Item 1. Business.
Texfi Industries, Inc. ("the Company") was incorporated in Delaware in 1963.
The Company manufactures and markets a diverse line of textile products from a
variety of raw materials, including natural and synthetic materials. The
Company's executive offices are located at 1430 Broadway, 13th Floor, New York,
New York, 10018, telephone (212) 930-7200.
The Company's only division, Texfi Blends, operates four manufacturing
facilities located in Rocky Mount, Fayetteville, and Haw River, North Carolina
and Jefferson, Georgia, providing an aggregate of 1,165,000 square feet of
manufacturing facilities. The division's sales and marketing headquarters are
in New York City, with branch offices or agents in other major cities throughout
the United States and Europe. Texfi Blends manufactures products made from
textured polyester, flame-retardant polyester, and blends of polyester, rayon,
and wool which are sold worldwide to the menswear, womenswear and childrenswear
apparel, uniform, home furnishings, and export markets. During its 1998 fiscal
year, the Company merged its weaving operations located at its Fayetteville,
North Carolina facility into its Rocky Mount, North Carolina facility. The
Company incurred $526,000 in employee-related severance and benefit costs which
were segregated as a restructuring charge.
Prior to October 1997, the Company operated its Texfi Narrow Fabrics division
which manufactured products from polyester, nylon and rubber that were sold
domestically to the intimate apparel, insert apparel, medical and automotive
markets. On November 1, 1996, the Company restructured its narrow fabrics
operations, closing this division's woven narrow fabrics' facility in Graham,
North Carolina and consolidating the remaining division assets into its knitted
narrow fabrics' Asheboro, North Carolina facility. As a result, the Company
recorded an initial $3.3 million restructuring charge during fiscal 1996 which
consisted of a $2.5 million write-down of property, plant and equipment and
inventory to net realizable value and $800,000 in other various restructuring
costs. During fiscal 1997, the Company proceeded to liquidate a majority of the
Graham facility assets and placed for sale its remaining knitted narrow fabrics
business. On October 3, 1997, the Company sold its knitted narrow fabrics
business, excluding trade and factor accounts receivable, for $7.7 million,
which generated a gain of $3.8 million. Also during the fourth quarter of fiscal
1997, the Company recorded an additional $3.3 million in restructuring charges
to write-down the assets of the Graham facility to net realizable value.
Finally, in fiscal 1998, the Company incurred an additional $415,000 in
restructuring charges associated with the liquidation of the remaining Texfi
Narrow Fabrics division assets which included a $133,000 post-closing sale
adjustment, a $152,000 write-down of property, plant and equipment to net
realizable value, and $130,000 in various other restructuring costs.
During fiscal 1996, the Company discontinued the operations at its Kingstree
Knit Apparel division. During the fourth quarter of fiscal 1997, the Company
liquidated the remaining inventory related to this division and recorded a loss
from discontinued operations of $1.0 million after reserves. The fiscal 1998
loss on disposal of discontinued operations of $1.9 million is primarily related
to the loss on sale of property, plant, and equipment remaining from the
Kingstree Knit Apparel division's operations at prices less than recorded value,
plus associated liquidation costs. As of October 30, 1998, the Company has
approximately $368,000 of Kingstree Knit Apparel division assets still held for
The Company accounted for its interest in Rival Sport, LLC ("Rival"), a joint
venture which was formed in February 1997 between the Company and NHL
Enterprises in order to market and source a branded line of hockey-related
apparel, using the equity method. During fiscal 1997, the Company invested $4.9
million in Rival, which recorded sales of $259,000 and a net loss of $3.2
On December 18, 1997 the Company divested its interest in Rival by selling its
50% ownership interest to an entity affiliated with certain of the Company's
then executive officers. The Company received a secured $4.5 million ten-year
note which bore interest at 5.0% per annum, payable at maturity. In the first
quarter of fiscal 1998, the Company determined that as a result of continued and
anticipated future losses at Rival and in light of the terms of the note there
had been a permanent impairment to its net investment in Rival and accordingly
restated its financial records as of October 31, 1997 to reflect a reserve of
$3.4 million against its net investment in Rival.
During the first quarter of fiscal 1998, the Company invested $1.2 million in
Rival. Also in the first quarter of fiscal 1998, the Company recorded an
additional $1.1 million impairment against its net investment in Rival, thus
reserving the full value of the note. Subsequent to year-end, management was
informed that the note may be of no collectible value.
The Company manufactures woven finished fabrics for the apparel and home
The approximate percentage of total revenue contributed by each of the Company's
product groups is as follows:
1998 1997 1996
Woven finished fabrics 100.0% 90.9% 87.5%
Narrow fabrics -- 9.1 12.5
100.0% 100.0% 100.0%
The Company ceased manufacture of narrow knitted and woven fabrics in fiscal
During 1998 and 1997, the Company's business exhibited seasonality, primarily
due to temporary plant shutdowns during the Christmas/New Year's holiday season.
As a result, sales have been and are expected to be lower during the first half
of the fiscal year while working capital requirements increase in anticipation
of higher second half sales. Working capital is comprised chiefly of
inventories and accounts receivable. Inventories are reported at the lower of
cost or market value with cost being determined primarily by the first-in,
first-out method. Market value is based on replacement cost or net realizable
value, as appropriate. The majority of accounts receivable are due from certain
financial institutions with which the Company has entered into factoring
At October 30, 1998, the Company had a $30,469,000 backlog of orders believed to
be firm, as compared to a $43,776,000 backlog at October 31, 1997. The current
backlog of orders is expected to be filled prior to the end of fiscal 1999.
In fiscal 1998, the Company's products were sold to more than 1,000 customers,
which were primarily domestic manufacturers of apparel and home furnishings, as
well as medical suppliers and retailers. Sales to the 10 largest customers
represented approximately 35.5% of total sales, but no one customer accounted
for more than 6% of total sales. The Company does not believe that the loss of
any one of its customers would have a material adverse effect on the Company.
The Company's products are sold through a sales force of 18 full-time, salaried
account executives and 10 independent, commissioned sales representatives, the
latter of whom may sell products of other manufacturers, including some
competitors of the Company. The Company maintains its primary sales office in
New York City. The Company's production is determined in large part by customer
contracts received by its sales force. As part of its marketing effort, the
Company continually works to develop new products and processes and improve
existing products and processes, but expenditures for these activities are not
In order to improve its customer service capabilities, the Company utilizes
computerized networks with many of its customers to provide "quick response" for
more competitive product deliveries. By providing these customers with certain
direct inventory information, the Company believes that the customers' inventory
requirements and inventory carrying costs can be reduced.
The textile and apparel industry is highly competitive with a large number of
domestic and foreign manufacturers, none of which dominates the market for any
of the Company's product lines. The Company competes on the basis of styling,
price, product performance and customer service.
U.S. producers, including the Company, are significantly affected by competition
from foreign manufacturers. Rules under the General Agreement on Trade and
Tariffs ("GATT") would eliminate restrictions on imports of textiles and apparel
after a ten-year transition period. The North American Free Trade Agreement
("NAFTA") between the United States, Canada and Mexico has created the world's
largest free-trade zone. The Agreement contains safeguards for the U.S. textile
industry, including a rule of origin requirement that products be processed in
one of the three countries in order to benefit from NAFTA. There can be no
assurance that either NAFTA or GATT will not adversely affect the Company.
Because of the absence of published information regarding sales of competing
products by other manufacturers, some of which are privately owned companies or
divisions or subsidiaries of large companies, it is not possible to determine
precisely the market shares of the Company and its competitors for the Company's
SOURCES OF RAW MATERIALS
The Company purchases from outside suppliers natural and synthetic fibers and
dyes and chemicals for use in its fabric manufacturing operations. The Company
purchases virtually all of its textured polyester yarns from the leading
independent domestic supplier of such yarns. The Company has not experienced a
significant shortage of raw materials and believes that such supplies will
continue to be available.
As of October 30, 1998, the Company had approximately 1,100 employees with whom
it considers its relationship to be good.
RESEARCH AND DEVELOPMENT
Although the Company pursues improvements in the quality, style and performance
of its products, research and development expenditures have not accounted for a
material portion of the Company's total operating costs.
The Company believes that it is in substantial compliance with federal, state
and local provisions regulating the release of materials into the environment,
or otherwise relating to the protection of the environment.
The existence of groundwater contaminants primarily of a type often found in
commonly used industrial solvents was discovered at one of the Company's
facilities. This facility has not been operated by the Company since 1980 and
has been sold to another party. The State of North Carolina has issued a permit
to discharge treated groundwater, and treatment systems have been installed to
complete groundwater remediation. The Company's cost to monitor and maintain
the treatment system will be approximately $54,000 annually until the site is
remediated. In addition, there may be other potential environmental conditions
at the site to be addressed, and the remedial plan does not cover these
conditions; however, management does not believe that the cost of taking
corrective action will have a material adverse effect on the Company's financial
The Company has instituted a corporate policy statement on safety and
environmental affairs to ensure that the Company and its divisions comply with
federal, state and local regulatory standards relating to safety and
environmental pollution controls. Included in this policy is a requirement for
periodic compliance audits at each of the Company's facilities. The Company
believes that costs to be expended now or in the future to ensure compliance
with environmental and safety regulations will not have a material adverse
impact on the financial condition of the Company.
The Company's ongoing operations are concentrated in a single industry, the
manufacture and production of textiles.
The Company has focused considerable attention upon potential disruptions that
could result from certain computer programs' inability to recognize the year
2000. See "YEAR 2000 IMPACT" in "Management's Discussion and Analysis of
Results of Operations and Financial Condition" in the Company's 1998 Annual
Report to Shareholders for information relating to this issue on the Company and
the Company's efforts to address the issue.
FORWARD LOOKING INFORMATION
Statements contained in the foregoing discussion and elsewhere in this report
that are not based on historical fact are considered "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are based on management's present assumptions as to
future trends, and changes in current economic trends, prevailing interest
rates, the availability and cost of raw materials, laws affecting the Company's
business and similar factors could affect the validity of such assumptions.