit facilities, will be adequate to meet the Company's future liquidity needs for at least the next several years. The Company may, however, need to refinance all or a portion of the principal of the Notes on or prior to maturity. There can be no assurance that the Company's business will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized or that future borrowings will be available under the Company's credit facilities in an amount sufficient to enable the Company to service its indebtedness, including the Notes, or to fund its other liquidity needs. In addition, there can be no assurance that the Company will be able to effect any such refinancing on commercially reasonable terms or at all. The Company's high degree of leverage could have important consequences to the Company, including, but not limited to: (i) making it more difficult for the Company to satisfy its obligations, (ii) increasing the Company's vulnerability to general adverse economic and industry conditions, (iii) limiting the Company's ability to obtain additional financing to fund future working capital, capital expenditures, and other general corporate requirements, (iv) requiring the dedication of a substantial portion of the Company's cash flow from operations to the payment of principal of, and interest on, its indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, research and development or other general corporate purposes, (v) limiting the Company's flexibility in planning for, or reacting to, changes in its business and the industry, and (vi) placing the Company at a competitive disadvantage compared to less leveraged competitors. In addition, the Indenture and the Company's credit facilities contain financial and other restrictive covenants that limit the ability of the Company to, among other things, borrow additional funds. Failure by the Company to comply with such covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on the Company. YEAR 2000 COMPLIANCE Worldtex established a Year 2000 project team in 1998 and retained an independent consulting group to provide assistance in assessing Year 2000 risks and to provide recommendations for remediation. The project scope included both information technology and computer based embedded technology. The project team has focused its efforts on information systems software and hardware, manufacturing equipment and facilities, and third-party relationships. The Company is near completion of a worldwide business system replacement project that uses programs primarily from one vendor. The initial implementation of the new systems is generally scheduled to be completed during the second quarter of 2000. The replacement project has incurred costs of $7.1 million as of December 31, 1999 with $5.2 million capitalized and $1.9 million charged to expense since project inception. Remediation for other information systems and computer based embedded technology systems was completed as of December 31, 1999 so that all systems were Year 2000 compliant. The Company has experienced no discernable problems with any computer-based applications as a result of the Year 2000. NEW ACCOUNTING STANDARDS In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities was issued. SFAS No. 133 establishes accounting and reporting standards for derivative financial instruments embedded in other contracts (collectively referred to as embedded derivatives) and for hedging activities. The new standard requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 was amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date for FASB Statement No. 133, which delays the Company's effective date until the first quarter of the year ending December 31, 2001. Management is currently evaluating the effects of SFAS No. 133 on the Company's financial statements and current disclosures. EUROPEAN MONETARY UNION - EURO The Company conducts business in multiple currencies, including the currencies of various European countries in the European Union which are participating in the single European currency by adopting the Euro as their common currency on January 1, 1999, the date that the Euro commenced trading on currency exchanges. The legal currencies of the participating countries will remain legal tender for a transition period between January 1, 1999 and January 1, 2002. During the transition period, wire transfers can be made in the Euro with payment for goods and services in either the Euro or the legacy currency. Between January 1, 2002 and July 1, 2002, the participating countries will introduce Euro notes and coins and eventually withdraw all legacy currencies. Currency rates during the transition period will no longer be computed from one legacy to another but instead will first be converted into the Euro. The Company is addressing the issues involved with the introduction of the Euro and the impact on its business, both strategically and operationally. Based on current information, the Company does not expect the Euro conversion to have a material adverse effect on the financial position or results of operations of the Company. FORWARD-LOOKING STATEMENTS Certain statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations which are other than historical facts are intended to be "forward-looking statements" within the meaning of federal securities laws. Words such as "expects", "believes", "anticipates", "projects", "estimates", "plan", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are subject to various risks and uncertainties, many of which are outside the control of the Company. Risks and uncertainties include, but are not limited to, the matters discussed under "- Risk Factors to be Considered" above, the financial strength of the apparel industry, the level of consumer spending for apparel, changing consumer preferences, the competitive pricing environment within the apparel industry, foreign currency translation, success of new product introductions, and other risk factors. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements, which reflect management's judgment only as of the date hereof. The Company does not intend to update publicly this information to reflect new information, future events or otherwise. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company in the normal course of business is exposed to the risk of loss from non-performance by its customers for amounts due the Company through the extension of credit. The Company controls credit risk exposure through credit approvals, credit limits, factoring certain selected receivables and monitoring procedures. The Company did not have any significant exposure to any individual customer as of December 31, 1999 that had not been adequately provided for through an allowance for bad debts. The Company's sales are predominantly denominated in the local currency of the subsidiary originating the sale. A significant decline in the value of currencies of the foreign countries in which the Company does business could have a material adverse impact on the Company's business, financial condition and results of operations. The Company's primary source of funds other than cash from operations is borrowings under its domestic revolving and foreign lines of credit facilities which incur interest at variable rates at terms not to exceed six months, at which time the borrowings are reset to current market rates. The Company may utilize interest rate swap agreements to manage its exposure to interest rate risk. The Company's net exposure to interest rate risk primarily consists of an inability to benefit from lower interest rates due to its fixed rate Senior Notes. The following table summarizes the Company's market risks associated with long-term debt and derivative financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash out-flows and related weighted average interest rates by year of maturity. For interest rate derivative instruments, the table presents notional amounts and weighted average interest rates by year of maturity. Fair values used below were determined using quoted market rates or interest rates that are currently available to the Company on debt with similar terms and remaining maturities. INTEREST RATE SENSITIVITY (DOLLARS IN THOUSANDS)
FAIR ` 2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE ---- ---- ---- ---- ---- ---------- ----- ----- LIABILITIES: Fixed rate $232 236 227 232 252 175,592 176,771 143,533 Average interest rate 7.00% 7.00% 7.00% 7.00% 7.00% 9.6% Variable rate 24,860 - - - - 6,000 30,860 30,551 Average interest rate 8.66% - - - - 5.10% INTEREST RATE SWAPS: Fixed to variable - - 30,000 - - - 30,000 (183) Average pay rate - - 4.57% - - - Average receive rate - - 5.20% - - - SWAP OPTIONS: Fixed to variable 20,000 - - - - - 20,000 (99) Average pay rate To be set - - - - - Average receive rate 6.72% - - - - -
EFFECTS OF INFLATION The results of operations and financial condition of Worldtex are based upon historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of estimates required, Worldtex believes the effects on the results of operations and financial condition have been minor. Worldtex will continue to monitor the impact of inflation in setting its pricing and other policies. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements, supplementary financial information and schedule are filed as part of this Report: WORLDTEX, INC. Independent Auditors' Reports Financial Statements: Consolidated Statements of Operations, Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Comprehensive Income (Loss), Years Ended December 31, 1999, 1998 and 1997 Consolidated Balance Sheets, December 31, 1999 and 1998 Consolidated Statements of Stockholders' Equity, Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows, Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Supplementary Financial Information Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts Years Ended December 31, 1999, 1998 and 1997 All schedules not mentioned above are omitted for the reason that they are not required or are not applicable, or the information is included in the Consolidated Financial Statements or the Notes thereto. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of Worldtex, Inc.: We have audited the accompanying consolidated balance sheets of Worldtex, Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for the years then ended. Our audit also included the financial statement schedule for the years ended December 31, 1999 and 1998 listed in the Index at Item 8. 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. The financial statements and financial statement schedule of the Company for the year ended December 31, 1997 were audited by other auditors whose report, dated February 27, 1998, expressed an unqualified opinion on those statements. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 1999 and 1998 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule for the years ended December 31, 1999 and 1998, 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. Deloitte & Touche LLP Hickory, North Carolina March 30, 2000 WORLDTEX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 ________ ________ ________ Net sales (Note 11) $285,787 258,537 203,256 Cost of goods sold (Notes 3 and 15) 243,052 216,267 167,272 -------- ------- ------- Gross profit 42,735 42,270 35,984 Selling and administrative expense (Notes 3 and 16) 28,331 25,599 15,802 Goodwill amortization (Notes 3 and 16) 2,951 4,638 968 -------- ------- ------- Operating profit 11,453 12,033 19,214 Interest expense (Note 3) 19,952 18,765 7,043 Other income (expense) - net (1,476) 340 (302) -------- ------- ------- Income (loss) before income taxes (9,975) (6,392) 11,869 Provision (benefit) for income taxes (Note 11) 170 (494) 5,377 -------- ------- ------- Income (loss) before extraordinary item (10,145) (5,898) 6,492 Extraordinary item, net (Note 6) - - (1,344) ------- ------- ------- Net income (loss) $(10,145) (5,898) 5,148 ========= ======= ======= Basic net income (loss) per share (Note 3): Income (loss) before extraordinary item $ (.71) (.41) .45 Extraordinary item, net - - (.09) -------- ------- ------- Net income (loss) $ (.71) (.41) .36 ======== ======= ======= Diluted net income (loss) per share (Note 3): Income (loss) before extraordinary item $ (.71) (.41) .44 Extraordinary item, net - - (.09) -------- ------- ------- Net income (loss) $ (.71) (.41) .35 ======== ======= ======= Weighted average shares outstanding (Note 3): Basic 14,271 14,368 14,420 ======== ======= ======= Diluted 14,271 14,368 14,821 ======== ======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. WORLDTEX, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - -------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
1999 1998 1997 ________ ________ ________ Net income (loss) $(10,145) (5,898) 5,148 Other comprehensive income (loss): Foreign currency translation adjustments (10,845) 2,704 (12,937) (Note 3) -------- ------- -------- Comprehensive loss $(20,990) (3,194) (7,789) ======== ======= ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WORLDTEX, INC. CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- DECEMBER 31, 1999 AND 1998 (IN THOUSANDS) ASSETS 1999 1998 ______ ______ Current assets: Cash and cash equivalents (Note 3) $5,686 6,715 Accounts and notes receivable, less allowance for doubtful accounts of $6,568 in 1999 and $2,041 in 39,877 42,885 1998 (Notes 4 and 6) Inventories (Notes 3 and 7) 61,817 58,515 Prepaid expenses and other current assets (Note 11) 5,791 3,982 _______ _______ Total current assets 113,171 112,097 Property, plant and equipment - net (Notes 3 and 6) 110,025 113,652 Other assets (Notes 3 and 15) 8,625 12,850 Cost in excess of net assets of acquired businesses, net of accumulated amortization of $11,546 in 1999 and $9,146 in 1998 (Note 3) 82,615 85,521 _______ _______ $314,436 324,120 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings (Note 5) $6,423 7,308 Current installments of long-term debt (Note 6) 25,092 525 Accounts payable-trade and other liabilities (Notes 8 and 10) 33,780 27,995 Income taxes payable (Note 11) 481 1,700 _______ _______ Total current liabilities 65,776 37,528 Long-term debt (Note 6) 182,539 198,246 Other long-term liabilities 3,073 1,986 Deferred income taxes (Note 11) 10,556 12,878 _______ _______ Total liabilities 261,944 250,638 _______ _______ Commitments and contingencies (Notes 8 and 9) Stockholders' equity (Note 7): Preferred stock - - Common stock (shares issued of 14,701 in 1999 and 1998) 147 147 Paid-in capital 30,084 30,084 Retained earnings 46,024 56,169 Accumulated other comprehensive loss: Cumulative foreign translation adjustment (21,414) (10,569) Less - Treasury stock, at cost (430 shares in 1999 and 1998) (2,349) (2,349) Total stockholders' equity 52,492 73,482 _______ _______ $314,436 324,120 _______ _______ _______ _______ SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. WORLDTEX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
CUMULATIVE COMMON FOREIGN STOCK COMMON PAID-IN RETAINED TRANSLATION TREASURY SHARES STOCK CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL ______ ______ _______ ________ ___________ ________ _____ Balances at December 31, 1996 14,670 $ 147 29,946 56,919 (336) (1,498) 85,178 Net income - - - 5,148 - - 5,148 Foreign currency translation adjustment - - - - (12,937) - (12,937) Options exercised 25 - 113 - - - 113 ______ _______ ______ ______ _______ ______ ______ Balances at December 31, 1997 14,695 147 30,059 62,067 (13,273) (1,498) 77,502 Net loss - - - (5,898) - - (5,898) Foreign currency translation adjustment - - - - 2,704 - 2,704 Purchases of treasury stock - - - - - (851) (851) Options exercised 6 - 25 - - - 25 ______ _______ ______ ______ _______ ______ ______ Balances at December 31, 1998 14,701 147 30,084 56,169 (10,569) (2,349) 73,482 Net loss - - - (10,145) - - (10,145) Foreign currency translation - - - - (10,845) - (10,845) adjustment ______ _______ ______ ______ _______ ______ ______ Balances at December 31, 1999 (Notes 6 and 7) 14,701 $ 147 30,084 46,024 (21,414) (2,349) 52,492 ______ _______ ______ ______ _______ ______ ______ ______ _______ ______ ______ _______ ______ ______
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. WORLDTEX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------ FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS) 1999 1998 1997 _________ ________ _________ Cash flows from operating activities: Net income (loss) $(10,145) (5,898) 5,148 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 14,931 11,934 5,877 Amortization 2,951 4,638 968 Provision for losses on accounts 4,830 590 305 receivable Deferred income taxes (2,451) (5,089) 720 Change in assets and liabilities net of effects of acquisitions: Accounts and notes receivable (4,459) 2,729 (1,064) Inventories (6,406) (2,228) (7,396) Prepaid expenses and other current (256) 135 (248) assets Accounts payable - trade and other current liabilities 7,488 392 (4,313) Income taxes payable (981) 1,850 (1,494) ------- ------ ------- Net cash provided by (used in) 5,502 9,053 (1,497) operating activities ------- ------ ------- Cash flows from investing activities: Capital expenditures (17,716) (19,871) (7,706) Acquisitions, net of cash acquired - (12,810) (85,382) Other investing activities (1,928) (2,830) (8,190) -------- -------- --------- Net cash used in investing activities (19,644) (35,511) (101,278) -------- -------- --------- Cash flows from financing activities: Borrowings under line of credit - 9,482 3,548 arrangements Payments under line of credit (55) (3,221) (3,435) arrangements Borrowings under revolving credit 110,960 12,000 109,550 facility Payments under revolving credit (98,100) - (121,940) facility Borrowings under long-term loans - - 175,000 Payments under long-term loans (1,463) - (50,000) Stock issued or (reacquired), net - (825) 113 Other financing activities 2,027 276 1,068 ------ ------ ------- Net cash provided by financing 13,369 17,712 113,904 activities ------ ------ ------- Effects of exchange rate changes on cash (256) 589 1,626 ------- ------ ------ Net increase (decrease) in cash and (1,029) (8,157) 12,755 cash equivalents Cash and cash equivalents at beginning of 6,715 14,872 2,117 year ------ ------ ------ Cash and cash equivalents at end of year $5,686 6,715 14,872 ====== ====== ====== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $19,155 19,667 7,374 ====== ====== ====== Income taxes $3,602 1,920 7,594 ====== ====== ====== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) NOTE 1 - ORGANIZATION AND BUSINESS Worldtex, Inc. ("Worldtex" or the "Company"), a Delaware corporation organized in July 1992, is a holding company engaged through its subsidiaries in the manufacture of covered elastic yarn, which is used to manufacture hosiery products and other apparel items; and narrow elastic fabrics that are used as components in the production of apparel products and elastic bands in women's hosiery. Worldtex's principal markets are in North America, South America and Europe. Worldtex's principal subsidiaries are Regal Manufacturing Company, Inc. ("Regal"), based in Hickory, North Carolina, Rubyco (1987), Inc. ("Rubyco"), based in Montreal, Canada, Filix, s.a. ("Filix"), based in Troyes, France, Fibrexa, Ltda. ("Fibrexa"), based in Bogota, Colombia, and Elastic Corporation of America, Inc. ("ECA"), based in Columbiana, Alabama. During 1999, the Company became a 51% partner in an Indian joint venture. A reference to Worldtex includes its subsidiaries unless the context indicates otherwise. NOTE 2 - BASIS OF PRESENTATION The consolidated financial statements of Worldtex as of December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997 include the accounts of Regal, Rubyco, Filix, Fibrexa, Elastex effective October 3, 1997 and ECA effective December 1, 1997. The Company also has 38% and 51% interests in joint ventures in Estonia and India, respectively, which are accounted for under the equity method. All significant intercompany balances and transactions for all periods are eliminated in the consolidated financial statements. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Cash and Cash Equivalents At December 31, 1998, cash included a demand deposit of $2,596 with a commercial bank earning daily money market investment yields. At December 31, 1998, restricted cash on deposit of $2,247 is included in other assets as security for loans to Fibrexa in Colombia, South America. (b) Inventories Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. As of December 31, 1999 and 1998, the major classes of inventory are: 1999 1998 ---- ---- Raw Materials $17,836 16,032 Work in Process 14,035 14,749 Finished Goods 29,946 27,734 ------ ------- $61,817 58,515 ======= ======= (c) Property, Plant and Equipment Property, plant and equipment are recorded at cost and depreciated primarily using the straight-line method over the following estimated useful lives of the related assets: machinery and equipment (6 to 14 years), structures (20 to 40 years), other equipment (5 to 10 years). Leasehold improvements are amortized over their respective lease terms or their estimated useful lives, if shorter. Repair and maintenance costs are charged to expense as incurred. Renewals and betterments which substantially extend the useful life of an asset are capitalized and depreciated. WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) As of December 31, 1999 and 1998, property, plant and equipment consists of: 1999 1998 ---- ---- Land $ 2,889 3,255 Buildings and leasehold improvements 42,752 39,246 Machinery and equipment 113,180 111,417 -------- -------- $158,821 153,918 Less accumulated depreciation and amortization 48,796 40,266 -------- -------- $110,025 113,652 ======== ======= (d) Cost in Excess of Net Assets of Acquired Businesses The cost in excess of net assets of acquired businesses is amortized using the straight-line method over the expected periods to be benefited, generally 40 years. The Company assesses the recoverability of these intangible assets by determining whether the amortization of the cost in excess of net assets of acquired businesses over their remaining lives can be recovered through the undiscounted future operating cash flows of the acquired business. The assessment of the recoverability of goodwill will be impacted if estimated future cash flows are not achieved. (e) Forward Exchange Contracts The Company enters into forward exchange contracts as a hedge against accounts payable denominated in foreign currency. These contracts are used to minimize exposure and reduce risk from exchange rate fluctuations in the regular course of its foreign business. Gains and losses on forward contracts, which are not material, are deferred and included in the measurement of the related foreign currency transactions. The impact of forward contracts on cash flows is reflected in the change in accounts payable-trade and other liabilities. As of December 31, 1998, $400 in contracts was outstanding. (f) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for tax purposes and financial statement purposes and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income (deductions) 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 change. No provision is made for income taxes which may be payable if undistributed earnings of foreign subsidiaries were to be paid as dividends to Worldtex. The foreign currency translation adjustment shown on the consolidated statements of comprehensive income (loss) is not shown net of tax. Worldtex intends that such earnings will continue to be invested in those countries. At December 31, 1999, the cumulative amount of foreign undistributed earnings amounted to $56,984. Foreign tax credits may be available as a reduction of United States income taxes in the event of such distributions. (g) Foreign Currency Assets and liabilities denominated in foreign currencies have been translated into U. S. dollars at the period-end exchange rate. Revenues and expenses denominated in foreign currencies have been translated into U.S. dollars at the weighted average exchange rate. Translation gains and losses are accounted for in a separate component of stockholders' equity. The exchange gains and losses arising on transactions are charged to income as incurred. Net foreign currency losses charged to income for the years 1999, 1998 and 1997 were $1,860, $380 and $526, respectively. (h) Net Income per Share Basic earnings per share are calculated based upon the weighted average number of common shares outstanding during the year. Diluted earnings per share are based upon the weighted average number of common shares and dilutive common WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) equivalent shares outstanding during the year. The reconciliation of income available to common stockholders and weighted average number of common shares for basic and diluted per share amounts are as follows: 1999 1998 1997 ---- ---- ---- Diluted net income (loss) $(10,145) (5,898) 5,148 ======== ====== ===== Basic weighted average common shares outstanding 14,271 14,368 14,420 Effect of dilutive options outstanding - - 401 -------- ------- ------ Diluted weighted average common and common equivalent shares outstanding 14,271 14,368 14,821 ======== ======= ====== Potentially dilutive shares not included because their effect was antidilutive 1,760 1,814 80 ======== ======= ====== (i) Revenue Recognition Revenue from sales is recognized when goods are shipped to the customer, at which point the risk of loss has passed to the customer. The Company provides allowances for bad debts based upon periodic evaluations of the aging of the accounts receivable and related claims experience. (j) Interest Rate Swap Agreements The Company terminated an interest rate swap agreement in 1998. During 1999, the Company entered into new interest rate swap and swap option agreements. Interest swap and swap option agreements are accounted for like a hedge of the underlying debt obligation and interest expense is recorded using the revised interest rate, with fees and other payments amortized as yield adjustments. (k) Stock Options The Company accounts for its stock option plan using the intrinsic value based method. (l) 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 period. Actual results could differ from those estimates. (p) Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not impact net income as previously reported. (n) New Accounting Standards In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities was issued. SFAS No. 133 establishes accounting and reporting standards for derivative financial instruments embedded in other contracts (collectively referred to as embedded derivatives) and for hedging activities. The new standard requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 was amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date for FASB Statement No. 133, which delays the Company's effective date until the first quarter of the year ending December 31, 2001. Management is currently evaluating the effects of SFAS No. 133 on the Company's financial statements and current disclosures. (o) Capitalization of Interest The Company capitalizes interest expense associated with construction of certain assets. In 1999 and 1998, interest of $722 and $379, respectively, was capitalized. WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (p) Advertising and Sales Promotion Costs Advertising and sales promotion costs are expensed as incurred and totaled $276, $417 and $115 in 1999, 1998 and 1997, respectively. NOTE 4 - NOTES RECEIVABLE Foreign subsidiaries have the U.S. dollar equivalent of $942 and $2,845 of non-interest bearing notes receivable as of December 31, 1999 and 1998, respectively, with maturities within four months of those dates. NOTE 5 - SHORT-TERM BORROWINGS Short-term debt consists of notes payable to banks, advances under bank lines of credit and overdraft facilities. The Company's foreign subsidiaries have available the U.S. dollar equivalent of $20,286 under various bank lines of credit and overdraft facilities providing for unsecured borrowings and letter of credit financing generally due in 90 to 180 days. At December 31, 1999 and 1998, $6,423 and $7,308, respectively, were outstanding under these foreign agreements at average interest rates of 8.7% and 5.25% respectively. NOTE 6 - LONG-TERM DEBT As of December 31, 1999 and 1998, long-term debt consists of: 1999 1998 -------- -------- 9.625% Senior Notes due December 15, 2007 $175,000 175,000 Industrial revenue bonds due June 1, 2014 with interest at variable rates (5.1% average rate as of December 31, 1999) 6,000 6,000 Revolving credit facilities due December 1, 2002 with interest at variable rates (8.66% weighted average rate as of December 31, 1999) 24,860 12,000 Other indebtedness, primarily fixed rate debt, due at various dates through 2007 1,771 5,771 ------- ------- 207,631 198,771 Less current installments 25,092 525 ------- ------- $182,539 198,246 ======== ======= The aggregate annual maturities of long-term debt during each of the five years subsequent to December 31, 1999 are as follows: YEAR ENDING DECEMBER 31, AMOUNT ------------ ---------- 2000 $25,092 2001 236 2002 227 2003 232 2004 252 Thereafter 181,592 -------- $207,631 ======== The Company entered into an indenture dated December 1, 1997, under which a total of $175,000 of Senior Notes due December 15, 2007 were issued with interest at the annual rate of 9.625%. The notes are unconditionally guaranteed by each of the U.S. subsidiaries of the Company. The Company may redeem the notes on or after December 15, 2002, at redemption prices ranging from 104.813% in 2002 to 100% in 2005. Up to 35% of the aggregate principal amount of notes WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) originally issued may be redeemed at a price of 109.625% with the net proceeds of a public offering of common stock at any time on or before December 15, 2000. The indenture restricts the ability of the Company and its subsidiaries to incur additional indebtedness and issue preferred stock, enter into sale and leaseback transactions, incur liens, pay dividends or make certain other restricted payments, apply net proceeds from certain asset sales, enter into certain transactions with affiliates, and assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company. At December 31, 1999, Worldtex was in compliance with the various covenants. Upon the issuance of the notes, the Company repaid certain existing indebtedness. An extraordinary charge of $1,344, net of a tax benefit of $693, was recorded for the early debt extinguishment. In addition, during 1998, the Company cancelled an interest rate swap agreement relating to indebtedness repaid by the issuance of the notes and received a settlement of $286. The Company has interest rate swap agreements and swap option agreements with a commercial bank that effectively converted a portion of its fixed rate debt to a floating rate for a period of up to three years with the floating rate reset every six months. Under these agreements, the Company receives a weighted average fixed rate of 5.2% at December 31, 1999 and pays a floating rate based on LIBOR or based on a rate indexed to selected foreign currency denominated indices, resulting in a weighted average floating rate of 4.6% at December 31, 1999. Notional principal amounts of $30,000 in swap agreements and $20,000 in swap option agreements were outstanding at December 31, 1999. Net amounts received under these agreements decreased interest expense for 1999 by $70. The estimated amount the Company would have to pay to terminate these agreements was approximately $282 at December 31, 1999. Certain property and equipment collateralize the industrial revenue bonds, which are also secured by an annually renewable letter of credit. The Company has a domestic credit facility that provides for revolving credit borrowings in an aggregate principal amount of up to $25,000. The domestic credit facility terminates and all amounts borrowed thereunder will be due December 1, 2002. Loans under the domestic credit facility bear interest at variable rates based upon a base rate (the higher of the prime rate or the Federal Funds rate), certificate of deposit rates or Eurodollar rates, in each case plus an applicable margin. Loans are guaranteed by all U.S. subsidiaries of the Company and are required to be secured by liens on the accounts receivable and inventory of the Company and its U.S. subsidiaries, 100% of the outstanding capital stock of the Company's U.S. subsidiaries and 65% of the outstanding capital stock of each of the foreign subsidiaries. The domestic credit facility carries a commitment fee of .50% of the unused available borrowings. The domestic credit facility contains customary covenants and restrictions on the Company's ability to engage in certain activities. In addition, the domestic credit facility provides that the Company must meet certain financial covenants, including a minimum consolidated current ratio, a maximum leverage ratio and a minimum interest coverage ratio. In addition, the domestic credit facility restricts the payment of dividends. At December 31, 1999, Worldtex was not in compliance with financial covenants relating to the leverage ratio, interest coverage ratio, current ratio, minimum tangible net worth and limitations on capital expenditures of the domestic credit facility. The Company obtained a waiver of these covenants and an amendment to the domestic credit facility through June 30, 2000. The Company is currently negotiating to refinance its domestic credit facility and expects to complete this process during the first half of 2000. Accordingly, the $24,860 outstanding balance on the domestic credit facility has been classified as current installments of long-term debt as of December 31, 1999. Under the most restrictive of these debt agreements, no amounts were available for the payment of dividends and other distributions as of December 31, 1999. NOTE 7 - STOCKHOLDERS' EQUITY Worldtex is authorized to issue up to 40,000,000 shares of common stock, $.01 par value, and 10,000,000 shares of preferred stock, $.01 par value. As of December 31, 1999 and 1998, there were issued 14,700,971 and outstanding 14,271,171 shares of common stock and no shares of preferred stock. Worldtex has a current authorization to repurchase up to 1,000,000 shares of its common stock although no amount was available for such repurchases at December 31, 1999, under restrictive covenants in Worldtex's debt agreements. Through December 1999, 429,800 shares had been purchased and are carried at cost as Treasury Stock. WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Preferred stock is issuable in one or more series with dividend rates, liquidation preferences and redemption, conversion and voting rights as may be determined by Worldtex's Board of Directors. In connection with Worldtex's formation in 1992, each shareholder received, in addition to one share of Worldtex common stock, one share purchase right for each outstanding share of the former parent's common stock. Each right entitles the registered holder to purchase from Worldtex a unit ("Unit") consisting of one one-hundredth of a share of preferred stock of Worldtex, at a price of $30 per Unit. The share purchase rights are not exercisable or transferable apart from Worldtex common stock until the earlier to occur of 1) the tenth day following a public announcement that a person or group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding Worldtex common stock (an "Acquiring Person"), or 2) the tenth business day following the commencement of a tender offer or exchange offer if, upon consummation thereof, any person or group would be an Acquiring Person. The share purchase rights will expire at the close of business on December 31, 2002, unless earlier redeemed or exchanged by Worldtex. Certain investment managers made filings with the Securities and Exchange Commission on February 28, 2000 stating they were the beneficial owners of approximately 34% of the outstanding shares of Worldtex common stock. The share purchase rights attached to the outstanding Worldtex common stock provide that they would trade separately from such stock and become exercisable the tenth day following public announcement that beneficial ownership of 20% or more of the outstanding Worldtex common stock had been acquired. The Board of Directors subsequently extended the shareholder rights 10-day period on several occasions. On March 27, 2000, Worldtex entered into a Standstill Agreement with such investment managers and certain related persons. Pursuant to the Standstill Agreement, Worldtex amended the share purchase rights plan to prevent the share purchase rights from trading separately or becoming exercisable as a result of such announced beneficial ownership, unless the Board of Directors of Worldtex WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) determines that there has been a breach of the Standstill Agreement by any of such other parties. Under the terms of the Worldtex 1992 Stock Incentive Plan, as amended by the stockholders in May 1998, options to purchase up to 2,100,000 shares of common stock may be awarded to officers and employees. Options granted under the plan may be for such terms and exercised at such times as determined at the time of grant by the Compensation Committee of the Board of Directors. In addition, the Plan provides that each outside director will be granted a one-time option to purchase 10,000 shares of common stock of the Company. As of December 31, 1999, 37,600 had been exercised and 302,000 shares were reserved for future awards under the plan. The 1992 Stock Incentive Plan also includes provisions for the granting of stock appreciation rights, restricted stock, deferred stock, employee loans and tax offset payments. At December 31, 1999, no such grants had been issued, except for limited stock appreciation rights applicable if there is a change of control (as defined) of the Company. The following table summarizes stock option activity during each of the last three years: WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE ----------- ---------- Balances at December 31, 1996 1,315,800 $5.44 Options Granted 80,000 $8.26 Options Exercised ( 25,400) $4.43 Options Cancelled ( 3,000) $6.44 --------- Balances at December 31, 1997 1,367,400 $5.53 Options Granted 444,100 $3.38 Options Exercised ( 6,000) $4.19 Options Cancelled ( 1,000) $6.75 --------- Balances at December 31, 1998 1,804,500 $5.07 Options Granted 325,000 $3.20 Options Cancelled ( 369,100) $6.15 --------- Balances at December 31, 1999 1,760,400 $4.50 ========= WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Options Exercisable: December 31, 1997 891,680 $5.76 December 31, 1998 1,040,940 $5.65 December 31, 1999 1,760,400 $4.50 Weighted average fair value of options granted: December 31, 1997 $3.79 December 31, 1998 $1.98 December 31, 1999 $1.94 Options outstanding and exercisable at December 31, 1999: WEIGHTED AVERAGE WEIGHTED RANGE OF NUMBER REMAINING AVERAGE EXERCISE OF CONTRACTUAL EXERCISE PRICES SHARES LIFE PRICE -------- ------ ----------- -------- $2.81 - $4.75 1,270,900 7.3 yrs $ 3.76 $6.00 - $6.75 489,500 3.0 yrs $ 6.43 The Company accounts for stock options using the intrinsic value based method and, accordingly, recognizes compensation expense to the extent the quoted market price of the stock exceeds the amount the employee is required to pay as of the date of grant of the option. The acquisition of beneficial ownership of approximately 34% of the Worldtex common stock by certain investment managers as described above was deemed to be a "change in control event" under such options. Consequently, all outstanding stock options became fully vested and exercisable. Had compensation cost for the Company's stock option plan been determined using the fair value based method, the Company's net income (loss) and net income (loss) per share would be as follows: WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1999 1998 1997 --------- -------- -------- Net income (loss) as reported $(10,145) (5,898) 5,148 Pro forma net income (loss) (10,782) (6,019) 5,046 Diluted net income (loss) per share as reported (.71) (.41) .35 Pro forma net income (loss) per share (.76) (.42) .35 The fair value of each option grant is established on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997: dividend yield of 0%; expected volatility of 39%, 36% and 33%; risk-free interest rates of 5.5% and expected lives of eight years. NOTE 8 - EMPLOYEE BENEFIT PLANS The Worldtex, Inc. Profit Sharing and Retirement Savings Plan (the "Plan") provides for discretionary profit sharing contributions, elective deferrals pursuant to Internal Revenue Code Section 401(k), and discretionary matching contributions for employees of the Company and its participating subsidiaries. All Company contributions vest at the rate of 20% after two years, 40% after three years, 60% after four years and 100% after five years. Employees participating in the Plan have an opportunity to purchase various investment funds, including Company stock, through payroll deductions. The Company determines, on a prospective basis, the extent to which these employee contributions are matched by Worldtex. In 1998, Worldtex instituted a matching program at the rate of one-third of the employee contribution up to a maximum employee contribution of 6% of salary. Matching contributions to the Plan were $270, $187 and $0 in 1999, 1998 and 1997 respectively. The Plan also permits the Company to decide each year whether to make a profit sharing contribution and the amount of each such contribution. No discretionary WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) profit sharing contributions were made in 1999 and 1998. The Company made profit sharing contributions of $89 for the year ended December 31, 1997. Employee 401(k) and Company matching contributions are invested as directed by the employee from a menu of funds available under the Plan. Profit sharing contributions are invested as directed by the Plan's investment committee. Certain contributions made to the Plan in prior years are required to be invested in Company stock. Employees of Rubyco participate in a Registered Retirement Savings plan. The plan provides for employee contributions of 4% of salary to a maximum of $2.3 per employee with corresponding contributions by Rubyco of 5% of salary to a maximum of $2.3 per employee. Contributions for the years ended December 31, 1999, 1998 and 1997 were $19, $20 and $23 respectively. Filix is legally obligated to contribute to an employee profit-sharing plan whereby annual contributions are determined on the basis of a prescribed formula using capitalization, salaries and certain revenues. Amounts are paid into a bank trust fund the year following the contribution calculation. Contributions for the years ended December 31, 1999, 1998 and 1997 were $447, $590 and $720 respectively. Under the terms of an industry-wide labor agreement, Filix employees participate in an unfunded plan which provides for a lump-sum payment at normal retirement age of up to four months salary depending on their number of years of service. Such amounts are payable only if the employee remains with Filix until retirement. The Company's accumulated benefit obligation for this plan was $195 and $212 at December 31, 1999 and 1998, respectively, with a projected benefit obligation of $210 and $228. The projected obligation at December 31, 1999 and 1998 was determined using an assumed discount rate of 7.25% and an assumed long-term rate of increase in compensation of 3%. The Company's net periodic pension cost for this plan was $23, $22 and $21 in 1999, 1998 and 1997 respectively. Worldtex also has unfunded supplemental plans for certain senior executives. The accrued liability at December 31, 1999 and 1998 was $2,979 and $2,365. The Company accrued $818, $878 and $200 for the years ended December 31, 1999, 1998 and 1997 respectively for benefits under this plan. NOTE 9 - COMMITMENTS AND CONTINGENCIES Future minimum lease payments under non-cancelable operating leases, primarily for real property, as of December 31, 1999 are: 2000 $2,325 2001 1,994 2002 1,372 2003 1,041 2004 170 ------ Total $6,902 ====== WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Rental expense for cancelable and non-cancelable operating leases charged to operations for the years ended December 31, 1999, 1998 and 1997 was $2,327, $2,100 and $1,134 respectively. In the normal course of business, Worldtex and its subsidiaries may sometimes be named as a defendant in litigation. In the opinion of management, based upon the advice of counsel, any uninsured liability which may result from the resolution of any present litigation or asserted claim will not have a material effect on Worldtex's operations, financial position or liquidity. NOTE 10 - ACCOUNTS PAYABLE -TRADE AND OTHER LIABILITIES Accounts payable - trade and other liabilities consist of the following as of December 31, 1999 and 1998: 1999 1998 ---- ---- Accounts and other payables - trade $25,062 17,621 Salaries, wages and other compensation 2,689 4,306 Pensions, profit sharing and employee benefits 1,662 2,006 WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1999 1998 ---- ---- Taxes, other than income taxes 650 1,162 Interest 1,034 1,145 Other 2,683 1,755 ------- ------- Total $33,780 27,995 ======= ======= NOTE 11 - INCOME TAXES The provisions (benefit) for income taxes for the years ended December 31, 1999, 1998 and 1997 are as follows: U. S. U.S. STATE FEDERAL FOREIGN & LOCAL TOTAL ------- ------- ---------- ----- 1999 - ---- Current $ 0 2,276 65 2,341 Deferred (1,650) (91) (430) (2,171) -------- ------ ----- ------- Total $(1,650) 2,185 (365) 170 ======== ====== ===== ======= 1998 - ---- Current $ 0 3,892 (55) 3,837 Deferred (3,954) (266) (111) (4,331) -------- ------ ------ ------- Total $(3,954) 3,626 (166) (494) ======== ====== ====== ====== 1997 - ---- Current $(310) 4,335 (55) 3,970 Deferred (275) 1,794 (112) 1,407 ------ ------ ------ ----- Total $(585) 6,129 (167) 5,377 ====== ====== ====== ===== Income (loss) before income taxes for the years ended December 31, 1999, 1998 and 1997 is comprised as follows: 1999 1998 1997 ---- ---- ---- U.S $(18,012) (12,760) (2,245) Foreign 8,037 6,368 14,114 --------- -------- ------ $ (9,975) (6,392) 11,869 ======== ======== ====== A reconciliation for the years ended December 31, 1999, 1998 and 1997 between the amount computed using the U. S. Federal income tax rate and the effective rate of tax on book income is as follows: WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1999 1998 1997 ---- ---- ---- Statutory U.S. Federal income tax rate (34.0)% (34.0)% 34.0% Effect of increase (decrease) in French tax rate on deferred taxes (4.2) - 9.7 Effect of higher foreign tax rates on current taxes 3.7 12.8 7.1 Effect of foreign inflation adjustments (6.1) (5.2) (7.8) Amortization of goodwill 2.3 16.1 2.2 Valuation allowance 41.5 - - Other, net (1.5) 2.6 .1 ----- ---- ---- Effective rate of tax on book income/loss 1.7% (7.7)% 45.3% ===== ===== ==== There was a $4,135 valuation allowance established in 1999 for deferred tax assets due to uncertainty as to the future benefit of domestic federal net operating loss carryforwards. There was also a valuation allowance for certain state net operating loss carryforwards of $1,635 and $894 for the years ended December 31, 1999 and 1998, respectively. At December 31, 1999, the Company had U.S. Federal and state net operating loss carryforwards aggregating $33,578 and $33,133, respectively, which expire at various dates through 2019. In October 1997, France increased the tax rate from 36.67% to 41.67%. The rate increase resulted in a $1,156 charge in 1997 to the income tax provision to increase the deferred tax liability as of January 1, 1997 to the higher enacted income tax rate. During 1999, France decreased the tax rate from 41.67% to 40% resulting in a $417 reduction to the 1999 income tax provision to decrease the deferred tax liability as of January 1, 1999. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1999 and 1998 are as follows: WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1999 1998 ---- ---- Deferred tax assets: Inventories $1,125 936 Employee benefits 1,401 1,294 Allowance for doubtful accounts 2,064 467 Net operating loss carryforwards 7,103 7,153 ------ ------ 11,693 9,850 ------ ----- 1999 1998 ---- ---- Deferred tax liabilities: Property, plant and equipment (15,270 (17,932) Goodwill amortization (1,645) (1,323) Imputed interest (744) (775) Other (455) (280) -------- -------- (18,114) (20,310) -------- -------- Net deferred income taxes $ (6,421) (10,460) ======== ======== Deferred taxes are classified in the accompanying Consolidated Balance Sheets captions as follows: ASSET (LIABILITY) --------------------- 1999 1998 ---- ---- Prepaid expenses and current assets $ 4,135 2,418 Deferred income taxes (10,556) (12,878) ------- -------- $(6,421) (10,460) ======= ======== NOTE 12 - OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION The Company's operations are conducted within two product lines, the manufacturing and sale of covered elastic yarns and of woven and knitted narrow elastic fabrics. The Company has aggregated these product lines for reporting purposes due to their similar economic characteristics, production processes, customers and distribution methods. External sales by product line are as follows: 1999 1998 1997 ---- ---- ---- Covered elastic yarn $167,596 178,768 194,386 Narrow elastic fabric 118,191 79,769 8,870 -------- ------- ------- $285,787 258,537 203,256 ======== ======= ======= External sales and net long-lived assets by geographic area are as follows: WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1999 1998 1997 ---- ---- ---- UNITED STATES Net sales $192,652 146,684 73,843 Net long-lived 134,603 138,791 122,803 assets CANADA Net sales 17,052 20,968 24,295 Net long-lived 1,199 1,570 6,025 assets FRANCE Net sales 64,626 79,472 92,417 Net long-lived 44,861 53,096 49,673 assets COLOMBIA Net sales 11,457 11,413 12,701 Net long-lived 20,602 18,566 15,520 assets In 1999, Fruit of the Loom accounted for 16.8% of consolidated net sales. In 1999, no other customer, and in 1998 and 1997, no customer, represented over 10% of consolidated net sales. NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values are determined as follows: (a) Cash, Accounts and Notes Receivable and Accounts and Notes Payable The carrying amount approximates fair value because of the short maturity of these instruments. (b) Long-Term Debt The fair values of each of the Company's long-term debt instruments are based on quoted market rates or the amount of future cash flows associated with each instrument discounted using the Company's current borrowing rate for similar debt instruments of comparable maturity. The estimated fair values of the Company's long-term debt instruments are: WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) DECEMBER 31, 1999 ----------------- CARRYING ESTIMATED AMOUNT FAIR VALUE ------ ---------- 9.625% Senior Notes $175,000 141,750 Revolving credit facilities 24,860 24,860 Other indebtedness 7,771 7,474 -------- ------- Total $207,631 174,084 ======== ======= DECEMBER 31, 1998 ----------------- CARRYING ESTIMATED AMOUNT FAIR VALUE ------ ---------- 9.625% Senior Notes $175,000 155,750 Revolving credit facilities 12,000 12,000 Other indebtedness 11,771 11,825 -------- ------- Total $198,771 179,575 ======== ======= (c) Forward Exchange Contracts The forward exchange contracts described in Note 3 (e) are relatively simple, short-term instruments in which future exchange rates are locked in for a fee. Due to the short-term nature of the foreign exchange contracts, management believes that the fair value, if any, is not significant. (d) Interest Rate Swap Agreement The Company has an aggregate of $50,000 interest rate swap and swap option agreements with a fair value of $(282) as of December 31, 1999. (e) Limitations of Estimates Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. NOTE 14 - ACQUISITIONS On October 3, 1997, the Company purchased substantially all of the assets of Elastex for approximately $8,400 in cash. On December 1, 1997, the Company WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) purchased substantially all of the assets of ECA for approximately $76,300 in cash and the assumption of $6,000 in long term debt. The net proceeds from the sale of the $175,000 senior notes were used to fund the acquisition of ECA and to reduce outstanding indebtedness incurred to finance the acquisition of Elastex. The excess of cost over fair value of net assets acquired was approximately $53,161 for ECA and approximately $3,949 for Elastex and is being amortized using the straight-line method over 40 years. ECA acquired substantially all of a narrow elastic fabric manufacturing facility of Fruit of the Loom on December 30, 1998, for approximately $12,500. The excess of cost over fair value of net assets acquired of approximately $3,836 are being amortized using the straight-line method over periods of 5 to 10 years. The acquisitions were accounted for as purchases and, accordingly, the results of operations have been included in the Company's consolidated financial statements from the date of acquisition. Additionally, during 1999, the Company entered into a 51% joint venture in India. NOTE 15 - RELATED PARTY TRANSACTIONS In 1999, 1998 and 1997, other assets include a $600 non-interest bearing note receivable due in the year 2002 from a senior executive NOTE 16 - SIGNIFICANT FOURTH QUARTER CHARGES During the fourth quarter of 1999, the Company initiated a consolidation plan to reduce conventional covered yarn production in the United States. One of three manufacturing facilities located in Hickory, North Carolina will be closed during the first half of 2000, with its operations moved into the remaining facilities. The Company recorded a one-time charge of $2,813 as of December 31, 1999 for the consolidation. This charge, recorded in cost of sales, covers provisions for real estate and manufacturing equipment that will be taken out of service, as well as certain inventory provisions. In addition, the Company recorded in selling, general and administrative expenses reserves of $4,000 for accounts receivable owed by Fruit of the Loom as of December 31, 1999, one-time WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) charges for Canadian severance relating to the 1998 restructuring of $404, and certain retirement benefit costs of $506. During the fourth quarter of 1998, the Company recorded charges of $7,843 which included a $4,376 restructuring provision for discontinuing the Company's conventional covered yarn production in Montreal, Quebec, $1,940 related primarily to asset provisions for underutilized equipment in the United States and $1,527 related to the retirement of the Company's former chairman and chief financial officer. The charges included $3,814 recorded in cost of goods sold, $1,707 recorded as selling and administrative expenses and $2,322 recorded as a goodwill writedown. The Company transferred its production of conventional covered elastic yarn previously manufactured in Montreal, Quebec to existing operations in the United States and Colombia, South America. NOTE 17 - SUBSEQUENT EVENT On February 28, 2000, a Schedule 13D report was filed with the Securities and Exchange Commission stating that certain investment managers affiliated with EGS Partners, L.L.C. (the "EGS Persons") were the beneficial owners of approximately 34% of the outstanding shares of Worldtex common stock. The filing states that the Worldtex shares were acquired for investment. As a consequence of the filing of such report, the "poison pill" shareholder rights attached to the outstanding Worldtex common stock were required to trade separately from such stock and become exercisable after 10 days, unless otherwise provided by the Worldtex Board of Directors. The Board of Directors subsequently extended the initial 10-day period on several occasions in order to permit discussions with the EGS Persons. On March 27, 2000, Worldtex entered into a Standstill Agreement (the "Standstill Agreement") with the EGS Persons and certain related entities (collectively, the "EGS Parties"). Pursuant to the Standstill Agreement, Worldtex amended its "poison pill" shareholder rights plan to prevent the rights from trading separately or becoming exercisable as a result of the announced beneficial ownership by the EGS Parties, unless the Board of Directors of Worldtex determines that there has been a breach by an EGS Party of the Standstill Agreement. Under the Standstill Agreement, the EGS Parties agreed, among other things, not to (i) acquire additional shares of Worldtex common stock, (ii) encourage other persons to acquire Worldtex common stock, (iii) submit or encourage a proposal for the acquisition of Worldtex, (iv) make any solicitation of proxies for Worldtex common stock, (v) sell any Worldtex common stock, except sales of not more than 5% of the outstanding shares in any 90 day period so long as the buyer is not and will not thereby become the beneficial owner of 5% or more of the Worldtex common stock or (vi) submit any shareholder proposal. In addition, each EGS Party agreed to vote the Worldtex common stock beneficially owned by it, at its option, (i) in the manner recommended by the Worldtex Board of Directors or (ii) in the same proportion as the votes of other holders of Worldtex common stock. The EGS Parties also agreed to make payments to Worldtex aggregating $800, in reimbursement of certain expenses. The term of the Standstill Agreement is ten years. Also as a result of such acquisition of Worldtex common stock by the EGS Persons, all outstanding stock options granted under the 1992 Stock Incentive Plan of Worldtex became vested. In addition, Barry D. Setzer, Chairman of the Board, President and Chief Executive Officer of Worldtex, and Marty R. Kittrell, Senior Vice President and Chief Financial Officer of Worldtex, each has asserted that, under the terms of his employment agreement with Worldtex, he is entitled to terminate his employment and receive payment of 2.99 times his "base salary" (as defined). If both officers were entitled to exercise such right, Worldtex would be obligated to make severance payments of approximately $2,100. The Worldtex Board of Directors has taken the position that such officers are not entitled to exercise such right. However, the Board of Directors has entered into negotiations with such officers seeking to settle the matter amicably. The departure from Worldtex of these senior managers could have a material adverse effect on Worldtex. WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) NOTE 18 - SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION The $175,000 Senior Notes are guaranteed by each of the U.S. subsidiaries of the Company. The guarantor subsidiaries are wholly owned subsidiaries of the Company and the guarantees are full, unconditional and joint and several. There are no restrictions on the ability of the guarantor subsidiaries to make distributions to the Company, except those generally applicable under relevant corporation laws. Separate financial statements of each guarantor subsidiary have not been presented because management has determined that they are not material to investors. The following pages include summarized consolidating financial information for the Company, segregating the parent, the guarantor subsidiaries and the nonguarantor subsidiaries. WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Consolidating Statements of Operations Year Ended December 31, 1999
GUARANTOR NON-GUARANTOR DOMESTIC FOREIGN WORLDTEX, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------- ------------ ------------ ------------ ------------ Net sales $ - 197,512 109,662 (21,387) 285,787 Cost of goods sold - 175,409 88,595 (20,952) 243,052 ------ ------- ------ -------- ------- Gross profit - 22,103 21,067 (435) 42,735 Selling and administrative expense 4,080 18,559 8,599 44 31,282 ------- ------ ------ ------ ------ Operating profit (loss) (4,080) 3,544 12,468 (479) 11,453 Interest expense 18,475 432 1,045 - 19,952 Intercompany interest expense (income) (10,280) 9,454 826 - - Intercompany administrative charges (2,862) 1,860 1,002 - - Other income (expense) - net (289) 429 (1,616) - (1,476) -------- ------- ------- ------ ------- Income (loss) before income taxes (9,702) (7,773) 7,979 (479) (9,975) Provision (benefit) for income taxes (283) (1,852) 2,305 - 170 Undistributed loss of subsidiaries (247) 5,674 - (5,427) - -------- ------- ------ ------- -------- Net income (loss) $(9,666) (247) 5,674 (5,906) (10,145) ======== ======= ====== ======= =========
WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Consolidating Statements of Operations Year Ended December 31, 1998
GUARANTOR NON-GUARANTOR DOMESTIC FOREIGN WORLDTEX, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------- ------------ ------------ ------------ ------------ Net sales $ - 151,775 123,154 (16,392) 258,537 Cost of goods sold - 131,534 101,125 (16,392) 216,267 ------- ------- ------- -------- ------- Gross profit - 20,241 22,029 - 42,270 Selling and administrative 5,627 12,574 12,036 - 30,237 ------ ------ ------ ------ ------ expense Operating profit (loss) (5,627) 7,667 9,993 - 12,033 Interest expense 17,120 586 1,059 - 18,765 Intercompany interest expense (income) (9,467) 8,183 1,284 - - Intercompany administrative charges (2,896) 1,894 1,002 - - Other income (expense) - net 557 63 (280) - 340 ------ ------ ------ ------ ------ Income (loss) before income taxes (9,827) (2,933) 6,368 - (6,392) Provision (benefit) for income taxes (3,307) (813) 3,626 - (494) Undistributed earnings of subsidiaries 622 2,742 - (3,364) - ------ ------ ------ ------- ------ Net income (loss) $(5,898) 622 2,742 (3,364) (5,898) ======== ====== ====== ======= =======
WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Consolidating Statements of Operations Year Ended December 31, 1997
GUARANTOR NON-GUARANTOR DOMESTIC FOREIGN WORLDTEX, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------- ------------ ------------ ------------ ------------ Net sales $ - 77,893 138,892 (13,529) 203,256 Cost of goods sold - 69,413 111,388 (13,529) 167,272 ------ ------ ------- -------- ------- Gross profit - 8,480 27,504 - 35,984 Selling and administrative expense 2,572 4,270 9,928 - 16,770 ------ ------ ------ ------ ------ Operating profit (loss) (2,572) 4,210 17,576 - 19,214 Interest expense 5,962 247 834 - 7,043 Intercompany interest expense (income) (2,535) 844 1,691 - - Intercompany administrative charges (2,435) 1,948 487 - - Other income (expense) - net 87 61 (450) - (302) ------ ------ ------ ------ ------ Income (loss) before income taxes (3,477) 1,232 14,114 - 11,869 Provision (benefit) for income taxes (1,083) 331 6,129 - 5,377 Undistributed earnings of subsidiaries 8,886 7,985 - (16,871) - ------ ------ ------ ------- ------ Net income before extraordinary Item 6,492 8,886 7,985 (16,871) 6,492 Extraordinary item 1,344 - - - 1,344 ------ ------ ------ ------ ------ Net income $5,148 8,886 7,985 (16,871) 5,148 ====== ====== ====== ======== ======
WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Consolidating Balance Sheets December 31, 1999
GUARANTOR NON-GUARANTOR DOMESTIC FOREIGN WORLDTEX, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------- ------------ ------------ ------------ ------------ Current assets Cash and cash equivalents $1,769 (1,769) 5,686 - 5,686 Accounts and notes receivable, net 315 18,173 21,389 - 39,877 Inventories - 40,719 21,535 (437) 61,817 Prepaid expenses and other current assets 4,200 666 925 - 5,791 ------ ------ ------ ------ ------ Total current assets 6,284 57,789 49,535 (437) 113,171 Property, plant and equipment, net 5,160 57,366 47,540 (41) 110,025 Other assets 7,499 312 814 - 8,625 Cost in excess of net assets of acquired businesses, net - 64,364 18,251 - 82,615 Intercompany investments 107,038 95,177 - (202,215) - Intercompany advances 154,811 - - (154,811) - ------- ------ ------ --------- ------ $280,792 275,008 116,140 (357,504) 314,436 ======== ======= ======= ========= ======= Liabilities and Stockholders' equity Current liabilities Short-term borrowings $ - - 6,423 - 6,423 Current installments of long-term debt 24,860 - 232 - 25,092 Accounts payable-trade and 8,246 10,393 15,141 - 33,780 other liabilities Income taxes payable 1,230 (1,431) 682 - 481 ------ ------- ------ ------ ------ Total current liabilities 34,336 8,962 22,478 - 65,776 Long-term debt 175,000 6,000 1,539 - 182,539 Other long-term liabilities 2,550 - 523 - 3,073 Deferred income taxes (5,479) 6,155 9,880 - 10,556 Intercompany payables - 146,854 7,957 (154,811) - ------ ------- ------ --------- ------ Total liabilities 206,407 167,971 42,377 (154,811) 261,944 ------- ------- ------ --------- ------- Stockholders' equity Common stock 147 - 37,720 (37,720) 147 Paid-in capital 30,084 38,793 - (38,793) 30,084 Retained earnings 46,503 68,244 57,457 (126,180) 46,024 Accumulated other - - (21,414) - (21,414) comprehensive loss Less-Treasury stock, at cost (2,349) - - - (2,349) -------- ------ ------ -------- ------- Total stockholders' equity 74,385 107,037 73,763 (202,693) 52,492 -------- ------- ------ --------- ------ $280,792 275,008 116,140 (357,504) 314,436 ======== ======= ======= ========= =======
WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Consolidating Balance Sheets December 31, 1998
GUARANTOR NON-GUARANTOR DOMESTIC FOREIGN WORLDTEX, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------- ------------ ------------ ------------ ------------ Assets Current assets Cash and cash equivalents $2,596 14 4,105 - 6,715 Accounts and notes - 19,486 23,399 - 42,885 receivable, net Inventories - 33,815 24,700 - 58,515 Prepaid expenses and other 2,594 183 1,205 - 3,982 ------ ------ ------ ------ ------ current assets Total current assets 5,190 53,498 53,409 - 112,097 Property, plant and equipment, 337 58,710 54,605 - 113,652 net Other assets 9,239 2,457 1,154 - 12,850 Cost in excess of net assets of acquired businesses, net - 68,048 17,473 - 85,521 Intercompany investments 101,344 83,560 - (184,904) - Intercompany advances 155,820 - - (155,820) - ------- ------- ------- -------- ------- $271,930 266,273 126,641 (340,724) 324,120 ======== ======= ======= ======== ======= Liabilities and Stockholders' equity Current liabilities Short-term borrowings $ - - 7,308 - 7,308 Current installments of long-term debt - - 525 - 525 Accounts payable-trade and other liabilities 3,799 9,440 14,756 - 27,995 Income taxes payable 1,091 (1,641) 2,250 - 1,700 -------- ------ ------ ------- ------ Total current liabilities 4,890 7,799 24,839 - 37,528 Long-term debt 187,000 6,000 5,246 - 198,246 Other long-term liabilities 1,417 - 569 - 1,986 Deferred income taxes (5,428) 6,870 11,436 - 12,878 Intercompany payables - 144,260 11,560 (155,820) - -------- ------- ------ -------- ------- Total liabilities 187,879 164,929 53,650 (155,820) 250,638 -------- ------- ------ -------- ------- Stockholders' equity Common stock 147 - 31,778 (31,778) 147 Paid-in capital 30,084 32,852 - (32,852) 30,084 Retained earnings 56,169 68,492 51,782 (120,274) 56,169 Accumulated other comprehensive loss - (10,569) (10,569) Less-treasury stock, at cost (2,349) - - - (2,349) -------- ------- ------ -------- ------- Total stockholders' equity 84,051 101,344 72,991 (184,904) 73,482 -------- ------- ------ -------- ------- $271,930 266,273 126,641 (340,724) 324,120 ======== ======= ======= ======== =======
WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Consolidating Balance Sheets December 31, 1998
GUARANTOR NON-GUARANTOR DOMESTIC FOREIGN WORLDTEX, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------- ------------ ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $(9,666) (247) 5,674 (5,906) (10,145) Adjustments to reconcile net income (loss)to net cash provided (used in) by operating activities: Undistributed earnings of 247 (5,674) - 5,427 - subsidiaries Depreciation and amortization 213 11,990 5,681 (2) 17,882 Provision for losses on accounts receivable - 4,446 384 - 4,830 Deferred income taxes (1,768) (715) 32 - (2,451) Change in assets and liabilities net of effects of acquisitions: Accounts and notes receivable (315) (3,132) (1,012) - (4,459) Inventories - (6,904) 61 437 (6,406) Prepaid expenses and other current assets 110 (483) 117 - (256) Accounts payable-trade and other current liabilities 4,446 953 2,089 - 7,488 Income taxes payable 139 210 (1,330) - (981) ------ ------- ------- ------- ------- Net cash provided by (used in) operating activities (6,594) 444 11,696 (44) 5,502 ------ ------- ------- ------- ------- Cash flows from investing activities: Capital expenditures (5,037) (7,401)` (5,322) 44 (17,716) Acquisitions, net of cash acquired (5,942) (5,942) - 11,884 - Other investing activities (515) 1,982 (3,395) - (1,928) ------ ------- ------- ------- ------- Net cash used in investing activities (11,494) (11,361) (8,717) 11,928 (19,644) ------- ------- ------- ------- ------- Cash flows from financing activities: Borrowings under line of credit arrangements - - - - - Payments under line of credit arrangements - - (55) - (55) Borrowings under revolving credit facility 110,960 - - - 110,960 Payments under revolving credit facility (98,100) - - - (98,100) Borrowings under long-term loans - - - - - Payments under long-term loans - - (1,463) - (1,463) Stock issued or (reacquired), net - - - - - Advances - affiliated companies 1,009 3,192 (2,967) (1,234) - Other financing activities (3,392) 5,942 3,979 (11,286) 2,027 ------- ------ ------ -------- ------ Net cash provided by (used in) financing activities 17,261 9,134 (506) (12,520) 13,369 ------- ------ ------ ------- ------ Effects of exchange rate changes on cash - - (892) 636 (256) ------- ------ ------ ------- ------ Net increase (decrease) in cash and cash equivalents (827) (1,783) 1,581 - (1,029) Cash and cash equivalents at beginning of year 2,596 14 4,105 - 6,715 ------- ------ ------ ------- ------ Cash and cash equivalents at end of year $ 1,769 (1,769) 5,686 - 5,686 ======= ====== ====== ======= ======
WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Consolidating Balance Sheets December 31, 1998
GUARANTOR NON-GUARANTOR DOMESTIC FOREIGN WORLDTEX, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------- ------------ ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $(5,898) 622 2,742 (3,364) (5,898) Adjustments to reconcile net income (loss)to net cash provided (used in) by operating activities: Undistributed earnings of subsidiaries (622) (2,742) - 3,364 - Depreciation and amortization 30 7,414 9,128 - 16,572 Provision for losses on accounts receivable - 311 279 - 590 Deferred income taxes (4,871) 49 (267) - (5,089) Change in assets and liabilities net of effects of acquisitions: Accounts and notes receivable - 1,072 1,657 - 2,729 Inventories - (5,564) 1,732 1,604 (2,228) Prepaid expenses and other current assets (135) 329 (59) - 135 Accounts payable-trade and other current liabilities 198 911 (717) - 392 Income taxes payable 799 145 906 - 1,850 -------- ------ ------ ------ ------ Net cash provided by (used in) operating activities (10,499) 2,547 15,401 1,604 9,053 -------- ------ ------ ------ ------ Cash flows from investing activities: Capital expenditures (138) (17,314) (8,859) 6,440 (19,871) Acquisitions, net of cash acquired (2,740) - - (10,070) (12,810) Other investing activities 400 (6,221) (1,777) 4,768 (2,830) -------- ------- ------- ------- ------- Net cash used in investing activities (2,478) (23,535) (10,636) 1,138 (35,511) -------- ------- ------- ------- ------- Cash flows from financing activities: Borrowings under line of credit arrangements - - 9,482 - 9,482 Payments under line of credit arrangements - - (3,221) - (3,221) Borrowings under revolving credit facility 12,000 - - - 12,000 Stock issued or (reacquired), net (825) - - - (825) Advances - affiliated companies (9,657) 20,683 (10,960) (66) - Other financing activities 1,293 - (580) (437) 276 -------- ------- ------- ------- ------- Net cash provided by (used in) financing activities 2,811 20,683 (5,279) (503) 17,712 -------- ------- ------- ------- ------- Effects of exchange rate changes on cash 2,704 (2) 126 (2,239) 589 -------- ------- ------- ------- ------- Net decrease in cash and cash equivalents (7,462) (307) (388) - (8,157) Cash and cash equivalents at beginning of year 10,058 321 4,493 - 14,872 Cash and cash equivalents at end of year $ 2,596 14 4,105 - 6,715 ======== ======= ======= ======= =======
WORLDTEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Consolidating Balance Sheets December 31, 1998
GUARANTOR NON-GUARANTOR DOMESTIC FOREIGN WORLDTEX, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------- ------------ ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $5,148 8,886 7,985 (16,871) 5,148 Adjustments to reconcile net income (loss)to net cash provided (used in) by operating activities: Undistributed earnings of (8,886) (7,985) - 16,871 - subsidiaries Depreciation and amortization 37 2,630 4,178 - 6,845 Provision for losses on accounts - 71 234 - 305 receivable Deferred income taxes (1,099) 341 1,792 (314) 720 Change in assets and liabilities net of effects of acquisitions: Accounts and notes receivable (200) (3,060) 2,196 - (1,064) Inventories - (2,007) (5,389) - (7,396) Prepaid expenses and other (86) (34) (128) - (248) current assets Accounts payable-trade and other current liabilities 406 (2,171) (1,902) (646) (4,313) Income taxes payable (459) (597) (984) 546 (1,494) ------ ------ ------ ------ ------ Net cash provided by (used in) operating activities (5,139) (3,926) 7,982 (414) (1,497) ------- ------- ------ ------- ------- Cash flows from investing activities: Capital expenditures (3) (2,823) (5,426) 546 (7,706) Acquisitions, net of cash acquired (7,502) - - (77,880) (85,382) Other investing activities (7,017) 835 (1,875) (133) (8,190) ------ ------ ------ ------- ------- Net cash used in investing activities (14,522) (1,988) (7,301) (77,467) (101,278) ------- ------ ------ ------- -------- Cash flows from financing activities: Borrowings under line of credit - - 3,548 - 3,548 arrangements Payments under line of credit - - (3,435) - (3,435) arrangements Borrowings under revolving credit facility 109,550 - - - 109,550 Payments under revolving credit facility (121,940) - - - (121,940) Borrowings under long-term loans 175,000 - - - 175,000 Payments under long-term loans (50,000) - - - (50,000) Stock issued or (reacquired), net 113 - - - 113 Advances - affiliated companies (70,376) 6,068 1,036 63,272 - Other financing activities (119) - 1,546 (359) 1,068 ------ ------ ------ ------ ------ Net cash provided by financing activities 42,228 6,068 2,695 62,913 113,904 ------ ------ ------ ------ ------- Effects of exchange rate changes on cash (12,937) (7) (398) 14,968 1,626 ------- ------- ------- ------ ------ Net increase in cash and cash equivalents 9,630 147 2,978 - 12,755 Cash and cash equivalents at 428 174 1,515 - 2,117 ------ ------ ------ ------ ------ beginning of year Cash and cash equivalents at end of year $10,058 321 4,493 - 14,872 ======= ====== ====== ====== ======
WORLDTEX, INC. SUPPLEMENTARY FINANCIAL INFORMATION ________________________________________________________________________________ YEARS ENDED DECEMBER 31, 1999 AND 1998 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
DILUTED NET NET INCOME UNAUDITED NET GROSS INCOME (LOSS) PER QUARTERLY FINANCIAL DATA SALES PROFIT (LOSS) SHARE (A) ------------------------ ----- ------ ------ --------- 1999 Quarter: First $78,017 13,528 815 .06 Second 73,607 13,517 1,260 .09 Third 69,721 10,229 (712) (.05) Fourth (B) 64,442 5,461 (11,508) (.81) ------- ------- -------- $285,787 42,735 (10,145) ======== ======= ======== 1998 Quarter: First $69,229 14,052 2,151 .15 Second 66,054 12,818 748 .05 Third 59,801 9,040 (1,061) (.07) Fourth (B) 63,453 6,360 (7,736) (.54) ------- ------- -------- $258,537 42,270 (5,898) ======== ======= ========
NOTES: (A) Diluted net income (loss) per share amounts are calculated based upon the weighted average number of common shares outstanding and common dilutive equivalent shares during the year. (B) See note 16 of the consolidated financials statements for significant fourth quarter charges in 1999 and 1998. WORLDTEX, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ________________________________________________________________________________ YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS) ------ADDITIONS------ BALANCE CHARGED BALANCE AT TO COSTS DEDUCTIONS AT END BEGINNING AND FROM OF OF PERIOD EXPENSES OTHER RESERVES PERIOD --------- -------- ----- -------- ------ 1999 Allowance for doubtful $2,041 4,830 (A) - 303 (B) 6,568 accounts 1998 Allowance for doubtful $2,085 590 - 634 (B) 2,041 accounts 1997 Allowance for doubtful $2,589 305 470 (C) 1,279 (B) 2,085 accounts NOTES: (A) See note 16 of the consolidated financials statements for significant fourth quarter charges in 1999. (B) Accounts charged off, recoveries, and other adjustments, net. (C) Increases to reserves reflecting subsidiary purchase price allocation. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the information responsive to the Items comprising this Part III that is contained in Worldtex's definitive proxy statement for its 2000 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS AND SCHEDULES The financial statements and financial statement schedules included in this Report are listed in the introductory portion of Item 8. EXHIBITS The following exhibits are filed as part of this Report (for convenience of reference, exhibits are listed according to numbers assigned in the exhibit tables of Item 601 of Regulation S-K under the Securities Exchange Act of 1934 and management contracts or compensatory plans are indicated by an asterisk): EXHIBIT NO. DESCRIPTION ________ ___________ 2.1 Purchase Agreement, dated as of March 28, 1995, among Fibrexa, S.A., the stockholders of Fibrexa, Worldtex Colombiana, Ltda. and Worldtex - filed as Exhibit 2 to the Company's report on Form 8-K dated June 5, 1995 and incorporated herein by reference. EXHIBIT NO. DESCRIPTION ________ ___________ 2.2 Asset Purchase Agreement, dated as of October 29, 1997, among Elastic Corporation of America, Inc. (a wholly-owned subsidiary of Worldtex, Inc.), Worldtex, Inc., and NFA Corp. -- filed as Exhibit 2.1 to the Worldtex, Inc. Current Report on Form 8-K dated December 1, 1997 and incorporated herein by reference. 3.1 Certificate of Incorporation of Worldtex -- filed as Exhibit 3.1 to Worldtex's Registration Statement on Form 10, dated October 1, 1992, as amended, and incorporated herein by reference. 3.2 By-Laws of Worldtex -- filed as Exhibit 3.2 to Worldtex's Registration Statement on Form 10, dated October 1, 1992, as amended, and incorporated herein by reference. 4.1 Share Purchase Rights Agreement, dated as of August 1, 1992, by and between Worldtex and Chemical Bank as Rights Agent - filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K for 1992 and incorporated herein by reference. 4.2 Indenture, dated as of December 1, 1997, by and among Worldtex, Inc., Willcox & Gibbs Filix of Delaware, Inc., Regal Manufacturing Company, Inc., Elastic Corporation of America, Inc., Elastex, Inc., Regal Yarns of Argentina, Inc., WTX Colombia I, Inc. and WTX Colombia II, Inc. (together, other than Worldtex, Inc., the "Guarantors"), and IBJ Schroder Bank & Trust Company, as Trustee, with respect to the 9 5/8% Senior Notes due 2007 -- filed as Exhibit 4.1 to the Company's Registration Statement on Form S-4 (No. 333-45331) and incorporated herein by reference. 4.3 Registration Rights Agreement, dated as of December 1, 1997, by and among Worldtex, Inc., the Guarantors and the Initial Purchasers - filed as Exhibit 4.3 to the Company's Registration Statement on Form S-4 (No. 333-45331) and incorporated herein by reference. 4.4 Form of 9 5/8% Note - included in Exhibit 4.2. 10.1 Distribution Agreement dated as of November 12, 1992, between W&G and Worldtex - filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for 1992 and incorporated herein by reference. 10.2 Tax Sharing Agreement dated as of November 12, 1992, between W&G and Worldtex - filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for 1992 and incorporated herein by reference. 10.3 Severance Agreement, dated February 10, 1999, between Worldtex and Richard J. Mackey - filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for 1998 and incorporated herein by reference.* EXHIBIT NO. DESCRIPTION ________ ___________ 10.4 Employment Agreement, dated November 15, 1993, between Worldtex and Barry D. Setzer - filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for 1993 and incorporated herein by reference.* 10.5 Employment Agreement, dated December 22, 1998, between Worldtex and Marty R. Kittrell - filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for 1998 and incorporated herein by reference.* 10.6 1992 Stock Incentive Plan of Worldtex, as amended - filed as Appendix A to Worldtex's proxy statement, dated April 1, 1994, for the 1994 Annual Meeting of Stockholders, and incorporated herein by reference.* 10.7 Credit Agreement, dated as of December 1, 1997, among Worldtex, the Guarantors, the Lenders named therein and NationsBank, N.A., as Agent - filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for 1998 and incorporated herein by reference. 10.8 Standstill Agreement, dated as of March 27, 2000, among (i) EGS Associates, L.P., a Delaware limited partnership, (ii) EGS Partners, L.L.C., a Delaware limited liability company, (iii) Bev Partners, L.P., a Delaware limited partnership, (iv) Jonas Partners, L.P., a New York limited partnership, (v) FK Investments, L.P., a Delaware limited partnership, (vi) William Ehrman, (vii) Frederic Greenberg, (viii) Jonas Gerstl, (ix) Julia Oliver, (x) EGS Management, L.L.C., a Delaware limited liability company, and (xi) the Company -- filed herewith. 10.9 Amendment No. 5, dated as of March 27, 2000, to the Rights Agreement, dated as of August 1, 1992 -- attached as Exhibit A to the Standstill Agreement filed as Exhibit 10.8 hereto. 21.1 Subsidiaries of Worldtex - filed herewith. 23.1 Consent of KPMG LLP - filed herewith. 23.2 Consent of Deloitte & Touche LLP - filed herewith. 24.1 Powers of Attorney executed by certain directors and officers of Worldtex - filed as Exhibit 25.1 to the Company's Annual Report on Form 10-K for 1992 and incorporated herein by reference. 24.2 Powers of Attorney executed by Mitchell R. Setzer - filed as Exhibit 24.2 to the Company's Annual Report on Form 10-K for 1994 and incorporated herein by reference. 24.3 Powers of Attorney executed by Claude D. Egler - filed as Exhibit 24.3 to the Company's Annual Report on Form 10-K for 1996 and incorporated herein by reference. EXHIBIT NO. DESCRIPTION ________ ___________ 24.4 Power of Attorney executed by Marty R. Kittrell - filed as Exhibit 24.4 to the Company's Annual Report on Form 10-K for 1998 and incorporated herein by reference. 27.1 Financial Data Schedule (filed with EDGAR only). 8-K REPORTS During the last quarter of the Company's 1999 fiscal year, the Company filed no reports on Form 8-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 30, 2000 WORLDTEX, INC. By /s/ BARRY D. SETZER ____________________________________ Barry D. Setzer Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 30, 2000 by the following persons on behalf of the registrant and in the capacities indicated. /s/ BARRY D. SETZER ___________________________________________ Barry D. Setzer, Chairman of the Board, President, Chief Executive Officer and Director and Attorney for the persons indicated by asterisk /s/ MARTY R. KITTRELL ___________________________________________ Marty R. Kittrell, Chief Financial and Accounting Officer CLAUDE D. EGLER* Claude D. Egler, Director JOHN B. FRASER* John B. Fraser, Director ___________________________________________ Salim M. Ibrahim, Director WILLI ROELLI* Willi Roelli, Director MICHAEL B. WILSON* Michael B. Wilson, Director JOHN K. ZIEGLER* John K. Ziegler, Director EX-10.8 2 STANDSTILL AGREEMENT STANDSTILL AGREEMENT Standstill Agreement, dated as of March 27, 2000 (this "AGREEMENT"), among (i) EGS Associates, L.P., a Delaware limited partnership, (ii) EGS Partners, L.L.C., a Delaware limited liability company ("EGS PARTNERS"), (iii) Bev Partners, L.P., a Delaware limited partnership, (iv) Jonas Partners, L.P., a New York limited partnership, (v) FK Investments, L.P., a Delaware limited partnership ("FK INVESTMENTS"), (vi) William Ehrman, (vii) Frederic Greenberg, (viii) Jonas Gerstl, (ix) Julia Oliver, (x) EGS Management, L.L.C., a Delaware limited liability company ("EGS MANAGEMENT" and, together with the Persons referred to in the preceding clauses (i) through (ix), the "EGS PARTIES"), and (xi) Worldtex, Inc., a Delaware corporation (the "COMPANY"). The EGS Parties are the beneficial owners of shares of common stock, par value $.01 per share (the "COMMON STOCK"), of the Company, which in the case of certain EGS Parties aggregates 4,878,495 shares, or approximately 34.2% of the outstanding shares. Under the terms of the Rights Agreement, dated as of August 1, 1992 (the "RIGHTS AGREEMENT"), between the Company and ChaseMellon Shareholder Services L.L.C., as successor to Chemical Bank, as Rights Agent, the rights to acquire additional shares of the Company issued under the Rights Agreement will become exercisable by the shareholders of the Company, other than the EGS Parties, unless the Rights Agreement is amended or the rights are redeemed by the Company. In order to induce the Company to amend the Rights Agreement as provided herein, the EGS Parties have agreed to enter into this Agreement. Accordingly, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS. (a) The following terms shall have the following meanings: "ACQUISITION PROPOSAL" means any offer or proposal for, or any indication of interest in, (i) a merger or other business combination involving the Company or any of its Subsidiaries, (ii) the acquisition by any Person or Persons of beneficial ownership of Restricted Securities representing, on a fully exercised basis, more than 5% of the Total Voting Power, or (iii) the acquisition by any Person or Persons of all or a substantial part of the assets of the Company or any of its Subsidiaries or of any equity securities of any of the Company's Subsidiaries. "AFFILIATE" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with, such Person. For the purposes of this definition, "CONTROL" when used with respect to any Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "CONTROLLING" and "CONTROLLED" have meanings correlative to the foregoing. "AGREEMENT" is defined in the first paragraph of this Agreement. "AVERAGE CLOSING PRICE" means, with respect to any Restricted Security, the arithmetic average of the closing prices of such Restricted Security on the national securities exchange (as defined under the Exchange Act) located in or nearest to the City of New York on which such security is then listed or, if not listed on any national securities exchange, as reported by NASDAQ, for any specified days. "BENEFICIAL OWNERSHIP" and "BENEFICIALLY OWN" shall be determined in accordance with Rule 13d-3 under the Exchange Act. "BUSINESS DAY" means a day on which the New York Stock Exchange is open for trading. "CLOSING DATE" means the date of this Agreement. "COMMON STOCK" is defined in the second paragraph of this Agreement. "COMPANY" is defined in the first paragraph of this Agreement. "CONTINUING DIRECTOR" means any member of the Board of Directors of the Company on the date of this Agreement and any successor of a Continuing Director whose nomination or election has been approved by a majority of the Continuing Directors then on the Board of Directors. "EGS MANAGEMENT" is defined in the first paragraph of this Agreement. "EGS PARTIES" is defined in the first paragraph of this Agreement. "EGS PARTNERS" is defined in the first paragraph of this Agreement. "EGS PERSON" means any EGS Party and any Affiliate of an EGS Party. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "FK INVESTMENTS" is defined in the first paragraph of this Agreement. "FULLY EXERCISED BASIS" means, in determining beneficial ownership of Voting Securities by any Person, an assumption that all securities and rights convertible into or exercisable for Voting Securities beneficially owned by such Person have been fully converted and exercised, regardless of whether by their terms they may be so converted and exercised at that time, but without assuming conversion or exercise by any other Person. "GROUP" shall have the meaning provided under Section 13(d)(3) of the Exchange Act. "MANAGED ACCOUNTS" is defined in Section 6(b). "PERCENTAGE LIMITATION" means that number of Voting Securities which then represents the lesser of (i) 34.2% of the Total Voting Power and (ii) the highest percentage of the Total Voting Power beneficially owned by any EGS Person immediately following any sale or transfer of shares of Voting Securities by an EGS Person, PROVIDED that if the percentage under this clause (ii) shall be less than the Rights Threshold, the applicable percentage under this clause (ii) shall be deemed to be the Rights Threshold. "PERSON" means an individual, corporation, partnership, company, limited liability company, joint venture, association, trust, group, any other unincorporated organization or entity and a governmental entity or any department or agency thereof. "RESTRICTED SECURITIES" means any Voting Securities and any other securities or rights convertible into or exercisable (whether immediately or otherwise) for Voting Securities. "RIGHTS AGREEMENT" is defined in the second paragraph of this Agreement. "RIGHTS THRESHOLD" means the minimum percentage of shares of Common Stock required to be beneficially owned by a Person in order for such Person to be an "Acquiring Person" under the Rights Agreement, or under any substantially similar rights agreement subsequently adopted by the Company, as such percentage may be amended from time to time (which percentage is 20% as of the Closing Date). "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "SUBSIDIARY" means, with respect to any Person, any corporation in which such Person beneficially owns securities representing a majority of the combined voting power of voting interests entitled to vote generally for the election of directors. "TERM" means the period commencing on the date of this Agreement and ending on the termination date specified in Section 7. "TOTAL VOTING POWER" means the aggregate number of votes which may be cast by holders of outstanding Voting Securities. In determining the number of outstanding Voting Securities, Voting Securities held in the treasury of the Company shall not be deemed to be outstanding. "VOTING SECURITIES" means the Common Stock and any other securities of the Company entitled to vote generally for the election of directors of the Company. (b) Unless herein otherwise provided, or unless the context shall otherwise require, words importing the singular number shall include the plural number, and vice versa; the terms "HEREIN", "HEREOF" and "HEREUNDER", or other similar terms, refer to this Agreement as a whole and not only to the particular sentence, paragraph, subsection or Section in which any such terms may be employed; and a reference to any Person shall include such Person's predecessors and successors. 2. INVESTMENT COVENANTS. Each EGS Party covenants and agrees as follows: (a) Each EGS Party will not, and will not permit its Affiliates to, directly or indirectly: (1) Beneficially own any Restricted Security if, on a fully exercised basis, any EGS Person would, in the aggregate, beneficially own Voting Securities in excess of the Percentage Limitation, or acquire, solicit an offer to sell or agree to acquire, any Restricted Security if the effect of such acquisition, on a fully exercised basis, would be to increase the aggregate number of Voting Securities then beneficially owned, directly or indirectly, by any EGS Person, to a number greater than the Percentage Limitation; PROVIDED that an EGS Person shall not be in violation of this provision by reason of its beneficial ownership of Restricted Securities which complied with the Percentage Limitation when such Restricted Securities first became beneficially owned by it but which subsequently exceeded the Percentage Limitation as a result of a reduction in the number of outstanding Voting Securities in a transaction approved by a majority of the Continuing Directors. (2) Take any action to advise, encourage or assist any other Person to purchase or acquire in any manner any Restricted Security, or participate with or provide assistance to any Person in the purchase or other acquisition of any Restricted Security, PROVIDED that this provision shall not prohibit reports to Persons whose funds are managed by an EGS Party regarding their investment in Restricted Securities that are beneficially owned by an EGS Party. (3) Make any public announcement or filing with respect to, or submit to the Company or any of its directors, officers, employees, agents or representatives, an Acquisition Proposal, or take any action to advise, encourage or assist any other Person to make an Acquisition Proposal. (4) Become a member of a group with respect to any Restricted Securities, other than a group consisting solely of the EGS Parties and EGS Persons. (5) Make, or in any way encourage or support, any "solicitation" of "proxies" (as such terms are defined in Rule 14a-1 under the Exchange Act) to vote any Voting Security, or agree or announce its intention to vote with any Person undertaking a "solicitation," or seek to advise, encourage or influence any Person with respect to the voting of any Voting Security. (6) Deposit any Restricted Security in a voting trust, or, except as contemplated by this Agreement, subject any Restricted Security to a voting or similar agreement. (7) Sell, transfer, pledge or otherwise dispose of or encumber any Restricted Security or any interest in any Restricted Security, or agree to take any of the foregoing actions, except (i) a sale of a Restricted Security so long as the amount of Restricted Securities sold, together with all sales of Restricted Securities of the same class by all EGS Persons within the preceding 90 days, does not exceed 5% of the outstanding number of shares or units of such class of Restricted Securities; PROVIDED that no sale shall be permitted hereunder if the buyer would, after giving effect to such sale, be the beneficial owner of Voting Securities representing 5% or more of the Total Voting Power; PROVIDED, FURTHER, that a sale of a Restricted Security may be made without restriction if at the time of such sale the EGS Persons beneficially own in the aggregate Voting Securities representing less than 5% of the Total Voting Power; or (ii) pursuant to a tender or exchange offer made by the Company or pursuant to other written request of the Company; or (iii) pursuant to an Acquisition Proposal approved by a majority of the Continuing Directors; or (iv) a BONA FIDE pledge to a nationally recognized financial institution to secure indebtedness for borrowed money on a full recourse basis to the pledgor, PROVIDED that the pledgee agrees, in a manner satisfactory in form and substance to the Company, to be bound by the obligations of the EGS Persons under this Agreement if the pledgee forecloses on such pledged Restricted Securities; or (v) a BONA FIDE pledge to a nationally recognized financial institution to secure indebtedness for borrowed money on a full recourse basis to the pledgor of Restricted Securities held in a margin account commingled with other securities under management by an EGS Party if the proceeds of such borrowings were utilized to purchase securities held in such account; or (vi) a transfer to another EGS Party. (8) Initiate or propose any shareholder proposal for submission to a vote of holders of Voting Securities, propose any Person for election to the Board of Directors of the Company or otherwise seek to control or influence the management or policies of the Company. (9) Allow any Person other than an EGS Person to have the power to vote or direct the vote of any Voting Securities beneficially owned by any EGS Person, except for (i) votes that comply with Section 2(e) and (ii) the grant of a proxy to an officer or director of the Company. (10) Disclose to any other Person, or make any filing under the Exchange Act disclosing, any intention, plan or arrangement inconsistent with the provisions of this Section 2(a). (11) Request the Company (or any of its directors, officers, employees, agents or representatives) to waive, amend or modify any provision of this Section 2(a), except in response to a request to an EGS Party from the Company for some action by such EGS Party. (b) It shall not be a violation of Section 2(a)(7) if a Managed Account shall terminate the authority of an EGS Party to manage the investments of such Managed Account and withdraw the Voting Securities from the custody and control of all EGS Persons such that no EGS Person is thereafter the beneficial owner of such Voting Securities. In addition, if FK Investments shall no longer be an Affiliate of any other EGS Party and shall provide a written representation, warranty and covenant to the Company, in form and substance satisfactory to the Company, that neither it nor any of its Affiliates is then, nor will it at any time during the remainder of the Term become, the beneficial owner of more than 248,000 shares of Common Stock or any other Voting Security, then the Company shall release FK Investments from its obligations under this Agreement (other than with respect to such representation, warranty and covenant). (c) [Intentionally omitted] (d) AGREEMENT TO PROVIDE INFORMATION. Each EGS Party agrees to provide to the Company all information concerning any EGS Person as may be necessary for the Company to prepare any reports or filings required by the Securities Act, the Exchange Act, or other applicable federal and state securities laws. (e) VOTING. Each EGS Party shall cause all Voting Securities beneficially owned by it or any EGS Person over which it or any EGS Person has the power to vote or direct the vote to be represented, in person or by proxy, at all meetings of holders of Voting Securities, so that such Voting Securities may be counted for the purpose of determining the presence of a quorum at such meetings. On each matter voted upon by holders of Voting Securities, each EGS Party shall cause all Voting Securities beneficially owned by it or any EGS Person to be voted, at its option, (i) in the manner recommended by the Board of Directors of the Company for such matter or (ii) in the same proportion as the votes of holders of Voting Securities (other than the EGS Persons) voted on such matter. (f) ADDITIONAL EGS PARTIES. If any EGS Person not an EGS Party shall become the beneficial owner of Restricted Securities, the EGS Parties shall cause such EGS Person prior to its becoming such beneficial owner to execute and deliver to the Company a valid and binding agreement of such EGS Person, in form and substance satisfactory to the Company, providing that such EGS Person shall comply with the obligations set forth in this Agreement of, and shall be deemed to be, an EGS Party. 3. RIGHT TO PURCHASE RESTRICTED SECURITIES. Each EGS Party agrees that, in the event of any violation of Section 2(a)(1), in addition to its other rights and remedies, the Company or any Person designated by the Company shall have the right and option to purchase from each EGS Party and each of its Affiliates, and each EGS Party shall sell and cause their Affiliates to sell, such Restricted Securities beneficially owned by them as is necessary to reduce the total combined voting power of all Voting Securities beneficially owned, on a fully exercised basis, by all EGS Persons, in the aggregate, to the then applicable Percentage Limitation. Any Restricted Securities purchased by the Company or its designee pursuant to this Section shall be purchased for cash at a price per share or other unit equal to the lower of (i) the weighted average cost per share or other unit to all EGS Persons of all Restricted Securities of the class to be purchased then held by them, and (ii) the Average Closing Price of the Restricted Securities of the class to be purchased for the 20 consecutive Business Days ending five Business Days preceding the date on which the Company or its designee gives written notice to EGS Management of its intent to exercise its option under this Section. The right and option provided for in this Section shall be exercised by the Company's delivery of written notice, within 180 days after the Company first learns of the event giving rise to such option, to EGS Management specifying the nature of such event, the number and class of Restricted Securities to be purchased and the date on which said purchase shall occur, which date shall be not less than five nor more than 60 days after the date on which such notice was given to EGS Management. 4. FEES AND EXPENSES. In reimbursement of the Company's current and future expenses relating to the negotiation of this Agreement, the EGS Parties agree, jointly and severally, to pay to the Company (a) $400,000 on April 3, 2000, (b) $200,000 on the fifth Business Day after January 1, 2001 and (c) $200,000 on the fifth Business Day after January 1, 2002. 5. AMENDMENT OF RIGHTS AGREEMENT. On the Closing Date, the Company shall amend the Rights Agreement as provided in Exhibit A to this Agreement (the "RIGHTS PLAN AMENDMENT"). 6. REPRESENTATIONS AND WARRANTIES. (a) REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each EGS Party that (i) the Company has the corporate power and authority to enter into and perform this Agreement and the Rights Plan Amendment, (ii) the execution and delivery of this Agreement by the Company and the performance by it of its obligations under this Agreement have been duly authorized by the Company, and (iii) this Agreement constitutes a valid, binding and enforceable agreement of the Company. (b) REPRESENTATIONS AND WARRANTIES OF THE EGS PARTIES. Each EGS Party represents and warrants to the Company that (i) such EGS Party has full legal right, power and authority to enter into and perform this Agreement, (ii) the execution and delivery of this Agreement by such EGS Party and performance by such EGS Party of its obligations under this Agreement have been duly authorized by such EGS Party, (iii) this Agreement constitutes a valid, binding and enforceable Agreement of such EGS Party, (iv) William Lautman is not, as of the date of this Agreement, an Affiliate of any EGS Person and is not the beneficial owner of any Restricted Securities, (v) each EGS Party beneficially owns the number of shares of Common Stock set forth opposite its name on Exhibit B hereto and no other Voting Securities, (vi) 3,110,618 shares of Common Stock are held in discretionary accounts for the benefit of Persons other than EGS Persons (together the "MANAGED ACCOUNTS"), in each case under the investment management of EGS Partners, (vii) EGS Partners has the sole discretion to vote and to dispose of the shares of Common Stock held in the Managed Accounts, (viii) the statements in the Statement on Schedule 13D, dated February 28, 2000, filed by the EGS Parties with the SEC relating to the Common Stock (the "SCHEDULE 13D") are true and correct as of the Closing Date in all material respects and do not as of the Closing Date omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading (it being understood that the number of shares of Common Stock beneficially owned as of the Closing Date is correctly stated in Exhibit B hereto) and (ix) no EGS Party has any agreement, arrangement or understanding with any Person with respect to any matter that such EGS Party is prohibited to do by this Agreement. 7. TERM. The obligations of the parties under this Agreement shall terminate and be of no further force and effect on and after the tenth (10th) anniversary of the Closing Date. 8. MISCELLANEOUS. (a) SEVERABILITY. If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. To the extent permitted by applicable law, each party waives any provision of law which renders any provision of this Agreement invalid, illegal or unenforceable in any respect. (b) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by and against the successors and assigns of the parties hereto. No right or obligation hereunder of any EGS Party shall be assignable without the consent of the Company, and any such purported assignment shall be void. (c) ENTIRE AGREEMENT; MODIFICATION. This Agreement sets forth the entire agreement and understanding among the parties with respect to the subject matter hereof and supersedes all agreements and understandings among the parties with respect to the subject matter hereof entered into prior to the execution hereof. This Agreement may be modified only by a written instrument duly executed by or on behalf of each party and, in the case of the Company, only if approved by a majority of the Continuing Directors. No breach of any covenant, agreement, warranty or representation shall be deemed waived unless expressly waived in writing by and on behalf of the party who might assert such breach and, in the case of a breach of any EGS Party, only if approved by a majority of the Continuing Directors. (d) NOTICES. Any notice, direction or other advice or communication required or permitted to be given hereunder shall be in writing and shall be given by certified mail, next business day delivery service such as Federal Express or personal delivery against receipt to the party to whom it is to be given at such party's address set forth below or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section. Any notice or other communication shall be deemed to have been given on the fifth business day after so mailed, on the next business day after dispatch when sent by such delivery service or as of the date so personally delivered. If to the Company: Worldtex, Inc. 915 Tate Boulevard, S.E., Suite 106 Hickory, North Carolina 28602 Attention: Chief Executive Officer If to any EGS Party: c/o EGS Management L.L.C. 350 Park Avenue, 11th Floor New York, New York 10022 Attention: William Ehrman (e) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the substantive law of the State of Delaware without giving effect to the principles of conflict of laws thereof. (f) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. (g) EFFECT OF HEADINGS. The section headings herein are for convenience only and shall not affect the construction thereof. (h) SPECIFIC PERFORMANCE. Each EGS Party recognizes that any breach of the terms of this Agreement by an EGS Person shall give rise to irreparable harm for which money damages would not be an adequate remedy, and accordingly agrees that, in addition to other remedies, the Company shall be entitled to enforce the terms of this Agreement by a decree of specific performance without the necessity of proving the inadequacy as a remedy of money damages. (i) CONSENT TO JURISDICTION; RECEIPT OF PROCESS. Each party hereby consents to the jurisdiction of, and confers non-exclusive jurisdiction upon, any federal court located in the State of Delaware and the Chancery Court of the State of Delaware, and appropriate appellate courts therefrom, over any action, suit or proceeding arising out of or relating to this Agreement, or any of the transactions contemplated hereby. Each party hereby irrevocably waives, and agrees not to assert as a defense in any such action, suit or proceeding, any objection which it may now or hereafter have to venue of any such action, suit or proceeding brought in any such federal or state court and hereby irrevocably waives any claim that any such action, suit or proceeding brought in any such court or tribunal has been brought in an inconvenient forum. Process in any such action, suit or proceeding may be served on any party anywhere in the world, whether within or without the State of Delaware, provided that notice thereof is provided pursuant to provisions for notice under this Agreement. [Remainder of this page blank.] IN WITNESS WHEREOF, the parties hereto and have caused this Agreement to be duly executed as of the day and year first above written. WORLDTEX, INC. EGS ASSOCIATES, L.P. BEV PARTNERS, L.P. JONAS PARTNERS, L.P. By:___________________________ FK INVESTMENTS, L.P. Name: By: EGS MANAGEMENT, L.L.C., Title: as General Partner By:___________________________ Name: William Ehrman Title: Managing Member EGS MANAGEMENT, L.L.C. By:___________________________ Name: William Ehrman Title: Managing Member EGS PARTNERS, L.L.C. By:___________________________ Name: William Ehrman Title: Member ______________________________ William Ehrman ______________________________ Frederic Greenberg ______________________________ Jonas Gerstl ______________________________ Julia Oliver EXHIBIT A TO STANDSTILL AGREEMENT AMENDMENT NO. 5 TO RIGHTS AGREEMENT ----------------------------------- AMENDMENT NO. 5, dated as of March 27, 2000 (the "Amendment"), to the Rights Agreement, dated as of August 1, 1992 (the "Rights Agreement"), between Worldtex, Inc., a Delaware corporation (the "Company"), and ChaseMellon Shareholder Services, L.L.C., a New Jersey limited liability company, as successor to Chemical Bank (the "Rights Agent"). Capitalized terms used but not defined herein shall have the meanings given to such terms in the Rights Agreement. WHEREAS, the Company and the Rights Agent entered into the Rights Agreement specifying the terms of the Rights; and WHEREAS, the Company and the Rights Agent desire to amend the Rights Agreement in accordance with Section 28 thereof; NOW, THEREFORE, in consideration of the premises and mutual agreements set forth in the Rights Agreement and this Amendment, the parties hereby agree as follows: 1. The last sentence of Section 1(a) is amended by inserting, immediately following the words "Notwithstanding the foregoing,": (x) no EGS Person (as defined in the Standstill Agreement) shall on or prior to March 22, 2000 be deemed to have been or thereafter shall be or become an "Acquiring Person" during the Term (as defined in the Standstill Agreement) unless the Board of Directors of the Company shall have determined in its sole and absolute discretion that there has been a breach of any covenant, agreement, warranty or representation of an EGS Person made in or pursuant to the Standstill Agreement that is not waived by the Company in accordance with the requirements of the Standstill Agreement, in which case any EGS Person that would be an Acquiring Person but for this clause (x) shall immediately be deemed an "Acquiring Person"; and (y). 2. Section 1(x) is amended to insert the following at the end of such sentence: ", PROVIDED that the date of any public announcement prior to March 22, 2000 that any EGS Person (as defined in the Standstill Agreement) has acquired the beneficial ownership of 20% or more of the Common Shares shall not be deemed to be a Share Acquisition Date." 3. Section 1 is amended to insert after subsection (aa) thereof the following: (bb) "Standstill Agreement" shall mean the Standstill Agreement, dated as of March 27, 2000, among (i) EGS Associates, L.P., a Delaware limited partnership, (ii) EGS Partners, L.L.C., a Delaware limited liability company, (iii) Bev Partners, L.P., a Delaware limited partnership, (iv) Jonas Partners, L.P., a New York limited partnership, (v) FK Investments, L.P., a Delaware limited partnership, (vi) William Ehrman, (vii) Frederic Greenberg, (viii) Jonas Gerstl, (ix) Julia Oliver, (x) EGS Management, L.L.C., a Delaware limited liability company, and (xi) the Company. 4. The term "Agreement" as used in the Rights Agreement shall be deemed to refer to the Rights Agreement as amended hereby. 5. This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [Remainder of this page blank] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. WORLDTEX, INC. By:___________________________________ Name: Barry D. Setzer Title: Chairman of the Board, President and Chief Executive Officer CHASEMELLON SHAREHOLDER SERVICES, L.L.C. By:___________________________________ Name: Title: EXHIBIT B TO STANDSTILL AGREEMENT SHARES OF COMMON STOCK NAME BENEFICIALLY OWNED - ---- ------------------ EGS Associates, L.P. 1,083,430 EGS Partners, L.L.C. 3,110,618 Bev Partners, L.P. 414,947 Jonas Partners, L.P. 21,500 FK Investments, L.P. 248,000 William Ehrman 4,878,495 Frederic Greenberg 4,878,495 Jonas Gerstl 4,878,495 Julia Oliver 4,878,495 EGS Management, L.L.C. 1,767,877 --------- Total for all EGS Persons 4,878,495 EX-21.1 3 WORDLTEX, INC. SUBSIDIARIES EXHIBIT 21.1 WORLDTEX, INC. SUBSIDIARIES ________________________________________________________________________________ STATE OR OTHER JURISDICTION NAME OF SUBSIDIARY OF INCORPORATION __________________ ___________________________ Filix, s.a. France Moulinage de la Galaure France Worldtex France, s.a. France Willcox & Gibbs Filix of Delaware, Delaware Inc. Rubyco (1987), Inc. Quebec Regal Yarns of Argentina, Inc. North Carolina Regal Manufacturing Company, Inc. Delaware Fibrexa, Ltda Colombia WTX Colombia I, Inc. Delaware WTX Colombia II, Inc. Delaware Elastic Corporation of America, Inc. Delaware Worldtex Valliappa Private Limited India EX-23.1 4 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Worldtex, Inc.: We consent to the incorporation by reference in Registration Statements on Form S-8 (Nos. 33-55124, 33-72640, 33-97276 and 333-68975 of Worldtex, Inc. and subsidiaries of our audit report dated February 27, 1998, relating to consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows and related schedule for the year ended December 31, 1997, which report appears in the December 31, 1999 Annual Report on Form 10-K of Worldtex, Inc. /s/ KPMG LLP KPMG LLP Atlanta, Georgia March 27, 2000 EX-23.2 5 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-55124, 33-72640, 33-97276 and 333-68975 of Worldtex, Inc. on Form S-8 of our report dated March 30, 2000, appearing in this Annual Report on Form 10-K of Worldtex, Inc. for the year ended December 31, 1999. /s/ Deloitte & Touche LLP Hickory, North Carolina March 30, 2000 EX-27.1 6 FDS WORLDTEX
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WORLDTEX, INC. FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 DEC-31-1999 5,686 0 46,445 6,568 61,817 113,171 158,821 48,796 314,436 65,776 182,539 0 0 147 52,345 314,436 285,787 285,787 243,052 243,052 0 4,830 19,952 (9,975) 170 (10,145) 0 0 0 (10,145) (.71) (.71)
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