10-Q 1 itxn20130930_10q.htm FORM 10-Q itxn20130930_10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 


  

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

Commission File Number 000-23938

 


 

INTERNATIONAL TEXTILE GROUP, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware

33-0596831

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification Number)

 

804 Green Valley Road, Suite 300, Greensboro, North Carolina 27408

(Address and zip code of principal executive offices)

 

(336) 379-6299

(Registrant’s telephone number, including area code)

 


(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve 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     No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes    No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ☐

Accelerated filer  ☐

Non-accelerated filer  ☐

Smaller reporting company   

   

(Do not check if a smaller

reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    No   

 

The number of shares outstanding of the registrant’s common stock, $0.01 par value per share, as of November 4, 2013, was 17,468,327.

 

 
- 1 -

 

 

     

PAGE

     

PART I

FINANCIAL INFORMATION

 
       
 

ITEM 1.

FINANCIAL STATEMENTS

 
       
   

Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012

4

       
   

Unaudited Consolidated Statements of Operations for the three and nine months ended

September 30, 2013 and 2012

5

       
   

Unaudited Consolidated Statements of Comprehensive Operations for the three and nine months

ended September 30, 2013 and 2012

6

       
   

Unaudited Consolidated Statements of Cash Flows for the nine months ended

September 30, 2013 and 2012

7

       
   

Notes to Consolidated Financial Statements (Unaudited)

8 - 29

       
 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

30 - 40

       
 

ITEM 4.

CONTROLS AND PROCEDURES

40

     

PART II

OTHER INFORMATION

 
     
 

ITEM 1.

LEGAL PROCEEDINGS

41

       
 

ITEM 6.

EXHIBITS

41

   

SIGNATURE

42

 

 
- 2 -

 

 

Safe Harbor—Forward-Looking Statements

 

The discussion in this report includes forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are statements that are not historical in nature, and may relate to predictions, current expectations and future events. Forward-looking statements may include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “continue,” “likely,” “target,” “project,” “intend,” or similar expressions. Readers are cautioned not to place undue reliance on such forward-looking statements, as they involve significant risks and uncertainties.

 

Forward-looking statements are inherently predictive and speculative and are not a guarantee of performance. No assurance can be given that any such statements, or the results predicted thereby, will prove to be correct. All forward-looking statements are based on management’s current beliefs and assumptions, such as assumptions with respect to general economic and industry conditions, cost and availability of raw materials, the timing of full production at the Company’s operations in China, the ability to maintain compliance with the requirements under various credit facilities, national and international legislation and regulation, and potential financing sources and opportunities, among others, all of which in turn are based on currently available information and estimates. Any of these assumptions could prove inaccurate, which could cause actual results to differ materially from those contained in any forward-looking statement.

 

In addition to changes to the underlying beliefs and assumptions, developments with respect to important factors including, without limitation, the following, could cause our actual results to differ materially from those made or implied by any forward-looking statements:

 

national, regional and international economic conditions and the continued uncertain economic outlook;

 

our financial condition, which has placed us under financial stress and may put us at a competitive disadvantage compared to our competitors that have less debt;

 

adverse changes or increases in U.S. government policies that are unfavorable to domestic manufacturers, including among other things, significant budget constraints and potential further cost reductions in various governmental agencies, including the U.S. Defense Department, that could result from the ongoing sequestration process that could affect certain of our businesses and result in impairments of our goodwill and/or indefinite lived intangible assets;

 

significant increases in the underlying interest rates on which our floating rate debt is based;

 

our ability to comply with the covenants in our financing agreements, or to obtain waivers of these covenants when and if necessary;

 

our inability to repay or refinance our debt currently due or as it becomes due;

 

actions by our lenders to accelerate any of our indebtedness or proceed against the collateral securing such indebtedness;

 

lower than anticipated demand for our products;

 

our ability to generate sufficient cash flows, improve our liquidity and obtain funds for working capital related to our operations;

 

our dependence on the success of, and our relationships with, our largest customers;

 

competitive pricing pressures on our sales, and our ability to achieve cost reductions required to sustain global cost competitiveness;

 

significant increases in the prices of energy and raw materials, and our ability to plan for and respond to the impact of those changes;

 

risks associated with foreign operations and foreign supply sources, such as disruptions of markets, changes in import and export or other laws, changes in future quantitative limits, duties or tariffs, currency restrictions and currency exchange rate fluctuations;

 

the failure by the Company’s insurance providers to provide any required coverage;

 

successfully maintaining and/or upgrading our information technology systems;

 

our inability to protect our proprietary information and prevent or enforce third parties from making unauthorized use of our products and technology;

 

the funding requirements of our defined benefit pension plan or lower than expected investment performance by our pension plan assets, which may require us to increase the funding of our pension liability and/or incur higher pension expense;

 

changes in existing environmental laws or their interpretation, more vigorous enforcement by regulatory agencies or the discovery of currently unknown conditions; and

 

risks associated with cyber attacks and breaches, including, among other things, the gaining of unauthorized access to our systems, the corruption of data, and the disruption of our operations.

 

Forward-looking statements include, but are not limited to, those described or made herein or in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 and in other filings made from time to time with the Securities and Exchange Commission (“SEC”) by the Company. You are encouraged to carefully review those filings for a discussion of various factors that could result in any of such forward-looking statements proving to be inaccurate. Forward-looking statements also make assumptions about risks and uncertainties. Many of these factors are beyond the Company’s ability to control or predict and their ultimate impact could be material. Further, forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update publicly any of them in light of new information or future events.

 

 
- 3 -

 

 

PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

 

INTERNATIONAL TEXTILE GROUP, INC. AND SUBSIDIARY COMPANIES

Consolidated Balance Sheets
(Dollar amounts in thousands, except per share data)

 

   

September 30,

2013

   

December 31,

2012

 
   

(Unaudited)

         

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 3,020     $ 3,240  

Accounts receivable, less allowances of $1,118 and $682, respectively

    83,020       66,680  

Sundry notes and receivables

    10,735       10,929  

Inventories

    113,517       109,604  

Deferred income taxes

    2,246       2,040  

Prepaid expenses

    4,228       2,908  

Assets held for sale

          29  

Other current assets

    1,205       767  

Total current assets

    217,971       196,197  

Investments in and advances to unconsolidated affiliates

          18  

Property, plant and equipment, net

    131,054       140,952  

Intangibles and deferred charges, net

    2,042       2,112  

Goodwill

    2,740       2,740  

Deferred income taxes

    4,300       2,233  

Other assets

    3,898       1,623  

Total assets

  $ 362,005     $ 345,875  

Liabilities and Stockholders’ Deficit

               

Current liabilities:

               

Current portion of bank debt and other long-term obligations

  $ 26,377     $ 17,260  

Callable debt

    38,006       38,006  

Short-term borrowings

    45,491       36,969  

Accounts payable

    56,536       46,051  

Sundry payables and accrued liabilities

    37,832       32,610  

Income taxes payable

    5,507       7,571  

Deferred income taxes

    5,814       4,624  

Total current liabilities

    215,563       183,091  

Bank debt and other long-term obligations, net of current portion

    88,154       84,393  

Senior subordinated notes

          16,656  

Senior subordinated notes - related party

    158,655       145,051  

Income taxes payable

    1,806       1,806  

Deferred income taxes

    2,713       2,534  

Other liabilities

    23,282       25,191  

Total liabilities

    490,173       458,722  

Commitments and contingencies

               

Stockholders' deficit:

               

International Textile Group, Inc. stockholders' deficit:

               

Series C preferred stock (par value $0.01 per share; 5,000,000 shares authorized; 123,714 and 116,502 shares issued and outstanding; and aggregate liquidation value of $123,225 and $116,013 at September 30, 2013 and December 31, 2012, respectively)

    123,225       116,013  

Series A convertible preferred stock (par value $0.01 per share; 15,000,000 shares authorized; 13,230,520 and 12,505,687 shares issued and outstanding; and aggregate liquidation value of $330,763 and $312,642 at September 30, 2013 and December 31, 2012, respectively)

    330,763       312,642  

Common stock (par value $0.01 per share; 150,000,000 shares authorized; 17,468,327 shares issued and outstanding at September 30, 2013 and December 31, 2012)

    175       175  

Capital in excess of par value

    8,377       33,710  

Common stock held in treasury, 40,322 shares at cost

    (411 )     (411 )

Accumulated deficit

    (583,159 )     (567,312 )

Accumulated other comprehensive loss, net of taxes

    (7,138 )     (7,706 )

Total International Textile Group, Inc. stockholders’ deficit

    (128,168 )     (112,889 )

Noncontrolling interests

          42  

Total stockholders' deficit

    (128,168 )     (112,847 )

Total liabilities and stockholders' deficit

  $ 362,005     $ 345,875  
 

See accompanying Notes to Consolidated Financial Statements (unaudited)

 

 
- 4 -

 

 

INTERNATIONAL TEXTILE GROUP, INC. AND SUBSIDIARY COMPANIES

Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Net sales

  $ 163,013     $ 159,758     $ 472,519     $ 478,516  

Cost of goods sold

    143,737       142,120       416,522       436,802  

Gross profit

    19,276       17,638       55,997       41,714  

Selling and administrative expenses

    10,056       10,380       32,299       33,899  

Provision for (recovery of) bad debts

    8       27       119       (2 )

Other operating income - net

    (3,131 )     (9,169 )     (3,168 )     (9,388 )

Impairment charge

    -       -       2,049       -  

Restructuring charges (recoveries)

    (26 )     162       96       995  

Income from operations

    12,369       16,238       24,602       16,210  

Non-operating other income (expense):

                               

Interest income

    23       7       71       49  

Interest expense - related party

    (4,721 )     (5,464 )     (13,604 )     (22,658 )

Interest expense - third party

    (3,138 )     (3,774 )     (9,463 )     (11,187 )

Other income (expense) - net

    (4,882 )     (1,595 )     (10,066 )     (3,792 )

Total non-operating other income (expense) - net

    (12,718 )     (10,826 )     (33,062 )     (37,588 )

Income (loss) from continuing operations before income taxes and equity in losses of unconsolidated affiliates

    (349 )     5,412       (8,460 )     (21,378 )

Income tax expense

    (879 )     (1,155 )     (1,443 )     (2,530 )

Equity in losses of unconsolidated affiliates

    (67 )     (22 )     (175 )     (381 )

Income (loss) from continuing operations

    (1,295 )     4,235       (10,078 )     (24,289 )

Discontinued operations, net of taxes:

                               

Loss from discontinued operations

    (1,991 )     (2,139 )     (5,752 )     (11,281 )

Loss on deconsolidation of subsidiary

    -       -       -       (22,204 )

Loss from discontinued operations

    (1,991 )     (2,139 )     (5,752 )     (33,485 )

Net income (loss)

    (3,286 )     2,096       (15,830 )     (57,774 )

Less: net loss attributable to noncontrolling interests

    -       -       -       (2,666 )

Net income (loss) attributable to International Textile Group, Inc.

  $ (3,286 )   $ 2,096     $ (15,830 )   $ (55,108 )
                                 

Net income (loss) attributable to International Textile Group, Inc.

  $ (3,286 )   $ 2,096     $ (15,830 )   $ (55,108 )

Accrued preferred stock dividends

    (8,698 )     (7,470 )     (25,333 )     (18,566 )

Net loss attributable to common stock of International Textile Group, Inc.

  $ (11,984 )   $ (5,374 )   $ (41,163 )   $ (73,674 )
                                 

Net loss per share attributable to common stock of International Textile Group, Inc., basic:

                               

Loss from continuing operations

  $ (0.57 )   $ (0.19 )   $ (2.03 )   $ (2.46 )

Loss from discontinued operations

    (0.11 )     (0.12 )     (0.33 )     (1.76 )
    $ (0.68 )   $ (0.31 )   $ (2.36 )   $ (4.22 )

Net loss per share attributable to common stock of International Textile Group, Inc., diluted:

                               

Loss from continuing operations

  $ (0.57 )   $ (0.19 )   $ (2.03 )   $ (2.46 )

Loss from discontinued operations

    (0.11 )     (0.12 )     (0.33 )     (1.76 )
    $ (0.68 )   $ (0.31 )   $ (2.36 )   $ (4.22 )
                                 

Weighted average number of shares outstanding - basic

    17,468       17,468       17,468       17,468  

Weighted average number of shares outstanding - diluted

    17,468       17,468       17,468       17,468  
 

See accompanying Notes to Consolidated Financial Statements (unaudited)

 

 
- 5 -

 

 

INTERNATIONAL TEXTILE GROUP, INC. AND SUBSIDIARY COMPANIES

Consolidated Statements of Comprehensive Operations
(Amounts in thousands)
(Unaudited)

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 
                                 

Net income (loss)

  $ (3,286 )   $ 2,096     $ (15,830 )   $ (57,774 )
                                 

Other comprehensive income, net of taxes:

                               

Cash flow hedge adjustments

    86       -       86       -  

Pension and postretirement liability adjustments

    161       173       482       520  

Other comprehensive income

    247       173       568       520  
                                 

Net comprehensive income (loss)

    (3,039 )     2,269       (15,262 )     (57,254 )
                                 

Less: net comprehensive loss attributable to noncontrolling interests

    -       -       -       (2,666 )
                                 

Net comprehensive income (loss) attributable to International Textile Group, Inc.

  $ (3,039 )   $ 2,269     $ (15,262 )   $ (54,588 )
 

See accompanying Notes to Consolidated Financial Statements (unaudited)

 

 
- 6 -

 

 

INTERNATIONAL TEXTILE GROUP, INC. AND SUBSIDIARY COMPANIES

Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)

 

   

Nine Months Ended

September 30,

 
   

2013

   

2012

 

OPERATIONS

               

Net loss

  $ (15,830 )   $ (57,774 )

Adjustments to reconcile net loss to cash provided by operations:

               

Non-cash impairment charge

    2,049       -  

Loss on deconsolidation of subsidiary

    -       22,204  

Provision for (recovery of) bad debts

    119       (1 )

Depreciation and amortization of property, plant and equipment

    11,298       13,485  

Amortization of deferred financing costs

    810       778  

Deferred income taxes

    (954 )     517  

Equity in losses of unconsolidated affiliates

    175       381  

Gain on sale of assets

    (140 )     (204 )

Noncash interest expense

    14,133       24,454  

Foreign currency remeasurement losses

    1,181       659  

Contributions to pension and postretirement benefit plans

    (2,733 )     (1,759 )

Payment of interest on payment-in-kind notes

    (505 )     -  

Change in operating assets and liabilities:

               

Accounts receivable

    (16,385 )     (14,169 )

Inventories

    (3,914 )     30,934  

Other current assets

    (1,468 )     533  

Accounts payable and accrued liabilities

    15,468       6,685  

Income taxes payable

    (2,108 )     2,480  

Other

    601       (92 )

Net cash provided by operating activities

    1,797       29,111  
                 

INVESTING

               

Capital expenditures

    (3,326 )     (839 )

Investments in and advances to unconsolidated affiliates

    (16 )     (98 )

Distributions from unconsolidated affiliates

    500       -  

Effect on cash from deconsolidation of subsidiary

    -       (201 )

Proceeds from sale of property, plant and equipment

    70       757  

Deposit and other costs related to equipment to be purchased

    (2,182 )     -  

Net cash used in investing activities

    (4,954 )     (381 )
                 

FINANCING

               

Proceeds from issuance of term loans

    12,350       -  

Repayment of term loans

    (13,262 )     (10,887 )

Net borrowings (repayments) under revolving loans

    13,934       (4,756 )

Net proceeds from (repayments of) short-term borrowings

    7,716       (12,731 )

Payment of financing fees

    (783 )     (187 )

Repayment of capital lease obligations

    (186 )     (181 )

Fees related to issuance of preferred stock

    -       (490 )

Payment of principal on payment-in-kind notes

    (16,655 )     -  

Acquisition of noncontrolling interest

    (17 )     -  

Decrease in checks issued in excess of deposits

    (3 )     -  

Net cash provided by (used in) financing activities

    3,094       (29,232 )
                 

Effect of exchange rate changes on cash and cash equivalents

    (157 )     (351 )

Net change in cash and cash equivalents

    (220 )     (853 )

Cash and cash equivalents at beginning of period

    3,240       3,987  

Cash and cash equivalents at end of period

  $ 3,020     $ 3,134  
                 

Supplemental disclosures of cash flow information:

               

Cash payments of income taxes, net

  $ 4,224     $ 829  

Cash payments for interest

  $ 7,967     $ 8,856  

Noncash investing and financing activities:

               

Accrued preferred stock dividends

  $ 25,333     $ 18,566  

Exchange of unsecured subordinated notes payable to related party for preferred stock

  $ -     $ 112,469  

Additions to property, plant and equipment using deposits or trade credits

  $ 100     $ -  

Capital lease obligations incurred to acquire assets

  $ 41     $ -  

 

See accompanying Notes to Consolidated Financial Statements (unaudited)

 

 
- 7 -

 

 

INTERNATIONAL TEXTILE GROUP, INC. AND SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements (Unaudited)

 

Note 1 Description of the Company and Basis of Presentation

 

International Textile Group, Inc. (“ITG”, the “Company”, “we”, “us” or “our”) is a global, diversified textile manufacturer headquartered in Greensboro, North Carolina, with operations principally in the United States, Mexico, and China. The Company believes it is one of the world’s largest and most diversified producers of denim fabrics and the largest producer of better denim fabrics for products distributed through department stores and specialty retailers. In addition, the Company believes it is one of the largest worsted wool manufacturers and commission printers and finishers in North America, and is a leading developer, marketer and manufacturer of other fabrics and textile products.

 

The December 31, 2012 consolidated balance sheet data included herein was derived from the Company’s audited financial statements. The unaudited consolidated financial statements included herein have been prepared by ITG pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) as well as accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the information furnished reflects all adjustments necessary for a fair statement of the results for the reported interim periods and as of the reported dates, which consist of only normal recurring adjustments. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this report, as is permitted by such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The results of any given quarter are not necessarily indicative of the results to be expected for any other quarter or the full fiscal year.

 

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts recorded in the consolidated financial statements and the related notes to consolidated financial statements. On an ongoing basis, the Company evaluates its estimates, including those related to the valuation of trade receivables, inventories, goodwill, other long-lived assets, indemnification obligations, and assumptions used in the calculation of, among others, income taxes, pension and postretirement benefits, legal costs and environmental costs. These estimates and assumptions are based upon historical factors, current circumstances and expectations, and the experience and judgment of the Company’s management. Management monitors economic conditions and other factors and will adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile foreign currencies and equity share values as well as changes in general or industry-specific economic conditions affecting the Company can increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results may differ from these estimates under different assumptions or conditions. Changes in these estimates resulting from continuing changes in the economic environment or other factors are reflected in the financial statements in the periods in which such change occurs. Management believes that its estimates impacting the accompanying consolidated financial statements, including for these matters, are reasonable based on facts currently available.

 

The unaudited consolidated financial statements and other financial information included in this Quarterly Report on

Form 10-Q, unless otherwise specified, have been presented to separately show the effects of discontinued operations.

 

Business and Credit Concentrations

 

The Company’s business is dependent on the success of, and its relationships with, its largest customers. The loss of any key customer or a material slowdown in the business of one of its key customers could have a material adverse effect on the Company’s overall results of operations, cash flows and financial position. No one customer accounted for 10% or more of the Company’s accounts receivable as of September 30, 2013, and one customer, V.F. Corporation, accounted for approximately 10% of the Company’s net sales in the 2012 fiscal year and in the three and nine months ended September 30, 2013.

 

Certain of the Company’s consolidated subsidiaries are subject to restrictions in relevant financing documents that limit cash dividends they can pay and loans they may make to the Company. Of the Company’s consolidated cash balance of $3.0 million at September 30, 2013, approximately $0.5 million held by certain subsidiaries was restricted due to certain contractual arrangements. In addition, certain of the Company’s foreign consolidated subsidiaries are subject to various governmental statutes and regulations that restrict and/or limit loans and dividend payments they may make to the Company. At September 30, 2013, the Company’s proportionate share of restricted net assets of its consolidated subsidiaries was approximately $10.3 million.

 

 

 
- 8 -

 

 

Recently Adopted Accounting Pronouncements

 

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-02, “Intangibles—Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment,” which amends the guidance in Accounting Standards Codification (“ASC”) 350 on testing indefinite-lived intangible assets, other than goodwill, for impairment. Under ASU 2012-02, an entity testing an indefinite-lived intangible asset for impairment has the option of performing a qualitative assessment before calculating the fair value of the asset. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e., a likelihood of more than 50 percent) impaired, the entity would not need to calculate the fair value of the asset. ASU 2012-02 does not revise the requirement to test indefinite-lived intangible assets annually for impairment. In addition, ASU 2012-02 does not amend the requirement to test these assets for impairment between annual tests if there is a change in events or circumstances; however, it does revise the examples of events and circumstances that an entity should consider in interim periods. ASU 2012- 02 was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of ASU 2012-02 did not have a material impact on the Company’s consolidated financial statements.

 

In February 2013, the FASB issued ASU 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required under GAAP to be reclassified in their entirety to net income in that reporting period, entities are required to cross-reference to other disclosures required under GAAP that provide additional detail on these amounts. ASU 2013-02 was effective for reporting periods beginning after December 15, 2012. Because this ASU only impacts presentation and disclosure requirements, its adoption did not have a material impact on the Company’s consolidated results of operations or financial position.

 

Recently Issued Accounting Pronouncements

 

In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”. This ASU clarifies the timing of release of currency translation adjustments (“CTA”) from accumulated other comprehensive income (“AOCI”) upon deconsolidation or derecognition of a foreign entity, subsidiary or a group of assets within a foreign entity and in step acquisitions. Specifically, upon deconsolidation or derecognition of a foreign entity, CTA would be released; upon a sale of a subsidiary or a group of assets within a foreign entity, CTA would not be released, unless it also represents the complete or substantially complete liquidation of the foreign entity in which it resides; and, in a step acquisition, the AOCI related to the previously held investment would be included in the calculation of gain or loss upon a change in control. ASU 2013-05 is effective prospectively for reporting periods beginning after December 15, 2013, with early adoption permitted. The Company will adopt ASU 2013-05 on January 1, 2014 and such adoption is not expected to have a material impact on the Company’s consolidated financial statements.

 

In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)”. This update clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. The Company will adopt ASU 2013-11 on January 1, 2014 and such adoption is not expected to have a material impact on the Company’s consolidated financial statements.

 

 
- 9 -

 

 

Note 2 Deconsolidation and Discontinued Operations

 

On October 7, 2013, Cone Denim de Nicaragua, S.A. (“CDN”), a wholly–owned subsidiary of the Company, entered into various agreements pursuant to which substantially all of the operating assets of CDN were transferred to a third party in full settlement of CDN’s debt and lease financing obligations (see Note 16, “Subsequent Event”). Because such assets and obligations comprised the entire business operations of CDN and the Company has no significant continuing cash flows from, or continuing involvement with, such operations, the results of operations of CDN are presented as discontinued operations in all periods presented in the Company’s historical consolidated statements of operations.

 

As previously disclosed, the Company deconsolidated its ITG-Phong Phu Joint Venture (“ITG-PP”), a cotton-based fabrics and garment manufacturing operation in Vietnam, as of May 25, 2012 as a result of the entry into an enforcement agreement (“the Enforcement Agreement”) pursuant to which Vietnam Technological Commercial Joint Stock Bank (“Techcombank”) took possession of certain assets in accordance with the terms of its credit agreement with ITG-PP. The Company, as parent company of ITG-PP, has certain related party loans receivable from ITG-PP collateralized by the assets of ITG-PP on a junior basis, and ITG-PP has a capital lease obligation with its joint venture partner. The obligations of ITG-PP are non-recourse to the Company or any other subsidiary of the Company, but are secured by the assets of ITG-PP. As of May 25, 2012, the securitized assets had a net book value of approximately $37.3 million. Approximately $21.6 million of the Company’s related party loans receivable from ITG-PP is collateralized by the assets of ITG-PP on a junior basis according to the Enforcement Agreement. Under the Enforcement Agreement, proceeds from the sale of the securitized assets are to be applied in the following priority: (i) to pay certain legal and other costs, taxes and fees related to the sale, (ii) to repay all principal and interest under loans with Techcombank, and (iii) to repay principal and interest owed by ITG-PP to ITG under certain related party loans described above. Any excess proceeds from the sale of the security assets are required to be remitted to, or at the direction of, ITG-PP. As of the date hereof, no sale of the assets has occurred. Assuming an orderly disposition, the Company has estimated that the fair value of the securitized assets, net of selling costs, will be sufficient to satisfy the Techcombank obligations and a portion of the related party loans payable to the Company, as the parent company of ITG-PP, although there can be no assurances of the timing or amounts thereof. The Company is continuing to work with Techcombank to provide for an orderly disposition of the securitized assets.

 

Presentation of Discontinued Operations

 

The results of operations of the CDN and ITG-PP businesses are presented as discontinued operations in the accompanying consolidated statements of operations for all periods presented. Prior year results of operations have been recast to conform to the current presentation. The Company allocates parent company interest to discontinued operations based on parent company debt that is required to be repaid from proceeds of the transactions giving rise to the disposition. No parent company interest has been allocated to the ITG-PP discontinued operations due to the uncertainty of any amounts to be received by the Company, as the parent company of ITG-PP, and no parent company interest has been allocated to the CDN discontinued operations due to the lack of any amounts received by the Company, as the parent of CDN. Net sales and certain other components included in discontinued operations were as follows (in thousands):

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Net sales:

                               

ITG-PP business

  $     $     $     $ 6,180  

CDN business

  $     $     $     $  
                                 

Loss from discontinued operations:

                               

ITG-PP business

  $ (67 )   $ (154 )   $ (22 )   $ (5,492 )

CDN business

  $ (1,924 )   $ (1,985 )   $ (5,730 )   $ (5,789 )
                                 

Loss on deconsolidation of ITG-PP business

  $     $     $     $ (22,204 )

 

 
- 10 -

 

 

Note 3 Inventories

 

Inventories are valued at the lower of cost or market value using the first-in, first-out (“FIFO”) method. The major classes of inventory are as follows (in thousands):

 

   

September 30,

2013

   

December 31,

2012

 
                 

Raw materials

  $ 13,100     $ 12,477  

Work in process

    42,095       36,513  

Finished goods

    45,792       48,287  

Dyes, chemicals and supplies

    12,530       12,327  
    $ 113,517     $ 109,604  

 

 

Note 4 Impairment Testing of Long-Lived Assets

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If required, the Company updates each quarter the test of recoverability of the value of its long-lived assets pursuant to the provisions of FASB ASC 360, “Property, Plant, and Equipment”. Such recoverability reviews and tests, primarily based on fair value measured by prices for similar assets, did not result in any impairment charges in the three months ended September 30, 2013 or in the three or nine months ended September 30, 2012.

 

During the nine months ended September 30, 2013, the Company recorded a non-cash impairment charge of $2.0 million in the narrow fabrics segment as a result of reduced sales volumes and continued negative operating results, primarily due to certain government budget pressures and a slower than expected increase in other product sales. The non-cash impairment charge was equal to the amount by which the carrying value of the asset group exceeded the estimated fair value of such assets as measured by the market approach using the assistance of independent third-party appraisers. The market approach has been determined to be the most representative because of the uncertainty of projected future cash flows in this segment. Such non-cash impairment charge primarily reduced the carrying amount of the segment’s land, buildings, machinery and equipment.

 

The Company cannot predict the occurrence of any future events that might adversely affect the carrying value of long-lived assets. A decline in general economic or industry-specific business conditions could result in future impairment charges with respect to the Company’s long-lived assets, including any of its property, plant and equipment.

 

 
- 11 -

 

 

Note 5 Long-Term Debt and Short-Term Borrowings

 

Total outstanding long-term debt of the Company consisted of the following (in thousands):

 

   

September 30,

2013

   

December 31,

2012

 

Revolving loans:

               

ITG, Inc.

  $ 56,650     $ 42,695  

Parras Cone de Mexico, S.A. de C.V. (1)

    12,366       12,386  

Term loans:

               

ITG, Inc.

    11,771       10,027  

Burlington Morelos S.A. de C.V. (1)

    17,875       14,500  

Parras Cone de Mexico, S.A. de C.V. (1)

    2,100        

Cone Denim (Jiaxing) Limited (1)

    13,711       18,168  

Jiaxing Burlington Textile Company (1)

          3,646  

Cone Denim de Nicaragua (1)

    38,006       38,006  

Other:

               

Senior subordinated notes

          16,656  

Senior subordinated notes - related party

    158,655       145,051  

Capitalized lease obligations

    38       207  

Other notes payable

    20       24  

Total long-term debt

    311,192       301,366  

Less: current portion of long-term debt

    (26,377 )     (17,260 )

Less: callable debt

    (38,006 )     (38,006 )

Total long-term portion of long-term debt

  $ 246,809     $ 246,100  

 

 

(1)

Non-recourse to the U.S. parent company.

 

 

Revolving and Term Loans and Factoring Agreements

 

On March 30, 2011, the Company and certain of its U.S. subsidiaries entered into an Amended and Restated Credit Agreement with General Electric Capital Corporation (“GE Capital”), as agent and lender, and certain other lenders (as amended, the “2011 Credit Agreement”). On March 29, 2013, the Company entered into Amendment No. 10 to the 2011 Credit Agreement. This amendment, among other things, provided for a revolving credit facility of $90.0 million, including an increase in availability under the revolving loan facility (the “U.S. Revolver”) of approximately $8.2 million, an increase of $4.0 million in the term loan facility thereunder (the “U.S. Term Loan”) and extended the final maturity date of all revolving and term loans thereunder to March 30, 2016. The U.S. Term Loan required the repayment of $0.5 million in principal per month from May 2011 to April 2012, and requires repayment of $0.3 million per month thereafter until maturity, at which date the entire remaining principal balance of the U.S. Term Loan is due.

 

Borrowings under the 2011 Credit Agreement bear interest at the London Interbank Offered Rate (“LIBOR”), plus an applicable margin, or other published bank rates, plus an applicable margin, at the Company’s option. At September 30, 2013, there was $56.6 million outstanding under the U.S. Revolver at a weighted average interest rate of 5.3% and $11.8 million outstanding under the U.S. Term Loan at a weighted average interest rate of 5.0%. As of September 30, 2013, the Company had $10.5 million of standby letters of credit issued in the normal course of business, none of which had been drawn upon, that reduced the borrowing availability under the U.S. Revolver. At September 30, 2013, availability under the U.S. Revolver was $20.7 million.

 

The obligations of the Company (and certain of its U.S. subsidiaries) under the 2011 Credit Agreement are secured by certain of the Company’s (and its U.S. subsidiaries’) U.S. assets, a pledge by the Company (and its U.S. subsidiaries) of the stock of their respective U.S. subsidiaries and a pledge by the Company (and its U.S. subsidiaries) of the stock of certain of their respective foreign subsidiaries.

 

The 2011 Credit Agreement contains affirmative and negative covenants and events of default customary for agreements of this type, including, among other things, requiring the Company to maintain compliance with a U.S. fixed charge coverage ratio (as defined in the 2011 Credit Agreement). The 2011 Credit Agreement also contains a cross default and cross acceleration provision relating to the Note Purchase Agreement (defined below).

 

 

 
- 12 -

 

 

Under the 2011 Credit Agreement, the Company is required to maintain availability, or average adjusted availability (each as defined) at or above certain predefined levels, or certain limitations may be imposed on the Company, including those which may impact or restrict the Company’s ability to operate its business in the ordinary course. The following describes actions that may be taken, and margins, fees or limitations that may be imposed upon the Company, under the 2011 Credit Agreement at certain availability or average adjusted availability levels:

 

 

if average adjusted availability is less than $22.5 million or if availability is less than $12.5 million, the Company is restricted from making loans to, and/or investments in, its international subsidiaries. At September 30, 2013, average adjusted availability was approximately $15.7 million and availability was $20.7 million, and the Company was subject to such restrictions. Notwithstanding these restrictions, the Company and the lenders under the 2011 Credit Agreement entered into certain consents and amendments to the 2011 Credit Agreement which provided the Company the ability to (i) make investments in ITG-PP in an amount up to $3.5 million, which investments were made in the form of loans to ITG-PP in June 2011, and (ii) enter into and perform its obligations under an amended Guaranty of Payment (as amended and restated, the “Guaranty”) in favor of WLR Recovery Fund IV, L.P. (“Fund IV”), an affiliate of Wilbur L. Ross, Jr., the Chairman of our Board of Directors and who, together with certain investment entities controlled by him (collectively, the “WLR Affiliates”) is our controlling stockholder, not to exceed $15.5 million (see “Guarantees” below). In March 2013, the Company entered into Amendment No. 9 to the 2011 Credit Agreement, which provides that either (i) the lenders under the 2011 Credit Agreement are entitled to receive payment under a $3.7 million evergreen standby letter of credit executed by Fund IV (the “Fund IV LC”) that automatically renews each year, unless notified by the issuing bank, until a final termination date of March 31, 2016 or (ii) the Company’s investments in ITG-PP discussed above are required to be repaid to the Company by ITG-PP no later than one month prior to the stated expiry date, non-renewal date or termination date of the Fund IV LC (see Note 2 related to a potential sale of the assets of ITG-PP);

 

 

if availability is less than $17.5 million, the Company is required to comply with a specified fixed charge coverage ratio (as defined in the 2011 Credit Agreement). The Company was not subject to such fixed charge coverage ratio as of September 30, 2013, but would have been in compliance with such ratio as of that date;

 

 

depending on average adjusted availability, the applicable margin added to LIBOR or other published bank interest rates for borrowings under the 2011 Credit Agreement can range from 4.25% to 4.75% (the weighted average applicable margin was 4.6% at September 30, 2013). In addition, depending on amounts borrowed and average adjusted availability, the U.S. Revolver requires the payment of an unused commitment fee in the range of 0.50% to 0.75% annually, payable monthly; and

 

 

if the Company’s excess availability (as defined in the 2011 Credit Agreement) falls below certain predefined levels, the lenders under the 2011 Credit Agreement can draw upon an evergreen standby letter of credit in the amount of $20.0 million executed by the WLR Affiliates that automatically renews each year, unless notified by the issuing bank, until a final termination date of March 31, 2016; no such amounts had been drawn by the lenders as of September 30, 2013.

 

On March 23, 2011, a wholly-owned subsidiary of the Company, Burlington Morelos S.A. de C.V. (“Burlington Morelos”), entered into a five year, $20.0 million term loan with Banco Nacional De Mexico, S.A., (“Banamex”) which requires the repayment of $0.3 million in principal per month until February 2016, with the remaining principal balance due in March 2016, and on March 27, 2013, Burlington Morelos received funding of $6.3 million under a three year term loan agreement with Banamex which requires repayments of $0.1 million in principal per month until February 2016, with the remaining principal balance due in March 2016. The obligations of Burlington Morelos under such term loans are denominated in U.S. dollars and are secured by a pledge of all the accounts receivable, inventories, and property, plant and equipment of Burlington Morelos and its subsidiaries. The interest rate on borrowings under the term loans is variable at LIBOR plus 4%. At September 30, 2013, the amount outstanding under the Burlington Morelos term loans was $17.9 million at an interest rate of 4.2%.

 

On March 7, 2013, a wholly-owned subsidiary of the Company, Parras Cone de Mexico, S.A. de C.V. (“Parras Cone”), entered into an amended revolving receivables factoring agreement under which Parras Cone agreed to sell certain of its accounts receivable to Banamex, on a recourse basis. The amount of accounts receivable of Parras Cone that can be sold under this agreement cannot exceed $20.0 million. At September 30, 2013, the amount of secured borrowings outstanding under the factoring agreement was $12.4 million, at an interest rate of 4.3%, which borrowings are collateralized by certain of Parras Cone’s trade accounts receivable in the aggregate amount of approximately $13.0 million. This agreement, as amended, expires on March 7, 2014.

 

 
- 13 -

 

 

On June 18, 2013, Parras Cone entered into a $5.0 million credit facility for the purchase of new machinery and equipment, of which $2.1 million had been drawn as of September 30, 2013, at an interest rate of 4.3%. Parras Cone can draw the remaining amount under this credit facility until December 2013 as equipment is purchased or delivered. Borrowings under the facility are secured by certain assets of Parras Cone and guaranteed by Burlington Morelos. The interest rate on borrowings under the facility is variable at LIBOR plus 4%, and equal monthly principal repayments are due beginning in January 2014 until November 2018 with a 25% balloon payment due in December 2018.

 

The term loans issued by the Company’s subsidiaries in Mexico described above contain customary provisions for default for agreements of this nature. Upon the occurrence of an event of default, the lenders may terminate the loan commitments, accelerate all loans and exercise any of their rights as a secured party. Such term loans also contain certain customary financial covenant requirements. In addition, Burlington Morelos and its subsidiaries are restricted under such term loans from making annual capital expenditures in excess of one percent of annual consolidated net sales of such consolidated group. As of September 30, 2013, the Company was in compliance with such covenants.

 

In 2006 and 2007, Cone Denim (Jiaxing) Limited obtained financing from Bank of China, that is non-recourse to the ITG parent company, to fund its capital expenditures in excess of partner equity contributions, which contributions are in accordance with applicable Chinese laws and regulations. The financing agreement provided for a $35.0 million term loan available in U.S. dollars, which was used for the import of equipment to Cone Denim (Jiaxing) Limited. Interest is based on three-month LIBOR plus a contractual spread of 6.0% or greater, depending upon periodic credit reviews. At September 30, 2013, outstanding borrowings under this facility were $13.7 million with a weighted average interest rate of 7.3%. The agreement was amended in January 2013 to provide that the term loan is required to be repaid in monthly principal installments of no less than $0.5 million. These payments began in January 2013 and continue until January 2016. An additional principal repayment of $0.5 million was made in January 2013 against the outstanding balance of the term loan prior to this amendment. The term loan is secured by the building, machinery, equipment and certain inventory of Cone Denim (Jiaxing). The financing agreement contains certain covenant requirements customary for agreements of this nature.

 

In June 2013, Jiaxing Burlington Textile Company fully repaid its outstanding term loan balance of $1.2 million related to borrowings from China Construction Bank using proceeds from short-term borrowings described below.

 

On October 7, 2013, the CDN loans were fully extinguished, and all of the Company’s guarantees, bonds and pledges related to the CDN Loans, including under its Project Funds and Subordination Agreement, were cancelled (see Note 16, “Subsequent Event”).

 

Senior Subordinated Notes

 

In June 2007, the Company issued senior subordinated notes with an original maturity date of June 6, 2011 (the “Notes”). Prior to the occurrence of a Qualified Issuance (as defined in the Note Purchase Agreement) of its debt and/or equity securities, interest on the Notes is payable in-kind (“PIK”) on a quarterly basis, either by adding such interest to the principal amount of the Notes, or through the issuance of additional interest-bearing Notes. At each interest payment date occurring after the completion of a Qualified Issuance, 75% of the then-accrued but unpaid interest on the Notes will be payable in cash, and the remaining portion will continue to be payable in-kind.

 

At various times, the WLR Affiliates purchased from holders certain of the Notes which were thereafter amended, restated and reissued in the form of Tranche B Notes, and which were subordinate in right of payment and collateral to Notes held by third parties other than the WLR Affiliates with an original interest rate of 12% per annum (the “Tranche A Notes”). On March 29, 2013, the Company used proceeds of $4.0 million from the U.S. Term Loan, $5.0 million from borrowings under certain term loans in Mexico, and the balance from additional U.S. Revolver borrowings to repay in full all amounts outstanding ($17.2 million including PIK interest) under the Tranche A Notes, and to pay fees and expenses in connection with such financing activities. In the three months ended March 31, 2012, the interest rate on the Tranche A Notes was 15.5% per annum; in the three months ended June 30, 2012, the interest rate on the Tranche A Notes was 16.0% per annum; in the three months ended September 30, 2012, the interest rate on the Tranche A Notes was 16.5% per annum; and in the three months ended March 31, 2013, the interest rate on the Tranche A Notes was 17.5% per annum. The Tranche B Notes are classified as “Senior subordinated notes - related party” in the Company’s accompanying consolidated balance sheets. The Tranche B Notes bear PIK interest at 12% per annum and have a maturity date of June 2015. At September 30, 2013, $158.7 million aggregate principal amount was outstanding under the Tranche B Notes, including PIK interest.

 

 
- 14 -

 

 

Debt Agreement Compliance

 

The Company is in compliance with the terms and covenants under its principal credit facilities. Any inability or failure by the Company to pay outstanding amounts when due, including as a result of any acceleration of the due date thereof, to obtain any necessary waivers or modifications to its credit facilities, to refinance its various debt or to obtain any necessary funding in amounts, at times and on terms acceptable to it, if at all would result in liquidity issues and may delay or make impossible the implementation of the Company’s strategy.

 

Debt Maturities

 

As of September 30, 2013, aggregate maturities of long-term debt for each of the next five 12-month periods were as follows: $26.4 million, $172.3 million, $73.3 million, $0.3 million and $0.3 million. The Cone Denim de Nicaragua debt of $38.0 million is excluded from the aggregate maturities listed above in light of the events described in Note 16, “Subsequent Event”.

 

 

Short-term Borrowings

 

The Company and certain of its subsidiaries had short-term borrowing arrangements with certain financial institutions or suppliers in the aggregate amount of $45.5 million at September 30, 2013 and $37.0 million at December 31, 2012, with weighted average interest rates of 6.7% and 6.9%, respectively. At September 30, 2013, ITG and its U.S. subsidiaries had outstanding short-term financing obligations from certain cotton and other suppliers in the amount of $5.3 million; Cone Denim (Jiaxing) Limited had outstanding short-term working capital loans in an aggregate amount of $34.4 million from various Chinese financial institutions, including approximately $4.0 million secured by land and buildings at Jiaxing Burlington Textile Company and $2.5 million guaranteed by a $2.8 million standby letter of credit with a WLR Affiliate; and Jiaxing Burlington Textile Company had outstanding short-term working capital loans from certain Chinese financial institutions in the amount of $5.8 million, all of which are guaranteed by standby letters of credit from the U.S. parent company, with such loans being non-recourse to the U.S. parent company except for such guaranteed portions.

 

Guarantees

 

FASB ASC 460, “Guarantees,” provides guidance on the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued and specific disclosures related to product warranties. As of September 30, 2013, the Company and various consolidated subsidiaries of the Company were borrowers under various bank credit agreements (collectively, the “Facilities”). Certain of the Facilities are guaranteed by either the Company and/or various consolidated subsidiaries of the Company. The guarantees are in effect for the duration of the related Facilities. The Company does not provide product warranties within the disclosure provisions of FASB ASC 460. The Company did not have any off-balance sheet arrangements that were material to its financial condition, results of operations or cash flows as of September 30, 2013 or December 31, 2012, except as noted herein.

 

In 2011, the Company entered into the Guaranty in favor of Fund IV. Pursuant to the Guaranty, the Company has guaranteed the prompt payment, in full, of the reimbursement obligations of Fund IV under certain letter of credit agreements to which Fund IV is a party and under which Fund IV has agreed to be responsible for certain obligations of ITG-PP, up to a total amount of $15.5 million. Also pursuant to the Guaranty, the Company is required to pay a per annum amount equal to 10% of the amount of any such outstanding letters of credit. The obligations of the Company are payable in cash or, if cash is not permitted to be paid pursuant to the terms and conditions of the 2011 Credit Agreement and related documentation, then such amounts are payable in additional Tranche B Notes. As of September 30, 2013, the total obligations under such letters of credit guaranteed by the Company were $6.5 million. In each of the nine months ended September 30, 2013 and 2012, the Company incurred guarantee fees of $0.5 million. The Guaranty will continue in force until the underlying obligations are satisfied or terminated.

 

 
- 15 -

 

 

 

Note 6 Stockholders’ Deficit

 

The components of stockholders’ deficit were as follows (in thousands):

 

   

International Textile Group, Inc. Stockholders

                 
   

Series C

preferred

stock

   

Series A

convertible

preferred

stock

   

Common

stock

   

Capital in

excess of

par value

   

Treasury

stock

   

Accumulated

deficit

   

Accumu-

lated

other

compre-

hensive loss

   

Non-

controlling

interests

   

Total

 
                                                                         

Balance at December 31, 2012

  $ 116,013     $ 312,642     $ 175     $ 33,710     $ (411 )   $ (567,312 )   $ (7,706 )   $ 42     $ (112,847 )

Net loss

                                  (15,830 )                 (15,830 )

Other comprehensive income, net of taxes

                                        568             568  

Liquidation and dissolution of majority-owned subsidiary

                                  (17 )           (42 )     (59 )

Preferred stock dividends

    7,212       18,121             (25,333 )                              

Balance at September 30, 2013

  $ 123,225     $ 330,763     $ 175     $ 8,377     $ (411 )   $ (583,159 )   $ (7,138 )   $     $ (128,168 )

 

As of September 30, 2013, the Company had 100,000,000 shares of preferred stock authorized, including 5,000,000 shares of Series C Preferred Stock (the “Series C Preferred Stock”), of which 123,714 shares of Series C Preferred Stock were issued and outstanding at September 30, 2013 (116,502 shares issued and outstanding at December 31, 2012), 15,000,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”), of which 13,230,520 shares of Series A Preferred Stock were issued and outstanding at September 30, 2013 (12,505,687 shares issued and outstanding at December 31, 2012) and 5,000,000 shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock”), none of which were issued or outstanding at September 30, 2013 or December 31, 2012. The Company’s certificate of incorporation provides that the board of directors is authorized to create and issue additional series of preferred stock in the future, with voting powers, dividend rates, redemption terms, repayment rights and obligations, conversion terms, restrictions and such other preferences and qualifications as shall be stated in the resolutions adopted by the board of directors at the time of creation.

 

On July 24, 2012, the Company entered into the Exchange Agreement with the WLR Affiliates. Pursuant to the Exchange Agreement, the WLR Affiliates exchanged approximately $112.5 million of the Company’s unsecured subordinated notes – related party (see Notes 1 and 5) held by the WLR Affiliates for 112,469.2232 shares of Series C Preferred Stock of the Company.

 

The terms of the Series C Preferred Stock provide that, among other things:

 

each share of Series C Preferred Stock has an initial liquidation preference of $1,000 (the “Series C Preferred Stock Liquidation Value”);

 

the Series C Preferred Stock is not convertible;

 

the Series C Preferred Stock, with respect to dividend rights and rights upon liquidation, winding up or dissolution, ranks (i) senior to the Company’s Series A Preferred Stock, Series B Preferred Stock, common stock and all classes and series of stock which expressly provide they are junior to the Series C Preferred Stock or which do not specify their rank; (ii) on parity with each other class or series of stock, the terms of which specifically provide they will rank on parity with the Series C Preferred Stock; and (iii) junior to each other class or series of stock of the Company, the terms of which specifically provide they will rank senior to the Series C Preferred Stock;

 

dividends on the Series C Preferred Stock are cumulative and accrue and are payable quarterly, in arrears, when, as and if declared by the board out of funds legally available therefor, at an annual rate of 8.0%, and are payable in additional shares of Series C Preferred Stock;

 

shares of Series C Preferred Stock are redeemable at the option of the Company at any time upon notice to the holder thereof and payment of 100% of the Series C Preferred Stock Liquidation Value, plus accrued dividends; and

 

shares of Series C Preferred Stock generally do not have any voting rights except as may be prescribed under the Delaware General Corporation Law; provided, however, that for so long as any shares of Series C Preferred Stock are outstanding, certain fundamental corporate actions set forth in the Certificate of Designation of Series C Preferred Stock may not be taken without the consent or approval of the holders of 66 2/3% of the outstanding Series C Preferred Stock.

 

 

 
- 16 -

 

 

Shares of Series A Preferred Stock vote together with shares of the Company’s common stock on all matters submitted to a vote of the Company’s stockholders. Each share of Series A Preferred Stock is entitled to one vote per share on all such matters. Each share of the Series A Preferred Stock is convertible, at the option of the holder thereof, into 2.5978 shares of the Company’s common stock. Notwithstanding the foregoing, however, for a period of up to six months from and after the time of an initial filing by the Company relating to a Public Offering (as defined in the Certificate of Designation of Series A Convertible Preferred Stock), any then-applicable conversion rights would be suspended. Upon the consummation of any such Public Offering, each share of Series A Preferred Stock will automatically convert into a number of shares of the Company’s common stock equal to $25.00 (subject to certain adjustments, the “Series A Preferred Stock Liquidation Value”) at the time of conversion divided by the product of (i) the price per share of common stock sold in such Public Offering and (ii) 0.75. The Company may redeem any and all shares of Series A Preferred Stock upon notice to the holders thereof and payment of 110% of the Series A Preferred Stock Liquidation Value. Dividends on the Series A Preferred Stock are cumulative and accrue and are payable quarterly, in arrears, when, as and if declared by the board out of funds legally available therefor, at an annual rate of 7.5%. Dividends are payable in additional shares of Series A Preferred Stock.

 

Shares of Series B Preferred Stock are authorized to be issued pursuant to the Company’s 2008 Equity Incentive Plan (the “2008 Plan”). The certificate of designation relating to the Series B Preferred Stock provides the following:

 

shares of Series B Preferred Stock rank (i) senior to the Company’s common stock and all other classes of stock which by their terms provide that they are junior to the Series B Preferred Stock or do not specify their rank, (ii) on parity with all other classes of stock which by their terms provide that such classes rank on parity with shares of Series B Preferred Stock, and (iii) junior to the Company’s Series A Preferred Stock, Series C Preferred Stock (defined below) and all other classes of stock which by their terms provide that they are senior to the Series B Preferred Stock, in each case with respect to rights on dividends and on a liquidation, winding up or dissolution of the Company;

 

upon any liquidation, winding up or dissolution of the Company, holders of shares of Series B Preferred Stock will be entitled to receive $25.00 per share, plus any declared but unpaid dividends, prior and in preference to any payment on any junior securities;

 

shares of Series B Preferred Stock will automatically convert into shares of the Company’s common stock upon the completion of a qualified Public Offering of common stock by the Company at a ratio equal to $25.00 divided by the public offering price per share in such Public Offering. Notwithstanding this, however, if the total number of shares of common stock to be issued upon such automatic conversion would exceed the maximum number of shares of common stock then available for issuance pursuant to awards under the Plan, then the conversion ratio for the Series B Preferred Stock will be adjusted such that the total number of shares of common stock to be issued upon such conversion will equal the number of shares of common stock then available for issuance pursuant to awards under the Plan; and

 

shares of Series B Preferred Stock will vote together with all other classes and series of stock of the Company on
all matters submitted to a vote of the Company’s stockholders. Each share of Series B Preferred Stock will be entitled to one vote per share on all such matters.

 

 

 
- 17 -

 

 

The components of, and changes in, accumulated other comprehensive loss (net of income taxes of $0.0 as of and for the periods ended September 30, 2013 and September 30, 2012) were as follows (in thousands):

 

   

Gains and

Losses on

Foreign

Currency

Cash Flow

Hedges (1)

   

Pension

Benefits (2)

   

Postretirement

Benefits (2)

   

Total

 
                                 

Balance at December 31, 2012

  $     $ (7,442 )   $ (264 )   $ (7,706 )

Other comprehensive income before reclassifications

                       

Amounts reclassified:

                               

Amortization of net actuarial losses

          159       1       160  

Other comprehensive income for the period

          159       1       160  

Balance at March 31, 2013

          (7,283 )     (263 )     (7,546 )

Other comprehensive income before reclassifications

                       

Amounts reclassified:

                               

Amortization of net actuarial losses

          160       1       161  

Other comprehensive income for the period

          160       1       161  

Balance at June 30, 2013

          (7,123 )     (262 )     (7,385 )

Other comprehensive income before reclassifications

    86                   86  

Amounts reclassified:

                               

Gains and losses included in cost of goods sold

                       

Amortization of net actuarial losses

          161             161  

Other comprehensive income for the period

    86       161             247  

Balance at September 30, 2013

  $ 86     $ (6,962 )   $ (262 )   $ (7,138 )
                                 
                                 

Balance at December 31, 2011

  $     $ (6,828 )   $ (397 )   $ (7,225 )

Other comprehensive income before reclassifications

                       

Amounts reclassified:

                               

Amortization of net actuarial losses

          171       3       174  

Other comprehensive income for the period

          171       3       174  

Balance at March 31, 2012

          (6,657 )     (394 )     (7,051 )

Other comprehensive income before reclassifications

                       

Amounts reclassified:

                               

Amortization of net actuarial losses

          171       2       173  

Other comprehensive income for the period

          171       2       173  

Balance at June 30, 2012

          (6,486 )     (392 )     (6,878 )

Other comprehensive income before reclassifications

                       

Amounts reclassified:

                               

Amortization of net actuarial losses

          171       2       173  

Other comprehensive income for the period

          171       2       173  

Balance at September 30, 2012

  $     $ (6,315 )   $ (390 )   $ (6,705 )

 

(1)

See Note 8, "Derivative Instruments".

(2)

These components are included in the computations of net periodic benefit costs. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for additional information about the Company's pension and postretirement benefit plans.

 
- 18 -

 

 

Note 7 Reconciliation to Diluted Loss Per Share

 

The following table shows the amounts used in computing loss per share and the effect on loss per share of the weighted average number of shares of dilutive potential common stock issuances (in thousands).

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Income (loss) from continuing operations

  $ (1,295 )   $ 4,235     $ (10,078 )   $ (24,289 )

Less: net income (loss) from continuing operations attributable to noncontrolling interests

                       

Accrued preferred stock dividends

    (8,698 )     (7,470 )     (25,333 )     (18,566 )

Loss from continuing operations applicable to common shareholders

    (9,993 )     (3,235 )     (35,411 )     (42,855 )

Effect of dilutive securities:

                               

None

                       

Numerator for diluted loss per share from continuing operations

  $ (9,993 )   $ (3,235 )   $ (35,411 )   $ (42,855 )
                                 

Loss from discontinued operations

  $ (1,991 )   $ (2,139 )   $ (5,752 )   $ (33,485 )

Less: net loss from discontinued operations attributable to noncontrolling interests

                      (2,666 )

Loss from discontinued operations applicable to common shareholders

    (1,991 )     (2,139 )     (5,752 )     (30,819 )

Effect of dilutive securities:

                               

None

                       

Numerator for diluted loss per share from discontinued operations

  $ (1,991 )   $ (2,139 )   $ (5,752 )   $ (30,819 )

 

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Weighted-average number of common shares used in basic earnings per share

    17,468       17,468       17,468       17,468  

Effect of dilutive securities:

                               

None

                       

Weighted-average number of common shares and dilutive potential common shares used in diluted earnings per share

    17,468       17,468       17,468       17,468  

 

 

Based on the number of shares of Series A Preferred Stock outstanding as of September 30, 2013 and the Liquidation Value thereof on such date, the Series A Preferred Stock could potentially be converted at the option of the holders thereof into 34,370,244 shares of the Company’s common stock. The following shares that could potentially dilute basic earnings per share in the future were not included in the diluted loss per share computations because their inclusion would have been antidilutive (in thousands).

 

 
- 19 -

 

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Convertible preferred stock

    34,370       31,876       33,735       31,285  

 

 

Note 8 Derivative Instruments

 

Derivative instruments used by the Company for foreign currency, cotton, wool and natural gas purchases consist primarily of forward purchase contracts. The Company does not utilize financial instruments for trading or other speculative purposes. The Company has historically qualified for the “normal purchases exception” under GAAP for derivatives related to its cotton and wool forward purchase contracts and certain of its natural gas contracts and, as a result, these derivative instruments are not marked to market in the Company’s consolidated financial statements. The Company monitors its risk associated with the volatility of certain foreign currencies against its functional currency, the U.S. dollar. The Company periodically uses certain derivative financial instruments to reduce exposure to volatility of certain foreign currencies and has designated such instruments as cash flow hedges under hedge accounting rules in the three months ended September 30, 2013. The Company did not designate its natural gas forward purchase contracts as hedges for any of the periods presented herein. At September 31, 2013 and December 31, 2012, the Company had the following outstanding forward contracts that were entered into to hedge forecasted purchases through the end of December of the years following such dates:

 

Contract

 

Number of Units

Foreign currency forward contracts outstanding as of September 30, 2013

 

79,936,800 Pesos

Natural gas forward contract outstanding as of September 30, 2013

 

78,000 MBTU

Natural gas forward contract outstanding as of December 31, 2012

 

195,015 MBTU

     

The fair value of the Company’s derivative instruments recognized in the September 30, 2013 and December 31, 2012 consolidated balance sheets consisted of the following (in thousands):

 

   

September 30, 2013

 
   

Asset Derivatives

   

Liability Derivatives

 
   

Balance

Sheet

Location

   

Fair

Value

   

Balance

Sheet

Location

   

Fair

Value

 

Derivatives designated as hedging instruments under FASB ASC 815

                               

Foreign currency contracts

 

Sundry notes and

receivables

    $ 57    

N/A

    $  

Derivatives not designated as hedging instruments under FASB ASC 815

                               

Commodity contracts

 

N/A

         

Sundry payables and

accrued liabilities

      5  
                                 

Total Derivatives

          $ 57             $ 5  

 

 

 
- 20 -

 

 

   

December 31, 2012

 
   

Asset Derivatives

   

Liability Derivatives

 
   

Balance

Sheet

Location

   

Fair

Value

   

Balance

Sheet

Location

   

Fair

Value

 

Derivatives not designated as hedging instruments under FASB ASC 815

                               

Commodity contracts

 

N/A

    $    

Sundry payables and

accrued liabilities

    $ 15  
                                 

Total Derivatives

          $             $ 15  

 

 

The Company did not exclude any amounts of its foreign currency cash flow hedges from effectiveness testing during any periods presented herein, and such tests resulted in the hedges being effective, or expected to be effective, in offsetting the variability of the designated forecasted cash flows, which cover a period of four months through December 2013. The effect of derivative instruments on the financial performance of the Company was as follows (in thousands):

 

   

Amount of Gain (Loss) in

Other Comprehensive Income

(Effective Portion)

 

Location of Gain (Loss)

Reclassified from

 

Amount of Gain (Loss)

Reclassified from

Accumulated Other

Comprehensive Income

into Income

 
   

Three and Nine Months

Ended September 30,

 

Accumulated Other

Comprehensive Income