PINX:ITXN International Textile Group Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012
 
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 x     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 x   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 definition 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   x
   
(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 x
 
The number of shares outstanding of the registrant’s common stock, $0.01 par value per share, as of August 3, 2012, was 17,468,327.
 

 
-1-

 
 
     
PAGE
     
PART I
FINANCIAL INFORMATION
 
       
 
ITEM 1.
FINANCIAL STATEMENTS
 
       
   
Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011
4
       
   
Unaudited Consolidated Statements of Operations for the three and six months ended
June 30, 2012 and 2011
5
       
   
Unaudited Consolidated Statements of Comprehensive Operations for the three and six months ended June 30, 2012 and 2011
6
       
   
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011
7
       
   
Notes to Consolidated Financial Statements (Unaudited)
8 - 30
       
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
31 - 42
       
 
ITEM 4.
CONTROLS AND PROCEDURES
42
     
PART II
OTHER INFORMATION
 
       
 
ITEM 5.
 
ITEM 6.
 
OTHER INFORMATION
 
EXHIBITS
43
 
43
   
SIGNATURE
44

 
 
-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 of 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, expected timing of production at various international greenfield initiative locations, the ability to maintain compliance with the requirements under various credit facilities, expected 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;
 
·
our inability to repay or refinance our debt currently due or as it becomes due at our international greenfield initiative locations or otherwise;
 
·
further actions by our lenders to accelerate any of our indebtedness or proceed against the collateral securing such indebtedness;
 
·
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;
 
·
lower than anticipated demand for our products;
 
·
our international greenfield initiatives not producing the expected benefits, or our incurring asset impairments related thereto;
 
·
our ability to generate sufficient cash flows, maintain our liquidity and obtain funds for working capital related to our operations, specifically including our international greenfield initiatives;
 
·
our dependence on the success of, and our relationships with, our largest customers;
 
·
competitive pricing pressures on our sales, and our ability to achieve the level of 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;
 
·
adverse changes or increases in U.S. Government policies that are unfavorable to domestic manufacturers, including among other things, significant budget restraints that could affect certain of our businesses;
 
·
risks associated with foreign operations and foreign supply sources, such as disruptions of markets, changes in import and export 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 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 the operations of the Company.
 
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, 2011 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)

   
June 30,
   
December 31,
 
 
 
2012
   
2011
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 2,523     $ 3,987  
Accounts receivable, less allowances of $723 and $1,096, respectively
    83,744       73,250  
Sundry notes and receivables
    10,237       8,834  
Inventories
    115,421       140,079  
Deferred income taxes
    1,759       1,771  
Prepaid expenses
    4,104       3,770  
Assets held for sale
    122       307  
Other current assets
    1,086       1,063  
Total current assets
    218,996       233,061  
Investments in and advances to unconsolidated affiliates
    347       652  
Property, plant and equipment, net
    147,460       193,185  
Intangibles and deferred charges, net
    2,610       2,944  
Goodwill
    2,740       2,740  
Income taxes receivable
    269       263  
Deferred income taxes
    1,989       1,892  
Other assets
    1,237       1,363  
Total assets
  $ 375,648     $ 436,100  
Liabilities and Stockholders’ Deficit
               
Current liabilities:
               
Current portion of bank debt and other long-term obligations
  $ 43,420     $ 28,214  
Callable long-term debt classified as current
    53,322       65,552  
Short-term borrowings
    39,384       54,451  
Accounts payable
    52,159       51,325  
Sundry payables and accrued liabilities
    28,926       30,339  
Income taxes payable
    4,227       3,773  
Deferred income taxes
    3,667       3,225  
Total current liabilities
    225,105       236,879  
Bank debt and other long-term obligations, net of current maturities
    89,704       113,697  
Senior subordinated notes - related party
    136,547       128,626  
Unsecured subordinated notes - related party
    111,193       101,920  
Income taxes payable
    1,721       1,681  
Deferred income taxes
    2,192       2,124  
Other liabilities
    25,716       26,696  
Total liabilities
    592,178       611,623  
Commitments and contingencies
               
Stockholders' deficit:
               
International Textile Group, Inc. stockholders' deficit:
               
Series A convertible preferred stock (par value $0.01 per share; 13,000,000 and 12,000,000 shares authorized; 12,039,740 and 11,595,895 shares issued and outstanding; and aggregate liquidation value of $300,994 and $289,897 at June 30, 2012 and December 31, 2011, respectively)
    300,994       289,897  
Common stock (par value $0.01 per share; 150,000,000 shares authorized; 17,468,327 shares issued and outstanding at June 30, 2012 and December 31, 2011)
    175       175  
Capital in excess of par value
    49,391       60,488  
Common stock held in treasury, 40,322 shares at cost
    (411 )     (411 )
Accumulated deficit
    (559,843 )     (502,639 )
Accumulated other comprehensive loss, net of taxes
    (6,878 )     (7,225 )
Total International Textile Group, Inc. stockholders’ deficit
    (216,572 )     (159,715 )
Noncontrolling interests
    42       (15,808 )
Total stockholders' deficit
    (216,530 )     (175,523 )
Total liabilities and stockholders' deficit
  $ 375,648     $ 436,100  
 
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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
          (As recast)           (As recast)   
Net sales
  $ 163,101     $ 167,344     $ 318,758     $ 315,605  
Cost of goods sold
    150,232       151,011       296,438       283,371  
Gross profit
    12,869       16,333       22,320       32,234  
Selling and administrative expenses
    11,991       12,113       23,530       24,561  
Provision for (recovery of) bad debts
    (56 )     88       (29 )     143  
Other operating income - net
    (216 )     (310 )     (219 )     (713 )
Restructuring charges
    700       -       833       14  
Income (loss) from operations
    450       4,442       (1,795 )     8,229  
Non-operating other income (expense):
                               
Interest income
    14       171       42       248  
Interest expense - related party
    (8,859 )     (7,362 )     (17,194 )     (14,212 )
Interest expense - third party
    (4,681 )     (3,513 )     (9,450 )     (7,429 )
Other income (expense) - net
    (24 )     (2,139 )     (2,197 )     (3,541 )
Total non-operating other income (expense) - net
    (13,550 )     (12,843 )     (28,799 )     (24,934 )
Loss from continuing operations before income taxes and equity in income (losses) of unconsolidated affiliates
    (13,100 )     (8,401 )     (30,594 )     (16,705 )
Income tax expense
    (485 )     (1,040 )     (1,375 )     (2,054 )
Equity in income (losses) of unconsolidated affiliates
    19       78       (359 )     54  
Loss from continuing operations
    (13,566 )     (9,363 )     (32,328 )     (18,705 )
Discontinued operations, net of taxes:
                               
Loss from discontinued operations
    (1,621 )     (4,394 )     (5,338 )     (9,103 )
Loss on deconsolidation of subsidiary
    (22,204 )     -       (22,204 )     -  
Gain (loss) on disposal
    -       (44 )     -       2,066  
Loss from discontinued operations
    (23,825 )     (4,438 )     (27,542 )     (7,037 )
Net loss
    (37,391 )     (13,801 )     (59,870 )     (25,742 )
Less: net loss attributable to noncontrolling interests
    (792 )     (2,335 )     (2,666 )     (4,354 )
Net loss attributable to International Textile Group, Inc.
  $ (36,599 )   $ (11,466 )   $ (57,204 )   $ (21,388 )
                                 
Net loss attributable to International Textile Group, Inc.
  $ (36,599 )   $ (11,466 )   $ (57,204 )   $ (21,388 )
Accrued preferred stock dividends
    (5,600 )     (5,193 )     (11,096 )     (10,234 )
Net loss attributable to common stock of International
Textile Group, Inc.
  $ (42,199 )   $ (16,659 )   $ (68,300 )   $ (31,622 )
                                 
Net loss per share attributable to common stock of International Textile Group, Inc., basic:
                               
Loss from continuing operations
  $ (1.10 )   $ (0.82 )   $ (2.49 )   $ (1.64 )
Loss from discontinued operations
    (1.32 )     (0.13 )     (1.42 )     (0.17 )
    $ (2.42 )   $ (0.95 )   $ (3.91 )   $ (1.81 )
Net loss per share attributable to common stock of International Textile Group, Inc., diluted:
                               
Loss from continuing operations
  $ (1.10 )   $ (0.82 )   $ (2.49 )   $ (1.64 )
Loss from discontinued operations
    (1.32 )     (0.13 )     (1.42 )     (0.17 )
    $ (2.42 )   $ (0.95 )   $ (3.91 )   $ (1.81 )
                                 
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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net loss
  $ (37,391 )   $ (13,801 )   $ (59,870 )   $ (25,742 )
                                 
Other comprehensive income, net of taxes:
                               
Amortization of unrecognized net losses included in periodic benefit cost
    173       120       347       239  
                                 
Net comprehensive loss
    (37,218 )     (13,681 )     (59,523 )     (25,503 )
                                 
Less: net comprehensive loss attributable to noncontrolling interests
    (792 )     (2,335 )     (2,666 )     (4,354 )
                                 
Net comprehensive loss attributable to International Textile Group, Inc.
  $ (36,426 )   $ (11,346 )   $ (56,857 )   $ (21,149 )

 

 
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)
 

   
Six Months Ended
 
   
June 30,
 
   
2012
   
2011
 
OPERATIONS
           
Net loss
  $ (59,870 )   $ (25,742 )
Adjustments to reconcile net loss to cash provided by (used in) operations:
               
Loss on deconsolidation of subsidiary
    22,204       -  
Gain on disposal of discontinued operations
    -       (2,066 )
Provision for (recovery of) bad debts
    (28 )     130  
Depreciation and amortization of property, plant and equipment
    9,507       10,252  
Amortization of deferred financing costs
    517       753  
Deferred income taxes
    396       728  
Equity in (income) losses of unconsolidated affiliates
    359       (54 )
Gain on sale of assets
    (219 )     (713 )
Noncash interest expense
    18,345       16,140  
Foreign currency exchange losses
    715       1,017  
Contributions to pension benefit plan
    (1,270 )     (1,479 )
Payment of interest on payment-in-kind notes
    -       (1,527 )
Change in operating assets and liabilities:
               
Accounts receivable
    (10,678 )     (15,853 )
Inventories
    24,127       (37,911 )
Other current assets
    (1,626 )     (2,236 )
Accounts payable and accrued liabilities
    7,082       28,975  
Income taxes payable
    359       (836 )
Other
    759       1,912  
Net cash provided by (used in) operating activities
    10,679       (28,510 )
                 
INVESTING
               
Capital expenditures
    (422 )     (1,255 )
Investments in and advances to unconsolidated affiliates
    (98 )     -  
Effect on cash from deconsolidation of subsidiary
    (201 )     -  
Proceeds from sale of property, plant and equipment
    416       1,430  
Proceeds from sale of other assets, net
    -       6,106  
Net cash provided by (used in) investing activities
    (305 )     6,281  
                 
FINANCING
               
Proceeds from issuance of term loans
    -       40,500  
Repayment of term loans
    (7,619 )     (25,863 )
Net borrowings under revolver loans
    7,512       76,201  
Repayment of revolving loan facility at maturity
    -       (38,577 )
Net proceeds from (repayments of) short-term borrowings
    (10,592 )     13,020  
Payment of financing fees
    (171 )     (2,556 )
Repayment of capital lease obligations
    (127 )     (324 )
Proceeds from issuance of senior subordinated notes - related party
    -       2,000  
Payment of principal on payment-in-kind notes
    -       (38,992 )
Decrease in checks issued in excess of deposits
    -       (581 )
Net cash provided by (used in) financing activities
    (10,997 )     24,828  
                 
Effect of exchange rate changes on cash and cash equivalents
    (841 )     (596 )
Net change in cash and cash equivalents
    (1,464 )     2,003  
Cash and cash equivalents at beginning of period
    3,987       3,890  
Cash and cash equivalents at end of period
  $ 2,523     $ 5,893  
                 
Supplemental disclosures of cash flow information:
               
Cash payments of income taxes, net
  $ 396     $ 760  
Cash payments for interest
  $ 6,078     $ 4,949  
Noncash investing and financing activities:
               
Accrued preferred stock dividends
  $ 11,096     $ 10,234  
Issuance of note receivable for sale of assets
  $ -     $ 1,041  
Debt incurred to settle financing costs
  $ -     $ 300  
 
 
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, China, and Mexico. The Company deconsolidated all operations related to its greenfield facility in Vietnam as of May 25, 2012. Accordingly, the financial position, results of operations and cash flows related to this business are not included in the Company’s consolidated financial statements subsequent to May 25, 2012 (see Note 2).
 
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, 2011 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”). 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. In the opinion of management, the information furnished reflects all adjustments necessary for a fair statement of the results for the reported interim periods, 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, 2011. The results of any given quarter are not necessarily indicative of the results 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, intangible assets, other long-lived assets, guarantee obligations, indemnifications, and assumptions used in the calculation of, among others, income taxes, pension and postretirement benefits, legal costs and insurance recoveries and environmental costs. These estimates and assumptions are based upon historical factors, current circumstances 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 global consumer spending 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 will be reflected in the financial statements for future periods. Management believes that its estimates impacting the accompanying consolidated financial statements, including for these matters, are reasonable based on facts currently available.
 
Financial Condition
 
The Company and its subsidiaries have a significant amount of debt outstanding under various credit facilities and agreements. A substantial portion of the Company’s debt is payable by various of the Company’s subsidiaries organized in foreign jurisdictions and is non-recourse to the ITG parent company. In addition, a substantial portion of the Company’s debt, $247.7 million at June 30, 2012, is payable to related parties (namely, certain entities affiliated with Wilbur L. Ross., Jr., the Company’s chairman of the board (collectively, the “WLR Affiliates”)). However, $112.5 million of such related party debt that was outstanding on July 24, 2012 was exchanged for newly issued shares of a newly-designated series of preferred stock (see Note 16, “Subsequent Events”). As a result of the foregoing, the Company’s total debt, as reported on its consolidated balance sheet, has been reduced by approximately $112.5 million as of July 24, 2012. The following table presents a summary of the Company’s debt obligations payable to third parties as of June 30, 2012 (in thousands). Amounts in the column labeled “U.S.” represent debt guaranteed by, or otherwise with recourse to, the ITG parent company. Amounts in the column labeled “International” represent debt not guaranteed by, or without recourse to, the ITG parent company.
 

 
-8-

 
 
   
U.S.
   
International
   
Total
 
                   
Current portion of long-term debt
  $ 3,329     $ 40,091     $ 43,420  
Callable long-term debt classified as current
    15,316       38,006       53,322  
Short-term borrowings
    4,388       34,996       39,384  
      23,033       113,093       136,126  
Bank debt and other long-term obligations, net of current maturities
    75,494       14,210       89,704  
   Total third party debt
  $ 98,527     $ 127,303     $ 225,830  

As of December 31, 2011 and continuing through the date hereof, the Company has not been in compliance with a covenant under the purchase agreement (the “Note Purchase Agreement”) relating to its senior subordinated notes (the “Notes”). Under the terms of the Note Purchase Agreement, such noncompliance constitutes an event of default that gives the holders thereof the right, among others, to declare all outstanding principal and accrued interest under the facility ($15.3 million at June 30, 2012) immediately due and payable after the passage of a 120 day waiting period, and to take possession of and dispose of certain assets of the Company after a 540 day waiting period. These waiting periods commenced on April 27, 2012.  In connection with the foregoing, in March 2012, the Company and the other parties thereto entered in to an amendment to the Company's $105.5 million Amended and Restated Credit Agreement (the “2011 Credit Agreement”). This amendment, among other things waives, until March 31, 2013, any cross default under the 2011 Credit Agreement, which would otherwise have arisen as a result of the event of default under the Note Purchase Agreement. Amounts due and payable under the Note Purchase Agreement are subordinated in right of payment to all amounts outstanding under the 2011 Credit Agreement. No assurances can be given that the Company will be able to obtain any further necessary modifications, amendments or waivers to the 2011 Credit Agreement in the future, or concerning the timing or costs thereof.

Although the Company believes it is positioned to manage its liquidity requirements within its businesses over the next twelve months through funds expected to be generated from operations and available borrowing capacity, the Company’s ability to manage its non-recourse or certain of its other debt that becomes due within the next twelve months will be dependent upon its ability to (i) refinance such existing debt, (ii) restructure or obtain replacement financing for such debt, or (iii) obtain modifications or amendments to any debt instruments of which the Company is not in covenant compliance. The Company has estimated that the fair value of its collateral is sufficient to satisfy the debt obligations which may be secured by such collateral. There can be no assurances as to the Company’s ability to complete any of the foregoing, as to the availability of any other necessary financing and, if available, whether any potential sources of funds would be available on terms and conditions acceptable to the Company, or whether and to what extent the loss of any collateral securing any debt would have an effect on the Company. For additional information on the Company’s outstanding indebtedness, see Note 5.

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 or financial position. No one customer accounted for 10% or more of the Company’s accounts receivable as of June 30, 2012, but one customer, V.F. Corporation, accounted for more than 10% of the Company’s net sales in the 2011 fiscal year and in the six months ended June 30, 2012. Additionally, the Company believes that one of its customers, Levi Strauss & Co. (“Levi Strauss”), is able to direct certain of its garment producers to purchase denim (or other fabric) directly from the Company for use in Levi Strauss products. Although Levi Strauss is not directly liable in any way for the payment by any of those producers for fabric purchased from the Company, the Company believes that continued sales to these customers are dependent upon the Company maintaining a strong supplier/customer relationship with Levi Strauss, as well as Levi Strauss’ continued success in the marketplace.

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 $2.5 million at June 30, 2012, approximately $0.2 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 June 30, 2012, the Company’s proportionate share of restricted net assets of its consolidated subsidiaries was approximately $7.2 million.
 
 
-9-

 

Recently Adopted Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This ASU represents the converged guidance of the FASB and the International Accounting Standards Board on fair value measurement. The guidance clarifies how a principal market is determined, addresses the fair value measurement of instruments with offsetting market or counterparty credit risks, addresses the concept of valuation premise and highest and best use, extends the prohibition on blockage factors to all three levels of the fair value hierarchy and requires additional disclosures. ASU 2011-04 was effective for interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements.
 
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” which amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The provisions of this guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. This accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which indefinitely defers certain provisions ASU 2011-05 to allow the FASB time to deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. The adoption of ASU 2011-05 did not have any impact on our financial position or results of operations but impacted our financial statement presentation; the Company elected the option to present two separate but consecutive statements of comprehensive income.

Recently Issued Accounting Pronouncements
 
In July 2012, the FASB issued 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 ASC 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 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 with early adoption permitted. The Company does not expect the adoption of ASU 2012-02 to have a material impact on its consolidated financial statements.

Note 2 Deconsolidation, Discontinued Operations, and Long-Lived Assets Held for Sale

Deconsolidation of the ITG-Phong Phu Cotton-Based Fabrics and Garment Manufacturing Operations

The Company deconsolidated its cotton-based fabrics and garment manufacturing operations as of May 25, 2012. Since completion in December 2008 and after the significant economic downturn in 2008 and 2009, the Company’s ITG-Phong Phu Joint Venture (“ITG-PP”) facility experienced increasing capacity utilization but, through December 31, 2011, continued to incur operating losses primarily due to a shortage of available working capital resulting in plant curtailments, late customer deliveries and high air freight costs. As a result, the Company, with the assistance of an affiliate of the Company’s chairman of the board, made additional investments in ITG-PP during 2011. At December 31, 2011, this facility had not reached full capacity utilization and the Company remained in discussions with the joint venture partner to resolve certain disputes. The Company and its joint venture partner have entered into an arbitration process to resolve these disputes. As a result of such disputes, in December 2011, the Vietnam operation was idled beginning in January 2012.

In October 2007, ITG-PP entered into a seven year, $22.3 million term loan agreement (the “ITG-PP Term Loan”) with Vietnam Technological Commercial Joint Stock Bank (“Techcombank”). ITG-PP also entered into a seven year lease agreement with its joint venture partner for certain equipment through June 2014 (the “Kusters Equipment”), and the Company recorded this lease as a capital lease in an original amount of $10.2 million. ITG-PP is also a party to a credit line agreement with Techcombank to provide short-term working capital loans upon request. The Techcombank obligations and the ITG-PP capital lease obligation are non-recourse to the ITG parent company or any other subsidiary of the Company, but are secured by the assets of ITG-PP. Additionally, the ITG parent company has certain related party loans receivable from ITG-PP collateralized by the assets of ITG-PP on a junior basis.

 
-10-

 
 
ITG-PP did not make its scheduled ITG-PP Term Loan installment payment in February 2012. On March 10, 2012, Techcombank sent ITG-PP notice of an event of default declaring all outstanding principal and accrued interest under the ITG-PP Term Loan and short-term credit line agreement immediately due and payable.  Pursuant to a security agreement entered into in connection with the ITG-PP Term Loan, this notice also gave Techcombank the right to, among other things, take possession and dispose of all of ITG-PP’s assets which secured such indebtedness (the “Security Assets”), which constitute all of ITG-PP’s assets other than the Kusters Equipment. ITG-PP had also not made certain scheduled principal payments on the capital lease obligation related to the Kusters Equipment, which constitutes an event of default under the capital lease agreement.

On May 25, 2012, ITG-PP entered into an enforcement agreement (“the Enforcement Agreement”) with Techcombank pursuant to which Techcombank took possession of the Security Assets. The Enforcement Agreement provides, among other things, that Techcombank has the power to conduct a sale of the Security Assets within 60 to 90 days after the date of the Enforcement Agreement and within other specified intervals thereafter, if necessary; and that the agreed upon minimum selling price for the Security Assets is $40.0 million, subject to certain reductions. As of May 25, 2012, the outstanding amount of the Techcombank obligations was approximately $18.6 million, including accrued interest and fees, and the outstanding amount of the ITG parent company related party loans receivable from ITG-PP was approximately $35.9 million, including accrued interest. Under the Enforcement Agreement, proceeds from the sale of the Security 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 the ITG-PP term loan and short-term credit line agreement, 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 will be remitted to, or at the direction of, ITG-PP.

As of May 25, 2012, the Security Assets had a net book value of approximately $28.7 million. Approximately $21.6 million of the ITG parent 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. Assuming an orderly disposition, the Company has estimated that the fair value of the Security Assets, net of selling costs, will be sufficient to satisfy the Techcombank obligations and a portion of the related party loans payable to the ITG parent company, although there can be no assurances in this regard.

The Security Assets and the Kusters Equipment support the entire business operations of ITG-PP.  As a result of the execution of the Enforcement Agreement and the default under the lease agreement relating to the Kusters Equipment, the Company does not expect that it will regain control of such assets and that the loss of control of the ITG-PP assets is, therefore, not temporary. Consequently, ITG deconsolidated ITG-PP as of May 25, 2012. Accordingly, the financial position, results of operations and cash flows of ITG-PP are not included in the Company’s consolidated financial statements subsequent to May 25, 2012. The Company has recorded a loss on deconsolidation of ITG-PP in the amount of $22.2 million in the three and six months ended June 30, 2012, of which $22.0 million is a non-cash loss.

Sale of Jacquard Fabrics Business

On March 31, 2011, the Company sold certain assets related to its jacquard fabrics business, including accounts receivable, inventories, certain intellectual property, and property, plant and equipment. The purchase price included $6.4 million in cash and a non-interest bearing promissory note of $1.1 million, which is being paid in eleven monthly installments which began in September 2011 (recorded with an initial discount of $0.1 million).

Presentation of Discontinued Operations and Certain Pro Forma Financial Information
 
The results of operations related to the ITG-PP and jacquard fabrics business operations 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 interest to discontinued operations based on debt that is required to be repaid from proceeds of the disposal transactions. No interest has been allocated to the ITG-PP discontinued operations in the three or six months ended June 30, 2012 or 2011 due to the uncertainty of any amounts to be received by the ITG parent company. Net sales and certain other components included in discontinued operations were as follows (in thousands):
 
 
-11-

 
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net sales:
                       
ITG-PP business
  $     $ 8,370     $ 6,180     $ 18,094  
Jacquards fabrics business
  $     $     $     $ 3,609  
                                 
Interest expense allocated to discontinued operations:
                       
ITG-PP business
  $     $     $     $  
Jacquards fabrics business
  $     $     $     $ 90  
                                 
Loss from discontinued opeations:
                               
ITG-PP business
  $ (1,621 )   $ (4,373 )   $ (5,338 )   $ (9,053 )
Jacquards fabrics business
  $     $ (21 )   $     $ (50 )
                                 
Loss on deconsolidation of ITG-PP business
  $ (22,204 )   $     $ (22,204 )   $  
                                 
Gain (loss) on disposal of jacquards fabrics business
  $     $ (44 )   $     $ 2,066  
 
The following unaudited pro forma condensed consolidated financial information is designed to show how the deconsolidation of ITG-PP and the disposal of the jacquard fabrics business might have affected certain of the Company’s historical consolidated results of operations if such transactions had occurred on January 1, 2011 (amounts in thousands). Such pro forma results exclude the nonrecurring loss on deconsolidation of ITG-PP of $22.2 million in the three and six months ended June 30, 2012 and the nonrecurring gain on the disposal of the jacquard fabrics business of $2.1 million in the six months ended June 30, 2011. Reference is made to the accompanying consolidated statements of operations that present net sales and loss from continuing operations excluding the discontinued operations of the ITG-PP and jacquard fabrics businesses for each period presented. The unaudited pro forma financial information presented below has been prepared by the management of the Company for illustrative purposes only and is not indicative of the results of operations that will be presented in future filings with the SEC, and is not necessarily indicative of the results that actually would have been realized had the transactions been completed at the beginning of the specified periods or at any other time, nor those to be expected at any time in the future.
 
   
Six Months Ended
 
    June 30,  
   
2012
   
2011
 
Net loss:
           
As reported
  $ (59,870 )   $ (25,742 )
Pro forma
  $ (32,328 )   $ (18,705 )
                 
Net loss attributable to International Textile Group, Inc.:
               
As reported
  $ (57,204 )   $ (21,388 )
Pro forma
  $ (32,328 )   $ (18,465 )
                 
Net loss attributable to common stock of International Textile Group, Inc.:
               
As reported
  $ (68,300 )   $ (31,622 )
Pro forma
  $ (43,424 )   $ (28,699 )
                 
Net loss per common share attributable to International Textile Group, Inc., basic and diluted:
               
As reported
  $ (3.91 )   $ (1.81 )
Pro forma
  $ (2.49 )   $ (1.64 )
                 
 
 
 
-12-

 
 
Assets Held for Sale
 
At June 30, 2012 and December 31, 2011, the Company had $0.1 million and $0.3 million, respectively, of long-lived assets held for sale related to certain buildings in the bottom-weight woven fabrics segment. Such long-lived assets held for sale are classified as current assets in the June 30, 2012 consolidated balance sheet because the Company expects to sell these assets within the twelve months following such date.
 
Note 3 Inventories
 
The major classes of inventory are as follows (in thousands):
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
             
Raw materials
  $ 14,168     $ 17,472  
Work in process
    38,737       45,139  
Finished goods
    50,382       63,874  
Dyes, chemicals and supplies
    12,134       13,594  
    $ 115,421     $ 140,079  

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 Accounting Standards Codification (“ASC”) 360, “Property, Plant, and Equipment”. No impairment charges related to property, plant and equipment had any impact on the Company’s cash flows or liquidity in any period presented. In addition, the decision by the Company to idle its Cone Denim de Nicaragua (“CDN”) facility in April 2009 requires the Company to test the recoverability of the value of CDN’s long-lived assets in the Company’s all other segment each quarter. 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 or six months ended June 30, 2012 or 2011. The Company cannot predict the occurrence of any future events that might adversely affect the carrying value of long-lived assets. Any further decline in economic conditions could result in future impairment charges with respect to the Company’s long-lived assets, including any of its property, plant and equipment.

 
-13-

 
 
Note 5 Long-Term Debt and Short-Term Borrowings

Total outstanding long-term debt of the Company consisted of the following (in thousands). See Note 2 for a discussion of the deconsolidation of the ITG-PP business. See Note 16, “Subsequent Events”, for a description of the exchange of the unsecured subordinated notes – related party shown below for newly issued shares of Series C Preferred Stock.
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
Revolving loans:
           
ITG, Inc.
  $ 66,949     $ 59,992  
Parras Cone de Mexico, S.A. de C.V.
    11,880       11,326  
Term loans:
               
ITG, Inc.
    11,531       14,035  
Burlington Morelos S.A. de C.V.
    16,000       17,500  
Cone Denim (Jiaxing) Limited (1)
    21,234       23,280  
Jiaxing Burlington Textile Company (1)
    5,187       6,760  
Cone Denim de Nicaragua (1)
    38,006       38,006  
ITG-Phong Phu Limited Company (1)
          13,380  
Other:
               
Senior subordinated notes
    15,316       14,166  
Senior subordinated notes - related party
    136,547       128,626  
Unsecured subordinated notes - related party
    111,193       101,920  
Capitalized lease obligations
    317       8,922  
Other notes payable
    26       96  
Total long-term debt
    434,186       438,009  
Less: current portion of long-term debt
    (43,420 )     (28,214 )
Less: callable long-term debt classified as current
    (53,322 )     (65,552 )
Total long-term portion of long-term debt
  $ 337,444     $ 344,243  
 
 
(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 a $105.5 million Amended and Restated Credit Agreement with General Electric Capital Corporation (“GE Capital”), as agent and lender, and certain other lenders signatory thereto (as amended, the “2011 Credit Agreement”), which replaced the Company’s then-existing U.S. bank credit agreement and its Mexican term loan agreement. The 2011 Credit Agreement provided for a revolving credit facility (the “U.S. Revolver”) initially in the amount of $85.0 million and a $20.5 million term loan facility (the “U.S. Term Loan”), each having a maturity date of March 30, 2015. On December 27, 2011, the Company and the lenders under the 2011 Credit Agreement entered into Consent and Amendment No. 4 to the 2011 Credit Agreement which provided the Company with additional available liquidity through an increase of $10.0 million in revolving loan commitments under the 2011 Credit Agreement, with the availability thereunder remaining subject to the borrowing base limitations contained in the 2011 Credit Agreement.
 
The U.S. Term Loan required the repayment of $0.5 million in principal per month from May 2011 to April 2012, and $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 June 30, 2012, there was $66.9 million outstanding under the U.S. Revolver at a weighted average interest rate of 4.7% and $11.5 million outstanding under the U.S. Term Loan at a weighted average interest rate of 4.3%. As of June 30, 2012, the Company had $11.8 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 June 30, 2012, availability under the U.S. Revolver was approximately $6.8 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.
 
 
-14-

 
 
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).
 
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, including its international greenfield initiatives. At June 30, 2012, average adjusted availability was approximately $6.7 million and availability was $6.8 million, and the Company was subject to such restrictions. Notwithstanding these restrictions, in June 2011, the Company and the lenders under the 2011 Credit Agreement entered into Consent and Amendment No. 1, and Amendment No. 2, to the 2011 Credit Agreement which, among other things, 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., not to exceed $15.5 million (see “Guarantees” below). Further, in June 2012, the Company and the lenders under the 2011 Credit Agreement entered into Amendment No. 6 to the 2011 Credit Agreement, which provides that either (i) such investments in ITG-PP are required to be repaid to the Company by ITG-PP no later than November 22, 2012 (see Note 2 related to a plan to sell the assets of ITG-PP) or (ii) the lenders under the 2011 Credit Agreement are entitled to receive payment under a $3.7 million letter of credit issued by Fund IV no later than December 22, 2012;
 
 
·
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 subject to, and in compliance with, such fixed charge coverage ratio as of June 30, 2012. In March 2012, the Company and the lenders under the 2011 Credit Agreement entered into Limited Waiver and Amendment No. 5 to the 2011 Credit Agreement which, among other things, reduces the minimum fixed charge coverage ratio for specified periods in 2012;
 
 
·
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 3.25% to 3.75% (the weighted average applicable margin was 3.5% at June 30, 2012). 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 a standby letter of credit in the amount of $20.0 million issued by the WLR Affiliates, under the terms of a support agreement entered into by such affiliates pursuant to Consent and Amendment No. 4 to the 2011 Credit Agreement, dated December 27, 2011; no such amounts have been drawn by the lenders as of June 30, 2012.
 
On March 23, 2011, a wholly-owned subsidiary of the Company, Burlington Morelos S.A. de C.V. (“Morelos”), entered into a five year, $20.0 million term loan (the “Mexican Term Loan”) with Banco Nacional De Mexico, S.A., (“Banamex”). The obligations of Morelos under the Mexican Term Loan are in U.S. dollar loans and are secured by a pledge of all the accounts receivable, inventories, and property, plant and equipment of Morelos and its subsidiaries. The interest rate on borrowings under the Mexican Term Loan is variable at LIBOR plus 4%. At June 30, 2012, the amount outstanding under the Mexican Term Loan was $16.0 million at an interest rate of 4.2%. The Mexican Term Loan requires the repayment of $0.3 million in principal per month until February 2016, with the remaining principal balance due in March 2016.
 
The Mexican Term Loan contains 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. The Mexican Term Loan also contains certain financial covenant requirements customary for agreements of this nature. As of June 30, 2012, the Company was in compliance with such covenants. In addition, Morelos and its subsidiaries are restricted under the Mexican Term Loan from making annual capital expenditures in excess of one percent of annual consolidated net sales of such consolidated group.

 
-15-

 
 
In connection with the Mexican Term Loan, on March 23, 2011, a wholly-owned subsidiary of the Company, Parras Cone de Mexico, S.A. de C.V. (“Parras Cone”), entered into a 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, as amended, cannot exceed $20.0 million. At June 30, 2012, the amount of secured borrowings outstanding under the Mexican factoring agreement was $11.9 million, at an interest rate of 4.4%, which borrowings are collateralized by certain of Parras Cone’s trade accounts receivable in the aggregate amount of approximately $13.2 million. This agreement, as amended, expires on March 7, 2013.

In 2006 and 2007, Cone Denim (Jiaxing) Limited obtained financing from the 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 provides 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. Outstanding borrowings under this facility were $21.2 million with a weighted average interest rate of 6.4% at June 30, 2012. Interest is based on three-month LIBOR plus a contractual spread of 1.3% or greater, depending upon the prevailing LIBOR. The agreement was amended in June 2012 to provide that the outstanding loan amount will be required to be repaid in the principal amounts of $1.0 million in the quarter ending September 30, 2012, $8.6 million in the quarter ending December 31, 2012, and $11.6 million in the quarter ending June 30, 2013. The term loan is secured by the building, machinery and equipment of this joint venture. The financing agreement also contains limitations on asset disposals.
 
The Company’s wholly-owned subsidiary, Jiaxing Burlington Textile Company, obtained project financing from China Construction Bank that is non-recourse to the ITG parent company. Such funding was used to finance machinery and equipment capital expenditure needs in excess of ITG’s equity contributions, which contributions are in accordance with applicable Chinese laws and regulations. The financing agreement provides for term loans in the original amount of approximately $11.0 million, available in either U.S. dollars or Chinese RMB, at the option of the Company and subject to foreign currency exchange rate changes. The term loan is being repaid in quarterly installments of $0.8 million in each quarter of 2012 and $1.2 million in each of the first three quarters of 2013. The financing agreement has a maturity date of August 2013 and bears interest at six-month LIBOR plus 3.0% for U.S. dollar loans. The financing agreement provides the lender the right to immediately declare this debt due and payable if Jiaxing Burlington Textile Company incurs a book loss in excess of 5.0 million renminbi under Chinese generally accepted accounting principles during any calendar fiscal year through the date of maturity. As of June 30, 2012, Jiaxing Burlington Textile Company expects that it will be able to comply with this requirement. Pricing for Chinese RMB loans is at the rate established by the China Central Bank. At June 30, 2012, outstanding borrowings under this facility were $5.2 million (in U.S. dollar equivalents) with a weighted average interest rate of 6.7%. The loans are secured by the building, machinery and equipment of Jiaxing Burlington Textile Company. The financing agreement also contains financial reporting requirements and limitations on asset disposals.

In December 2007, CDN entered into a $37.0 million term loan agreement with Inter-American Investment Corporation (“Inter-American”) and four co-financing banks doing business in Nicaragua that is non-recourse to the ITG parent company. The loan amounts were used to finance a denim manufacturing plant built by CDN outside of Managua, Nicaragua. Loans under this agreement are required to be repaid in up to 16 quarterly installments of $1.850 million, which began on September 15, 2010, with a final payment of $7.4 million due on September 15, 2014. The term loans bear interest at LIBOR plus a margin of 4%, and a late payment fee of 6% per annum is assessed on the amount of principal payments in arrears. As amended, the original term loans thereunder have been re-characterized either as senior loans, for which accrued interest thereon is required to be paid either as originally scheduled or, for certain portions of the interest accruing through June 15, 2010, the amounts have been converted to 12% junior loans. Interest on the junior loans is required to be repaid quarterly beginning on September 15, 2010 and continuing through September 15, 2014, with the principal amount of the junior loans due on September 15, 2014. Both the senior and junior loans are non-recourse to the Company, but are secured by a pledge of all of the stock of CDN as well as the land, building, machinery and equipment of CDN. At June 30, 2012, $37.0 million of senior loans with an interest rate of 4.5%, and $1.0 million of junior loans, were outstanding under this facility.
 
In light of decisions by two of the largest customers of CDN’s facility in Nicaragua to discontinue production in certain of their Central American facilities, in April 2009, the Company decided to idle this facility. Through June 30, 2012, CDN had not made $22.4 million of required term loan principal, interest and late fee payments, which constitutes a default. Upon a default, all amounts outstanding thereunder are immediately due and payable, penalty interest is charged at the rate of 6% per annum on outstanding balances, and the lenders thereunder have the right to proceed against the collateral securing such loans. In addition, as a result of the accumulated losses of CDN and pursuant to Nicaraguan law, the lenders under CDN’s term loan have certain rights in addition to those under the term loan agreement, including certain rights with respect to requiring the dissolution of CDN. To date, CDN’s lenders have not exercised these rights. The Company, as sponsor of CDN, has entered into a Project Funds and Subordination Agreement with the CDN lenders. The Project Funds and Subordination Agreement does not constitute a guarantee of the loan, but may, in certain instances, obligate the Company to cover certain deficiencies (as defined in the Project Funds and Subordination Agreement). On July 26, 2010, the Company received a notice from Inter-American, which states that the Company, pursuant to the Project Funds and Subordination Agreement, was required to provide CDN a loan in the amount of $14.9 million no later than August 23, 2010. The Company has not provided such loan through the date hereof. The Company believes that such term loan is adequately secured, assuming an orderly disposition, if needed, although there can be no assurances in this regard. The Company is reserving all of its rights with respect thereto, and believes that any such required loan ultimately would only be required if and to the extent that the loan under the term loan agreement is not adequately secured. Because of the uncertainties related to CDN and the related issues, the Company has classified the entire amount of such debt as current as of June 30, 2012 and December 31, 2011. The Company continues to evaluate all of its options with respect to CDN and its loans outstanding and continues to be in discussions with Inter-American with respect to the loan.
 
 
-16-

 
 
Senior Subordinated Notes

On June 6, 2007, the Company issued and sold $80.0 million of its 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 purchase agreement relating to the Notes, the “Note Purchase Agreement”) of its debt and/or equity securities, interest on the Notes is payable in-kind (“PIK Interest”) 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. Upon the completion of a Qualified Issuance, 50% of the then-outstanding PIK Interest and 50% of the accrued but unpaid interest on the Tranche A Notes (defined below) will be immediately payable in cash. In addition, 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 in 2009, the WLR Affiliates purchased from Note holders certain of the Notes with an original face amount of $57.5 million which were thereafter amended, restated and reissued in the form of Tranche B Notes, which are 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”). The Tranche B Notes are classified as “Senior subordinated notes - related party” in the Company’s accompanying consolidated balance sheet at June 30, 2012 and December 31, 2011. The interest rate on the Tranche B Notes was set at 12% per annum. In August 2010, the Company and the Note holders entered into the “Consent and Modification of Senior Subordinated Note Purchase Agreement and Tranche B Notes” (the “Consent Agreement”), which gave the Company the right to sell to the WLR Affiliates additional Tranche B Notes in an aggregate principal amount not to exceed $15.0 million, the proceeds of which were required to be used for investments in ITG-PP to be funded no later than January 31, 2011. The Company issued and sold $12.0 million of such Tranche B Notes prior to December 31, 2010 and issued and sold an additional $2.0 million of such Tranche B Notes through January 31, 2011. In 2011, the Company issued $9.0 million of additional Tranche B Notes in connection with the Guaranty (see “Guarantees” below).
 
On March 16, 2011, the Company entered into Amendment No. 4 to the Note Purchase Agreement (the “Fourth Note Purchase Agreement Amendment”). The Fourth Note Purchase Agreement Amendment, among other things, allowed the Company to enter into a factoring agreement with Bank of America, N.A. (“B of A”), pursuant to which the Company may sell certain of its receivables to B of A on a non-recourse basis. The Company entered into this factoring agreement on March 17, 2011. On March 30, 2011, the Company entered into Amendment No. 5 to the Note Purchase Agreement (the “Fifth Note Purchase Agreement Amendment”). The Fifth Note Purchase Agreement Amendment, among other things, extended the maturity date of the Tranche A Notes to June 2013, extended the maturity date of the Tranche B Notes to June 2015, and eliminated the excess U.S. collateral coverage covenant contained in the Note Purchase Agreement. Also under the Fifth Note Purchase Agreement Amendment, the interest rate on the Tranche A Notes increases by 0.5% per annum at the beginning of each quarter until maturity, beginning on October 1, 2011, and the interest rate increases an additional 2.5% per annum after the occurrence of and during the continuance of an event of default (as defined in the Note Purchase Agreement). At June 30, 2012, the interest rate on the Tranche A Notes was 16.0% per annum.
 
In March 2011, the Company used $18.0 million of proceeds from the Mexican Term Loan and a related factoring facility, $20.5 million of proceeds from the 2011 Credit Agreement and $2.0 million of proceeds from the sale of the jacquards fabrics business to repay $40.5 million of the Tranche A Notes. At June 30, 2012, $151.9 million aggregate principal amount of the Notes was outstanding (of which $136.5 million was held by the WLR Affiliates, including PIK Interest).

The Note Purchase Agreement contains affirmative and negative covenants by the Company customary for financing transactions of this type, including those relating to mandatory prepayment upon the occurrence of certain events. In addition, the Note Purchase Agreement imposes certain restrictions on the Company’s ability to engage in certain transactions, including those with affiliates or certain other extraordinary transactions. The Note Purchase Agreement currently provides for, among other things, the guaranty by certain of the Company’s U.S. subsidiaries of the Company’s obligations thereunder. In addition, the obligations of the Company are secured by liens on substantially all of the Company’s (and its subsidiaries) U.S. assets, a pledge by the Company (and its subsidiaries) of the stock of certain of its U.S. subsidiaries and a pledge by the Company of the stock of certain of its foreign subsidiaries. The liens and pledges granted to secure the Notes are subordinated to the senior liens of the lenders under certain of the Company’s other financing agreements. The right of the holders of the Notes to receive payment in respect of the Notes is subordinated to the right of the lenders under the 2011 Credit Agreement to receive payment.
 
 
-17-

 
 
As of December 31, 2011 and continuing through the date hereof, the Company has not been in compliance with a financial covenant under the Note Purchase Agreement. Under the terms of the Note Purchase Agreement, such noncompliance constitutes an event of default that gives the Tranche A Note holders the right, among others, to declare all outstanding principal and accrued interest under the facility immediately due and payable after the passage of a 120 day waiting period, and to take possession of and dispose of certain assets of the Company after a 540 day waiting period. These waiting periods commenced on April 27, 2012. The Company has classified as current the entire amount of the Tranche A Notes ($15.3 million and $14.2 million as of June 30, 2012 and December 31, 2011, respectively) in accordance with GAAP. In March 2012, the Company entered into Limited Waiver and Amendment No. 5 to the 2011 Credit Agreement which waives any cross default and cross acceleration provision through March 31, 2013 in such agreement relating to the covenant violation under the Note Purchase Agreement. The Company continues to evaluate all of its options with respect to the Tranche A Notes and continues to be in discussions with the Tranche A Note holder relating to each party’s rights and obligations thereunder and the potential for amendments or waivers from various provisions of such agreement. The Company cannot provide any assurances as to its ability to obtain any necessary modifications, amendments or waivers, or the timing or costs thereof.

Unsecured Subordinated Notes—Related Party

As of June 30, 2012, the Company had borrowed a total of $55.0 million original principal amount from three funds affiliated with Wilbur L. Ross, Jr., pursuant to six unsecured subordinated notes due in March 2016 (as amended). At June 30, 2012, $111.2 million was outstanding, including interest that has been accrued or converted to principal. On July 24, 2012, the Company entered into a Debt Exchange Agreement (the “Exchange Agreement”) with the WLR Affiliates. Pursuant to the Exchange Agreement, the WLR Affiliates released the Company in full from the Company’s obligations to the WLR Affiliates under approximately $112.5 million of the Company’s unsecured subordinated notes – related party, and the Company exchanged such obligations for the issuance to the WLR Affiliates of an aggregate of 112,469.2232 newly issued shares of Series C Preferred Stock of the Company. As a result of the foregoing, the Company’s total debt, as reported on its consolidated balance sheet, has been reduced by approximately $112.5 million as of July 24, 2012 (see Note 16, “Subsequent Events”). The unsecured subordinated notes had an interest rate of 18.0%, which was compounded semi-annually. Accrued but unpaid interest was converted to additional principal amounts on the last day of each September and March.
 
Debt Agreement Compliance

The Company is in compliance with, or has obtained waivers or loan modifications for, the terms and covenants under its principal credit facilities, except for the Cone Denim de Nicaragua term loan and the Note Purchase Agreement, each as described above (see Note 2 for a discussion of the ITG-PP Term Loan). Any additional failure by the Company to pay outstanding amounts when due, to obtain any further necessary waivers or modifications, to refinance its various debt or to obtain any necessary additional funding in amounts, at times and on terms acceptable to it, if at all may result in further liquidity issues and may delay or make impossible the implementation of the Company’s strategy to be the leading, globally diversified provider of textiles and related supply chain solutions by geographically aligning with its customers.

Debt Maturities

As of June 30, 2012, aggregate maturities of long-term debt for each of the next five 12-month periods were as follows: $43.4 million, $7.2 million, $212.1 million, $118.2 million and $0.0 million. Because of the uncertainties related to the potential acceleration of the Cone Denim de Nicaragua term loan as described above, and due to the covenant violations under the Tranche A Notes as described above, the Company has classified the entire amount of the Cone Denim de Nicaragua debt, $38.0 million and the entire amount of the Tranche A Notes, $15.3 million, as current as of June 30, 2012, although such amounts are excluded from the aggregate maturities listed above. The aggregate maturities in the fourth 12-month period listed above include $111.1 million of related party unsecured subordinated notes that were outstanding as of June 30, 2012. The outstanding amount of such notes as of July 24, 2012, $112.5 million, was subsequently exchanged on such date for the issuance of shares of a newly-designated series of preferred stock (see Note 16, “Subsequent Events”).

Short-term Borrowings

The Company and certain of its subsidiaries have short-term borrowing arrangements with certain financial institutions or suppliers in the aggregate amount of $39.4 million at June 30, 2012 and $54.5 million at December 31, 2011, with weighted average interest rates of 7.2% at each date (see Note 2 for a discussion of the ITG-PP debt facilities). At June 30, 2012, ITG and its U.S. subsidiaries have outstanding short-term financing from certain cotton and other suppliers in the amount of $4.4 million; Cone Denim (Jiaxing) Limited has outstanding short-term working capital loans in an aggregate amount of $31.0 million from various Chinese financial institutions, including $2.5 million guaranteed by a $2.8 million standby letter of credit with a WLR Affiliate; and Jiaxing Burlington Textile Company has outstanding short-term working capital loans from certain Chinese financial institutions in the amount of $4.0 million. These borrowings consist of lines of credit and other short-term credit facilities which are used primarily to fund working capital requirements within the respective entities.
 
 
 
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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 June 30, 2012, 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 June 30, 2012 or December 31, 2011, except as noted below.
 
In 2011, the Company entered into, among other things, the (i) Consent and Amendment No. 1 to the 2011 Credit Agreement, (ii) Amendment No. 2 to the 2011 Credit Agreement, (iii) Amendment No. 6 to the Note Purchase Agreement, (iv) Amendment No. 7 to the Note Purchase Agreement, and (v) Guaranty in favor of Fund IV. Such consent and amendments provided the Company, among other things, the requisite consents necessary to enter into and perform its obligations under the Guaranty. Pursuant to the Guaranty, the Company has agreed to guarantee 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 was required to pay Fund IV a letter of credit issuance fee of $0.2 million and 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 June 30, 2012, the total obligations under such letters of credit guaranteed by the Company were $6.5 million and, in the six months ended June 30, 2012 and 2011, the Company incurred guarantee fees of $0.3 million and $0.1 million, respectively. Since inception of the Guaranty, the Company has issued additional Tranche B Notes in the aggregate amount of $9.0 million in connection with such obligations. The Guaranty will continue in force until the underlying obligations are satisfied or terminated.
 
Note 6 Stockholders’ Deficit

The components of stockholders’ deficit were as follows (in thousands):
 
   
International Textile Group, Inc. Stockholders
             
                                 
Accumu-
             
                                 
lated other
             
   
Convertible
         
Capital in
               
compre-
   
Non-
       
   
preferred
   
Common
   
excess of
   
Treasury
   
Accumulated
   
hensive
   
controlling
       
   
stock
   
stock
   
par value
   
stock
   
deficit
   
loss
   
interests
   
Total
 
                                                 
Balance at December 31, 2011
  $ 289,897     $ 175     $ 60,488     $ (411 )   $ (502,639 )   $ (7,225 )   $ (15,808 )   $ (175,523 )
Comprehensive loss for the six months ended June 30, 2012:
                                                               
Net loss
                            (57,204 )           (2,666 )     (59,870 )
Amortization of actuarial losses on benefit plans, net of taxes
                                  347             347  
Net comprehensive loss
                            (57,204 )     347       (2,666 )     (59,523 )
Deconsolidation of ITG-PP
                                        18,516       18,516  
Preferred stock dividends
    11,097             (11,097 )                              
Balance at June 30, 2012
  $ 300,994     $ 175     $ 49,391     $ (411 )   $ (559,843 )   $ (6,878 )   $ 42     $ (216,530 )
 
See Note 2 for a discussion of the deconsolidation of the discontinued ITG-PP cotton-based fabrics and garment manufacturing operations.

As of June 30, 2012, the Company had 100,000,000 shares of preferred stock authorized, including 13,000,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”), of which 12,039,740 shares of Series A Preferred Stock were issued and outstanding at June 30, 2012 (11,595,895 shares issued and outstanding at December 31, 2011) and 5,000,000 shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock”), none of which were issued or outstanding at June 30, 2012 or December 31, 2011. 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 June 29, 2012, the Company filed with the Secretary of State of the state of Delaware a Certificate of Increase which increased the total number of authorized shares of the Company’s Series A Convertible Preferred Stock from 12,000,000 to 13,000,000 shares.
 
 
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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 “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 Liquidation Value. Dividends on the Series A Preferred Stock are cumulative and accrue and are payable quarterly, in arrears, 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.

 
-20-

 
 
Note 7 Reconciliation to Diluted Earnings (Loss) Per Share
 
The following data reflects the amounts used in computing earnings (loss) per share and the effect on the weighted average number of shares of dilutive potential common stock issuances (in thousands).
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Loss from continuing operations
  $ (13,566 )   $ (9,363 )   $ (32,328 )   $ (18,705 )
Less: net loss from continuing operations attributable to noncontrolling interests
          (250 )           (240 )
Accrued preferred stock dividends
    (5,600 )     (5,193 )     (11,096 )     (10,234 )
Loss from continuing operations applicable to common shareholders
    (19,166 )     (14,306 )     (43,424 )     (28,699 )
Effect of dilutive securities:
                               
None
                       
Numerator for diluted loss per share from continuing operations
  $ (19,166 )   $ (14,306 )   $ (43,424 )   $ (28,699 )
                                 
                                 
Loss from discontinued operations
  $ (23,825 )   $ (4,438 )   $ (27,542 )   $ (7,037 )
Less: net loss from discontinued operations attributable to noncontrolling interests
    (792 )     (2,085 )     (2,666 )     (4,114 )
Loss from discontinued operations applicable to common shareholders
    (23,033 )     (2,353 )     (24,876 )     (2,923 )
Effect of dilutive securities:
                               
None
                       
Numerator for diluted loss per share from discontinued operations
  $ (23,033 )   $ (2,353 )   $ (24,876 )   $ (2,923 )
                                 
                                 
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 June 30, 2012 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 31,276,836 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 earnings per share computations because their inclusion would have been antidilutive (in thousands).
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Convertible preferred stock
    31,277       29,001       30,986       28,733  
 
 
 
-21-

 
 
Note 8 Derivative Instruments
 
There have been no material changes in the use of derivative instruments or in the methods that the Company accounts for such instruments from the information disclosed in the Company’s  Annual Report on Form 10-K for the year ended December 31, 2011. The Company does not designate its derivative instruments as hedges under hedge accounting rules. Accordingly, unrealized gains and losses on commodity and foreign exchange derivative contracts are recorded in “other income (expense)” since these transactions represent noncash changes in the fair values of such open contracts that are not expected to correlate with the amounts and timing of the recognition of the hedged items. Because the hedged items are components of cost of goods sold, realized gains and losses on commodity and foreign exchange derivative contracts are recorded in cost of goods sold upon settlement of those contracts.
 
The fair values of derivative instruments recognized in the June 30, 2012 and December 31, 2011 consolidated balance sheets were not significant. Also, the effect of derivative instruments on the consolidated statements of operations was not significant in the three or six months ended June 30, 2012 or 2011.

Note 9 Commitments and Contingencies
 
Asbestos materials are present at certain of the Company’s facilities, and applicable regulations would require the Company to handle and dispose of these items in a special manner if these facilities were to undergo certain major renovations or if they were demolished. FASB ASC 410, “Asset Retirement and Environmental Obligations,” provides guidance on the recognition and/or disclosure of liabilities related to legal obligations to perform asset retirement activity. In accordance with FASB ASC 410, the Company has not recognized a liability associated with these obligations, because the fair value of such liabilities cannot be reasonably estimated due to the absence of any plans to renovate, demolish or otherwise change the use of these facilities. The Company expects to maintain these facilities by repair and maintenance activities that do not involve the removal of any of these items and has not identified any need for major renovations caused by technology changes, operational changes or other factors. In accordance with FASB ASC 410, the Company will recognize a liability in the period in which sufficient information becomes available to reasonably estimate its fair value. As of June 30, 2012, the Company did not have any liabilities recorded for these obligations.

As of June 30, 2012, the Company had capital expenditure commitments not reflected as liabilities on the accompanying consolidated balance sheet of less than $0.1 million. These commitments were not reflected as liabilities on the accompanying consolidated balance sheet because the Company had not received or taken title to the related assets.
 
As previously disclosed, three substantially identical lawsuits were filed in the Court of Common Pleas, County of Greenville, State of South Carolina related to the merger of the Company with a company formerly known as International Textile Group, Inc. (“Former ITG”) in October 2006 (the “Merger”). The first lawsuit was filed in 2008 and the second and third lawsuits were filed in 2009, all by the same attorney. These three lawsuits were consolidated in 2010. The actions name as defendants, among others, certain individuals who were officers and directors of Former ITG or the Company at the time of the Merger. The plaintiffs have raised purported derivative and direct (class action) claims and contend that certain of the defendants breached certain fiduciary duties in connection with the Merger. The plaintiffs have also made certain related claims against a former advisor of a defendant. While the Company is a nominal defendant for purposes of the derivative action claims, the Company is not aware of any claims for affirmative relief being made against it. However, the Company has certain obligations to provide indemnification to its officers and directors (and certain former officers and directors) against certain claims and believes the lawsuits are being defended vigorously. Certain fees and costs related to this litigation are to be paid or reimbursed in part under the Company’s insurance programs. Because of the uncertainties associated with the litigation described above, management cannot estimate the impact of the ultimate resolution of the litigation. It is the opinion of the Company’s management that any failure by the Company’s insurance providers to provide any required insurance coverage could have a material adverse impact on the Company’s consolidated financial statements.

The Company and its subsidiaries have and expect to have, from time to time, various claims and other lawsuits pending against them arising in the ordinary course of business. The Company may also be liable for environmental contingencies with respect to environmental cleanup activities. The Company makes provisions in its financial statements for litigation and claims based on the Company’s assessment of the possible outcome of such litigation and claims, including the possibility of settlement. It is not possible to determine with certainty the ultimate liability of the Company in any of the matters described above, if any, but in the opinion of management, except as may otherwise be described above, their outcome is not expected to have a material adverse effect upon the financial condition or results of operations or cash flows of the Company.

 
-22-

 
 
Note 10 Segment and Other Information

The Company is organized and managed primarily according to product categories and manufacturing processes rather than by markets or end-use customers. The Company currently has five operating segments that are reported to the chief operating decision maker (“CODM”) and four reportable segments that are presented herein. The bottom-weight woven fabrics segment includes heavy weight woven fabrics with a high number of ounces of material per square yard, including woven denim fabrics, synthetic fabrics, worsted and worsted wool blend fabrics used for government uniform fabrics for dress U.S. military uniforms, airbag fabrics used in the automotive industry, and technical and value added fabrics used in a variety of niche industrial and commercial applications, including highly engineered materials used in numerous applications and a broad range of industries, such as for fire service apparel, ballistics materials, filtration, military fabrics and outdoor awnings and covers. The commission finishing segment consists of textile printing and finishing services for customers primarily focusing on decorative fabrics and specialty prints as well as government uniform fabrics primarily for battle fatigue U.S. military uniforms. The narrow fabrics segment consists of narrow webbing products for safety restraint products such as seat belts and military and technical uses. The all other segment consists of expenses related to the idled CDN facility, transportation services and other miscellaneous items. The interior furnishings fabrics segment, consisting of contract jacquard fabrics and upholstery for the residential and commercial markets, as well as the ITG-PP business prior to its deconsolidation (see Note 2), are presented as discontinued operations in the Company’s consolidated statements of operations for the three and six months ended June 30, 2011.

Net sales, income (loss) from continuing operations before income taxes and total assets for the Company’s reportable segments are presented below (in thousands). The Company evaluates performance and allocates resources based on profit or loss before interest, income taxes, expenses associated with refinancing and corporate realignment activities, restructuring and impairment charges, certain unallocated corporate expenses, and other income (expense)-net. Intersegment net sales for the three months ended June 30, 2012 and 2011 were primarily attributable to commission finishing sales of $0.9 million and $5.5 million, respectively.  Intersegment net sales for the six months ended June 30, 2012 and 2011 were primarily attributable to commission finishing sales of $5.8 million and $10.6 million, respectively. See Note 2 for a discussion of the deconsolidation of the discontinued ITG-PP cotton-based fabrics and garment manufacturing operations.
 
 
-23-

 
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net Sales:
                       
Bottom-weight Woven Fabrics
  $ 147,561     $ 153,346     $ 288,531     $ 289,112  
Commission Finishing
    8,480       11,647       20,319       22,337  
Narrow Fabrics
    7,729       7,643       15,259       14,308  
All Other
    273       232       461       411  
      164,043       172,868       324,570       326,168  
Intersegment sales
    (942 )     (5,524 )     (5,812 )     (10,563 )
    $ 163,101     $ 167,344     $ 318,758     $ 315,605  
                                 
Income (Loss) From Continuing Operations Before Income Taxes:
                         
Bottom-weight Woven Fabrics
  $ 6,206     $ 10,293     $ 7,665     $ 18,818  
Commission Finishing
    (82 )     (180 )     325       (44 )
Narrow Fabrics
    (720 )     (379 )     (1,081 )     (706 )
All Other
    (881 )     (891 )     (1,767 )     (1,791 )
Total reportable segments
    4,523       8,843       5,142       16,277  
Corporate expenses
    (3,589 )     (4,711 )     (6,323 )     (8,747 )
Other operating income - net
    216       310       219       713  
Restructuring charges
    (700 )     0       (833 )     (14 )
Interest expense
    (13,540 )     (10,875 )     (26,644 )     (21,641 )
Other income (expense) - net
    (10 )     (1,968 )     (2,155 )     (3,293 )
      (13,100 )     (8,401 )     (30,594 )     (16,705 )
Income tax expense
    (485 )     (1,040 )     (1,375 )     (2,054 )
Equity in income (loss) of unconsolidated affiliates
    19       78       (359 )     54  
Loss from continuing operations
    (13,566 )     (9,363 )     (32,328 )     (18,705 )
Discontinued operations:
                               
Loss from discontinued operations, net of taxes
    (1,621 )     (4,394 )     (5,338 )     (9,103 )
Loss on deconsolidation of subsidiary
    (22,204 )           (22,204 )      
Gain (loss) on disposal, net of taxes
          (44 )           2,066  
Loss from discontinued operations
    (23,825 )     (4,438 )     (27,542 )     (7,037 )
Net loss
    (37,391 )     (13,801 )     (59,870 )     (25,742 )
Less: net loss attributable to noncontrolling interests
    (792 )     (2,335 )     (2,666 )     (4,354 )
Net loss attributable to International Textile Group, Inc.
  $ (36,599 )   $ (11,466 )   $ (57,204 )   $ (21,388 )
 
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
             
Total Assets:
           
Bottom-weight Woven Fabrics
  $ 303,069     $ 313,051  
Commission Finishing
    14,813       15,478  
Narrow Fabrics
    18,467       18,882  
All Other
    28,366       78,594  
Corporate
    10,933       10,095  
    $ 375,648     $ 436,100  

 
 
-24-

 

Note 11 Restructuring Activities
 
The charges for restructuring included in loss from continuing operations included the following (in thousands):
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                     
Severance, COBRA and other termination benefits
  $ 700     $     $ 833     $ 14  
 
The restructuring charges for the three and six months ended June 30, 2012 are primarily related to workforce reductions at the Company’s White Oak denim, Parras Cone denim, and Carlisle finishing facilities as described below. The provision for restructuring charges for the six months ended June 30, 2011 is primarily related to the Company’s ongoing multi-segment selling and administrative cost reduction plan as described below.

Restructuring Activities in the Bottom-weight Woven Fabrics Segment

Since the beginning of 2012, hourly and salaried workforce reductions of approximately 45 employees have been undertaken at the White Oak denim facility resulting in severance and other termination benefits of $0.1 million and $0.2 million recorded in the three and six months ended June 30, 2012, respectively. Salaried workforce reductions of 20 employees were undertaken at the Parras Cone denim facility resulting in severance and other termination benefits of $0.2 million in the three and six months ended June 30, 2012. These workforce reductions were primarily attributable to the Company’s ongoing cost saving initiatives, and in the case of the White Oak facility, the outlook for lower product demand at this facility.

Restructuring Activities in the Commission Finishing Segment

In the second quarter of 2012, workforce reductions of 49 employees were made at the Carlisle finishing facility resulting in severance and other termination benefits of $0.3 million in the three and six months ended June 30, 2012. These workforce reductions of mostly hourly employees were primarily attributable to the Company’s ongoing cost saving initiatives as well as the outlook for lower product demand in certain of the segment’s government contract businesses.

Other Restructuring Activities

Certain cost reduction programs associated with selling, administrative and other functions at its corporate headquarters and other locations have resulted in the termination of 15 and 16 employees in 2012 and 2011, respectively, and the Company recorded additional charges of $0.1 million related to these programs in the three and six months ended June 30, 2012, and charges of $0.0 million and less than $0.1 million related to these programs in the three and six months ended June 30, 2011, respectively.

Following is a summary of activity related to restructuring accruals (in thousands). The Company expects to pay the majority of the remaining liabilities outstanding at June 30, 2012 within the next twelve months.
 
   
Severance and
COBRA
Benefits
 
Balance at December 31, 2011
  $ 847  
2012 charges, net
    133  
Payments
    (424 )
Balance at March 31, 2012
    556  
2012 charges, net
    700  
Payments
    (464 )
Balance at June 30, 2012
  $ 792  
 

 
-25-

 
 
Note 12 Fair Value Measurements
 
FASB ASC 820, “Fair Value Measurement”, requires disclosure of a fair value hierarchy of inputs that the Company uses to value an asset or a liability. Under FASB ASC 820 there is a common definition of fair value to be used and a hierarchy for fair value measurements based on the type of inputs that are used to value the assets or liabilities at fair value.
 
The levels of the fair-value hierarchy are described as follows:
 
Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date,
 
Level 2: Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, or
 
Level 3: Inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
 
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The Company enters into derivative instruments from time to time, in addition to any commodity derivative contracts that are designated as normal purchases, which principally consist of natural gas forward contracts and foreign-currency forward contracts. These derivative contracts are principally with financial institutions and other commodities brokers, the fair values of which are obtained from third-party broker quotes.
 
The fair values of certain of the Company’s assets and liabilities measured on a recurring basis under FASB ASC 820 at June 30, 2012 and December 31, 2011 were not significant.

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. When conditions indicate potential impairment of such assets, the Company evaluates the estimated fair value of the assets. The Company’s assessments of impairment of long-lived assets in the three and six months ended June 30, 2012 and 2011 did not result in any impairment charges requiring disclosure of the fair values of such assets measured on a nonrecurring basis. The Company cannot predict the occurrence of events that might adversely affect the carrying value of long-lived assets held and used, goodwill or other intangible assets. Continued uncertainty or deterioration in global economic conditions, and/or additional changes in assumptions or circumstances, could result in impairment charges in long-lived assets held and used, goodwill or other intangible assets in future periods in which the change occurs.
 
The accompanying consolidated financial statements include certain financial instruments, and the fair market value of such instruments may differ from amounts reflected on a historical basis. Such financial instruments consist of cash deposits, accounts receivable, notes receivable, advances to affiliates, accounts payable, certain accrued liabilities, short-term borrowings and long-term debt. Based on certain procedures and analyses performed as of June 30, 2012 related to expected yield (under Level 2 of the fair value hierarchy), the Company estimated that the fair values of its Notes and its unsecured subordinated notes were approximately the principal plus accrued interest at June 30, 2012 (see Note 16 “Subsequent Events” related to the cancellation, extinguishment and discharge of the unsecured subordinated notes in exchange for the issuance of shares of a newly designated series of preferred stock on July 24, 2012). The estimate of fair value of its borrowings under its various bank loans and other financial instruments (under Level 2 of the fair value hierarchy) generally approximates the carrying values at June 30, 2012 because of the short-term nature of these loans and instruments and/or because certain loans contain variable interest rates that fluctuate with market rates.

Note 13 Other Operating Income - Net

“Other operating income-net” in the three months ended June 30, 2012 and 2011 includes net gains related to the disposal of miscellaneous property and equipment of $0.2 million and $0.3 million, respectively. “Other operating income-net” in the six months ended June 30, 2012 and 2011 includes net gains related to the disposal of miscellaneous property and equipment of $0.2 million and $0.7 million, respectively.

 
-26-

 

Note 14 Other Income (Expense) - Net
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Litigation expense, net of insurance reimbursements
  $ (705 )   $ (1,527 )   $ (1,738 )   $ (2,619 )
Foreign currency exchange gains (losses), net
    515       (598 )     (425 )     (903 )
Other
    166       (14 )     (34 )     (19 )
Total
  $ (24 )   $ (2,139 )   $ (2,197 )   $ (3,541 )
 
In the three months ended June 30, 2012 and 2011, the Company paid or accrued $0.7 million and $4.6 million, respectively, in legal fees not related to current operations. In the three months ended June 30, 2012 and 2011, the Company recorded $0.0 million and $3.1 million, respectively, in income from insurance reimbursements received or expected to be received for legal fees incurred by the Company. In the six months ended June 30, 2012 and 2011, the Company paid or accrued $2.6 million and $7.9 million, respectively, in legal fees not related to current operations. In the six months ended June 30, 2012 and 2011, the Company recorded $0.9 million and $5.3 million, respectively, in income from insurance reimbursements received or expected to be received for legal fees incurred by the Company. Such net non-operating expense is recorded in other expense in the consolidated statements of operations.

Note 15 Income Taxes
 
The Company’s income tax expense was $0.5 million in the three months ended June 30, 2012 and $1.0 million in the three months ended June 30, 2011. The Company’s income tax expense was $1.4 million in the six months ended June 30, 2012 and $2.1 million in the six months ended June 30, 2011. The Company has tax holidays in certain jurisdictions that provide for a zero percent tax rate or a reduced tax rate for a defined number of taxable years in these jurisdictions. The Company has recorded valuation allowances to reduce the U.S. and certain foreign deferred tax assets for the portion of the tax benefit that management considers that it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of future taxable income in the jurisdictions in which these deferred tax assets were recognized.
 
Income tax expense for the three months ended June 30, 2012 is different from the amount obtained by applying statutory rates to loss before income taxes primarily due to an increase of $4.3 million in the valuation allowance related to an increase in net operating losses and net deferred tax assets and $2.0 million related to foreign income tax rate differentials and adjustments, partially offset by state income taxes of $0.2 million and certain foreign and domestic business expenses that are not deductible. Income tax expense for the three months ended June 30, 2011 is different from the amount obtained by applying statutory rates to loss before income taxes primarily due to an increase of $2.4 million in the valuation allowance related to an increase in net operating losses and net deferred tax assets and $3.2 million related to foreign income tax rate differentials and adjustments, partially offset by state income taxes of $0.2 million and certain foreign and domestic business expenses that are not tax deductible.
 
Income tax expense for the six months ended June 30, 2012 is different from the amount obtained by applying statutory rates to loss before income taxes primarily due to an increase of $12.8 million in the valuation allowance related to an increase in net operating losses and net deferred tax assets and $0.5 million related to foreign income tax rate differentials and adjustments, partially offset by state income taxes of $0.6 million and certain foreign and domestic business expenses that are not deductible. Income tax expense for the six months ended June 30, 2011 is different from the amount obtained by applying statutory rates to loss before income taxes primarily due to an increase of $4.5 million in the valuation allowance related to an increase in net operating losses and net deferred tax assets and $6.4 million related to foreign income tax rate differentials and adjustments, partially offset by state income taxes of $0.4 million and certain foreign and domestic business expenses that are not tax deductible.

As described in Note 2, ITG-PP was deconsolidated as of May 25, 2012 for financial reporting purposes under GAAP. Because the sale of the ITG-PP assets and subsequent liquidation of ITG-PP have not yet occurred, management does not currently have the necessary information to determine the ultimate impact, if any, of these transactions on the Company’s income taxes. The entire amount of the tax impact ultimately recorded by the Company is expected to be reduced by a valuation allowance as management believes that it is more likely than not that any tax benefits will not be realized.  At this time, management does not expect that the tax impact of the deconsolidation, the sale of ITG-PP assets, and the ultimate liquidation of ITG-PP will have a material impact on the Company’s consolidated balance sheet, results of operations or cash flows. The Company expects that it will be able to obtain the necessary information to provide a reasonable estimate of the tax impact in its financial statements for the year ending December 31, 2012.
 
 
-27-

 
 
Note 16 Subsequent Events

Debt Exchange

On July 24, 2012, the Company entered into a Debt Exchange Agreement (the “Exchange Agreement”) with the WLR Affiliates.  Pursuant to the Exchange Agreement, the WLR Affiliates agreed to exchange approximately $112.5 million of the Company’s unsecured subordinated notes – related party (see Note 5) held by the WLR Affiliates for 112,469.2232 shares of newly issued Series C Preferred Stock of the Company (the “Series C Preferred Stock”) (the “Debt Exchange”). As a result of the foregoing, the Company’s total debt, as reported on its consolidated balance sheet, has been reduced by approximately $112.5 million as of July 24, 2012. Furthermore, the Company’s annual interest expense burden will be reduced by approximately $21.0 million per year. Finally, as illustrated below in the last paragraph of this Note 16, the Company’s U.S operations will benefit from a positive stockholders’ equity position.

The board of directors (the “Board”) of the Company formed a special committee (the “Special Committee”) consisting of members of the Board who are not affiliates of the Company’s Chairman of the Board, the WLR Affiliates or of management of the Company, and the Special Committee, along with its independent legal and financial advisors, negotiated and approved the terms and conditions of the Exchange Agreement and the Series C Preferred Stock, and recommended that the Board approve and adopt the Exchange Agreement, and approve the terms, issuance and sale of, the Series C Preferred Stock.

The Certificate of Designation of Series C Preferred Stock, filed with the Secretary of State of Delaware on July 24, 2012 for 5,000,000 authorized shares of such series provides, among other terms, as follows:
 
·
each share of Series C Preferred Stock has an initial liquidation preference of $1,000.00 (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, 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 may not be taken without the consent or approval of the holders of 66 2/3% of the outstanding Series C Preferred Stock.

Sale of Trademark Rights

On July 25, 2012, the Company, the other borrowers and credit parties thereto, General Capital, as agent and lender, and the other lenders thereto, entered into Consent and Amendment No. 7 (“Amendment No. 7”) to the 2011 Credit Agreement. Pursuant to Amendment No. 7 and related documentation, the Company and its subsidiary, Burlington Industries LLC, obtained the right to assign certain “Burlington” trademark rights to Kayser-Roth Corporation (the “Burlington IP Sale”), provided that the proceeds are used in their entirety to repay amounts outstanding under the U.S. Revolver. Amendment No. 7 also provides that, after such repayment, borrowing availability under the U.S. Revolver will be reduced by the amount of the net proceeds from the Burlington IP Sale used to repay the U.S. Revolver,  thus reducing the U.S. Revolver.
 
On July 25, 2012, the Company completed the Burlington IP Sale for gross proceeds of $6.0 million. Gross proceeds from the sale, less nominal fees and expenses, were used to repay amounts outstanding under the U.S. Revolver as required under Amendment No. 7.

 
-28-

 
 
Pro Forma Financial Information

The following unaudited pro forma condensed consolidated financial information is designed to show how the Debt Exchange and the Burlington IP Sale might have affected the Company’s historical consolidated results of continuing operations if such transactions had occurred on January 1, 2012 and how these transactions might have affected the Company’s historical consolidated balance sheet if such transactions had occurred on June 30, 2012. The unaudited pro forma condensed consolidated financial information has been prepared by the management of the Company for illustrative purposes only and is not indicative of the results of operations that will be presented in the Company’s future filings with the SEC, and is not necessarily indicative of the results that actually would have been realized had the Debt Exchange and the Burlington IP Sale been completed at the beginning of the specified periods or at any other time, nor those to be expected at any time in the future.
 
INTERNATIONAL TEXTILE GROUP,  INC. AND SUBSIDIARY COMPANIES
Unaudited Pro Forma Condensed Consolidated Statements of Operations
For the Six Months Ended June 30, 2012
(Amounts in thousands, except per share data)
 
         
Adjustment
   
Adjustment
       
   
As
   
for Exchange
   
for Burlington
   
Pro
 
   
Reported
   
Agreement
   
IP Sale
   
Forma
 
Net sales
  $ 318,758     $ -     $ (615 )(2)   $ 318,143  
Cost of goods sold
    296,438       -       -       296,438  
Gross profit
    22,320       -       (615 )     21,705  
Selling, administrative and other operating expenses
    23,282       -       -       23,282  
Restructuring charges
    833       -       -       833  
Loss from operations
    (1,795 )     -       (615 )     (2,410 )
Non-operating other income (expense):
                               
Interest expense - related party
    (17,194 )     9,273  (1)     -       (7,921 )
Interest expense, net - third party
    (9,408 )     -       15  (3)     (9,393 )
Other income (expense) - net
    (2,197 )     -       6,000  (4)     3,803  
Total non-operating other income (expense) - net
    (28,799 )     9,273       6,015       (13,511 )
Income (loss) from continuing operations before income taxes and equity in losses of unconsolidated affiliates
    (30,594 )     9,273       5,400       (15,921 )
Income tax expense
    (1,375 )     -  (5)     -  (5)     (1,375 )
Equity in losses of unconsolidated affiliates
    (359 )     -       -       (359 )
Income (loss) from continuing operations
  $ (32,328 )   $ 9,273     $ 5,400     $ (17,655 )
                                 
Net loss per share from continuing operations attributable to common stock of International Textile Group, Inc., basic and diluted
  $ (2.33 )                   $ (1.49 )
                                 
Weighted average number of shares outstanding - basic and diluted
    17,468                       17,468  
 
 
 (1)
Represents the decrease in interest expense that would have resulted from the extinguishment of the unsecured
   
subordinated notes had the Exchange Agreement occurred on January 1, 2012.
 (2)
Represents the decrease in licensing revenue that would have resulted had the Burlington IP Sale occurred on January 1, 2012.
 (3)
Represents the estimated decrease in interest expense that would have resulted from the paydown of the U.S. Revolver had
   
the Burlington IP Sale occurred on January 1, 2012 using the Company's U.S. Revolver average interest rate for such period.
 (4)
Represents the one-time gain on the Burlington IP Sale as if such transaction had occurred on January 1, 2012.
 (5)
The pro forma transactions included herein would have had no effect on income tax expense due to the Company's U.S.
   
net operating loss carryforwards.
 
 
 
-29-

 
 
INTERNATIONAL TEXTILE GROUP,  INC. AND SUBSIDIARY COMPANIES
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of June 30, 2012
(Amounts in thousands)
 
 
         
Adjustments
 
Adjustments
       
   
As
   
for Exchange
 
for Burlington
   
Pro
 
 
 
Reported
   
Agreement
 
IP Sale
   
Forma
 
Assets
                       
Current assets:
                       
Cash and cash equivalents
  $ 2,523     $ (536 )(1)   $     $ 1,987  
Accounts receivable, net
    83,744                   83,744  
Inventories
    115,421                   115,421  
Other current assets
    17,308                   17,308  
Total current assets
    218,996       (536 )           218,460  
Property, plant and equipment, net
    147,460                   147,460  
Other assets
    9,192                   9,192  
Total assets
  $ 375,648     $ (536 )   $     $ 375,112  
Liabilities and Stockholders’ Deficit
                               
Current liabilities:
                               
Current portion of bank debt and other long-term obligations
  $ 43,420     $     $     $ 37,420  
Callable long-term debt classified as current
    53,322                   53,322  
Short-term borrowings
    39,384                   39,384  
Accounts payable
    52,159                   52,159  
Other current liabilities
    36,820                   36,820  
Total current liabilities
    225,105                   219,105  
Bank debt and other long-term obligations, net of current maturities
    89,704             (6,000 )(2)     89,704  
Senior subordinated notes - related party
    136,547                   136,547  
Unsecured subordinated notes - related party
    111,193       (111,193 )(1)            
Other liabilities
    29,629                   29,629  
Total liabilities
    592,178       (111,193 )     (6,000 )     474,985  
Commitments and contingencies
                               
Stockholders' deficit:
                               
International Textile Group, Inc. stockholders' deficit:
                         
Series A convertible preferred stock
    300,994                   300,994  
Series C preferred stock
          110,657  (1)           110,657  
Common stock
    175                   175  
Capital in excess of par value
    49,391                   49,391  
Common stock held in treasury
    (411 )                 (411 )
Accumulated deficit
    (559,843 )           6,000  (3)     (553,843 )
Accumulated other comprehensive loss, net of taxes
    (6,878 )                 (6,878 )
Total International Textile Group, Inc. stockholders’ deficit
    (216,572 )     110,657       6,000       (99,915 )
Noncontrolling interests
    42                   42  
Total stockholders' deficit
    (216,530 )     110,657       6,000       (99,873 )
Total liabilities and stockholders' deficit
  $ 375,648     $ (536 )   $     $ 375,112  
 
 (1)
Represents the decrease in debt obligations and the increase in preferred stock, net of estimated cash transaction fees and expenses, that would have resulted had the Exchange Agreement occurred on June 30, 2012.
 (2)
Represents the paydown of the U.S. Revolver had the Burlington IP Sale occurred on June 30, 2012.
 (3)
Represents the one-time gain on the Burlington IP Sale had such transaction occurred on June 30, 2012.
 
The Debt Exchange and the Burlington IP Sale (the “Transactions”) will positively impact the Company’s American operations, customers and suppliers by creating positive stockholders’ equity while reducing the Company’s interest burden by approximately $21.0 million annually. The following table presents a condensed consolidated balance sheet (in thousands) of the Company’s U.S. operations as if the Transactions had occurred on June 30, 2012 (see footnotes above related to the Transactions).

   
Consolidated
               
Consolidated
 
   
U.S. Operations
   
Adjustments
   
Adjustments
   
U.S. Operations